Apr 28

Today’s News 28th April 2016

  • World's Most Exclusive Club

    Today I received in the mail the State of California Primary Voter’s Guide, which the Secretary of State prints up by the millions and sends to every blessed citizen. I was expecting a few boring candidate statements of the U.S. Senate – AKA the World’s Most Exclusive Club – but, boy, was I wrong. Just take a look at some of these gems.

    First off is a chap named Tim (I like him already………) who, understandably, doesn’t associate himself with any particular party. It seems what matters to him most is good old J.C., and he comes right to the point:

    0428-jesus 

    Next up is a woman whose first name, apparently, is President (which is shooting a bit high, since she only wants to be a United States Senator, a “prolific occupation”, as she puts it). For those considering whether or not to give her their vote, keep in mind that she is “mainstream Facebook in social media”, to say nothing of the fact that her core values are what drive America.

    0428-president 

    Mr. Peters, who decided not to bother sending in a photograph, is an “Andrew Jackson Democrat”, which I guess means he will soon be removed from our currency. The last 118 years, evidently, were misguided.

    0428-jackson 

    Karen Roseberry goes oblique on us with this coined phrase…….

    0428-karen 

    If you take the time to go to her web site, however, you can start to drink in her qualifications for this high office.

    0428-karencust 

    My personal favorite, being from Silicon Valley myself, is Jason Hanania’s, who offers up a binary statement (which cost him $25, the per-word rate, for his entire statement).

    0428-binary 

    Mike Peitiks is sporting a rocking beard and offers up his “single board” of a platform, which is climate change. I’d like to point out not one other candidate swore on the graves of future Californians. Not one.

    0428-oneboar 

    Lastly, we end with Ling Ling Shi who, at long last, is willing to challenge the “10 giant chaos in economy” that we’re all so weary of fighting. Rock it, Ling Ling!

    0428-lingling

  • Japanese Bloodbath After BoJ Disappoints – Nikkei Drops 1000 Points, USDJPY Crashes

    If there was a sign that nothing else matters but central bank largess, this was it. The moment The Bank of Japan statement hit and proclaims “unchanged” a vacuum hit USDJPY and Japanese stocks. Reflecting that Japan’s economy has “continued a moderate recovery trend” which is utter crap given the quintuple-dip recession, Kuroda and his cronies said they will “add easing if necessary” and apparently that is not now. Not so much as a higher ETF purchase or moar NIRP.. and the aftermath is carnage – NKY -1000 points and USDJPY crashed to a 108 handle!!

    • *BOJ WILL ADD EASING IF NECESSARY
    • *BOJ: SEES LARGE DOWNSIDE RISKS FOR ECONOMIC OUTLOOK
    • *BOJ: JAPAN’S CPI TO BE AROUND ZERO PERCENT FOR TIME BEING

    Incidentally, this is what consensus looked like ahead of today’s BOJ decision:

    Of 41 respondents, 19 predict an increase in purchases of
    exchange-traded funds, eight expect a boost in bond buying, and eight
    project the BOJ will cut its negative rate.

    And the result…

     

    Close-up…

     

    Some context…

     

    The BoJ website crashed also.

     

    The fallout is going global… Dow Futures tumbled 150 points to LoD…

     

    And Yuan surged…

     

    Just as we noted earlier, the biggest argument for a BOJ disappointment was that with the G7
    meeting in Japan in on month on 26–27 May 2016, it’s unlikely that
    Japanese policymakers will want to draw attention yet again to the idea
    that they are in the business of manipulating the JPY lower. After all
    the most recent G20 meeting once again confirmed that absent “disorderly moves” in the Yen, the US would frown on any attempt to dramatically manipulate its currency lower.

    Unless, of course, Abe wants to send Lew and Obama a message, that if
    China can enjoy a weaker dollar (courtesy of its USD peg), then so
    should the Bank of Japan.

  • "We All Work As A Team" – Millennials Explain How It's Going Living 'Rent-Free' At Home

    With millennials now the largest generation in the United States, a look into their economic standing is warranted. Using New York City as a proxy, we learn that millennials are now making 20% less than the generation before them, and have incurred tens of billions in student loan debt. Faced with these facts, they are searching for ways to cut down on expenses in order to make ends meet, and one common sense way to do that is to move back in with mom and dad.

