Japan's economy proving policymakers wrong

It wasn't long before the Japanese economy proved contrast to policymakers belief  that exceptional stimulus measures coupled with an experimental and untested use of interest rates below zero are necessary means to break out of decades long stagnation and deflation with the latest printed figures indicating the nation's economic activity only grew 0.2%  in the second quarter of 2016, a paltry increase that's bound to pressure the government to deliver expectedly.

Having written about the topic of Japan on numerous occasions my opinion has yet to change regarding the type of policies employed by both monetary and fiscal authorities who have failed to drive the economic progression towards a better outcome.

In recent weeks we heard a bold but skeptical plan hatched by Japanese prime minister Shinzo Abe to expand his government's budget in an effort to support the economy, a frequent past time that's featured more distinctly as evidence clearly points to policy failure having promised to save Japan from economic implosion.

Japan's economy stalls in April-June, casts doubts on Abe's policies https://t.co/AIGc6FpAlG

— Jennifer Ablan (@jennablan) August 15, 2016

His partner in crime Haruhiko Kuroda hasn't had luck either in convincing buyers in the Japanese Yen of the overstated strength they've poured into the currency in the last year. The devastating impact this is having on the country's export clearly shows up with relenting desire to derail future prospects.

However no confidence can be found when the actions of the Bank of Japan imitate that of its counterparts and vice versa with a "follow the leader" mentality attached closely with every desperate measure taken by developed world economies in a bid to save themselves. Actions which are spurring on fresh currency wars amongst each other.

If the scale of stimulus were to be increased to a larger amount than what we're witnessing currently we are certain of financial catastrophe that would overshadow the haunted past and when considering the extent to which policymakers are willing to extend monetary programs, the ease of which to reach this state is not out of grasp.

Once again it cannot be stressed enough that world leaders need to come to the realisation that the global economy doesn't require infinite amounts of money supply to move the dial but a closer look into the shifting dynamics that are having a greater effect on the economic cogs that motion the mechanisms of growth

Technical Tuesday: Toyota Motor Corp.

Quarterly

Resistance built up in the region of ¥8500 managed to hold the price back and subsequently push it back down significantly. Where price is sitting currently ¥5000 marks an important deciding point in the direction of price when seeing the polarity it's offered this stock since 2008. 

Two scenarios could take place depending on price action: 

• The Japanese Yen weakens which directly influences the price of cars manufactured thus driving sales higher. With sales increasing the stock price should respond in the same manner. 
• The Japanese Yen continues strengthening as it has been for the past two years causing the price to fall below ¥5000 to the next support of ¥2500. 

Both scenarios seem likely however the probabilities are slightly in favour of the bulls here when weighing in that price remains above the 50 Simple Moving Average (Yellow Line) and the stochastic lies within oversold territory creating divergence in the process. 

Although the prospects look bright we're only 12 days into the quarter accepting that a lot can still happen in a space of three months. 

Weekly

The most notable feature on this chart is the technical topping formation of the cup and handle that's broken to the downside. We've witnessed a rush into the selldown with little chance for those planning a short side trade to enter. The price movements have lost considerable ground to the 200 SMA (Blue Line) and price now lies below it and the 50 SMA. 

This put the bulls on an unsteady footing going into the next few weeks in trying to attain their presence. Admittedly price does lie some distance away from the downtrend which does suggest sellers complacency setting in. 

Possibilities of a throwback are likely but should be observed with a great deal of attention to assess whether the strength exhibited by the bulls is strong enough to push price above both long term moving averages. If they can't the move should be considered as a chance to re-enter a short position. 

The moving averages are heading into a technical storm which is termed a "death cross"where the 50 crosses below the 200, if that were to happen we'll likely see a selloff ensue.

Do negative yields call for bold new economic policy?

An emerging topic that's gaining traction of late is the tremendous shift seen in developed nations bond rates with some nations sovereign debt trading at negative yields, a world first. The ever expanding debt load that's fallen below zero yield has begun consolidating after initially bulging outwards at an alarming pace but could be fuelled further if investors search for positive return is exacerbated by the enormous demand for both US Treasuries and UK Gilts.

As of today the US 10 Year Treasury yield recorded an all time low as buyers stormed through sellers demands as fears from Brexit flood the market with worry and the outlook for the interest rate environment drifted away from expectancy of normalisation after a lengthy period near zero, a once thought lower bound of rationality.  

