by Matthew Piepenburg, Von Greyerz:
Between the market’s reaction to Warsh’s recent no-rate-hike announcement and the current disaster unfolding with the Japanese yen, the set-up for near-term “Uh-Oh” in stocks and bonds in general–and the longer-term wisdom in precious metals in particular– couldn’t be more obvious.
Stick to the Essential
Antoine de St. Exupery famously (and wisely) wrote that the “essential is invisible.”
In philosophical matters pertaining to the art of living, this phrase has great depth.
But in matters pertaining to market risk and economic forecasting, it will come as no surprise to anyone familiar with our views that the “essential lies in the bond market.”
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As bonds fall in trust, demand and hence price, their yields then rise.
And these yields (the highest in decades) represent the true cost of sovereign debt, which we all know is beyond sustainability.
At $40T in comical, mismanaged and criminally negligent public debt, the last thing the USA needs today are rising yields at the long end of its sovereign bond market, especially with over $8T of those bonds facing a re-fi (at a much higher rate) in the next 12 months.
Right now, America pays $3B per day on just the interest expense of its public debt.
As I’ve said countless times: Spiking yields and hence spiking debt costs are like shark fins to policy makers drowning in a debt-storm of their own doing.
The collision of these rising yields and rising debt levels mathematically means more currency debasement will be engaged to inflate away Uncle Sam’s increasingly grotesque bar tab.
This also means gold’s anti-fiat role as a store of real rather than fiat value/money is just beginning to stretch its legs.
So, how do we know what’s coming for gold in such a global monetary sea-change?
That’s easy. In fact, Japan’s yen and the Fed’s Warsh just told us so.
What the Yen’s Summer Collapse Really Means
As for the yen, it just reached its weakest levels against the USD in four decades.
This Japanese currency fall is the direct result of decades of extreme money printing, repressed interest rates and a debt/GDP ratio that waters the eyes.
(Sound familiar?)
Japan’s latest finance minister (they come and go like melting snowflakes) tried to save their yen with $73B worth of currency support (thanks to a massive Japanese sale of USTs).
But that strategy clearly failed.
Equally unsuccessful was Tokyo’s attempt to raise interest rates to a whopping 1% in June (the highest levels seen since the 1990’s).
This was pathetic, especially given the fact that for my entire market career, Tokyo ran zero to even negative rates.
The Carry Trade Is Over
Of course, at zero to negative rates, Japan became THE go-to lender for the global shadow banking and corporate elites, who would happily borrow yen for nothing and then convert those yen into trillions of dollars for massive leverage in the S&P and NASDAQ.
The fancy lads called this the Japanese “carry trade.” It was an absolute boon for American stocks.
But folks, the Japanese banks are now cutting off that free money spigot.
The carry trade (which saw its first hiccups in August of 2024) is now over, and the ripple effects are swelling into tidal waves racing toward your 401Ks.
The Market Pain Is Just Beginning
If you haven’t already noticed, the NASDAQ just saw its worst July in decades, which had a lot to do with all the selling of tech stocks by Japanese firms, which are now bringing their money home in order to desperately yet realistically exploit the biggest currency arbitrage in decades.
After all, when the yen is at historical lows, what better time than now for Japan to cash in on stronger dollar-based stocks?
Unfortunately, the timing couldn’t be worse for American stocks and bonds, as Japan’s actions don’t exist in a vacuum.
When the BoJ raises rates and the carry trade ends in a backdrop of hedge funds closing their levered stock positions, those same masters of the Wall Street universe have no choice but to buy back yen to close their credit obligations.
