Englund

  When adjusted for inflation, China’s trade surplus last year far exceeded any in the world in the past century, even those of export powerhouses like Germany, Japan or the United States.  Chinese factories are dominating global manufacturing on a scale not experienced by any country since the United States after World War II. China has gone from importing cars to becoming the world’s largest car exporter, surpassing Japan, South Korea, Mexico and Germany.  A Chinese state-owned enterprise has started making single-aisle commercial jetliners, in an attempt to replace Airbus and Boeing jets someday.  Chinese companies produce almost all of the world’s solar panels. Japan’s surplus, for example, peaked in 1993 at $96 billion. That works out to $185 billion in today’s dollars, or less than a fifth of China’s surplus last year. Germany ran enormous trade surpluses in the years after Europe’s financial crisis a decade ago. But its surplus peaked in 2017 at a sum equal to...

  Data show investors are piling back into bets against the Japanese yen, in a dynamic reminiscent of what preceded the violent reversal that shook global markets imarkets on Aug. 5. https://www.marketwatch.com/story/is-the-stock-market-meltdown-due-to-the-unwind-of-this-popular-hedge-fund-trade-2f6ab020 IMF blamed an unusually prolonged period of low volatility for encouraging hedge funds and other speculators to use leverage and other derivatives like forwards and swaps to supercharge their bets against the yen. Joseph Adinolfi MarketWatch 21 November 2024 https://www.marketwatch.com/story/are-traders-setting-the-stage-for-another-bruising-unwind-of-the-yen-carry-trade-8b8fc73a Börsen i Stockholm och New York 4-5 augusti 2024 https://englundmacro.blogspot.com/2024/08/borsen-i-stockholm-och-new-york-4-5.html The yen carry trade was a sure-fire recipe for easy profits: Just borrow in Japan, then plow it into Mexican bonds yielding over 10%, Nvidia’s soaring shares or even Bitcoin. ...

Japan has had near-zero interest rates for three decades and its net public debt is 159 per cent of GDP. Just as is true of China’s policies now, this was the result of an underlying condition of “underconsumption”, or structurally deficient demand.  Given that condition, demand needs to be stoked. Huge property bubbles are a feature of such economies, not a bug, as is the desperate need to intervene manically when they burst. In both cases, monetary policy was loosened, credit exploded and a huge boom in real estate was unleashed, again in the 1980s in Japan and the 2010s in China.  The huge defect of the “let us have a real estate bubble” solution to excess savings is that its bursting leaves a residue of falling asset prices, unpayable debt, damaged finance and unhappy people.  Worse, it also leaves still weaker demand, as the impact of the collapse further undermines investment and so exacerbates excess savings. Without strong policy action, the latter is almost certa...

Let’s start with the big picture.  Over the 40 years or so since Deng Xiaoping, China made a historically remarkable leap from widespread poverty to industrial prowess. Other countries have gone through this cycle, of course, but none so large and certainly not so fast. This had many global effects, including a massive boost to commodity demand. A growing but resource-constrained China imported vast amounts of energy and raw materials, which were then transformed into infrastructure, housing, and most of all exports to the West, often at prices low enough to render others uncompetitive. Chinese creativity, resourcefulness, and an impressive ability to “scale,” combined with what used to be cheap labor gave them a massive Ricardian comparative advantage. China transformed internally as rural farm workers took factory jobs in gleaming new cities. Living standards improved, at least near the coast, further boosting consumer goods demand.  The nominally Communist government seemed...

The way it unfolded so rapidly — and just as quickly faded out — is exposing how vulnerable markets are to a strategy that hedge funds exploited to bankroll hundreds of billions of dollars of bets in virtually every corner of the world. The yen carry trade was a sure-fire recipe for easy profits: Just borrow in Japan, then plow it into Mexican bonds yielding over 10%, Nvidia’s soaring shares or even Bitcoin. Then came the spark: an interest rate hike in Japan. The BOJ’s benchmark is now 0.25% Then, seemingly all at once, investors bailed out of the trade According to GlobalData TS Lombard, there was some $1.1 trillion piled into the strategy, assuming all overseas borrowing in Japan since the end of 2022 was used to finance it and domestic investors used leverage for their foreign purchases. “Further carry-trade unwinding seems likely but the most significant and destructive part of this bubble-burst is now behind us,” Steven Barrow The bubble, as Barrow called it, has decades-old root...