Stocks are overstretched and have been for a while considering the previous quantitative easing measures that had were in place for some time which prompted companies to take advantage of the low cost of borrowing to repurchase stock in the open market. Although the effects of this helped extend the bull market by an extra year or two the party soon came to an end when the taps turned off and earnings were suppose to continue their growth.

This hasn't happened, in fact earnings are fading fast along with the global economy that can't find the right footing to leverage the mounds of debt created to act as stimulus.

The US Federal Reserve divergent plan to act in a different manner to its developed nation counterparts is a far greater mission than had been expected which is why investors foresee it departing from this policy stance and reverting back to its old habits of printing money till the cows come home.

Why is this all bad?

Simply because the world cannot function on the perpetual money creating scheme that has so many politicians fixated with in an effort to cover up their own flaws. We've entered a new era of economics and the need to find policies that branch off from convention yet address the evolutionary problems that constantly grow as year go by cannot be without fail.

We trust the message of the bond market over stocks.#stocks vs #bonds$TLT vs $SPY#GrowthSlowing@KeithMcCullough pic.twitter.com/EvlfjctE6o

— Hedgeye (@Hedgeye) July 1, 2016

Will the Fed's hesitancy lead the market to see more risk?

Wait and see; that's the approach expected to be taken by the US Federal Reserve at today's announcement around its decision on interest rates that are yet to see further hikes after initiating the first such increase in rates in almost a decade following the Fed's December meeting. Since then the market has been largely affected with issues like China's economic growth stagnancy, a European refugee crisis and now a possible exit from the EU by the United Kingdom.

All these events have prevented the Fed from acting on their aspirations of seeing the Fed Funds Rate sit at a targeted level of 1.4%...pretty rich coming from a central bank that's been artificially fuelling asset bubbles since the introduction of Quantitative Easing.

Many at the time shot down the FOMC's projections by reiterating the weak global economic outlook that seemingly took hold of proceedings in the latter half of 2015 that was expected to last throughout the entire 2016. We've seen those conditions escalated in the first half of this year with advanced economies taking the front seat in terms of uncertainty, all showing signs of dragging down global growth.

5 things everyone will be talking about this Fed day https://t.co/BpeQaWs9ht pic.twitter.com/EGLOIU2ex1

— Bloomberg (@business) June 15, 2016

Brexit might be the excuse used this time but the Fed knows very well that if it continues to stall hiking interest rates the higher the likelihood will be for it to renegade on its normalisation policy.

The real risk presenting itself in the global financial system resides in the fact that central bankers are losing their influential hold on directing their economies by allowing world government's to fall back on monetary policy to reboot the global economy.

This no longer stands as a strong deterrent of deflation that poses a risk to an ever increasing debt mound that injected myopic confidence into a system with the results proving unsuccessful. It also shows a worrisome sign for the economic outlook that partly fed the miniscule economic growth numbers we've seen up until now.

Questions are being asked whether US Treasury's will follow in the footsteps of fellow nations such as Japan, Switzerland and now German in dipping below negative yields?

I don't think the answer to the question should be to speculate whether they could but rather what are the implications if they do and these nations should decide to start the normalisation process considering their bond instruments are amused "safe" and investors continue to flock into them to weather the financial storm.  

Update on Global Bond Yields as Global Growth continues to slow pic.twitter.com/h6jL2hcWlF

— Keith McCullough (@KeithMcCullough) June 15, 2016

Japan's delay of a sales tax hike merely spells doom

In an expected move Japanese Prime Minister Shinzo Abe delayed the implementation of a sales tax hike following the failure of the once prospective Abenomics that's seen Japanese debt balloon outwards placing its citizens with grim prospects of the future. The move will bring short term gain to an economy that's been battling deflationary pressures together with contractionary expectations related to the health of economic activity in the country.

Abe didn't deviate much from what he had said last week when Japan hosted the other 6 remaining members who make up the economic council of G7(otherwise known as Group of 7). He reiterated the risk the global economy faces due to the slowdown in activity in emerging market nations saying China had influenced most of the current downtrend being experienced adding that the adverse effects felt by most nations around the world had taken the wind out of the sails of a planned economic recovery that had been underway for some time.

As much as these economic conventions help guide investors on the course of direction the world economy is headed in, very often they're used to test alliances with the case of Japan's ties to China standing on shaky ground having centuries old rivalry with its Asian neighbour.

