Market Talk

Compliments to the Bank of Japan, for keeping it real.

While the Federal Reserve continues to pretend its easy money policies aren’t juicing commodity markets, the BoJ isn’t afraid to acknowledge the obvious. Colleague Kevin Kingsbury alerted us to this commentary issued by the BoJ last week titled: “Recent Surge in Global Commodity Prices – Impact of financialization of commodities and globally accomodative monetary conditions.”

And if anyone knows a thing or two about accommodative monetary conditions, it’s Japan.

The report certainly gives credit to global economic growth for pushing up commodities, but it also says “speculative investment flows into commodity markets have amplified the intensity of the price surge.”

Here’s a sentence from the summary that should have Bernanke, Dudley and other deniers at the Fed turning crimson: “Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”

Let’s start putting some of the pieces of this puzzle together, shall we?

The news has been almost uniformly bad the past two weeks, unless you were the one person in your office pool who had Virginia Commonwealth. But stocks have been on a tear. Why, exactly?

We have a few facts from which to start constructing a theory:

- On March 16, the yen spiked, reaching Y76 to the dollar. The next day, finance ministers from the G7 nations held a conference call and agreed to intervene in the forex markets to put a cap on the yen.

- The DJIA and S&P 500 hit their year low on March 16.

- The yield on the U.S. 10-year Treasury note hit a year low of 3.20% on March 16.

Since March 16:

- The yen has appreciated no further, and currently resides around Y82.88.

- The DJIA is up about 6.5%. The S&P is up about 5.8%.

- The 10-year Treasury yield rose as high as 3.49% on Tuesday. Through Tuesday, it had risen every session since March 16, a streak that has not occurred since 1990.

Do not think these various things are unconnected. March 16 was a pivotal day in the global markets.

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The stock rally continues unabated, at least as long as the easy money continues unabated.

The stock market has recovered all its losses suffered after the Japan earthquake/tsunami/nuclear crisis, shrugging off at least the economic consequences of the event. That’s a posture that seems entirely premature, and the New York Times had a story Saturday that illustrates why it’s too soon to make conclusions about the disaster’s impact on the global economy.

The NYT headline reads “Global Supply Lines at Risk as Shipping Lines Shun Japan,” and the gist is that some shipping companies are reluctant to call on ports in Tokyo Bay because of concerns about radiation spewing from the damaged Fukushima Daiichi nuclear plant.

Cargo carriers have a lot at stake. As the story notes, they’re obviously concerned about the safety of their crews, but they also don’t want to risk contaminating cargo or their ships. One industry source explained that a vessel may need to be scrapped “if quarantined even temporarily for radioactivity, because they would face extra coast guard checks for years at subsequent destinations.”

Sounds extreme, but those extra inspections would make it hard for a ship to stay on schedule, and who wants to ship cargo on a vessel that’s always delayed?

So it’s no small matter, this reticence to sail into Tokyo and Yokohama. As the Times story says, those ports “are normally Japan’s two busiest, representing as much as 40 percent of the nation’s foreign container cargo.” Continue reading…

The news headlines certainly aren’t bullish today, but gloomy news seems to be little match for the bountiful liquidity traversing the globe.

Stocks are under pressure, more pressure now than they were when we taped today’s video. The S&P 500 has slid into this 1292-1288 band that’s offering some support, and so far that support is holding, albeit there have been a couple slips below it.

US stocks surge, as does just about every “risk” asset, after the Bank of Japan tries again to arrest the yen’s rising, the most note-worth move among several from different central banks, including those in Australia and Brazil as well as the looming bond-buying program from the Fed, that have “currency war” written all over them.

DJIA jumps 193 (1.8%) to 10945, its highest close since May 3. S&P 500 rises 24 (2.1%) to 1161, Nasdaq Comp surges 55 (2.4%) to 2400.

It’s not just stocks: gold, crude, the euro all rise sharply, as investors are betting on a widespread bout of competitive devaluations among central banks. That’s good for nominal asset prices right now, but seems to us it’s bad for everybody in the long run.

It isn’t clear why the Fed seems so intent upon launching into all this dollar bashing, unless they think the economy is weaker than they’re letting on. If the recession’s over, and the economy’s recovering, why do something so dangerous destabilizing?

The Chicago Fed’s Charles Evans today said the central bank should do “much more” for the economy. Why’s that? “In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should,” he said. “This is a far grimmer forecast than we ought to have.”

This Friday’s jobs report will be an interesting one. While the sell siders and White House tout the private-sector jobs created, the fact of the matter is that over the past three months, the economy on the whole has shed jobs. Now, the jobs market doesn’t have to disgorge half a million workers a month for it to be bad. The economy needs to create at least 100,000-150,000 some-odd jobs just to keep up with population growth. To get the unemployment rate down, it’ll have to be closer to if not more than 200,000. So losing 54,000 may not sound so bad, but it is, because it just means the the employment picture is slipping for another month.

If we’re not creating jobs, it also stands to reason that wages aren’t growing, since there’s no upward pressure on employers to keep employees. If you ask me, the Fed’s afraid that this situation will slowly drag the economy back into recession. Coming as it would with an economy that hasn’t recovered from the first recession, the worst in our lifetimes, and coming as it would with a nasty bout of deflation to boot, it appears the Fed has plenty to worry about.

This is just a brilliant insight from Peter Boockvar of Miller Tabak, writing at The Big Picture. The bubble isn’t in gold, or bonds, or even stocks. No, sir. The bubble is in printing money.

If you have it, the Bank of Japan will buy it. The BoJ cut interest rates from .1% to a range of zero to .1% and announced a 5T yen fund to buy not just JGB’s but corporate debt, commercial paper, ETF’s and Japanese REIT’s. If you live in Japan and thought about selling stuff in the closet on EBAY, hawk it to the BoJ instead. Bernanke in the Q&A of a speech on Fiscal Sustainability last night responded to a question about QE and said “I do think that the additional purchases…have the ability to ease financial conditions.” Another round of QE seems inevitable with the size and pace being the only question. It’s no wonder that gold is rising to another record high. Gold is not in a bubble, money printing is. Emerging economies however are not happy with the rise in their currencies. Brazil doubled the tax on foreign purchases of fixed income and South Korea said banks who do FX trades will face audits.

Maybe it is a currency war. Or just a big game being played by big players.

These central bankers all walk around in their suits and ties, and talk in these dull monotones and use a lot of big words, and most people have absolutely no idea what they’re talking about. A stance that would match their words better, would make their intent much clearer, would be if they were running around like the nutty professor in Back to the Future, and holding a big, round black bomb with the fuse lit.

The Bank of Japan announces a monetary easing program to spur economic growth, and cuts its interest rates to essentially zero — again — and the reaction is, well, this may help, it may not. Our central bank chieftain, Ben Bernanke, last night speaking to college students, opined ever so dryly that “additional (asset) purchases have the ability to ease financial conditions.”

What he should have said was “fire!”

This is just ridiculous. Do you see what they’re doing? The Japanese are trying to debase their currency. The Fed here in the United States is doing the same thing, although they’ll never say it. The Chinese don’t debase it, exactly, but have been ruthlessly suppressing it (and, actually, it seems to be working out rather smashingly for them.) Debasing the currency is about the most desperate thing a central bank can do. It never ends well. But this is the path they’ve chosen, and to change direction now would cause even greater carnage.

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