Investment Newsletter – July 2024
John Hussman emphasizes the unprecedented extremity of current US financial market conditions, comparing them to historical peaks in 1929, 2000, 2007, and 2022. He notes that while these conditions are more consistent with a major peak than at any other point in history, this does not guarantee the market is at a peak. Nevertheless, he believes the US stock market is forming the extended peak of a speculative bubble.
For much of the past 4 months, Bank of America chief strategist Michael Hartnett has been pounding the table on why going long bonds will be the top trade of the second half of 2024. Harnett’s thesis is simple: with the US economy already sputtering and with fiscal stimulus “as good as it gets” since it will be virtually impossible to pass another massive fiscal stimulus in the years to come.
The government of Japan is engaged in one massive $20 trillion carry trade: here is the toxic dilemma faced by the Japanese central bank now that it has reached the end of the road: on one hand, if the Bank of Japan (BoJ) decides to tighten policy meaningfully, this trade will need to unwind. On the other, if the BoJ drags its feet to keep the carry trade going, it will require higher and higher levels of financial repression but ultimately pose serious financial stability risks, including potentially a collapse in the Yen. As DB’s chief FX strategist George Saravelos puts it, “Either option will have huge welfare and distributional consequences for the Japanese population: if the carry trade unwinds, wealthier and older households will pay the price of higher inflation via rising real rates; if the BoJ delays, younger and poorer households will pay the price via a decline in future real incomes.” Ultimately, someone will have to pay the cost of inflation “success.”
The Nikkei and Topix experienced the largest point crash in their history, surpassing even Black Monday. This crash underscored the political pressures that led the BoJ to abandon its rulebook and spike the Yen to curb inflation, resulting in a 20% stock market drop over three days. Unexpectedly, the BoJ’s Deputy Governor, Shinichi Uchida, sent a strong dovish signal amidst this historic market volatility. Less than a day after the crash, Uchida pledged to refrain from hiking interest rates during unstable market conditions, effectively signalling the end of rate hikes. This announcement came after a small 10-25 basis point rate increase the previous week had triggered a global deflationary wave and further destabilized Japan’s market. In a speech on August 7, 2024, to business leaders in Hakodate, northern Japan, Uchida stated, “I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, given the extreme volatility in financial and capital markets both domestically and internationally.”
