Feb. 5 (Bloomberg) – Treasuries rose as accelerating U.S. job losses offset concern that a record $67 billion of government debt to be sold next week will overwhelm demand.
U.S. securities due in 10 years or less gained for the first time in three days as a Labor Department report showed the number of Americans filing first-time claims for jobless benefits unexpectedly jumped last week to a 26-year high.
Keep in mind that employment data tends to lag the stock market by roughly 9 months. There are two things that we hear each and every cycle- the Fed is pushing on a string and it is a jobless recovery. Both assertions are based on lags. It takes time for easier monetary policy to work through the system and an even longer period of time before the employment data begins to improve.
We are going to move on to a new topic today. We might call this one ‘bad news may be good news’ but, then again, some times bad news is simply bad news. Time will tell.
We start with a comparative chart of the Japanese yen futures (yen versus the U.S. dollar) and the ratio between the Nikkei 225 Index and the S&P 500 Index (SPX).
The usual argument is that a rising yen is a negative for Japan’s export-based industries but to put this into perspective we should probably first discuss the Canadian dollar.
Six or seven years ago we held a very positive view on the Canadian dollar (projecting a rise from the .60’s up to around .88- history shows that we were a bit timid on this one). We were told that while the Canadian dollar might rise if it came anywhere near the levels that we expected Canada’s economy would collapse. The problem was that the reason the Cdn dollar could rise- strong commodity prices- was not fully understood or appreciated. With 2002 commodity prices levels the Cdn dollar could never get anywhere close to 88 cents but based on 2008’s commodity price levels even 1.00 was argued as being too low. Fair enough.
Returning to our chart the Japanese yen made a peak in late 1978 and then held below that level through into early 1986. The break to new highs by the yen marked the start of a multi-year period of relative outperformance by the Japanese stock market that culminated in one of the most extreme asset price bubbles in recent memory in early 1990. The argument would be that ‘bubbles’ are created by vast flows of liquidity heading into a somewhat contained sector. The larger the flows of money and the smaller the sector the greater the rise in price.
Strength in the Japanese yen reflected flows of capital into Japan’s asset markets and the party began in earnest in 1986 as the yen broke to new highs.
At present strength in the yen is viewed as a negative because, in large part, it reflects the flow of capital away from risk. Once again… fair enough.
The chart below compares the Japanese yen futures and the ratio between the Nikkei and the SPX from late 1994 to the present day.
The yen made a cycle peak in 1995 and has held below that level ever since. The argument is that yen strength is a negative based on what we know about Japan’s economic potential but that if the yen were to move above 1.25 (1995’s highs) then it could turn into a positive in a manner similar to 1986- 1990.
Our view is that the ‘key’ for Japan lies with its bond market. We believe that Japan’s stock market trends inversely to its bond market so stock market strength on a consistent basis requires rising long-term interest rates. The chart below right compares Japanese 10-year (JGB) bond futures with the ratio between the Nikkei and S&P 500 Index. The simple point is that even though one is bound to hear and read that rising interest rates in Japan will cut short its economic recovery… the opposite is and will be true.
Below we have included a chart of the CRB Index from 1992 through 2000 and a chart of the Nikkei 225 Index from 2002 to the present day.
The BIG argument is that the markets have been moving through a series of major cyclical trends. Commodity prices peaked in 1980, Japan in 1990, tech in 2000, and then… we returned to commodities.
If the Nikkei peaked 10 years after the commodity markets (1990 vs. 1980) then we will argue that it makes at least some sense to compare the Nikkei today with the CRB Index in early 1999. In both instances 18 or 19 years had elapsed since the major cycle peak and in both instances (1998- 99 and 2008- 09) the world was embroiled in a state of financial markets crisis.
The chart makes the point that the Nikkei could well be making a bottom through the first quarter or half of 2009 which fits in nicely with our general thesis that cyclical growth will start to improve- perhaps dramatically- through the latter half of this year. Meanwhile the yen has to rise to and then move above 1.25 as Japanese long-term interest rates push upwards.
