Before we get to that, though, let’s look at some of the places where the bears remain in charge…
The official definition of a bear market is a fall of 20% from the peak. Let’s see how different asset classes stack up using this metric. First, how are global stocks doing? The MSCI World Index officially entered bear market territory when it closed at 1345 on 11 July this year – 20% below its October 2007 highs. And it’s carried on sliding since – now down by 55% from peak to trough.
And you can’t have avoided noticing the savage commodities correction these past few months. Oil, gold, copper, wheat – they’ve all fallen by at least 20% from highs earlier in the year.
One of the most commonly used measures for the broad commodity sector is the CRB. It currently stands at 55% from the peak in June. No disputing the bear’s work there.
The bull market that never ends
But there is a market where you can always make profits from others’ bullishness. I’m talking about the currency, or Forex markets.
Because each currency is measured against another one, for every bear market, there has to be a corresponding bull market.
Let’s look at sterling. You’ll be aware that the pound has been a basket case these last few months. In fact, if you look at it over the last the year, it’s been smashed against every other major currency.
Against the US dollar, sterling has fallen 26%; against the euro, it’s fallen 21%; and it’s lost 23% of its value against the Swiss franc.
Which ever way you cut it, sterling’s in a bear market. But remember, Forex is a zero sum game. While the guy holding sterling has been losing money in a ferocious bear trend, the guy on the other side of each one of these trades has been raking it in.
And what really stands out is that whilst stock markets around the world have been in bear territory, one particular currency has been on fire. I’m talking about the Japanese yen. It’s outstripped all the others by going up 40% against the pound in the last 12 months.
As stock markets have fallen, the Japanese yen has soared…
Source: Bloomberg
The chart shows the Dow in red and the Japanese yen versus sterling in black.
The yen tends to be inversely correlated to stock markets. When stock markets are strong, the yen is weak, and vice versa.
This is because over the past several years, with Japanese interest rates at zero, investors have taken advantage of cheap yen-denominated loans. They borrowed in yen and bought into higher yielding investments – e.g. other currencies, stocks or commodities to earn the interest rate difference, or ‘carry’ (hence the name, ‘carry trade’).
This was all working well for investors. They were making money by borrowing cheap… and making inflated returns. In essence, they were using leverage. Meanwhile, the act of borrowing was, in effect, the same as selling yen – so naturally this pushed the yen down in value.
It was all going so well…
Everything was fine until the US housing market blew up and spilled over into other financial markets. Investors were forced to close out their winning trades in order to cover losing ones.
We have seen a huge deleveraging of financial markets – and a rush to pay back yen loans – in other words, buying yen. This has caused the yen to rally strongly – roughly in step with the stock market collapsing. Now, when stock markets rally – i.e. when there is an appetite for risk – then the yen is sold off to fund trades. And when the stock market falls, the yen suddenly finds favour again as a “risk aversion” trade.
We’ve seen this week that President-elect Obama’s huge infrastructure stimulus proposals have got the confidence back for stock market investors. Hence yesterday’s impressive rally in worldwide stocks (and corresponding fall in the yen).
But stock markets are not out of the woods yet – the economic data is still weak.
When equities fall, expect to see the weakest global currency (sterling) fall and the strongest (yen) rise. It’s a bull market that could run for as long as the bear market in stocks.
Until tomorrow,
Frank Hemsley
Fleet Street Daily
At least Britain excels at something…
BY BEN TRAYNOR
What with Northern Rock, the special liquidity scheme and all the other anti-downturn measures, our very own Bank of England currently wears the yellow jersey in a rather dubious race.
The chart below shows how central banks have been expanding their balance sheets since the crisis began last year:
Source: Bank for International Settlements
Since the end of June 2007 the Bank’s balance sheet has roughly tripled as it’s tried to unclog the credit markets.
And how has it paid for all those assets? By effectively printing money.
Bear in mind, we’re only now hearing policymakers talk openly about the need for quantitative easing. This is the policy Japan started in 2001, which involves the central bank buying assets in order to pump fresh money directly into the economy.
If we do go down this route, the resulting balance sheet expansion will dwarf what we’ve seen thus far. Sooner or later, the money itself will not be worth what it used to be…
The Daily Reckoning - Hey Dude, where’s my job?
BY BILL BONNER
As predicted in this space, the November payrolls were down a lot more than expected. Economists thought there would be 350,000 layoffs. Instead, the actual number was 200,000 more.
But US investors shrugged off the employment news. The rally continued...it has gone on for a month. The Dow rose again yesterday; this time it was up 298 points to 8,934. If the rally retraces 50% of the losses, it will make it all the way to 11,000. So, this trend probably has a way to go.
Oil rose too – back up to $43. And gold shot up $17 to $769.
Commodities, stocks, precious metals – almost everything was up yesterday.
One important exception: treasury bonds. The yield on ten-year T-notes rose to 2.76%...leading Bloomberg to report:
You can read today’s Daily Reckoning in full here
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