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CURRENCY CURRENTS

Tuesday 20 December 2011 Quotable Doubt is uncomfortable, certainty is ridiculous. Voltaire Commentary & Analysis

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The short of a lifetime! A trip down memory lane


About fifteen years ago I remember when the guru-in-chief for Morgan Stanley was Barton Biggs. He is a very bright man and has had many investment successes, so dont get me wrong when I share this. But I think it is the epitome of just how long markets can remain either overbought or oversold because of a major shift in the global macro backdrop for a particular asset class. Back in 1995, near the height of Mr. Biggs popularity as the go-to global macro analyst, he said Japanese government bonds (JGBs) were the short trade of the lifetime. Heck, who wouldnt have thought that; JGBs went from 7.5% to 2.5% after the Japanese stock market and real estate market crash. Take a look at what 10-year JGBs have done over the years: Notice the peak in yields just over 8% back in 1990? They lagged by about 9-months with the peak in the Japanese Nikkei which shows a 38,957 weekly high! For reference, the Nikkei 225 Index is trading at 8,336; thats down a cool 79% from its peak back in December 1989.

Japanese Nikkei 225 Index Weekly! Yikes! Buying the dips turned out to be a game for dips.

Down 89% since its peak!

Interestingly, and somewhat perversely, the Japanese yen is one currency that was not correlated with risk assets and did better as yields fell. Hmmm ... another kick in the head to conventional market wisdom at the time. The yen appreciated a blistering 106% against the US dollar over the same time frame as the Nikkei chart shows above.

Black Swan Capitals Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swans full disclaimer, which is available at http://www.blackswantrading.com/disclaimer

The reason I share this history with you is because now I hear some analysts pontificating about the US bond market being a huge bubbleeffectively they are saying the same thing Mr. Biggs said over 15-years ago about the Japanese bond market; its shaping up to be yet another short trade of a lifetime. Hmmm ...

US 10-year yields have been under 2% for about 4-6 months in total? Consider that JGBs yields have been trading under 2% for ELEVEN-PLUS YEARS! Also consider the US Fed is traveling down the same monetary policy path blazed before them by the Bank of Japan; whom Mr. Bernanke once criticized for not doing enough to pull Japan out of deflation. Mr. Bernanke I am sure now understands that monetary policy can only go so far when there is a secular change in the global macro environment for a country. If money does not get into the real economy, it is NOT inflationary in the standard meaning of the word. One could argue, however, it is extremely inflationary, but the inflation is in financial assets instead of the real economy. If one would say that, I would agree completely. So, if you think there is a US bond bubble by all means short the heck out of it. But keep in mind, we may have seen this movie before and it ends badly for short sellers of government bonds.
Black Swan Capitals Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swans full disclaimer, which is available at http://www.blackswantrading.com/disclaimer

Jack Cooks Black Swan Editor of Black Swan Options Predator Editor of Global Forex Alert www.blackswantrading.com Currency Currents Blog

Black Swan Capitals Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swans full disclaimer, which is available at http://www.blackswantrading.com/disclaimer