    The Chicago Tribune helps us understand how all of that is working out. To start, more than 20 percent of millennials are living with their parents, even after obtaining a college degree. Even if some are fortunate to move out, often times they boomerang back to their parents' home by age 27.

    As such, stories such as the one from 34 year old Meghan Kennihan are becoming the norm, even in today's economic "recovery".

    "I had an apartment in Chicago," said Meghan Kennihan, 34, a running coach and personal trainer who lives in her folks' finished basement in La Grange. "It was tiny and expensive. I was miserable. I moved back. Now, I have a bedroom plus an area for my scrapbooking hobby and another for my exercise equipment. It's like having my own apartment except I have more space than I can afford to have in an apartment."

    In order to move out on her own, Meghan cites the need for an employer who can help cover her health insurance, something all of these newly created waiter and bartender jobs aren't able to do.

    "To be able to buy my own place, I would need to work for an employer that would cover insurance for me"

     

    Not only is there more space, but the price is right. Millennials have been able to save on rent, and are just trying to chip in other ways around the house where possible, as 24 year old Dean Pearce explains.

    "My parents have done so much for me, and now they're letting me live here rent-free, so I try to help out. I pick up my sister from school, do the dishes or whatever chore needs to be done. My mom makes dinner. We all work as a team."

    As a matter of fact, the trend of kids living at home with their parents has gotten so strong that home builders are now designing homes with just that in mind. "One out of six buyers have or plan to have a grown child at home" said Richard Bridges, Chicago division sales manager at David Weekly Homes. For a mere $35,000-plus, Richard says the plan can include a bedroom/bathroom suite in a finished basement to accommodate the kids who inevitably will be returning home to live.

    Chicago area builder PulteGroup says in their new models, kids can enjoy a bedroom/bathroom suite with a kitchenette and separate living space. "Our NexGen option is the greatest in housing since indoor plumbing." said Jeff Roos, western regional president at Lennar Corp.

    In summary, it looks like things are going well for kids who are moving back home, all things considered. Rent is affordable, and now parents are even taking it upon themselves to buy houses that have the look and feel of one's own personal apartment for their children to return home to someday. It is safe to say that this is quickly becoming the new American Dream for current and future generations.

    The likelihood of this trend reversing course any time soon? Not likely. As Lennar Corp's Jeff Roos points out:

    "It could be a while before the millennial makes enough money to leave"

  • Paul Craig Roberts: World War III Has Begun

    Authored by Paul Craig Roberts,

    The Third World War is currently being fought. How long before it moves into its hot stage?

    Washington is currently conducting economic and propaganda warfare against four members of the five bloc group of countries known as BRICS—Brazil, Russia, India, China, and South Africa.

    Eric Draitser provides some details of Washington’s assault on Russia: http://www.mintpressnews.com/brics-attack-western-banks-governments-launch-full-spectrum-assault-russia-part/215761/

     

    …of Washington’s attack on South Africa: http://www.mintpressnews.com/brics-attack-empires-destabilizing-hand-reaches-south-africa/215126/

     

    …and of Washington’s attack on Brazil: http://www.mintpressnews.com/brics-attack-empire-strikes-back-brazil/214943/

     

    For my column on Washington’s attack on Latin American independence, see: http://www.paulcraigroberts.org/2016/04/22/washington-launches-its-attack-against-brics-paul-craig-roberts/

    Brazil and South Africa are being destabilized with fabricated political scandals. Both countries are rife with Washington-financed politicians and Non-Governmental Organizations (NGOs). Washington concocts a scandal, sends its political agents into action demanding action against the government and its NGOs into the streets in protests.

    Washington tried this against China with the orchestrated Hong Kong “student protest.” Washington hoped that the protest would spread into China, but the scheme failed. Washington tried this against Russia with the orchestrated protests against Putin’s reelection and failed again.

