CÓMO PUDO RECUPERARSE JAPÓN DE SU PEOR "CRASH" DESDE 1987- SU GPIF "ANGEL"” - JustDario

HOW COULD JAPAN RECOVER SO FAST FROM THE WORST CRASH SINCE 1987? THANKS TO ITS GPIF “ANGEL” - JustDario: No person can pretend to know everything; it is simply not humanly possible. If anyone claims to do so, more often than not, they actually know little in reality. Personally, I use an investigative approach in everything I do, most of all to fill the gaps in my ignorance. This...

 Sometimes, like today, I receive one of those comments that might easily get lost in the ocean of social media, but that in reality deserves much bigger attention since there is great value in it. This is the comment I received to this post on X:

 

GPIF stands for “Government Pension Investment Fund” of Japan and is literally the largest pension fund in the world with 258 trillion JPY, about 1.8 trillion USD at the current FX rate, of AUM as of the end of June 2024. These are the investment principles upon which Japan’s public pensions are being managed: 

 

 Minimal risk and long-term perspective 

Diversification by asset class, region, and timeframe 

Maximize returns against benchmarks using a mix of active and passive investing 

Focus on ESG principles 

Pursuing initiatives to promote long-term growth of investee companies and the market as a whole 

 

 All of these principles translate into a very simple, yet (so far) efficient portfolio management strategy you can see below:

 

 

 

 

As you can see from the chart below, since BOJ and FOMC policy decisions of the 31st of July that triggered a brutal JPY carry trade unwinding, US Treasuries and JGB appreciated while the TOPIX and SPY, after crashing almost 19% and 6% respectively into the 5th of August, then started an epic recovery.

 

 

So what likely happened in those days? Considering GPIF investment principles and strict asset allocation policies, it is very fair to assume that the largest pension fund in the world was actively trading in the market and, with the help of BOJ, FED, and other Central Banks, effectively saved stocks, especially Japanese ones, from an epic collapse. How did they exactly do it? 

 

Considering Japan stocks were crashing on the 5th without a chance to find a bid, the first “help” came from the BOJ that started to buy JGB, pushing yields lower even if they just pretended to stop actively doing so a few days before. 

 

Thanks to BOJ’s actions, the GPIF started to sell JGBs to the BOJ and bid Japanese stocks aggressively, creating a bottom first and then igniting a relief rally into the close because it quickly had to rebalance its portfolio asset allocation. However, this clearly was not enough. 

 

When Europe and US stocks began to trade, the GPIF was such a big seller into the market that market makers’ liquidity quickly dried up to the point many brokers had to pull the plug to avoid a market going “no bid” and begin to free fall due to panic selling. 

 

In this context, the action of FED, ECB, and other central banks, added to the “flight to safety” into government bonds, creating a strong bid for GPIF to sell into, rebalancing this part of its portfolio without a big impact on the market like it happened to JGBs hours before. 

• Algorithms clearly picked up this flow and started to front-run it, bidding hard on Japanese stock futures, hence helping to ease the “mark to market” losses in that portion of GPIF portfolio further and limiting their pressure to liquidate US and Europe stocks in the market.
• With the liquidity raised from selling Foreign government bonds and stocks overnight, on the 6th of August, the GPIF could then burst into the Japanese stock market guns blazing and bidding whatever was up for sale, pushing stocks further higher.
• At this point, the momentum was clearly reversing, and all the market dynamics that pushed the financial markets bubble till now (momentum algorithms, passive investing flows, volatility shorting, gamma squeezing, and so on) kicked in, triggering the historical breakneck rally across the board we all experienced astonished.
• The GPIF still remains a bidder for Japanese stocks and will remain so till the end of this quarter since, as you observed from the chart above, its asset allocation is still unbalanced in favor of foreign bonds, stocks, and domestic JGB versus domestic Japanese stocks. As a consequence, no one should feel surprised anymore to see a “floor” being put on Japanese stocks even if the strong JPY appreciation, almost back to the levels of the 5th of August crash, should have triggered another significant sell-off in Japanese stocks.
• However, a stronger JPY and the fact that the GPIF reports its AUM in JPY helps to ease the selling pressure in foreign stocks and bonds, reason why the rally could continue to stay in place just experiencing some speed bumps here and there.
  

