iBankCoin
Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always due their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
80 Blog Posts

USD/JPY 100 – KATY BAR THE DOOR

As a barometer for “risk off”, a rally in the Japanese Yen is spot on.

From the 121.70 USD/JPY euphoria level achieved post rate cut, we elevator shafted through 111 and even got into the 110’s before bouncing to the current 112.35. While 10 big figure moves in the world’s 3rd largest economy should be alarming to all, there is a good chance we get more. Barclay’s today forecast a further rally to 100 by the end of Q1 2016 and 95.00 by year end 2016 (prior YE 2016 estimate 120).

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Central banks have officially run out of runway.

Bank-of-Japan

The Fed, EBC, BoJ, ECB, Riksbank (Sweden cut to -0.50 yesterday, submerged by 5bp more than the market expected and expanded QE purchases through reinvesting monies from maturities and coupon payments) & SNB’s goal of achieving 2.0% inflation in unison is not going to happen.

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Gold has something different to infer from these moves it would appear. My modest allocation to gold miners will be tweaked (higher weighting) and DXJ (currency hedged Japan) jettisoned as wrong-footed folly. You have to trade what you see, not what you know (think you know).

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Japan Topix financials were down 24% since the very recent rate cut in Japan (the market is further dissolving today as they return back from vacation). Mitsubishi UFJ entered the jaws of today’s market trading at 49% of tangible book, Mizuho 66%, Sumitomo Mitsui 52%. For reference Bank of America trades  at 80% of tangible book. What is the liquidation value of a Japanese bank? Where does that bid come from? Not even Citi could make a go of it and sold their Japan franchise for less than $1bln. Even Ford is packing up their Japan tent and going home.

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The reasons for such apparent “distressed” bank valuations is clear, the lifeline of higher rates is further beyond the grasp of banks globally. Yellen, Gundlach, Bass, JP Morgan, etc. talk about and research negative rates as if it is a “normal” conversation to be having.

There is an ebb and flow to the relative valuation of financials, but historically the equity markets struggle without the participation of financials. Going forward, bank balance sheets will more fortress like, less levered, and more conservative in their make up. CoCos (Contingent Convertibles) will make up a bigger proportion of the capital structure as there will be no “put” to their respective governments. Credit ratings will be lower, as no “lift” from implicit government support should be implied or expected.

Coming back to the car analogy, gone are the days of the V8, 4 cylinders, hybrids and full on electric are in vogue. Adjust your return expectations accordingly. JCG

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5 comments

  1. jon v

    I mentioned this before. Japan is fucked.

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  2. firehorsecaper

    Japan is fine. Hedged Nikkei wobbly though. Some additional JPY context, hot off the presses:

    http://www.straitstimes.com//business/economy/asias-rich-advised-to-buy-yen-as-japans-negative-rates-backfire

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  3. firehorsecaper

    Even Goldman (smart Jimmy) had had to bail on their seminal market calls in recent weeks. GS formerly has EUR/USD at 1.05 by now. There is nothing wrong with being wrong, but there is something wrong with staying wrong in the face of new information.

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  4. tradingnymph

    You know that BoJ was suggesting an Emergency Meeting if the Yen continues to move up in Strength. IMHO that Friday Afternoon rally came from that statement. Amuses the heck out of me the failed Yen drop after the Negative Interest Rates (even though I think next week it actually goes into place?). I have been wondering if PBoC was in buying up the Yen to keep their Off Shore Yuan stable during the holidays??? It’s a Win/Win, Yuan is stable and it is a Straight blow to Abe’s economic leadership.

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  5. firehorsecaper

    Thankfully I gave the noted asset re-allocation 72 hours to cure given the extreme technicals (less DXJ, more GDX) hence did not get ginsu knifed. To still execute in time but with better levels on both legs.
    The State Administration of Foreign Exchange (SAFE) is PBoC’s arm responsible for the FX market. Clever bunnies, global offices (24 hour coverage). Your idea is not far fetched.

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