Notes From Underground: Back To Our Regularly Scheduled Programming

A giant hello and salutations from Notes From Underground.

It has been quite a long time since I have sat down to write about the state of things, but it is not because I haven’t been working. In fact, I have recorded numerous podcasts with the Financial Repression Authority over the last six weeks, sitting down with David Rosenberg, Michael Every and Kevin Muir. Links are below for your listening pleasure.

Over the weekend, Financial Repression Authority’s Richard Bonugli reposted a podcast from January 19, 2023 in which we sat with Louis Gave and discussed the positive outlook for Japanese equity markets.

There has been a great deal taking place in global macro but in terms of market-shaking events there has been nothing new. The most interesting situation is the continued weakening of the YEN as the CHF/YEN is making a run at the all-time high of 159.08 made in December 1979. (Editors’ note: It reached 159.20 when the markets reopened on Sunday night.) The EURO/YEN is also very strong as the most important cross in the G-7 world is back to levels seen in September 2008. The weakness in the Japanese currency is helping push the NIKKEI and TOPIX to levels not seen in 33 years.

In my opinion, the BOJ/MOF have to be careful not to let the Japanese financial community experience another equity bubble as the UEDA-led BOJ has decided yet again to keep rates unchanged and the overnight rate negative. There is a great deal involved with the weak YEN, especially as it gives the Japanese a great competitive edge versus Germany, its main export competitor.

Also, as Louis Gave and I discussed in January, the Japanese move to up its defense spending provides Japan with the ability to begin competing with US defense industry corporations. The question that turns over in my mind: Is the G7 led by the U.S. allowing the Japanese to weaken its currency as it attempts to reshore strategic business away from China to other Asian locations? Japan has the ability to leverage a WEAK YEN to begin a significant competitor to all comers in the global cheap market.

On Friday, the U.S. TREASURY issued its report on major trading partners designated as CURRENCY MANIPULATORS. None were cited as manipulators but Switzerland was added to “monitoring list.” In lieu of the current level of all the YEN crosses I would claim that the Treasury report is UNADULTERATED BULL. The Swiss are a very small trade participant compared to the Japanese, so Janet Yellen ought to just do the math.

Complicating the YEN situation was the ECB report, which Bloomberg News and Reuters covered on June 2. The ECB publication noted that a shift away from the low interest rate environment in Japan could test the resilience of global bond markets, while also arguing that higher that higher rates at home could lead to a repatriation of vast sums held by Japanese investors overseas.

This is going to give us lots to digest as we head into the second half of 2023.

As usual I remind readers that the basis of NOTES FROM UNDERGROUND is that 2+2=5 is also a beautiful thing. Enjoy the podcasts and I will hopefully post one this week on global-macro and energy with Doomberg, plus a few other guests.


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