What shall we expect to happen in the future then? If the FED goes forward with its nonsense promise to cut rates (“IF THE FED CUTS RATES, THE DAMAGES WILL BE FAR GREATER THAN THE BENEFITS“) and US treasury yields go further lower, this will actually push the GPIF to sell US Treasuries (that are appreciating in value) to buy more stocks, especially foreign ones if the USD starts depreciating significantly. However, if the BOJ keeps its promise to let JGB yields rise (hence letting JGB value decrease), then the GPIF will have to buy more JGBs while selling stocks, especially foreign ones, since the domestic ones are still currently underweight in its asset allocation. All in all, in theory, this will be a zero-sum game for foreign stocks, keeping the future market impact of the GPIF trading limited.

 

 What happens if the FED cuts rates, reignites inflation, and US Treasury yields start rising again as a consequence? The GPIF will have to sell foreign stocks to buy foreign government bonds, and the same will happen in the domestic part of its portfolio if the JGBs will be finally allowed to rise. Clearly, Central Banks cannot afford the risk of such a big seller of stocks jumping into the market, so likely if this scenario unfolds, they will have to reintroduce yield curve control and eventually QE, making inflation problems even worse and damaging their local economies even more. Clearly, something has to give, and once again the central planners will be asked to decide between defending the current bubble or letting it pop to save their domestic economies and the future of their younger generations. Personally speaking, I do not think they will try to risk the GPIF starting to sell heavily into the stock market, inverting the momentum and triggering a cascade of selling/deleveraging with unforeseen consequences, which is why they will keep maintaining a loose monetary policy, praying for a miracle to rescue them from what’s more and more an inevitable fate.

 

 

 

 

We Charted the Plunge and Rebound in the #Nikkei Versus #Nomura and #Citigroup; the Correlation Is Frightening https://t.co/bGL7CzSc4O

The graph shows that the Japanese, Nomura, and the giant U.S. Citigroup, are trading in eerie correlation to the trading debacle in Japan pic.twitter.com/GZjsJmexAL

— Guillermo Ruiz Zapatero (@ruiz_zapatero) September 2, 2024

"SI LA FED BAJA LOS TIPOS, LOS DAÑOS SERÁN MAYORES QUE LOS BENEFICIOS" (21/08/2024)

Two weeks ago, traders assigned a 60% probability to a FED emergency rate cut, potentially up to 75 basis points.

 What was the “emergency” that required such a swift and powerful action from the FED two weeks ago? If your answer is “Japan,” then why should the FED cut rates and print money on behalf of the BOJ?

Why would a FED emergency rate cut two weeks ago have been the equivalent of throwing gasoline on the Japanese wildfire? Because decreasing the rates differential in the short end of the yield curve, the one with the greatest impact on FX rates, between the US and Japan would have strengthened the JPY even more against the USD, increasing the volumes of JPY carry trade positions forced to be unwound.

What did the FED do instead? It clearly coordinated with the BOJ to devalue the JPY to take the foot off JPY carry traders’ necks. How did they do it? Check out what happened to the EUR that, in the past 2 weeks, counterintuitively STRENGTHENED against both USD and JPY.

How could this be achieved? On one side, the US Treasury and the FED used the “buy back” program to bring down the yields in the long term of the curve while financing the purchases by issuing T-Bills and shorter maturity treasuries, ultimately decreasing the differential between EUR and USD rates. This wasn’t enough though; at the same time, the BOJ kept purchasing longer-dated JGBs, lowering those yields too. So, while the rates differential between USD and JPY curves remained roughly stable, it shrunk between EUR and USD while contemporarily widening between EUR and JPY. The combined effect of what I described is to trigger a bid for EUR since Eurozone government bonds were appreciating in relative terms against both those of the US and Japan.

Of course, what I described is a temporary fix and it has already exhausted itself. Why? Because if the DXY depreciates further, the FED will trigger a flare-up in inflation again due to a natural increase in the costs of all goods and commodities the US imports. On the other side, if the EUR keeps appreciating, that will have a significant impact on the export-oriented Eurozone economies that will eventually see a further slowdown of their GDP due to a decrease in exports (their goods will be more expensive compared to competitors like China).

 As a matter of fact, as you can see in the DXY chart below, the previous time the FED “intervened” to help the BOJ (and when the market was dreaming about 6 rate cuts to be delivered in 2024), it was forced to stop and U-turn its narrative exactly where we are right now.

 

To all those who advocate rate cuts because those will benefit the economy, I dare to ask where exactly the economy will benefit in the current situation. A rate cut will not only risk triggering a resumption of forced JPY carry trades unwind, eventually putting stocks back on the brink of crashing before forced deleveraging, but will clearly reignite inflation in a country already dealing with a cost of living more and more unaffordable for a larger and larger portion of the population.

