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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Chip McVickar who wrote (7347)	5/20/2006 7:15:10 AM
From: robert b furman	Respond to of 33421

Hi Chip and John, Hope you are right. Strong Dollar and weak commodities will push a lot of money into equities. All of the talk about higher rates and a rolling over of real estate takes real property and bonds out of the picture. Looks like equities would benefit by default and never mind the fact that balance sheets are the strongest ever and earnigs keep chugging along at a very predictable rate. Modest and historically average interest rates (plus or minus a quarter here and maybe there)along with predictable earnings with money flows coming in is a recipe for multiple expansion NO? Bob

To: Chip McVickar who wrote (7347)	6/2/2006 10:18:17 PM
From: John Pitera	Read Replies (3) \| Respond to of 33421

A) The BIG PICTURE--Japan, Global Liquidity And Volatile Markets – A Thesis Art Cashin May 31, 2006 Japan, Global Liquidity And Volatile Markets – A Thesis – We have suggested over the last several weeks that the liquidation and violent swings across asset classes around the globe was due to a contraction in global liquidity. We further suggested that while the Fed and other central banks were hiking rates, a key player somewhat below the radar may have been the Bank of Japan. To understand that thinking you need to review some history. Back at the end of the 1980’s, Japan was seen as the looming economic power for the next century. Why not? The Nikkei was flirting with 40,000 and postage stamped sized pieces of real estate were selling for prices that sounded more like lottery prize numbers. And off-shore the Japanese were acquiring “trophy properties” like golf courses and legendary buildings as well as an occasional Van Gogh. Then, it all came apart. The stock market bubble burst. The real estate bubble burst. Unemployment, virtually unheard of, began to grow. What was definitely not growing was the economy. It would languish for more than a decade and a half. Trying to re-stimulate the economy the BOJ tried a zero interest rate policy. They figured things would perk up if they took interest rates to near zero and virtually give it away. But nothing seemed to improve. The money was not turning over. Stagnant money maintains stagnation in economies. The BOJ was getting frustrated, if not desperate. After a decade of virtually no growth and with deflation threatening, the BOJ needed something stronger. As the Dot.com Bubble burst, they adopted their policy of Quantitative Easing (QE). They didn’t actually print money as the Weimar Republic had done after WWI, resulting in one of the most violent bouts of inflation in world history. Nor did they drop money from helicopters as Mr. Bernanke once suggested (facetiously, we presume). Instead, they actively intervened in the money markets (not unlike the FOMC doing repo’s and bill passes but far more aggressively). Current account deposits swelled to 32 billion yen. The Japanese Monetary Base soared past the U.S. Monetary Base even though their economy is substantially smaller. At the same time the Japanese government was spending on thousands of projects and running up an enormous deficit. In late 2005 newspapers called it a record debt larger than the U.S. Despite all this spending and pumping, not many Japanese were borrowing or making use of the tons of liquidity. But other folks were. The Carry Trade – Revisited – For decades low Japanese rates had been attractive to arbitrageurs. You borrow money at a very low rate and take it to the U.S. and buy higher yielding Treasury bonds. It was simple. It was safe. (Your only risks were a sudden sharp move in either the yen or the dollar or a sudden sharp change in rates.) And, it was very, very profitable. Over the years, U.S. bond traders filled their firms coffers without appearing to use any money – at least not the firm’s. Occasionally credit or currency swings would make the carry trade less profitable or sometimes not profitable. Then along comes Quantitative Easing. Hey they’re giving away free money in Tokyo and there’s lots and lots of it so let’s go get some and use it to buy ___________. The blank could be filled in depending on which hedge fund or hot money type you were. The answer might be commodities or emerging market debt or emerging market stocks or U.S. stocks or – anything. Sometimes They Do Ring A Bell Even If You Don’t Always Hear It – As 2006 began, the Japanese economy gave hints of a stirring. Not much but what the heck some sign of life would be welcome. Investors had already begun to move back into the Nikkei. The BOJ met on March 8th & 9th. At the end of their meeting they announced to the world that they would end Quantitative Easing and begin to drain funds. They also announced they would stick with the Zero Interest Rate Policy for a while. (Remember the huge government debt? If they tightened by hiking rates like the Fed the governments debt service would be staggering.) Since the books close for the year on March 31st, they appeared to hold off action till then. With the ZIRP still in place and the BOJ appearing to be in no hurry, markets were unworried. Later, in mid-May the WSJ would report that they had cut the current account deposits by more than half, taking out in less than two months what had taken a full year to put in. (But nobody knew that then.) On May 10th, the yield on the Japanese five year note rose to its highest level since it was first issued back in early 2000. A bell went off. May 10th was the high on the Dow for 2006, above 11,600. Over the next two weeks, stocks, commodities, junk bonds, currencies, emerging market bonds and stocks all went on a wild, wild ride. Last week things seemed to pause. Late last week the BOJ added funds to the system for the first time in over 14 months . And they added again the next day. This was the same BOJ who had announced a policy of draining only two months ago. What would be the headlines if the Fed made such a sudden and dramatic shift? What did the BOJ see? What was it responding to? We don’t know if the BOJ was responding to domestic conditions or to the global market turmoil. We suspect it was a combination of both. This was no “pause”. It was more a reversal of policy. We are a bit surprised that it has not drawn more attention. Will The BOJ Moves Calm Markets? – It would be easy to assume that if the BOJ is back pumping in reserves, the pressure to liquidate assets should lessen. That is logical but markets are not always logical. The disruptive process may still have to work its way to conclusion in a variation of the lag factor often cited by the Fed.