    To destablilze Russia, Washington needs a firmer hold inside Russia. In order to gain a firmer hold, Washington worked with the New York mega-banks and the Saudis to drive down the oil price from over $100 per barrel to $30. This has put pressure on Russian finances and the ruble. In response to Russia’s budgetary needs, Washington’s allies inside Russia are pushing President Putin to privatize important Russian economic sectors in order to raise foreign capital to cover the budget deficit and support the ruble. If Putin gives in, important Russian assets will move from Russian control to Washington’s control.

    In my opinion, those who are pushing privatization are either traitors or completely stupid. Whichever it is, they are a danger to Russia’s independence.

    As I have often pointed out, the neoconservatives have been driven insane by their arrogance and hubris. In their pursuit of American hegemony over the world, they have cast aside all caution in their determination to destabilize Russia and China.

    By implementing neoliberal economic policies urged on them by their economists trained in the Western neoliberal tradition, the Russian and Chinese governments are setting themselves up for Washington. By swallowing the “globalism” line, using the US dollar, participating in the Western payments system, opening themselves to destabilization by foreign capital inflows and outflows, hosting American banks, and permitting foreign ownership, the Russian and Chinese governments have made themselves ripe for destabilization.

    If Russia and China do not disengage from the Western system and exile their neoliberal economists, they will have to go to war in order to defend their sovereignty.

  • Chinese Commodity Trading Volume Crashes: "Most Don't Even Know What They Are Trading"

    The speculative Chinese commodity bubble has begun to reach the mainstream as Citi's warning to "hold on to your hats" today at the surge in trading volumes across Rebar, Iron Ore, Coke, and Copper literally exploded with the former now the most actively trade commodity in the world. The frenzy has become so insane that the head of the largest metals exchange in the world exclaimed at a conference in Singapore today that "I don't think most people who trade it know what it is." We suspect he is 100% correct and judging by the following chart, we know exactly how it will end.

    As Bloomberg reports, the head of the world’s largest metals exchange said while volumes in China’s commodity futures markets have become phenomenal, it’s possible some traders don’t even know what it is they are buying or selling.

    “Why should steel rebar be one of the world’s most actively-traded futures contracts?” Garry Jones, chief executive officer of the London Metal Exchange, said at a conference in Singapore on Wednesday. “I don’t think most people who trade it know what it is.”

     

    Trading of commodity futures in China from steel reinforcement bars — a benchmark product used in construction — to iron ore, coking coal and cotton has ballooned this month on an unprecedented surge in retail investor interest. The jump in volumes has stunned global markets, according to Morgan Stanley, while eliciting concern from Goldman Sachs Group Inc.

     

    Exchanges in Asia’s top economy including in Shanghai have announced a series of measures this month to cool the frenzy, and said more steps may follow.

     

    “If you look at the client base of most Chinese exchanges, it’s heavily retail-focused,” Jones said on a panel discussion addressing commodities and risk management in China. The exchanges there “have very high retail participation. They have a very high velocity of trading,” he said.

    Now where have we seen this pattern of massive speculative volume rushing in from retail investors chasing a trend?

    The speculative activities will be vulnerable to a sharp reversal, once the upward price momentum wanes, according to BMI Research, a unit of Fitch Group, drawing parallels with a rally, followed by a slump, in Chinese equities last year.

    And that did not end well for price action before in 2015…

     

    or 2009…

     

    And just as expected above…once the volume reaches a crescendo it crashes and The Party's Over

     

    As reports from China suggest both major margin increases at the main exchanges and crackdowns on real production: Tangshan city is banning all coke, steel & cement productions for 24 hours starting this noon.

  • Apple Suicide: Man With Head Wound Found Dead Inside Apple Conference Room; Gun Nearby

    Update: according to ABC’s Matt Keller, the dead person found in a conference room at Apple Headquarters was a man. A gun was found nearby.

     

    Reuters adds that according to the East Bay Times newspaper reported that an emergency call was made at 8:35 a.m. from Apple’s campus in Cupertino and that the victim, who had suffered a head wound, was pronounced dead at the scene.  Local television station KTVU said investigators from the Santa Clara County Sheriff’s Office were en route to the scene.

