Day: August 19, 2013

Aug

2013

The One Line Bernanke is Praying Doesn’t Break

The QE party is ending. And the following hangover is going to be brutal.

Since 2007 the Central Bankers of the world have operated under the belief that they can hold the financial system together by engaging in round after round of Quantitative Easing (QE) without losing control of the bond markets/ interest rates.

They believed this because:

1) We haven’t had a bear market in bonds in 30+ years

2) They believe that they (Central Banks) will never lose credibility with the markets.

This entire theory crashed into the wall in April 2013 when the Bank of Japan announced its “shock and awe” QE program.

The yield on the ten-year Japanese Government bond has since violated its trendline and is now retesting former resistance. This is a classic breakout that typically precedes sharp moves higher. In the case of Japanese Government bonds, this would mean the bonds losing value.

Why does this matter?

This matters because bond markets have a nasty tendency of spinning out of control very quickly once things begin to unravel. A great example of this is Italy, which was considered a rock solid pillar of the EU for the better part of the last 15 years… and then, it lost all credibility in a matter of weeks and began to collapse.

As you can see, Italy’s ten-year bond yield broke its trendline in the autumn of 2011 when the EU crisis first began to spread outside of Greece. It hovered around 5% for a few months and then skyrocketed above 6%. Later it spiked again above 7%.

Both of these spikes occurred in just a few weeks’ time. What was thought to be “rock solid” for over a decade became bankrupt in a matter of months.

On that note, Ben Bernanke is praying to the Market Gods that the ten-year Treasury doesn’t take out the line below:

“So what?” many will think. What’s one trendline for bonds?

As the long-term chart shows. This isn’t just any trendline. This is THE trendline. Take it out and the 10 year will likely be yielding 5-6% in no time… which by the way is where it was for most of the ‘90s and very early ‘00s.

The only difference is that a drop like this would literally render the Fed bankrupt. The Fed currently owns 30% of all the ten year Treasuries in existence. If yields were to return to 5-6% on the ten year Treasury then the Fed would have literally lost several hundred billion Dollars on its Treasury holdings.

Sure, the Fed could print money to deal with this. But if Treasuries begin to collapse while the Fed is already buying them… and it can only buy more by money printing, then it’s GAME SET MATCH for Bernanke’s QE, the Fed, and the US economy.

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Chief Market Strategist

Phoenix Capital Research

Aug

2013

Asia’s Economic Engine is Breaking Down…

Asia has become the most important issue for the markets today. The Central Bankers’ dream of endless QE has become a nightmare for Japan while China’s “growth miracle” is rapidly falling to pieces.

Let’s start with Japan.

Japan launched its “shock and awe” mega-QE policy in April 2013. Having already launched eight QE programs over the last 20 years (equal to 20% of Japan’s GDP), Japan has only experienced two years in which GDP growth has exceeded 3%.

Despite this failure, Japan’s political leadership, lead by Shinzo Abe opted to increase its QE efforts, announcing a QE program equal to $1.4 trillion, roughly an additional 20%+ of Japan’s GDP.

The hope was that this massive stimulus would result in an uptick in GDP and employment.

Unfortunately, neither has picked up. Japan’s June industrial production fell 3.3% month over month in June. Household spending unexpectedly dropped 2% month over month for the same time period.

At the same time, inflation is beginning to rear its head.

Japan’s consumer price index registered its first increase in 14 months in June. The pace of increase was the fastest since 2008 when commodity prices were at record highs.

This is a huge problem. If the cost of living in Japan continues to rise without a commensurate rise in incomes or GDP, then Japan is finished as the benefits of monetary intervention will have been completely overcome by the negative consequences.

Another key development for the global economy that needs to be monitored is the collapse of China.

The mainstream financial media continues to proclaim that China’s liquidity crisis is solved and that the Chinese economy is growing at 7%.

However, we get confirmation of a slowdown in China via the latest round of corporate results there.

Consider that:

Apple just reported a 14% drop in Net Sales for operations in China.

Yum! Brands (owns Taco Bell, KFC, etc.) saw a 7% drop in sales in China.

Cosco Shipping (China’s largest shipping group) saw its first half net loss triple.

Anglo American, a mining group producing coal, iron ore and precious metals with large exposure to China, saw a 34% in pre-tax profits in the first half of 2013.

I also note the collapse in Copper (black line), which is closely mirroring the collapse of China’s stock market (blue line) below.

Combined, China and Japan account for roughly 18% of Global GDP. They are the second and third largest countries in the world respectively. The fact that the former is definitively in a hard landing while the latter is facing systemic unrest will not be something the markets can ignore for long.