  In 1971, US Treasury Secretary John Connally famously told his counterparts in the G10 that “the dollar is our currency, but it’s your problem.”  Connally was being unexpectedly candid about the fact that, even though the greenback was the world’s main reserve currency, its foremost purpose was to advance US interests. In June, the US Treasury added Japan to its “monitoring list” for potentially unfair foreign-exchange practices.  Although the Treasury stopped short of designating Japan as a currency manipulator – which could have resulted in the US imposing sanctions on one of its staunchest allies  Japanese authorities have indeed spent billions of dollars to prop up the yen, which has lost a third of its value since 2021 Ordinarily, monetary authorities will intervene to weaken the local currency to boost exports and enhance competitiveness.  The 1985 Plaza Accord, which led to the yen appreciating 46% against the dollar, did just that for the US, but dimin...

  In Japan you can still borrow money almost for free. As a result, investors such as hedge funds and investment banks have taken out large debts there. They then exchanged the yen they borrowed into another currency where interest rates are higher, such as US dollars or Mexican pesos. Bank of Japan took everyone by surprise by raising borrowing costs from 0.1pc to 0.25pc, and signalling it was prepared to go further. “The market was a bit complacent and sitting on a very large-sized carry trade. You just need a few of those people saying ‘I don’t want it anymore’,” says Andres Sanchez Balcazar, head of global bonds at Pictet Asset Management. “So they sell the foreign currency and buy the yen, they close their liabilities in yen and they close the investments in other currencies. Telegraph 8 August 2024 https://www.telegraph.co.uk/business/2024/08/08/japan-blew-up-global-markets-it-could-happen-again/ Stocks still vulnerable to further unwind of yen carry trade https://englundmacr...

There was, Japan's meteorological agency said, an increased risk of a "major earthquake". Japan's prime minister has cancelled a planned trip to a summit in Central Asia to be in the country for the next week. For many in Japan, thoughts turned to the "big one" - a once-in-a-century quake that many had grown up being warned about. BBC 9 August 2024 https://www.bbc.com/news/articles/cx2en927054o https://englundmacro.blogspot.com/2024/08/borsen-i-stockholm-och-new-york-8.html

  Wall Street analysts have debated how much money had been parked in the trade, and how much of it has since been unwound.  The inability to settle on a consensus has been due in part to the opaque nature of flows tied to the trade, as well as disagreement about what exactly constitutes a carry trade. Some have said the yen carry trade amounted to less than $500 billion at its peak, while others have estimated that more than $1 trillion in assets could be exposed to carry-related risks.  But everyone essentially agreed: there was still more toothpaste left in the tube. “There has been no significant change in terms of bond flows and equity flows into and out of Japan.” But others said a substantial amount of Japanese “real money” investors — including pension funds and insurance companies — also had exposure to the trade, mostly by holding unhedged positions in foreign assets.  Japanese investors owned more than $4.1 trillion worth of foreign stocks and bonds as of ...

  USA-börserna bästa dagen sedan 2022 https://www.di.se/live/lattnadsrally-tog-usa-borserna-till-basta-dagen-sedan-2022/ Moral hazard is back on the agenda; should central banks cave to markets? https://englundmacro.blogspot.com/2024/08/moral-hazard-is-back-on-agenda-should.html Denna sida uppdateras The immediate storm may be passing – but dark clouds have gathered over the US economy. Japan. Carry Trade https://englundmacro.blogspot.com/2024/08/the-immediate-storm-may-be-passing-but.html  Börsen stängde på plus   https://www.di.se/live/borsen-stangde-pa-plus-efter-sen-vandning/ German Trade Balance Drops The eurozone’s most important economy, recorded 20.4 billion euros trade surplus.  That was less than the €24.9 billion surplus it booked in May. Exports fell 3.4% Antalet nyanmälda arbetslösa i USA uppgick till 233.000  Veckans dessförinnan reviderade 250.000 personer. Östersjöstiftelsen, som bygger på löntagarfondspengar och stödjer forskning, ska ha låg ris...

