The bears have gone from panicking over news and the phantom crash they can’t stop predicting, to panicking over missing out on the bull market.
A UBS executive told Bloomberg that “We’ve gone in a month from abject fear to fear of missing out. The public is now coming back to the equity market.” In summer, no less, which the bears promise every year will be awful. Warning against the summer doldrums is a tradition on Wall Street, set in stone by the stock market seasonality put front and center in every Stock Trader’s Almanac.
Nonetheless, last week saw the Dow Jones Industrial Average hit a new high every day, and the S&P 500 do so throughThursday before settling back a bit on Friday.
Bloomberg wrote in its weekly wrap-up: “The S&P 500 has climbed 8.1% since June 27, a recovery that ranks with any in the bull market, after the gauge plunged to a three-month low in June following the UK’s secession vote. The velocity of the rebound is spurring a reallocation in the options market, where traders are piling into bullish calls and shunning defensive puts.”
It would behoove anybody still attempting market timing to keep in mind that every event presents both positive and negative pressures, particularly when discussing the global economy. Brexit was presented in stark terms negative for world trade generally, and for the UK specifically. This was silly for two reasons. First, it’s obvious that trouble in the UK is not enough on its own to disrupt the world. Second, it wasn’t at all clear that a Leave vote would spell trouble for the UK, and still isn’t. It’s a powerhouse economy run by one of the founding cultures of modern finance. It will find a way to keep making money.
As for that world economy residing at the edge of collapse, did anybody really think a UK vote would create only one-sided repercussions in the sprawling series of dependencies known as global finance? Talk about wet behind the ears. The same way all currency weakening is accompanied by opposing currency strengthening, which the media leave out in fear-mongering reports, so too does the Brexit bring opposing pressures.
In fact, currency is one place we saw this. Chinese policymakers were delighted that British voters surprised the world with their Leave decision. They’d been wanting to weaken their RMB currency for many quarters but couldn’t find a politically palatable way to do so without being accused of trade warfare by Washington and other participants. Then, in came the Brexit voters to solve the problem.
Deutsche Bank wrote:
“More subtly, Brexit indirectly helped reduce concerns of a ‘risk off’ shock from China thanks to the stealthy RMB devaluation around the UK vote. This has confirmed a new-found market tolerance of China currency slippage, at least when it looks controlled by policymakers.”
Other recent RMB devaluations such as the one earlier this year and the one last August, created accusations and more volatility than the Brexit deval. China was dancing in the hallways as most of the world expressed outrage at the Leave victory.
Remember, trouble in China’s economy, which is the second largest in the world, is a favorite talking point of permabears. It’s a convenient one since few people really understand it and just the phrase “Chinese economy” invokes belief that somebody knows something important that we don’t know, which involves an exotic economic disease from far away that we’d better guard against. Yet, the thing they warned us about most recently, the Brexit, ended up helping China.
Unwittingly, one permabear mentioned a different potential currency benefit of Brexit when warning of its dangers. Albert “The Bear” Edwards wrote on June 22:
“China is now exporting its deflation, and my goodness it has a lot of deflation to export. In the Ice Age world, countries need to devalue to avoid deflation. So if sterling slumps in the aftermath of a Brexit vote there may be at least one silver lining outside the EU if the UK economy manages to avoid the quagmire of outright deflation.”
So far, it was the potential benefits of Brexit that have shined brightly, while the supposedly damaging downside has turned into merely a set of fresh policy proposals by Britain’s new government. It should not surprise anybody that London wants what’s best for the UK, and is working overtime to create a structure that delivers it. Something tells me the right trade policies with the EU and others will be found. Meanwhile, devalued sterling and RMB are helping the UK and China.
Unbeknownst to the media, it’s actually hard to engineer a major crash. It’s why you’ll experience no more than four of them in your lifetime, if historical norms persist. To forecasters, the crash doth cometh more than it arriveth.
