#50 S2N: Has QE failed?

I am sending tomorrow’s letter today as tonight is the final 2 nights of Passover and I don’t work during the holidays for religious reasons. There won’t be a letter tomorrow, and I will work on Tuesday’s letter on Tuesday night, Australia time.

S2N Observations

There are a lot of observations to make.

The big tell of last week has to be the collapse of the Japanese yen. The yen has dropped in value by more than 4.5% this month and nearly 12% year-to-date. This is what happens when your government debt to GDP is more than 250%, following the biggest QE (quantitative easing) experiment known to macroeconomics. We are already witnessing inflation after decades of deflation, with the Bank of Japan (BOJ) stuck. Allowing interest rates to drift much higher will put enormous strain on the government’s fiscal ability to service the huge debt weighing down its balance sheet. The only thing left to give is the currency. Frankly, I don’t know how Japan sidesteps this train wreck. I wonder if we are seeing the first signs of this great quantitative easing experiment backfire. My bet is continued yen weakness; I don’t think the BOJ can defend it. It is out of ammo, I think it only has blanks left.

I am really struggling to find a reasonably priced data source for some of my charts. Remember, I am not the insto type with a Bloomberg terminal paying $2,500 a month. I would rather access the same data using a computer programme to fetch it for me for free. My previous vendor dropped me 2 months ago with a lot of my charts not being updated (I will sort this out ASAP; sadly, sometimes one does have to pay to access certain data timeously). There isn’t much data in the chart below, but it still explains the point I want to make. You currently get nearly 4% more interest on your US 10-year bond versus your Japanese counterpart. Interest Rate Parity (IRP) one of the common methods for valuing a currency, points towards a continued annual yen weakness of around the yield difference.

The carry trade is alive and well; a good friend who is a subscriber of this letter was ahead of his time and unfortunately got shaken out of this trade. It was a brilliant idea, but brilliance is often only discovered in hindsight.

My friend bought some distressed US property just after the GFC, around June 2009. The clever wrinkle was that he borrowed in yen, where the annual interest rate he was paying was around 0.75%. He borrowed when the yen to the USD was at 100. The belief was that due to the interest rate differential, the yen would drop, making the loan repayments cheaper as well as the mortgage balance outstanding. Sadly for my friend, the yen did the exact opposite of what it was supposed to do. When the yen hit 80, my friend had enough and bailed; his mortgage had grown by 20% in dollar terms. The property was no longer in distress, but he was. For those who put the same trade on when the yen was around 80, they would have done the trade of their lives. Sometimes trading global macro themes requires extreme patience and even more extreme confidence in one’s research.

I want to just add for the record that the Chinese currency could be the next one to experience some severe weakness. I need to do more research before recommending a trading opportunity.

Last week, I spoke about the AAII SP500 bull-bear spread having dropped close to zero. I got my days mixed up, and the chart I showed was for the previous weeks as the weekly data hadn’t been updated. Well, on Friday, the chart updated, and it has now dropped below zero. It is only the 49th time in the last 10 years that this index has been below 0.

On Friday, we got another strong bounce, with the SP500 and the Nasdaq ending the week up more than 2% and 4%, respectively. What is interesting is how they are challenging the 50-day moving averages they recently crossed below. If these 2 indexes close above their 50 days, then I think we are heading to new all-time highs.

Here are a few interesting charts. I think it is time to back up the truck and load up on some natural gas. They are practically giving the stuff away. I don’t know the difference between natural gas and unnatural gas, but I think I know what cheap looks like.

I like the look of Doctor Copper. It looks like it has the potential to breakout to new highs. I will be watching very closely; it is in a bit of no-man’s land at the moment. Copper is often referred to as “Doctor Copper” because it is seen as having a Ph.D. in economics due to its ability to predict turning points in the global economy. This nickname stems from copper’s widespread use in various sectors, including construction, electronics, power generation, and transportation, making its price highly sensitive to the health and trends of the global economy.

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