 The US Federal Reserve has waited too long to switch from fighting yesterday’s inflation to fighting tomorrow’s unemployment, allowing pre-recessionary conditions to metastasise. The immediate storm may already be passing. But there has unquestionably been a massive and sudden repricing of interlinked bonds, equities, and currencies across the world. That is more than a minor tremor. Parallels with the global financial crisis are completely misplaced. The eurozone is in stagnation and is reverting to fiscal austerity rather than doing anything about it.  The Bank of Japan’s long-delayed rate rise finally happened last week, timed to horrible perfection, just as America’s economy wobbles.  Japan is still the world’s largest creditor with some $3.5 trillion of net global assets.  When de facto yield differentials between Japan and US narrow suddenly,  and the yen appreciates violently, it leads to massive repatriation flows by Japanese investors. What happens if ...

  Nasdaq 1 dag och fem dagar Platt fall på Wall Street  Wall Street vände ned på onsdagskvällen efter en stark start.  Samtidigt steg marknadsräntorna. https://www.di.se/live/platt-fall-pa-wall-street-stangde-klart-pa-minus/ Lower for longer - Japan https://englundmacro.blogspot.com/2023/12/lower-for-longer-japan.html https://www.bloomberg.com/news/articles/2024-08-07/japan-morphs-into-the-center-of-worry-for-global-investors Kronan och Carry Trade -  SEB har en förklaring   ”Ett av de stora temana på marknaden just nu är att så kallade 'carry trading'-strategier – finansiera med en lågräntevaluta och placera i en högräntevaluta – klappar ihop och avvecklas”, skriver SEB och fortsätter: ”Volatiliteten, räntehöjningen i Japan och förväntade sänkningar i USA finns bland anledningarna till att dessa spekulativa strategier inte längre fungerar som tidigare, och när investerare nu stänger sina positioner behöver de köpa tillbaka finansieringsvalutor (till exempe...

 — a series of key assumptions that investors across the world were banking on —  They look, in hindsight, a bit naïve: the US economy is unstoppable; artificial intelligence will quickly revolutionize business everywhere; Japan will never hike interest rates — or not enough to really matter. The one-two-three punch jolted investors into suddenly seeing the peril inherent in, say, bidding Nvidia shares up 1,100% in less than two years or loading up on junk-rated loans bundled into bonds or borrowing money in Japan and plowing it into assets paying 11% in Mexico. In the span of three weeks, some $6.4 trillion has now been erased from global stock markets. Bloomberg 6 augusti 2024 at 12:27 CEST0 https://www.bloomberg.com/news/articles/2024-08-05/-6-4-trillion-wipeout-sows-fear-great-unwind-is-just-starting Carry Trade - The Usual Suspect https://englundmacro.blogspot.com/2024/08/carry-trade-usual-suspect.html   Nvidia’s Market Cap https://englundmacro.blogspot.com/2024/02/n...

Is the stock-market meltdown due to the unwind of this popular hedge-fund trade? Some are speculating about a closer link between the unwinding of the carry trade and sinking stocks.  Others say the reality is likely more complicated. Some concluded that the increasingly tightknit relationship between the rising yen and falling U.S. stocks likely wasn’t a coincidence.  They argued that traders might have been directly fueling leveraged bets on U.S. stocks — particularly megacap names and technology stocks — with money borrowed in yen.  Now these traders were being forced to cover their short-yen positions by selling their holdings in U.S. stocks. Carry trades have been used by sophisticated traders like hedge funds for decades. The strategy involves borrowing in a low-yielding currency like, in this case, the yen, then swapping the money for another currency and investing it in assets with a higher yield. They tend to be most profitable when there is a large spread betwee...