Trying to point out China's failings while ignoring their own dilemma of an increasing debt horde is quite rich when coming from the likes of Japan.

S&P says #Japan sales tax hike delay makes 'some sense' (as debt to GDP has grown to 240%). https://t.co/fdwLDUssIQ pic.twitter.com/2ScgLFnVv5

— Holger Zschaepitz (@Schuldensuehner) June 1, 2016

Credit rating agencies have already started circling with a handful of critics painting a woeful picture of the outlook of the Japanese economy if it doesn't properly arrest its debt problems that sits at the highest levels to GDP amongst all countries in the world. Furthermore the situation only becomes bleaker when you weigh up the poor take up of prime minister Abe's stimulant fiscal measures that produced the tiniest amount of excitement at the beginnings of its undertakings that subsequently fell by the wayside in recent years.

Refusal to concede defeat, Abe's lack of sensibility has prompted Bank of Japan Governor Haruhiko Kuroda to rush in and "save the day" as some might term it, when in fact the policies churned out from the monetary body is in direct conflict with the goals of the economy and its people.

The market never lies and none can be truer when observing the abnormal strength of the Yen versus the US Dollar leaving many theorist scratching around for answer after the BOJ dropped interest rates below zero and announcing more stimulus measures to an already extended program.

Supranational monetary organisation the International Monetary Fund have recently warned developed nations that the limits of monetary stimulus are wearing thin and stressed the need for governments to begin "structural reforms" of their economies if they want to avoid riding into economic catastrophe further down the line.

But again the powers that be continue to steer their economies in the opposing direction of rationality with Japan being a basket case leading the forefront of technological advancement in an economy yet failing to take into account the impact such changes bring onto the decision making process of its citizens.

Looking at reasons for why conventional economic policies aren't working isn't enough and should instead be viewed as a need to push past old beliefs by exploring the possibilities of exceeding the bounds of theories that have laid around for decades and renew the study of economics as it was intended in the formative years of Adam Smith.

Major currency volatility is feeding from the sentiment of political uncertainty

Brexit might be fear-mongering the British public into the possibilities of a Eurozone without the participation of the UK, it's also stirring up a lot more than fierce debate over the strengths and weaknesses of remaining in the EU with market players beginning to look further than the June 23rd referendum date set down for voting to take place.

The pound has suffered dearly as a result of news flow pointing to the nation going either way when it comes to vote day, sowing the seeds of public discord amongst voters, not the ideal situation UK Prime Minister David Cameron would like to be in facing a possible party backlash should the vote favour heading to the exit door. Such a strong disagreement over the course of action the government should take doesn't make it easier for the Conservative Party after such vote has taken place with many expected to become disgruntled at the outcome whichever way it goes.

Added to this is the US presidential election set to take place in November of this year which itself is beginning to be drawn into the outlook of political uncertainty that has taken hold of global risk sentiment with some saying that it's creating a fluctuating pool of volatility in currency markets.

Part of the reason we seeing stark movements in currency valuations stems from the continuation by some in developed nation economies to extend its expansionary monetary programs through its central bankers causing a tsunami of liquidity that's finding it difficult to secure a home for investment and return.

Top currency traders warn White House race may echo Brexit chaos https://t.co/XNVLqqz5zP via @rachelevans_ny pic.twitter.com/p1hEiU0swB

— Bloomberg Markets (@markets) May 16, 2016

Both Europe and Japan have joined a number of crippled nation's suffering from appreciative valuations in their domestic currencies, dissuading foreign buyers from purchasing goods and services that contribute significantly to economic activity. The plan of action has been to venture interest rates into negative territory, a first for the world which hasn't been taken too kindly at its implementation.

Japan has been the most aggressive in stepping up its approach yet the desired effects that the BOJ would like to have seen come out of the situation has taken a turn for the worst with the Yen drastically strengthening as the placement of savings abroad no longer meet the prime objective of investment, which is to seek return. Japanese investors are starting to see their little returns made outside its border erode as its counterpart nations follow a similar monetary policy path, causing a mammoth inflow of Yen back into Japan.

The implication of such action has led to the Japanese Finance Ministry threatening intervention in the currency market if the appreciation doesn't stop. This obviously raised the hairs on the back of the necks of its fellow foreign finance ministers who feel that such a move would evoke the start of fresh currency wars.