    Finally, some media report that the police are already investigating the death as a possible suicide, implicitly confirmed by the Santa Clara Sheriff office which described the event as an isolated incident:  “Through further investigation, they determined there was no other individuals involved and they believe it was an isolated incident. There was no one else on campus or in the public at risk,” Sgt. Andrea Urena with the Santa Clara County Sheriff’s Department told reporters.

    * * *

    And the hits just keep on coming. One day after AAPL reported its first revenue decline in over a deace, its first earnings disappointment in years, and the first ever decline in iPhone sales in history, the Santa Clara County Sheriff’s Office is reportedly investigating a body found at Apple’s Cupertino headquarters according to NBC.

    Acting spokesperson Sgt. Andrea Urina said she has no other other information at this time. Sheriff’s investigators are on scene. The Santa Clara County Fire Department said crews were called to the scene but were then waved off and never went on campus.

    As BMO adds, deputies were called to the company’s corporate headquarters on Wednesday morning after a person was found dead, but only few details were immediately available. Multiple police vehicles could be seen at the campus.

    Authorities have declined to provide further details, and it is unclear whether the person is an employee of Apple. The cause of death was also not immediately known and is under investigation by the Santa Clara County Sheriff’s Office.

    The Apple Campus is the corporate headquarters of Apple Inc., located at 1 Infinite Loop in Cupertino, California, United States. Its design resembles that of a university, with the buildings arranged around green spaces, similar to a suburban business park.

    Developing story

  • Central Bankers To The Masses: "Let Them Eat Rate"

    Authored by former Fed Advisor Danielle DiMartino Booth,

    There never was any cake, just crust.

    And the French Marie had nothing to do with it. Rather, a Spanish-born queen married to France’s King Louis XIV a century earlier was the ill-mannered Marie who dared to taunt the peasantry. So how then exactly did, “Let them eat cake!” become so universally associated with Marie-Antoinette? In a nutshell: Blackmail.

    Historians have uncovered the nasty truth, and it can be laid squarely at the feet some far from scrupulous London-based thugs, intent on shaking down King Louis XVI with threats to besmirch his young bride’s reputation. According to Simon Burrows of Leeds University, a criminal network, drawn to the French monarchy’s vast wealth, plotted to profit by producing a series of pamphlets filled with lies about the ill-fated queen. Those lies included a charge that she had callously suggested her subjects eat cake in response to news of a bread shortage plaguing the masses. Though the king paid a dear price for the pamphlets’ destruction, some 30 copies were not burned as promised and found their way into the public’s hands sealing the queen’s fate kneeling before the guillotine.

    Today, the shortage plaguing angry masses of savers worldwide is not one of bread or cake, but rather one of positive rates of return on their cash holdings. The central bankers know best as they command us to eat one rate cut after another. And like it.

    For nearly 30 years, central bankers have based their haughty reasoning on the idea that the lower the interest rate, the greater the generation of economic growth. As then Fed Chairman Ben Bernanke explained in 2012, “My colleagues and I are very much aware that holders of interest-bearing assets, such as certificates of deposit (CDs), are receiving very low returns. But low interest rates also support the value of many other assets that Americans hold, such as homes and businesses large and small.”

    It’s certainly been the case that the prices of homes and businesses have been upheld. Though their appetite may have waned a bit, investors have richly rewarded companies who use low interest rates to finance share buybacks with debt. And there’s no doubt investors of a different ilk did more than their fair share to prop up home prices at the lower end while wealthy individuals have bid up the prices of luxury homes to record highs.

    The question is, is that what Bernanke intended? It would appear not as one of the stated objectives of the punishing policy of ultra-low rates was to spur income-generating job creation:

    “Healthy investment returns cannot be sustained in a weak economy, and of course it is difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.”

    Or at least that’s what Bernanke led us to believe.

    While it is true that returns on risky investments have been stellar, fewer and fewer Americans are comfortable with the risks associated with owning the most common of the pack — stocks. According to an April Gallup poll, the percentage of U.S. adults invested in the stock market has fallen to 52 percent from 65 percent in 2007, a 20-year low. So while there are definitely benefits to some, Bernanke’s “ultimately benefitting most” part has fallen far short, and to an increasing extent.