Den japanska valutan yenen fortsätter att vara den allra största snackisen på de globala finansmarknaderna då investerare fruktar att landet – världens fjärde största ekonomi – riskerar en valutakris. Bakgrunden är denna: yenen har försvagats med över 10 procent gentemot dollarn sedan årsskiftet, och tappet har tilltagit de senaste dagarna. Men tidigt på måndagsmorgonen svensk tid skedde något exceptionellt – plötsligt stärktes yenen kraftigt med nästan 3 procent på mindre än ett par timmar, och detta utan några nyheter publicerats. Resultatet av endast en räntehöjning samtidigt som inflationen har stigit är att japanska realräntan har fallit kraftigt. Därmed har ett rejält realräntegap öppnat sig gentemot USA  Johan Wendel DI 29 april 2024 https://www.di.se/analys/varningsklockorna-tjuter-for-gigantiska-skuldexperimentet/ A systemic financial crisis - Japan The Japanese central bank may be forced to hike rates Japan’s enormous government debt and vulnerable banking sector mean tha...

  A $59.3 billion magnetic-levitation train that will run at 500 kilometers an hour and eventually connect Tokyo and Osaka in just over 60 minutes. Kawakatsu has refused to allow construction in his region After a gaffe in which he called public servants “highly intelligent, unlike people who sell vegetables, or take care of cows,” Kawakatsu is now set to resign in June amid anger from his constituents. (Stockholmare är smartare...) Formally known as the Chuo Shinkansen, it is Japan’s most ambitious construction project, a dream that has captivated tetsu-ota, or train nerds, for decades.  First envisioned in the 1970s, the maglev — which uses superconducting magnets to levitate the train about four inches (10 centimeters) off the track — hearkens back to the building of the first bullet train, an all-hands project that can demonstrate Japanese ingenuity to the world. Bloomberg 5 april 2024 https://www.bloomberg.com/opinion/articles/2024-04-04/japan-s-maglev-project-can-prevail...

  December 2023 BOJ Isn’t Ready for a Requiem to the Negative-Rate Era - Bloomberg https://www.internetional.se/japan.htm The “ultimate fear” is that Japanese investors, who have vast holdings of U.S. fixed income,  including Treasury notes and other securities, “begin to see a higher level of yields in their own backyard,” Torsten Slok, chief economist at Apoll MarketWatch 28 July 2023 Englund: Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak (englundmacro.blogspot.com)

The Japanese central bank may be forced to hike rates Japan’s enormous government debt and vulnerable banking sector mean that doing so could trigger a systemic financial crisis. Hiking interest rates in an environment of near-zero interest rates, when investors expect rates to remain ultra-low forever, will be challenging But if inflation remains persistently high, policymakers will be forced to act. After all, markets will inevitably push up rates across the yield curve. While some pundits cite Japan as evidence that enormous government debts do not matter, the fact is that they do.  Like other highly indebted countries such as Greece and Italy, Japan has experienced extremely low average growth over the past three decades. Kenneth Rogoff Project Syndicate 5 October 2023 https://www.project-syndicate.org/commentary/japan-monetary-tightening-could-affect-global-economy-by-kenneth-rogoff-2023-10

 It has taken two generations for most countries that were occupied by Nazi Germany to admit that it was the resisters, not the collaborators, who were the minority.  But now we risk swinging too far the other way: normalizing collaboration and making resistance such an exceptional choice that only saints would choose it.  Collaborators, argues Ian Buruma in his gripping study of three such figures, are a compelling subject because they have succumbed to a temptation that would confront us all if placed in the same situation. This is not how collaboration used to be understood.  The trials of Vichy officials who had been complicit in the murder of Jews continued into the 1990s. But not until Jacques Chirac’s presidency (1995-2007) did France publicly acknowledge that the deportation of French Jews to the Nazi death camps had been the work of a French government, French police, and French collaborators. https://www.project-syndicate.org/onpoint/wartime-collaboration-r...