I have reminded you to keep track of market volatility after Japan started their reckless monetary behavior. The Nikkei index went for a 9+% intraday dive last week after ballooning up to a 15-year record high on the same day. Yesterday, it went for another 5+% dive. Considering that the Nikkei had risen 65% in 6 months (itself a bad sign of a frothy bubble), the 15% dive would have been a much-needed correction except for the following accompanyiny phenomena.
Ominously, the 1,400 points drop in the Nekkei last week was accompanied by a collapse in Japanese government bonds (“JGB”), driving interest rate up! It was also accompanied by a sudden spurt in yen exchange rate. Normally, a significant drop in the equity index would go hand in hand with the opposite in interest rates and currency exchange rate. This is even more abnormal given that the Japanese government is endeavouring to keep interest at zero and the yen depreciating. Indeed, it had to intervene in the market, spending USD 9 billion worth in the one day last week to prop up the JGB, and more subsequently to keep the yen depreciating. It’s like pissing into a hurricane!
When things are abnormal, they are abnormal. Don’t believe in any analyses that try to tell you otherwise. There may be two plausible explanations for these phenomena in Japan. Firstly, if you are innocent and somewhat naive, you can interpret them as a sign that the market is expressing a lack of confidence in Prime Minister’s scheme to revive Japan into “World Number One”. Secondly, if you are not naive or part of the hedge fund groups acting in concert, this was just one round out of many when you collectively drew on the Japanese ATM.
Why is such abnormality possible? You have to first tell me why Japanese are such financial morons. Their government is acting like a big gambler, bringing a Himalayas of chips to the Poker table. All the other big players already know what this moron is going to do. So what do you think they are going to do?
What happens to the Nikkei recently reminds me of what happened to the S&P in 2007 and 2008 with Bear Stearns and Smith Barney. In other words, no matter how everybody said the “fundamentals are sound”, the persistent signals were that something was lurking underneath that gave off very bad smells.
And don’t ask me what that could be.
More seriously, the Japanese monetary aggression has already triggered a world-wide currency war, albeit little publicized (since most people have no idea what that is). Across the board, practically every nation has lowered their interest rates (except Brazil, but more on that later), setting the stage for competitive devaluation of their currencies to protect their export competitiveness. More and more nations are also printing more money, a lot more money. Even conservative Switzerland is doing that (thinking that their currency is an export commodity in and of itself, with the whole world seeking “better” money).