    Digging into the data, at -14 percentage points, those aged 18 to 34 were the most aggressive lot to abandon stocks. Meanwhile, at -9 percentage points, those aged 55 and above were the least. There seems to be an intuitive disconnect somewhere in that divide, one that should keep policymakers up at night.

    There is a very real refute that we’d have to return to the bad old days of rampant inflation, when the degradation of the purchasing power of the dollar more than offsets the plump interest rates on offer at our local bank branch.

    While we collectively rue that era, it’s fair to say most seniors would gladly settle for a happy medium, a return to the turn of this young century when you could get a five-year jumbo CD sporting a five-percent APR, which was offset by inflation somewhere in the two percent vicinity. Traditionally, two to three percentage points above inflation is where that old relic, the fed funds rate, traded. So the math worked.

    Of course, it could be worse. At least U.S. yields on savings are positive. That’s more that can be said of the $7 trillion of foreign sovereign bonds trading at negative yields. This dynamic spells disaster for life insurers to say nothing of pensions. Increasingly, foreign pensions are raising retirement ages as well as requiring higher employer and employee contributions, all the while lowering the salaries against which benefits are calculated, even as they segue benefits onto 401k-style platforms.

    For now, the judiciary in the U.S. is holding the legal line. As long as that’s the case, actions to shore up pension underfunding will be avoided. Of course, at some point drastic measures will be required as the tax bases supporting future benefits shrink in proportion to the highest tax payers fleeing the fleecing.

    Public pensioners with no back-up savings are sure to be enraged when their day of reckoning arrives. Then, today’s non-pension-backed retirees making crumbs on their cash holdings will be flush in comparison.

    And yet Bernanke deigns to wonder. Last fall after leaving the Fed, he had this to say to Martin Wolf of the Financial Times: “It’s ironic that the same people who criticize the Fed for helping the rich also criticize it for hurting savers. What’s the alternative? Should the Fed not try to support the recovery?”

    This coming from the same man who once said, “No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays a zero nominal interest rate.”

    According to one recent Wall Street Journal story, that last observation certainly does hold true. Negative interest rates do benefit at least one of our contingencies: U.S. companies with European subsidiaries. Now that the European Central Bank (ECB) is in the business of buying corporate bonds, demand for issuance is all but a lock given the ECB can buy up to 70 percent of an issue, at issuance, to boot. Bully for that?

    Not so fast says Standard & Poor’s (S&P), which just stripped the energy giant ExxonMobil of its coveted since 1949 ‘AAA’ credit rating. Why? Share repurchases and dividend payments have “substantially exceeded” internally generated cash flows in recent years even as its debt load has doubled. That leaves two solitary AAA-rated U.S. credits, Johnson & Johnson and Microsoft. It’s getting mighty lonely at the top.

    But of course, there’s nothing of the wildcatter in ExxonMobil’s overindulging its shareholders. For seven straight quarters, over 20 percent of the companies in the S&P 500 have reduced their year-over-year share count by at least four percent, which conveniently translates into at least a four percent pop in their PER share earnings. Ain’t math grand?

    Based on the data thus far, the trend is becoming increasingly entrenched. S&P’s Howard Silverblatt anticipates that public filings will reveal that over one-in-four deep-pocketed (debt-pocketed?) issues were in the aggressively juicing earnings cohort in the first quarter.

    The end result of all of these financial shenanigans? For starters and enders, a whole lot of nothing productive. According to Bookmark Advisors’ Peter Boockvar, the absolute level of core capital spending (nets out transportation) was $66.9 billion vs. $69 billion in 2011. As for the percentage of capacity that’s being utilized, it remains well below its long-term average seven years into this economic expansion.

    “Cheap money has created too much excess,” Boockvar noted. “On top of that, some CEOs are more interested in the short term focus on other capital uses such as buying back their own stock in the now second-longest bull market of all time.”

    Is it any wonder small investors continue to lose faith in the stock market? Should they be chastised for wanting a teensy weensy return on their cash? Dare we brand these conservative souls greedy, wanting to have their cake and eat it too?

    Perhaps. But maybe the real solution to placate the angry masses is an admission that the original intent of zero-to-negative interest rates has utterly failed. Sufficient economic growth to offset the forced risk taking simply has not materialized leaving Grandma and Grandpa with their life savings hanging in the balance.

