Let’s start putting some of the pieces of this puzzle together, shall we?
The news has been almost uniformly bad the past two weeks, unless you were the one person in your office pool who had Virginia Commonwealth. But stocks have been on a tear. Why, exactly?
We have a few facts from which to start constructing a theory:
- On March 16, the yen spiked, reaching Y76 to the dollar. The next day, finance ministers from the G7 nations held a conference call and agreed to intervene in the forex markets to put a cap on the yen.
- The DJIA and S&P 500 hit their year low on March 16.
- The yield on the U.S. 10-year Treasury note hit a year low of 3.20% on March 16.
Since March 16:
- The yen has appreciated no further, and currently resides around Y82.88.
- The DJIA is up about 6.5%. The S&P is up about 5.8%.
- The 10-year Treasury yield rose as high as 3.49% on Tuesday. Through Tuesday, it had risen every session since March 16, a streak that has not occurred since 1990.
Do not think these various things are unconnected. March 16 was a pivotal day in the global markets.
Between the line in the sand on the yen, and the Bank of Japan’s massive Y15 trillion stimulus package, you have a perfect set-up for speculators, an essentially guaranteed carry trade and a ton of easy money. The mechanics may yet be a bit hazy, but money is fungible. It’s pretty clear to this observer that the conventional wisdom on this latest leg of the rally is off. It’s all about the yen.
The pundits have been grasping at straws trying to explain it, and that is its own sign that something’s wrong. Some of the lazy rationalizations have been that consumers could handle higher oil prices. Or that the effects of Japan’s earthquake fell on a relatively small corner of the nation, and wouldn’t disrupt the wider world. People have been trying to sweep Europe’s problems under the rug since they started. It’s been suggested investors don’t want to be short ahead of Friday’s payrolls report, lest it prove stronger than expected.
The loopiest we’ve heard lately has been this idea that stocks, of all things, are the new safe haven. This is an actual idea, one that flies in the face of only about a century or two of historical evidence.
When you step back and look at everything going on in the market, one simple explanation makes itself plainly clear: the Bank of Japan, and G7, fueled another bout of risk taking. We made the point in yesterday’s closing comments, and have mentioned it once or twice on the air, and it’s not very different from our Fed’s buying the drinks post. The market’s just adding another benefactor.
Barry Ritholtz makes the point today at The Big Picture:
While many believe that QE3 is dead in the US, from a global perspective, the Bank of Japan's massive liquidity stimulus and intervention into the bond market is the equivalent of a US QE3.
Dennis Gartman, who edits and publishes the Gartman Letter, made reference to the dynamic as well in his commentary today, which John wrote up for the wire:
Stocks are responding “as they should to the massive injection of liquidity into the markets by the monetary authorities there,” writes Dennis Gartman in his daily Gartman Letter. When central banks “force feed liquidity into the system, that liquidity makes its way, at the margin, into equities before it finds its way ultimately into plant, equipment and labor,” he says. BoJ’s open market operations and the “massive intervention” to weaken the yen “has created very real and uncommonly large sums of reserves that will make and are making their way into the equity market.”
It is not outlandish to think that some of that money is also finding its way into U.S. equities. In an editorial in yesterday’s Wall Street Journal entitled The Truth About the Yen, Taisuke Tanaka, Nomura Securities’ chief foreign-exchange strategist, noted that Nomura started a new trust on March 23 to invest in U.S. equities, and that Japanese investors were net buyers of foreign securities the week of March 13-19.
So, not only is there currently no repatriation of foreign assets in Japan (as Tanaka explains, it just isn’t necessary to cover the rebuilding effort,) but the Japanese are taking the Bank of Japan’s money, and investing it in equities.
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