Counterparties: Meaningless plunge

May 23, 2013

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Japan’s Nikkei index plunged more than 7% on Thursday. Investors and economists spent the last 12 hours obsessing over possible explanations. Weak Chinese manufacturing data and comments from the Fed were both identified as possible culprits. Most likely Neil Irwin is right and there “wasn’t really any news overnight that would justify a swing of that magnitude”.

To put the fall in perspective, the Nikkei is now back at the level it was merely two weeks ago. And it is still up over 68% in the last year. That performance did not stop the WSJ from calling investors’ enthusiasm for Prime Minister Abe’s plan to boost Japan’s economy “brittle”. Paul Krugman thinks it may all of a sudden be reasonable to doubt the Bank of Japan’s commitment to monetary stimulus.

Following the vein of Bernanke’s comments and the possibility of curtailed stimulus, Tim Duy thinks the Fed could start slowing the pace of QE as early as September. However, Duy writes that the Fed should more directly communicate its intentions, rather than expecting market participants to divine specifics from opaque statements. Pointing to a shift in the Treasury yield-curve, Sober Look sees a preview of what may happen if the Fed tapers its monetary stimulus — declining value across multiple asset classes.

At times like this, analysts will recommend a lot of things, sometimes written in all caps to demonstrate conviction (which should be a warning sign in and of itself): “buy the dollar, sell EM FX and sell carry”; “long USD against the CHF, AUD and CAD”; “long USD/JPY and long Japanese stocks are the most crowded trades out there”; “the dollar rally is expected to gain momentum”; go long Herbalife. That last one has nothing to do with Japan or the Fed, but hey, why not. — Ben Walsh

On today’s links:

“The Too Big to Fail subsidy is negative ten billion dollars, says Goldman Sachs” – Matt Levine

Corporate America’s hoarding more and more cash, even as the economy improves – Bloomberg

EU Mess
Fixing the eurozone crisis will require massive writedowns of debt – Kenneth Rogoff
Greek youth unemployment is close to 75% in some areas – Telegraph

Dairy farmers are drowning in Greek yogurt’s acidic byproduct – Modern Farmer

Paul Tudor Jones: In macro trading, babies are “killer” to a woman’s focus – WaPo

Congress quietly watered down a new law on Congressional insider trading – NPR
The Department of Justice is actually not too sure if this whole “too big to jail” thing exists – Shahien Nasiripour

Second Acts
Meet the guy who helps hedge funders cope with prison – Hedge Fund Intelligence

“The view that ‘we have to pay a price for past sins’ is nearly always wrong” – Reuters

Things We Don’t Need
New rifle allows uses “user to stream live video and audio to an iPad” – Neil Irwin

Crisis Retro
Ratings agencies are not rating RMBS high enough, so investors are ignoring them – FT

And, of course, there are many more links at Counterparties.


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