 

As if what I described wasn’t enough already, if the FED cuts rates, there is the ultimate risk of triggering an inversion of the US yield curve back to upward sloping.

 Jerome Burns knows very well the moment the US Treasuries yield curve flips back to be upward sloping (as it should be in a world not heavily manipulated by central banks) it’s game over for stocks (“An inverted yield curve: why investors are watching closely“) since as you can see from the chart below the bubble always pops shortly after. Sorry, but this time, it won’t be different.

 

 

IF THE FED CUTS RATES, THE DAMAGES WILL BE FAR GREATER THAN THE BENEFITS

 

 

Ah, by the way, many other Central Banks like the #ECB have been doing similar things for years allowing banks to borrow from them at a rate and then lend the very same money back to Central Banks at a higher rate resulting in a “risk free” gain ultimately goosing banks bottom… https://t.co/T4GzOtV8zl

— JustDario 🏊‍♂️ (@DarioCpx) August 19, 2024

#NORINCHUKINBANK #CHAOS CAN TRIGGER AT ANY MOMENT - JustDario https://t.co/lxvZcgKQKb #Japan

— Guillermo Ruiz Zapatero (@ruiz_zapatero) August 20, 2024

THE JPY CARRY TRADE IMPLOSION CONTAGION IS ALREADY SPREADING INTO THE UK - JustDario

THE JPY CARRY TRADE IMPLOSION CONTAGION IS ALREADY SPREADING INTO THE UK - JustDario: While doing my best to untangle the mess of the Bank of Japan (BOJ), in particular, to figure out which financial institution/s could be in danger after what happened on Monday this week, I stumbled upon something very interesting. Please have a look. This chart represents the Bank of England...

 

... considering the almost parabolic spike in volumes drawn by banks from this facility. In that case, it looks like we have a bit of a liquidity problem in the UK.

 At this point, after looking closer into the volumes of this facility, I discovered something very interesting and I highlighted it to help you see what I saw.

 

Shocking, isn’t it? Here you have the perfect example of how the JPY carry trade became such an integral part of the global financial system with repercussions reaching far beyond Japan.

(...) 

Putting all the pieces of the puzzle together, at this point, it should be pretty obvious how banks have been pulling liquidity out of the BOE to absorb the drain in their books caused by the unwinding of the JPY carry trade that effectively removed a good chunk of leverage from the system. Wait, isn’t that supposed to be a zero-sum game for banks and brokers? In theory, yes, in practice, if the clients you sit in the middle and help facilitate trades start not having cash to settle their transactions, the bank is liable to cover the shortfall first and then go after the client that is defaulting on its obligations. The consequence of this is a liquidity gap that needs to be filled in the system. What if the client in trouble ends up not paying the bank? Well, the bank at the point takes the hit right into its capital.

Why is this specifically happening in London and not Japan or the US? The answer is straightforward because the vast majority of OTC derivatives are booked by banks and brokers onto their UK legal entities. This is a result of a particularly accommodative UK regulatory system regarding derivatives that allows banks to post a very small amount of capital in their books despite dealing with huge volumes in the space. What’s the rationale? To keep things simple, banks are supposed to “net” their flows and keep a very limited residual exposure. The problem is, in this incredibly complex web of transactions entangled between each other, if too many tiles come off, then everything has a very hard time keeping standing, similar to a Jenga tower. Furthermore, no one, including the regulator, has the full picture of it at any time. It is simply impossible to track with the current system in place as I already highlighted in “THIS IS NOT 1987, 2000, 2008 OR 2020, BUT A WHOLE NEW MARKET MONSTER”

After all we discussed this week, I believe there is no more doubt there is a “dead man walking” in the global financial system after Monday’s events. However, it is also clear there is an ongoing scramble to kick the can down the road as long as possible, hoping for a miracle to rescue all those involved.

However, as I explained yesterday, the longer the BOJ takes to stop the (liquidity) bleeding in the financial system caused by its reckless rate hike and series of FX interventions, the greater the damage. We see mounting signs of liquidity stress in the system (spike in the MOVE index, increase in Skew, gappy T-Bills trades in overnight hours, and so on) and even if investors love to ignore them in the same fashion they ignored those that anticipated last year’s US Regional Banks crisis and Credit Suisse implosion, at some point they will be forced to face reality because (black) holes in the financial system cannot be kept hidden forever.