A Day Early

Tue, 2018/02/13 - 1:45pm | Your editor
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The bloom is off the rose even before Valentine's Day when I predicted there would be a drop in stock prices. Bears have come out of hibernation a day early.

Today the experts indicate that despite eight quarters in a row of economic growth, Japanese inflation is still well below the target of 2%--and only at 1% under the most generous estimate. In early April, Haruhiko Kuroda's first term as central bank Governor at the Bank of Japan, will come to an end, after all his unorthdox moves to boost assets and push up yields failed to trigger higher prices or even the expectation of higher prices.

According to Russell Jones at LlewelynConsulting in London, Mr Kuroda had better be kept in office despite Japan's slowness to adopt inflation, because there are now “belated hints of success in meeting the inflation target”--despite recent BoJ “stealth tapering” of the purchase of government paper and exchange-traded funds. One trick would be to reduce the target to 1% instead of 2% and claim victory—blaming the gap on labor shortages. But there is also a risk that central bank actions will rebound with security sales in the private market and cause (for Japan) “positive inflation surprises”, meaning higher interst rates.

Without this reaction, which Mr Jones carefully hedges, the BoJ will have to again resort to “helicopter money” (mis-attributed to former US Fed head Ben Bernanke) to try returning to normal monetary policy.

The US currently looks more normal than Japan because our CB has committed to raising interest rates this year, what is terrifying the US bond and stock markets. Higher interest rates would be needed if the spare labor capacity of the US dries up and wage inflation risks arrive.Higher interest rates make older bonds cost less, and nip economic growth because companies and people have to better control their spending if they cannot borrow cheaply.

Fiscal policy in the US is now recklessly expansionist in a growth period when it is not normal to run deficits. So it is up to the Fed to take away the punch-bowl just when the party was really warming up. This is a quote from Democrat William McChesney Martin jr., who ran the Fed after being named as governor by Harry Truman.

'Truman expected Martin would let the White House run things. For 20 years he did the opposite under Presidents Eisenhower, Kennedy, Johnson, and Nixon. While Pres. Trump has little patience for precedents he is unlikely to try to bully the Fed.

UK inflation meanwhile is the highest in 6 years and boosted both the pound and the London FTSE index.

(The Japan material is from www.llewellyn-consulting.com in London, run by the former deputy chief economist of the OECD whom I know from Paris.)


Fidelity brokerage has blocked its clients from opening new purchases of reverse volatitily exchange-traded funds and notes and slapped a high margin on the whole volatility ETF and ETN group. You still can sell them. Because Fido is a private company it did not inform the market of its moves which took place on Feb. 6, but only confirmed it to Bloomberg last Friday. Another volatility vehicle, the LJM Preservation & Growth Fund, est. in 2006 with $800 mn under management, cashed out all its open positions. But the fund itself did not liquidate and asked its clients to be “patient.” Managers Anish Parvataneni and Anthony Caine claim LJM investz in “long and short options on the S&P 500 index that seek to profit, primarily, from the volatility premium' fell 82% in 2018 before it went into all-cash on Feb. 9.


More for paid subscribers from Israel (again because 3 companies there made news), Jordan, Russia, Ireland, Canada, Switzerland, Norway, Mexico, South Africa, Spain, Italy, Hong Kong, the Netherlands, Australia, Argentina, Chile and Finland.

We also explain why large well-known liquid American Depositary Receipt stocks do less well than smaller cap shares when markets are in the bear mood.

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