Monday, May 29, 2006


'Life After ZIRP'

The Telegraph has this editorial from Ambrose Evans-Pritchard. "Round one to the Bank of Japan, ultimate cause of the violent sell-off in stocks, commodities, and riskier bonds across the world over the past three weeks. Governor Toshihiko Fukui has bled more than $140bn (£75.3bn) from his banking system since March 9 to reduce a menacing overhang of liquidity left from the battle against deflation. He is halfway through."

"No longer buying fistfuls of US Treasuries with printed money to hold down the yen, the Bank of Japan has been the silent force pushing up global bond yields this year by 0.8pc, the jump that really lies behind the market rout."

"Japanese holdings of US Treasuries have fallen by $74.5bn since December. 'We are reaching an inflection point in monetary policy,' said Mr Fukui. Inflection to some, bloodbath to others. The first casualties began to emerge on the fringes of the 'yen carry trade' earlier this spring. Hedge funds that had borrowed for zilch in Tokyo, to lend for a fat premium to overheating Iceland and New Zealand, began rushing for narrow exits."

"'Most people underestimated the effects of monetary tightening in Japan,' said Phillip Poole, an economist at HSBC. 'The liquidity that has driven these markets is being withdrawn.'"

"The next Japanese spanner in the works will be the end of zero interest rates, or zirp as it is known. Bank-watchers have pencilled in July or September for the moment of reckoning. Few investors lose sleep worrying about life after zirp, but our guardians at the Bank of International Settlements view it as the greatest imminent risk to global markets."

"'We are all going to have to look over our shoulder when Japan raises rates because nobody knows what is going to happen when all this money goes back home,' said a BIS official."

"Even so, round two may yet go to the European Central Bank on June 8 as Frankfurt's hawks lose patience with exploding M3 money growth, and a housing bubble threatening the viability of monetary union itself. Housing loans (ex Germany) grew 19.4pc in the year to March, on top of the 17pc surge the year before. Spain is a disaster waiting to happen. In Portugal it has already happened."

"Judging by the apocalyptic tone of the Bundesbank's May report, Europe is on the brink of a monetary shock going far beyond the mincing half-measures trickled out until now by Jean-Claude Trichet, ECB chief and French 'soft euro' inflationist. On the warpath, the Teutonic-bloc is now trying to shame Mr Trichet's doves into doing their monetary duty. 'There is no dispute that a further tightening of monetary policy is needed,' said Austrian governor, Klaus Liebscher."

"Ben Bernanke was back-peddling fast in a letter to Congress last week, pleading that core CPI inflation 'overstates' price rises. 'Monetary policy must be forward-looking,' he said. Has the Fed already gone too far, baking a recession into the pie? Will the delayed effects of past tightening kick in, with mounting ferocity, just as the housing boom plummets into bust?"

"'Housing mayhem seems unavoidable. The US hard landing begins now,' said Charles Dumas, global strategist at Lombard Street Research."

"Mortgage applications are down 17pc in a year. House sales are down 5.7pc, and inventories of unsold new houses are at their highest since 1996. The central prop holding up the US consumer boom is crumbling, leaving behind record household debts equal to 127pc of disposable income."

"'As the hard landing/recession arrives, it is the Asian exporters, the commodity markets and currencies, and especially the base metals that are likely to crash over the next year. The game is up for assets that have gone way too high on the basis of cheap funding and optimistic delusions,' said Mr Dumas."

'Japanese holdings of US Treasuries have fallen by $74.5bn since December.'

The central banks have been telegraphing these moves for over a year through the G7 and the BIS. They are in agreement on drawing down liquidity. Even Peter Grandich thinks copper is a disaster waiting to happen.
'As the hard landing/recession arrives, it is the Asian exporters, the commodity markets and currencies, and especially the base metals that are likely to crash over the next year. The game is up for assets that have gone way too high on the basis of cheap funding and optimistic delusions,' said Mr Dumas

This is exactly what I've been arguing. When the U.S. consumer finally sobers up (or simply taps his credit line out), China is going to fall hard. That, along with greatly diminished U.S. homebuilding, is going to dry up demand for industrial metals and gold, which has been trading in sympathy with other metals, will come down as well. The bottom line is that CBs all over the world are withdrawing liquidity, and that's a bad sign for PMs and other bubblicious commodities.
except CBs will react by printing money, and the precious metals will rise. how low do you think commodities will go in china collapse? a 30% correction would probably be normal for any commodity bull market.
I should remind people that gold fell 50% early in the 70s before going right back up. commodities went through a bull market in the 30s and the 70s, hardly good times for the overall economy, no?
Nobody said it was going to be easy:

'The Bank of Japan said it has injected a total of 1.5 trln yen, the largest-ever, into the money market today, in a move seen aimed at curbing a rise in overnight call rates.'

'The central bank's same-day fund supplying operations followed a similar move last week, which was the first time since March 3, 2005. Under the same-day funding operations, the BoJ offers to buy bills from major banks and other financial institutions.'
Earier this year on Ben's housing blog I stated that the advent of BOJ tightening signalled the beginning of the end.

Damn, I just hate being right! ;-)


John in VA,

These are exactly the circumstances wherein the PMs will eventually divorce themselves from other commodities.

Inflection to some, bloodbath to others.

...greatest imminent risk to global markets.

Housing mayhem seems unavoidable. The US hard landing begins now.

Statements like these fuel PMs above all else. Alas, it's still early and the sense of foreboding is not yet overwhelming. A further correction is not out of the cards...
The entire world is going schizophrenic on these issues, so you will see a lot of volatilities. My take is that either side can be right, at some time on some aspects; but either side can be wrong too, at some time on some aspects.

All depends on smart allocation and correct timing.
According to source who has never been wrong...we've got a BIG correction in the world equity markets coming either tommorow or Tuesday. Big boys are going to be selling.

It's going to be really interesting to see how gold reacts. Actually, the extreme see-saw action taking place right now on Hong Kong spot gold market is what is really interesting. I can't call it.

Fasten your seatbelts boys and girls.
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