Buy Japanese Yen, Wear Diamonds
Abraham George Market Musings
It is time to take stock of the multi-asset class market performance - on a real return basis meaning year-to-date return minus inflation, all are down for the year. For the year so far oil is down 7%, gold is down 8%, Dow is down 15%, S&P 500 is down 25%, Nasdaq 100 is down 37% 10-year note is down 18% and the 30-year bond is down 24%. The major strength was seen in natural gas which was up 71%, orange juice was up 44% and heating oil was up 29%.
To a large extent, the Fed is responsible for the increased volatility around all Fed announcements and sending the wrong signals, and making statements that turned out to be totally wrong. The latest communique is projecting that you can expect rates to rise to a minimum of 5.1%. But let’s take a look at their track record from the last year alone. In 2021 they projected the Fed funds rate to be less than 1 pct by end of 2022. It turned out to be 4.4%. At a December meeting in 2021, the Fed projected the Fed funds rate will be 1.6% in 2023. Now they are saying it will be 5.1%. So you decide how much faith you want to put into what the policymakers are saying.
It has been a disastrous year for the Fed. Now they are at a stage of doing exactly the reverse of how they did not anticipate the rise in inflation. To give some benefit of the doubt to Fed let’s not blame it all on the Fed. Politics had a lot to do with it too for the current situation, albeit the supply-side disruptions that came on account of COVID and the war in Ukraine. The money supply grew by 40% in two years. In the past that has happened only over a period of ten years.
Now it is declining at the fastest rate on record going back more than 60 years. Remember as investors and traders it is not the actual numbers that are important but the rate of change. So be prepared for bigger surprises from what you hear and read from major TV channels and news article headlines.
While the Fed has been the most aggressive in hiking rates for this interest rate cycle causing the dollar to shoot up and creating untold misery for other countries that are dollar-pegged or have their debts denominated in dollars, in the last two weeks the momentum has shifted away from the dollar to the other major economies.
Looks like this is all very well coordinated. There have been more interest rate hikes from other central banks and rhetoric about their resolve to fight inflation whatever the cost.
The biggest surprise came from BoJ. Yesterday the Japanese central bank raised its 10-year sovereign bond yield cap from .25 % to .5 %. The market was under the belief such a hike would not happen as long as BOJ Governor Haruhiko Kuroda is in charge and not before when he will step down in April 2023. This has given a big jolt to the markets. The BOJ benchmark lending rate has been near zero since the 1990s and Kuroda who has led the BOJ since 2013 has been a big proponent of easy monetary policy. He had resisted calls from many other officials to raise rates in the past. Those policies no doubt weakened the yen a lot. The Yen's weakness combined with other global factors has pushed inflation above 2% for the first time since 2015. The weak yen would have benefited Japan if they were still a manufacturing center for the rest of the world but that had moved to China and other Asian countries.
With the most bloated balance sheet among the developed countries, further hikes in interest rates will be a big burden on the country but think as an investor or trader it won’t be a bad idea to buy yen and sell dollars on any rallies you see in USD/JPY.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.