Welcome we will be reviewing macro events from this past week from The Post I made at the beginning of this week on 2/22/22.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
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Table of Contents
State of the Macro
Japan Commits Hara Kiri
Bank of England Speech
US Employment
US Treasury Markets
Crypto Macro
Conclusion
1. State of The Macro
(this section was written on Tuesday 3/29)
I have spoken quite a bit about how the current cycle is significantly accelerated compared to the previous ~10 year cycle from 2009-2019. That cycle ended several years ~6 years after it started, and the taper took another 2 years to begin, and almost 1 year to fail. This time the cycle ended in about 18 months, the taper started instantly, and lasted 5 months. It’s been two weeks since the taper officially ended and the yield curves on US treasury bonds are already inverted. Last time that took an entire year to happen.
A brief explainer for those unaware of what a yield curve inversion is:
There are many different types of treasury bonds, notes, and bills, that are sold by the treasury. The main differentiator between these notes is their maturity date. There is short term debt that matures and pays out in 1 month, 3 months, 6 months, etc. And there is long term debt that matures and pays out over longer periods of time, like 3 years, 5 years, 10 years, 20 years, 30 years, etc. As a general rule, longer term debt tends to pay a higher interest rate than shorter term debt, because the longer you hold on to a debt without being repaid the more risk you are taking. So an inversion of the yield curve would be (as happened this week), when a 2 year treasury note pays more interest than a 10 year bond at maturity. You’ll notice in the Yahoo article I linked above they point out that this is typically a leading indicator of a recession, but the writer is unfamiliar with government lending markets and made the following claim about the timing of the last yield curve inversion.
Literally the very next month in September 2019 the overnight lending markets collapsed which lead to rate cuts preceding CovID, but the writer is somehow implying that CovID was the cause, and not simply the excuse to print more money to cover the collapse in September. I explained what happened in September 2019 in detail last month here, and why its important to understand now.
However, I’m going to also state that the typical interpretation of a yield curve inversion as being an artifact of the market expecting a recession no longer applies, as the treasury markets are not representative of investor sentiment in any way, shape, or form. The majority of government spending is funded on the short end of the curve, here is a quote from my February Treasury Auction Post.
As inflation increased, and the rates paid on primary auctions for the longer term notes increased when the Obama administration was promising an end to QE3 back in the 2010’s, the government shifted the majority of their funding to shorter term notes to avoid taking the budget hit because they budgeted for a much lower average interest rate paid. They are still doing this now because every temporary change within government becomes permanent.
So with a larger portion of government spending on the shorter term notes, there is significantly more pressure on these notes than there is on the longer term debt. Now that the Fed has pulled out of all of those markets (supposedly), this naturally results in interest rates on the shorter term debt rising the fastest as it was the debt that required the most intervention from the Fed. The yield curve inverting is not a sign of anything anymore because that entire market was broken, bruised, and left lying in a ditch, covered in mud, with its pelvis shattered after the US congress got done with it. But as with all things, people don’t like change and will look towards old signs and figures when trying to understand the future. So, we too must also look. Previously in 2019, the yield curve inversion was followed within a month by a massive lending collapse, and a Federal Reserve that entered panic mode in October 2019. We will see if that same schedule holds true, but if it does, expect no one to really notice the initial sign of trouble, much the same as nobody noticed the September 2019 crash (except me and a few other weirdos). I expect that the next collapse will only go unnoticed for a week at best, there will not be a 6 month warning like last time.
Japan commits Hara Kiri
If any of you have ever seen the movie “The Last Samurai,” there is a scene in it where Tom Cruise, a captured American soldier, dazed from battle is carried past a defeated Japanese general who opts to kill himself in defeat. A strange ritual if you will. I empathize with captain Nathan Algren because I feel much the same today watching Japan from where I sit in a broken and dazed America.
Well, Japan, in the most honorable fashion has decided that they have already lost the battle and they are doing the only thing that can be done by a government that has backed themselves into this corner. They have chosen to die with the lie. They are committing hara kiri, the slow kind, where you push the knife into your own belly and twist it, but there is no sympathetic samurai there to take you out of your misery. Yes, the Bank of Japan has announced the following:
The move bolsters the BOJ’s intervention in the bond market, running from Monday through Thursday, with an offer to buy unlimited amounts of 10-year government bonds at 0.25%.
Essentially they will be printing up endless amounts of Yen to control interest rates on Japanese treasuries across the board. In January they were discussing a potential taper, now it’s March and they are back to printing unlimited Yen to fund government spending. This is how fast this cycle will go for the other basket-case economies. The US and the Eurozone are next. In the last 2 months, the Japanese Yen has fallen 20% against Gold, also a significant fall against bitcoin and just about every other asset. (This is a significant move for the Yen, as the Yen and Gold have both typically been safe haven currencies but the Yen is slowly losing that status due to the Bank of Japan’s actions. Those of you here from TradersEye and 1T1M may remember my predictions of this from back in 2018).
This move is a further nationalization of the Japanese public debt, on top of their nationalization of their stock market. Anyone who is smart is selling treasuries to the Japanese government and getting out of the currency and into greener pastures. The collapse in value of the yen against assets will only continue and is a peek into what awaits us in the US and Europe. This fate might also befall Australia, New Zealand, The United Kingdom, and Canada depending on what choices their central banks make over the next year or two. The US and Europe’s fate’s are already sealed in my opinion.
In order to facilitate government spending well in excess of what they take in, the Bank of Japan is holding almost all interest rates at or below 0.
Under yield curve control, the BOJ sets its short-term rate target at -0.1% and that for the 10-year JGB yield around 0%.
Its current guidance is to allow the 10-year yield to move flexibly, as long as it is below an implicit 0.25% ceiling set around the target.
You can refer to section 3 of my post from January to see what my thoughts were about how necessary a commitment to taper was for Japan back then, as well as taking a peek at their debt to GDP which is the worst in the world currently and will very likely continue to increase at an unsustainable rate. I’m not sure what Japan will do next, I don’t live there, and a lot of their announcements come out in Japanese so I often have trouble following them as closely as I do the west. I suspect at some point Japan will be opening their borders to whatever sorts of immigrants they can get as like many developed nations they have a severe problem with their birth rate and are facing population decline and what is essentially a zombie government to go along with a zombie corporate sector and stock exchange. They’re on life support, and this will likely mark the nail in the coffin for the country’s productivity, but at least their exports will get cheaper for everyone else to buy, so their is a silver lining if you want a Yamaha guitar or whatever it is Yamaha makes these days.
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