Some days are turn over and go back to sleep days and this Monday was not one of them. The Japanese stock market was already reeling as we pointed out last week, but Monday saw the Nikkei average decline over 12%. The world quickly joined them. Ether was down 26%, Nvidia was down over 15%, and silver was down over a dollar an ounce. Everything that was nailed to the ground got sold. Ankur Banerjee and Junko Fujita write for Reuters “Japanese stocks collapsed on Monday in their biggest single day rout since the 1987 Black Monday sell-offs, driven by last week’s plunge in global stock markets, economic concerns and worries investments funded by a cheap yen were being unwound… Japan’s banking stocks led the rout, which pushed the Nikkei into bear market territory given its 27% drop from a July 11 peak of 42,426.77.” On May 19 of this year, we wrote about how the Japanese stock market was concealing a truly unhealthy economy and now the stock market has revealed that we got a bunch of Japanese that were swimming without their budgie smugglers. That is right, naked, as in nothing on but the radio naked. It wasn’t just the Japanese though as the Japan carry trade has been one of the biggest trades for decades.
Koasku Naioka and Rebecca Feng explain in the Wall Street Journal, “For years, global investors snapped up riskier assets, such as U.S. stocks, and funded those trades with the Japanese yen, thanks to ultralow interest rates in Japan. Until recently, many hedge funds and asset managers expected that rates would remain low, and the yen would remain weak.
Known as the carry trade, this strategy was yielding money for investors. Then the BOJ raised rates, causing the yen to appreciate about 7.6% against the U.S. dollar over the past week.
The rising yen fed on itself on Monday because of a squeeze on the carry trade, said strategists and traders. Investors who had borrowed yen were hit with margin calls as the currency jumped, meaning their bankers were insisting on more collateral. Those investors were forced to buy yen to cover their previous positions, pushing the currency higher and triggering still-further margin calls.”
Traders from all over the world had been using the Yen as the patsy, the currency that had low or negative interest rates and they would borrow in yen and then make a higher yield somewhere else. What his does is dry up a source of liquidity that markets risky assets ned to push higher again. When Vanguard, Fidelity, Schwab, and Robinhood had “platform trouble” Monday morning it was likely due to the the authorities needing some time to get in there and shore up the market with the plunge protection team which we have written about. They were able to right the ship before the average retail trader could log in and liquidate their positions, which would have driven the markets even lower. A platform outage across four different companies, come on, people if you believe that then I have a ski condo to sell you in Wichita.
We talked about the Japan situation on April 17 as well, but that was when the yen was pushing past 153 then 154 and the bank was going to be forced to do something. It didn’t until the currency hit 162 and then it raised interest rates to protect the currency into a slowing growth and recessionary economy. That is exactly what the Federal Reserve did to Americans right before the Great Depression. Those sky high equity values aren’t so sky high anymore. Inflation or a crash. Those are the choices.
So by late Monday afternoon the Japanese ripples had hit the American stock market with the worst damage being done at the open and the dip buyers trying to right the ship most of the day. As of late Monday, Caitlin McCabe and Katy Barnato write this in the Wall Street Journal, “The Dow dropped 1,034 points, while Nasdaq slid 3.4% and the S&P retreated 3%. The VIX, considered Wall Street’s fear gauge, notched its biggest intraday percentage gain ever, before paring back somewhat. Japanese stocks were among the hardest hit globally, with a tumble in SoftBank and bank stocks weighing. Elsewhere, South Korea’s benchmark Kospi sank 8%. The yen leapt against the dollar, amplifying a trade that started to take hold last month.”
This hit crypto particularly hard as Bitcoin dropped below 50,000 for the first time in months and the AI trade got wrecked. It didn’t help that over the weekend it was revealed that Warren Buffett had sold almost half of his stake in Apple, his largest holding, and was sitting on $277 billion cash. He is obviously ready for a crash and a chance to go bargain hunting.
