by Ivan Martchev
August 6, 2024
Hell-bent on saving his legacy when it comes to fighting inflation, Fed Chair Jerome Powell turned from an uber-dove in 2020 to an uber-hawk in 2022. He was too late to react to the inflation threat in 2022, even though inflation is not entirely his fault, and too late to react to falling inflation now, which is 100% his fault. It looks like part of his legacy would be “a day late and dollar short Powell,” even though he has made some good moves as Fed Chair, primarily during COVID.
Jolted by the economic data, the Treasury market is already cutting rates for the Fed, despite the FOMC failing to act in last week’s meeting. The 10-year Treasury yield fell dramatically last week to close the week at 3.79%, a new low for 2024. Keep in mind that in April we were nearly a point higher, at 4.74%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Powell appears to have not learned the famous words of Wayne Gretzky, to “Skate to where the puck is going to be, not to where it is now.” If the Fed cuts rates by 50-basis points in September, that would be an admission that they failed to cut rates by 25-basis points in July, which is becoming obvious given the way the Treasury rate is so rapidly sinking (see chart, above).
Another central bank that has been dragging its feet on its monetary policy decisions is the Bank of Japan (BOJ). They took their policy rate up to 0.25% last week, a mere 15-bp hike, but that moved the yen almost nine yen/dollar in four days, starting the day before the BOJ monetary policy meeting.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There are multiple factors moving the yen, a big one being normal trade and investment flows, including U.S. economic data and shrinking interest rate differentials, but since the yen has been used for years as a carry-trade funding currency it is unknowable to the average investor how big the short position in the yen is. As a reminder, borrowing yen is equal to shorting yen as foreign institutional investors need to sell the yen after they borrow it, in order to buy whatever assets they intend to carry outside of Japan.
My guess is that only a few people inside the BOJ and major global money center banks have a grasp of the size of the yen short position, which I suspect is huge, given how quickly it is appreciating and pushing the Nikkei 225 Index and the NASDAQ 100 Index lower.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A mere three weeks ago, the Nikkei 225 Index was up 26.86% percent for the year, but as of Friday it is up only 7.89%. That is a loss of almost 19 percentage points in three weeks, which is not normal. The index did decline below its April low as well as its rising 200-day moving average. It should find support soon, although finding support is a nebulous term and far from a precise science.
On Friday, the index declined 2,216.63 points to close at 35,909.70. Basically, the Nikkei 225 is trading like it did in March 2020, but without a pandemic as an excuse this time around.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The unfortunate correlation between the Nikkei 225 Index and the NASDAQ 100 Index is most likely due to yen-funded carry trades, as I wrote here last week. They appear to have been borrowing cheaply in yen, then buying the NASDAQ 100, enjoying the appreciation and then most likely levering up the returns quite a bit, judging by the high correlation with both the yen and the Nikkei 225.
The trouble with such startling declines, particularly when there is a high amount of leverage, is that they often overshoot. Nobody knows exactly where the market turns ahead of time, and if anyone tells you differently, they are lying. I thought a 4%-8% NASDAQ 100 decline was likely on July 16. Clearly the index is overshooting because of unwilling yen-funded leverage. I think the probability of a significant rebound this week is high, based on mean reversion and the fact that the VIX Index made it to 29.66 on Friday, which is at a level it has not seen since Silicon Valley Bank expeditiously failed in March 2023.
The VIX can make it above 30 and the NASDAQ 100 Index can make it to its 200-day moving average, which is currently at 17,643 (it closed Friday at 18,440), which can be a one day (or one morning) move. Moving averages are not magic, but somewhere around there we should find buyers for a decent rebound.
As far as what can spoil this setup is the geopolitical situation. A Hamas political leader was assassinated in Iran last week. I don’t know if Iran will hit back at Israel and if Israel would hit back in recrimination. Last time the air strikes on both sides, that resulted from the destruction of the Iranian Damascus consular building, were token, but I don’t believe anyone can guarantee the same relatively benign outcome now.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Jobs Data is Weaker Than Expected
Income Mail by Bryan Perry
The Market Fears the Fed is Behind the Curve Again
Growth Mail by Gary Alexander
The Current Medal Count Between the Big 3 Economies
Global Mail by Ivan Martchev
The Bond Market is Already Cutting Rates for the Fed
Sector Spotlight by Jason Bodner
What Kind of Volatility to Expect, Especially in Election Years
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Ivan Martchev
INVESTMENT STRATEGIST
Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
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