Japan's Taro Aso repeats explicit threat of yen-selling intervention https://t.co/BDWPmwOSDv via @Reuters pic.twitter.com/ldhcTwILMy

— Dan Popescu (@PopescuCo) May 10, 2016

US Treasury Secretary Jack Lew reiterated that participating in overzealous currency devaluation would only help weaken the world economy instead of fulfilling each nation's self-serving currency goals. This was said in the light of Japan's finance minister Taro Aso edging closer to starting the process of currency intervention and ahead of the G7 summit taking place in Japan in just under two weeks.

It certainly sets the tone for what will be interesting discussions that will likely create a stalemate in terms of agreement around how world leaders will direct the economy in the right way. It's this uncertainty created by indecision that could heighten currency volatility further with the need to find common ground becoming the bone of contention.

Dollar struggles after U.S. Treasury secretary’s comments on currency wars https://t.co/HeKUPdMnFW

— MarketWatch (@MarketWatch) May 16, 2016

Resurgence in commodities are only short term in nature

Colossal; the best way one would be able to describe the movements that's been witnessed in mining counters over the past year with the present bounce making no exceptions when pulling off hair raising moves that would frighten even the most experienced trader. The perception around this relief rally is that it was a response to a rather dramatic selldown and should only to temporary.

I found this chart tweeted by the World Economic Forum which shows the net exports/imports of various nations around the world in terms of commodities as a percentage of GDP. The resource abundant countries make up the usual supply force that determine the amount of quantities available to the market however the most interesting shades on the geographical chart are those that are resource dependent or otherwise the part of the market that stimulates demand for quantities.

The most distinctive areas that we are able to identify are countries such as the United States of America, Japan, Europe and China. I have mentioned these countries specifically for a reason because if we think about the economic commentary that's dominating the news flow currently we'd find that all these countries are suffering from economic inaptness.

Japan and Europe have both implemented negative interest rates that has the world flummoxed about whether these extents to monetary stimulus is either a hinderance or a necessity to the financial system. The inability to abate a deflationary price environment has meant that central bankers are pressured to pick up demand or face dealing with an inactive economy that refuses to budge.

China has gotten stuck in a transitory state between transferring between that of an industrial based economy to a consumer services oriented economy. Investors are hopeful that government may indicate that it intends on lending a helping hand to the economy that has stumbled along but the role of government is slowly diminishing as increasing debt piles continues to prevent them from executing radical infrastructure programs that would boost the economy.

The US looks like the only nations that has the capability to steer the world economy in the right direction however if we look at economic indicators being reported they would suggest less than needed activity showing that it may not be the saving grace the world's looking for.      

Could the commodity crisis be an opportunity for #Africa? https://t.co/68Fwchtviw #commodities pic.twitter.com/wtN0GRhlM2

— World Economic Forum (@wef) March 8, 2016

All these nations have pertinent issues that trouble their outlook but more so the fact that each one has been place in a trend of slowing economic activity at the same time makes for a bigger implication for the global outlook as a whole.

We've seen commodity stocks radically improving after last years onslaught brought on by supply glut fears however the rally that has evolved does not feel as if there is a steady trend of long term buyers entering the fray but rather that of a short squeeze. It would be dangerous to think that we've seen the end of a disastrous time for commodity stocks because there remains issues yet to be resolved.

Iron ore prices spiked 19% on Monday 7th March 2016 to record the largest one day jump ever but Australia's steel trade port was shut down due to a hurricane that halted operations together with a bolstering demand for steel following the end of holidays in China have all played a part in helping prop up prices in the short term however a supply glut looks likely to remain in place for the next 2-3 years if demand doesn't pick up significantly.

Oil remains a key component in deciphering any direction. With OPEC on its knees and shale gas producers drowning in debt, its quite evident we are far from the resolution required to allow prices to begin its ascent.

Then there's the big issue of debt that seems to be haunting many mining producers. Although fears may have faded for the time being, the increase in commodity prices we've seen so far this year isn't sufficient to generate cash flow to pay away these liabilities quickly enough to chase away credit ratings agencies from downgrading them further. While the market has become intoxicated with optimism they've forgotten these issues that haven't gone away.

Before we see a return of investors in the mining sector companies will need to show steady demand for its products and with supply gluts on the scale we've seen so far as well as the lack of response to stimulus measures from the four nations I mentioned above I don't envision seeing this happening anytime soon.