    Perhaps the current conundrum will present an opportunity when the next recession arrives, a chance to recognize the failure of the low interest rate era. As counterintuitive as it would seem, why not use the next period of economic weakness to set a permanently higher floor on interest rates. Will the weakest operators meet their makers at the corporate guillotine? Naturally that will be the case. But isn’t that the American way?

    A new generation of revolutionary central bankers must be called to arms for all of our sake. Their battle cry: We commit to never returning rates to zero or below again, to never let be money be free and forever ensure there is a true cost associated with borrowing. Release the markets to set interest rates now and forever!

    Will it work? Stranger things have been known to succeed in capitalistic economies with competitive and freely functioning markets.

  • Debt Is Growing Faster Than Cash Flow By The Most On Record

    By now it is a well-known fact that corporations have no real way of generating organic growth in this economy, so they are relying on two things to boost share prices: multiple expansion (courtesy of central banks) and debt-funded buybacks (courtesy of central banks), the latter of which requires the firm to generate excess incremental cash. Incidentally, as SocGen showed last year, all the newly created debt in the 20th century has gone for just one thing: to fund stock buybacks.

     

    The problem with this is that if a firm is going to continue to add debt to its balance sheet in order to fund buybacks (and dividends), then it needs to be able to generate enough operational cash flow in order to service the debt. Even if one makes the argument that debt is cheap right now, which may be true, or that central banks are backstopping it, which is certainly true in Europe as of a month ago, the fact remains that principal balances come due eventually also, and while debt can be rolled over, at some point the inability to generate cash from the operations catches up with them; furthermore even a small increase in rates means the rolling debt strategy is dies a painful death, as early 2016 showed.

    In the following chart we can see net debt growth skyrocketing nearly 30% y/y, while EBITDA (cash flow) has been contracting for the past year. In fact, as SocGen shows below, the difference in the growth rate between these two most critical data series is now over 35% – the biggest negative differential in recent history.

     

    Of course, every finance 101 student knows that a firm which has to borrow more cash than it is able to produce from its core operations is not a sustainable business model, and yet today’s CFOs, pundits and central bankers do not.

    And the next question is: what happens if the Fed does raise rates, what happens to the feasibility of these companies servicing the debt while also spending on R&D and CapEx (assuming there is any), and who can only afford the rising interest expense as a result of ever smaller interest rates? The answer is, first, massive cost cutting, i.e. layoffs, which would be a poetic way for the Fed’s disastrous policies to be reintroduced to the real economy… and then, more to the point, mass defaults. 

  • What If The BOJ Disappoints Tonight: How To Trade It

    It wasn’t until a week ago that the loud calls for the Bank of Japan to do much more easing came loud and strong, because it was last Wednesday when Goldman announced it had changed its base-case scenario from one of a June easing to making “easing in April our base-case scenario, given the rising risk that business confidence has been dented by recent financial market instability and the Kumamoto earthquakes, and in view of BOJ governor Haruhiko Kuroda’s recent proactive statements on possible additional easing in response to the sharp deceleration in inflation in April.” At that moment many Wall Street sellside lemmings promptly followed in Goldman’s footsteps and likewise made April their base easing case.

    Incidentally, moments ago Japan reported its latest March inflation data, according to which prices excluding fresh food slumped 0.3% from a year earlier, the biggest drop since April 2013, suggesting Japan’s deflationary black hole is once again sucking everything in and the BOJ may have no choice but to act.

    It was also one week ago when Goldman proposed that what the BOJ would most likely do was neither more QE (due to collateral limitations) nor more NIRP (due to its devastating effect), but double the pace of ETF purchases:

    The main issue for the BOJ, in our view, will be the means of applying additional easing. From an exchange rate perspective, the most effective means would be to widen the negative interest rate. However, financial institutions have not reacted positively to negative interest rate and we think there is a general unease among the population with respect to the policy, so we think the BOJ is unlikely to take rates deeper into negative territory at this stage.