This is what happened on an eventful Monday, but frankly it isn’t nearly enough. Google lost its lawsuit and has been deemed a monopolist by the government. I don’t know what this means to be honest, but I know 89% of your search is done in google and it goes to over 90% on your phone. That is a lot of revenue that will need to go somewhere else. That can’t be good for the stock. My first thought was that it was convenient with OpenAI revealing last week that its SearchGPT was now going to be available. Hmm, is the government going to force AI tools on us like EV cars?
The 2 year/10 year Treasury yield uninverted on Monday briefly. It is when the un inversion happens that the market and recession type all around bad boy behavior begins. The Sahm rule or a labor statistic that has a 100% accuracy also was triggered on Friday with the jobs reports release and unemployment hitting 4.3% This indicator is named after economist Claudia Sahm formerly of the Fed.
Wharton’s Jeremey Siegel came out and started saying that the Fed needed to do an emergency rate cut of 75 basis points. Michelle Fox for CNBC, “ In addition, there should be “another 75 basis-point cut indicated for next month at the September meeting — and that’s minimum,” Siegel, professor emeritus of finance at University of Pennsylvania’s Wharton School, said on CNBC’s “Squawk Box” on Monday. “The fed funds rate right now should be somewhere between 3.5% and 4%,” he said.” He has been yakking about this for a year. He might even be right, but if the Fed cuts now the market would smell the panic and the rout would be on. That is why he is in an ivory tower.
The Fed seldom makes surprise rate cuts. Usually, it is in response to something major like the stock market crash of 1987, the Gulf War, 9/11, the GFC or Covid. Does the unwind of the carry trade rank high enough to justify Fed intrusion? Maybe, but it will take more than Monday’s action. The other thing that is interesting here is that we are a long time away from the next Fed meeting in September. They just announced last Wednesday that they were staying put even though it feels like a lifetime ago in market action.
We have geopolitical risk as Israel assassinated a highly placed military office in Iran and now Iran is threatening Israel again. All this and oil still sells off. The market is screaming about recession right now. Copper, oil, labor markets, yes, it is all there for all the world to see. Yet every morning on Bloomberg, a well-dressed man or woman has gotten up very early to tell you that they are bullish stocks and bonds and bulls but not bears. They are talking their book folks.
So, I have been flapping my gums for months now that this whole thing is starting to fall apart. We get the VIX, the volatility index spiking to the highest on record, and yet we are bouncing Tuesday morning as I write this. This is the biggest bubble in history so it will not extinguish and give up the ghost without a fight. This takes time, as new sudden lows get made and then the market bounces and then it drifts lower and then it does it again. When the market is just puking all over itself and closing on the bottom for days that’s when bottom is usually found. This feels like nothing more than a tipping over point. This is a turning not yet the burning.
The market thinks that this is the bottom as people were saying buy the dip yesterday. This sell off is just shrapnel from the Japanese facing a terrible economy, one beset with debt even worse than ours. The jobs report spooked investors on Friday as Bloomberg was announcing we had a growth scare. Here is what is really scary. We are running 7% deficits as a percentage to GDP during peacetime which has never been done and we can only create 1-2% economic growth. If the government wasn’t spending money like a billionaire newly divorcee, we would be in something worse than a recession right now today.
This is why buying the dip is so dangerous right now because it has worked for almost 40 years. I had people tell me that they were mad yesterday because they couldn’t log into their Schwab account and buy bitcoin on the huge selloff. This was after they were down almost 20% on the day. The mentality that things can’t sell off and prices only go up has been ingrained in our bones so deeply that when it fails like in 1929 and doesn’t come back, the scars will create ghosts out of people that followed the pattern that worked for most of their lives. Be nice to them as they will be broken.
Sincerely Yours,
C Thomas Printer
On this date in history… 82 years ago to be exact, Allied forces seized the Japanese airfield on Guadalcanal in the first offensive action on the Pacific front.
Also born on this date … the man that built the Football Hall of Fame, literally, as he was born and raised in Canton, Ohio before leading Notre Dame to a national championship, before becoming the first man to win NFL MVP as a defensive player before becoming a Minnesota Supreme Court judge where he served until his mandatory age 70 retirement, the one and only Alan Page.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.