While the blinking dot of the Brexit moves to the edge of the radar screen, Japan’s newly elected government under the same prime minister is raring to go with Stimulus Plan 493, or so it seems. Everything within the realm of typical has been tried multiple times, so the next round should prove fascinating.
Top of the fascination list has to be the perpetual JGB, as in Japanese government bond. Former Fed head Ben Bernanke has his hands in this pie, as stimulus is his bag and he’s spent a lot of time studying Japan’s deflation, the Great Depression, and so on, and Japan likes him. While his successor, Janet Yellen, is busy not raising rates in the US, Bernanke is preparing to run experiments in Japan involving perpetual JGBs as his old favorite: helicopter money.
Remember that one of his nicknames is “Helicopter Ben” due to having discussed in a 2002 speech the ease of creating new currency, and referring to a statement by Milton Friedman about employing a “helicopter drop” of money into an economy to stave off deflation. It was also in that speech that Bernanke gave a wink to the real motivations of the money system by saying that “people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.”
You bet, so off to deflation land went Helicopter Ben to spread the love of inflation.
Last week, Goldman Sachs provided the following definition of helicopter money for those new to the concept: “Literally, it is a policy whereby the government or central bank supplies large amounts of money, as if it were scattering money from a helicopter. A more practical definition, however, is a policy whereby the central bank has primary responsibility for funding to facilitate more flexible and active fiscal spending by the government.”
Back in April, Bernanke told Japan that the best way to engineer helicopter money now was by issuing non-marketable perpetual bonds without maturity dates that the Bank of Japan would buy directly. This is akin to the government saying to the BoJ whenever it needs money, “Please print more.” Budget shortfalls? A thing of the past once more money is just a phone call away.
Obviously, this is anathema to stewards of responsible finance. It takes fiat currency all the way to the point of absurdity, which is why the yen immediately weakened against the dollar last week when the perpetual JGB became possible under the newly elected government.
Helicopter money has been part of Japan’s scene for a while already. Renewed interest in it is from the likelihood of a new level of volume on the way. Morgan Stanley gave a quick recap of recent helicopter money in Japan in a note sent to clientsThursday:
“Helicopter money has been pouring down in Japan for some long time. The last few months show an acceleration of BoJ purchases, above the Y80 trl official purchase pace. In the year to June 2016, BoJ holdings of JGBs rose by Y85 trl. This pace exceeds JGB issuance by more than two times.”
If these perpetuals on the way come with zero coupons as well, a new door in Wonderland will open. Pondering this, Kit Juckes at SocGen told FT Alphaville last week that:
“… in a negative rate world, I might buy bonds even knowing I have to pay to get the same amount of cash returned at a fixed point in the future. I might prefer that to hiding my cash under a rock. Or spending it. But to buy bonds that pay no interest and don’t guarantee repayment at any point must be less attractive… unless you can convince me that ‘perpetuals aren’t forever’… or something…”
Elsewhere in financial creativity, Deutsche Bahn became the first non-financial company to issue debt with a negative yield. Bloomberg reported that the railway operator sold €350M of five-year bonds with a zero coupon which were priced to yield -0.006%. It was shocking enough when NIRP entered the realm of government bonds, but it’s now creeping into the private market as well. Jim Reid at Deutsche Bank wrote:
“Given Deutsche Bahn is 100% state-owned we’d hesitate to go as far as saying that this marks the first such time a true corporate has issued negative yielding bonds in euros, but it’s a phenomenal statistic nonetheless and shows the power of ECB bond buying at government and corporate level.”
According to Reid and others, there’s talk of central banks swaggering fully into the purchase of corporate bonds, meaning that not only would helicopter money rain down on government spending but on corporate spending as well.
One of these weeks, I’ll have to write an article explaining how you, too, can issue your own private household NIRP debt for the Federal Reserve or other central bank near you to buy. This is the latest wave in finance, so why not bring it into personal finance right away? The phrase, “Honey, swing by the ATM for some cash” will soon be replaced by, “Honey, sell more NIRP notes to the Fed. Their number’s on speed dial.