     

    Another option would be to increase quantitative easing by again stepping up JGB purchases (currently at the rate of 80 trillion yen per year), but the marginal effect would be minimal as the decline in the yield curve is already more than sufficient, and we think additional expansion would even risk giving the impression that the BOJ is closer to the limit of purchasing JGBs at the current pace.

     

    By a process of elimination, we think the BOJ is most likely to ease mainly via the qualitative measure, with increasing ETF purchasing the central pillar, with a view to improving business confidence. We think the market is already factoring in an increase in annual purchasing from ¥3.3 tn to ¥5-6 tn, and we thus think the BOJ may look to slightly more than double its current figure to around ¥7 tn.

    Goldman floated one more option, namely the “possibility that the BOJ may combine the expansion of ETF purchases with a cut in the interest rate of its loan support scheme.” Incidentally this is precisely the “trial balloon” which the BOJ floated via Bloomberg the next day, sending the USDJPY higher by 300 pips – the most since the announcement of QQE – and since the market reaction to that particular “leak” was so positive, it stands to reason that this a combination of rate cuts on bank loans coupled with an increase in ETF purchases is what Kuroda will announce in a few short hours.

    Then, perhaps to set an even bid/ask range, earlier this week Goldman’s FX team came out with an absolutely outlandish research report, according to which the Bank of Japan would go so far as unleashing helicopter money to push the USDJPY to 130 for one simple reason: “the BoJ is already so long into ‘the reflationary trade’ that it has to continue to deliver further accommodation for the time being.“

    Basically, what Goldman is saying is the BOJ has to crush its currency today at all costs or risk losing even more credibility after the January NIRP fiasco.

    We doubt that the BOJ will unleash helicopter money today, but it may well boost the amount of equities it purchases by doubling its ETF purchases and it certainly may cut the interest rate of its loan support scheme to benefit Japan’s banks.

    Incidentally, this is what consensus looks like ahead of today’s BOJ decision due out in just a few short hours:

    Of 41 respondents, 19 predict an increase in purchases of exchange-traded funds, eight expect a boost in bond buying, and eight project the BOJ will cut its negative rate.

    This also means that a majority predict the BOJ will do nothing, which judging by the recent pent up market expectations of a major BOJ easing event would likely send the USDJPY plunging, which is ironic considering what Japan has already done to its monetary base and the BOJ’s balance sheet…

     

    But if the BOJ does disappoint, and one thinks it will, how should one trade it? For the answer we go to Credit Suisse whose strategists Shahab Jalinoos and Bhaveer Shah write that they suspect there is enough upside risk in the price for USD/JPY to allow for a decent move lower if the BOJ disappoints the market, adding what we said above, namely that the market is pricing in a higher probability of action this week than the economics consensus appears to suggest.

    This is how they would trade it:

    • Buy a 3 May 16 expiry 107.80 strike USD put/JPY call for ~0.185% of notional (spot ref: 111.37)
    • Both 1-wk implied vol and the risk-reversal skew bid for USD calls/JPY puts suggest market pricing in a risk of a pop higher in USD/JPY after the BOJ that is meaningful compared to historical precedent
    • A comparison with the same indicators in the 3-mo. tenor suggests risk is concentrated around BOJ decision
    • The trade would also perform if FOMC is more dovish than generally expected at its April 27 meeting
    • Risk to the trade is limited to the upfront premium
    • If BOJ were to expand the balance sheet with a domestic asset price and credit creation focus as opposed to an explicit attempt to weaken the JPY, the infrequently seen phenomenon of both a stable JPY and a stronger Nikkei could transpire

    But the biggest argument for a BOJ disappointment is that with the G7 meeting in Japan in on month on 26–27 May 2016, it’s unlikely that Japanese policymakers will want to draw attention yet again to the idea that they are in the business of manipulating the JPY lower. After all the most recent G20 meeting once again confirmed that absent “disorderly moves” in the Yen, the US would frown on any attempt to dramatically manipulate its currency lower.

    Unless, of course, Abe wants to send Lew and Obama a message, that if China can enjoy a weaker dollar (courtesy of its USD peg), then so should the Bank of Japan.

    In any case, for those who do think the Bank of Japan will disappoint tonight, that is how to profit.

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