The world is Uncle Ben's oyster, he can do whatever he wants, there are no checks and balances. He is treated like a hero for levitating the stock market. If the jobs number comes in terrible, he is viewed as prescient and it justifies his infinite QE. If the jobs number comes in good, he is credited with reviving the economy. Heads Ben wins, tails Ben wins. Bazooka Ben knows that his job performance is like that of a mutual fund manager, if the S&P goes up, he is praised. If it goes down, he is blamed. So of course he will do anything it takes to get the S&P up. Isn't that what Greenspan showed during his time in office?
BOJ chief Kuroda is playing the same game. I recently saw a video on a business channel reviewing Kuroda's performance after the past BOJ shock and awe announcement. Remember, this guy has been on the job for all of two weeks. And they all gave him As or B+s. The more money you print, the more you beat market expectations for money printing, the higher the grade. Simple game, print more, get better performance marks.
There is a simple playbook for playing the short and the long side of risk assets. First of all, you don't play short. This is the most important rule. With an ever increasing amount of money supply, pumping up asset markets, you pick your assets to go long.
If you are bullish on risk assets, you go long the S&P 500 and USDJPY. Those are the two alpha markets which go up with the most certainty when risk assets are rising. They are the strongest of the equity and currency markets, respectively.
If you are bearish on risk assets, you DO NOT short the S&P 500. It seems like the logical play, but in a central bank manipulated market, you DO NOT go short. Instead, you go long what they are going long, Treasury bonds and JGBs. 10 year and 30 year Treasuries are the assets to buy if you are bearish on the S&P, not shorting S&P! JGBs are the assets to buy if you are bearish on the Nikkei. Look what has happened since March, the S&P has been range bound, with slight upward bias, but Treasuries have been very strong. If you had gotten short ES, you would be frustrated. If you had gotten long 10 year and 30 year Treasuries, you would be sitting pretty.
One thing you should absolutely avoid is shorting Treasuries. This is the worst play when you are bullish on risk assets. I do hear my fair share of the pundits declaring bonds to be in a bubble, and overpriced. But most of them aren't speaking with their wallets. They are just pontificating on the thesis of, rates are historically low, governments are bankrupt, negative real interest rates, the Fed will have to exit, blah blah blah.
The problem with their thesis is that the central banks are loathe to exit their QE programs. Only if there is a big boom in the economy will you see tightening. That is not going to happen. IMHO, one of the most certain things in this environment is that the economy is weak, and will remain weak. Now this doesn't make me want to go short the S&P, it just makes me a Treasury bull.
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2 comments:
I agree 100% with your analysis, and disagree 100% with your conclusion. You are forgetting a little monkey wrench in the system, I think its called math. The central banks are all playing a ponzi scheme with their country finance. History has shown that in every previous case, this has blown up in their faces. Buying your own bonds is like a snake eating its tail eventually you get to the vital organs. The world is insolvent, and much as they try to hide it eventually the emperor will be exposed as naked and then the reaction is swift and sure. I believe a collapse of every class is inevitable here, the credit created must be defaulted.
You are talking in theoretical generalities. Does an insolvent world really result in a quick and swift reaction? We've never had the whole world being insolvent. So you have no historical basis for your conclusion. Credit created doesn't need to be defaulted, it can merely be transferred on to the central bank balance sheet, where they replace it with fresh shiny dollar bills.
Bond yields will not go up significantly without very high inflation. As long as the money doesn't flow to the masses, you do not get very high inflation. Since the middle class will not get a large boost in income from stock or bond capital gains, cash won't go towards bidding up the price of goods and services. Yes, there will be more inflation in the rich man's economy, where most of the stocks and bonds are owned, but that has little bearing on the masses.
Just ordinary high inflation will not stop these central banks from endless QE. They lie about it, using bogus inflation statistics like the CPI. Bernanke never admitted to an inflation problem when oil went from $70 to $147 in less than a year! They will only halt their activities in the face of revolt from the masses, and that can only happen with runaway inflation.
There are only two ways to get runaway inflation. 1) A reduction in production of goods, which only happens through commodity scarcity or reduction in industrial productivity. Neither are short or medium term concerns. 2) Wage inflation spiral. It is also not a near term or medium term concern because of the massive 3rd world population willing to work in factories for low wages.
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