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11 Apr 2013
Forex Flash: Abe´s Asset Bubble Economics - BAML
FXstreet.com (Barcelona) - Michael Hartnett, Chief Investment Strategist at BAML asks the interesting question, “Is Abe the anti-Thatcher?”
He notes that just as Thatcher, Reagan and Volcker waged a successful War against Inflation in the early-1980s, Abe (and Kuroda and Bernanke) are waging a War against Deflation today. He adds that Abe wants the Nikkei to soar and JGB yields to collapse. He continues to ask, “shouldn´t Abe stand for Asset Bubble Economics?”. He notes that capital is likely to flow out of Japan in search of yield, exacerbating the boom in bonds. he writes, “Rates Strategist, Priya Misra, believes a 5% shift in the assets of Japanese insurance and pension companies is likely to result in about $100 billion in additional demand for US fixed income. The boom in EM debt could be similarly exacerbated.” Looking ahead, he wonders whether, if the markets don´t correct up in Q2, could we not ´melt-up?´ He sees that Abe may postpone a needed pullback, but if further froth emerges in Q2 then the probability of a much larger correction will grow. He writes, “More liquidity, lower yields, no inflation, everyone (ourselves included) expecting a correction...if the Q1 US earnings season is strong then a "melt-up" in stocks and risk assets becomes a risk. The "stealth" winter correction in Europe, EM and cyclicals reversed this week, after a benign China CPI. As argued last week, BRIC resources would be our preferred trade as a hedge against the "melt-up" risk.”
He notes that just as Thatcher, Reagan and Volcker waged a successful War against Inflation in the early-1980s, Abe (and Kuroda and Bernanke) are waging a War against Deflation today. He adds that Abe wants the Nikkei to soar and JGB yields to collapse. He continues to ask, “shouldn´t Abe stand for Asset Bubble Economics?”. He notes that capital is likely to flow out of Japan in search of yield, exacerbating the boom in bonds. he writes, “Rates Strategist, Priya Misra, believes a 5% shift in the assets of Japanese insurance and pension companies is likely to result in about $100 billion in additional demand for US fixed income. The boom in EM debt could be similarly exacerbated.” Looking ahead, he wonders whether, if the markets don´t correct up in Q2, could we not ´melt-up?´ He sees that Abe may postpone a needed pullback, but if further froth emerges in Q2 then the probability of a much larger correction will grow. He writes, “More liquidity, lower yields, no inflation, everyone (ourselves included) expecting a correction...if the Q1 US earnings season is strong then a "melt-up" in stocks and risk assets becomes a risk. The "stealth" winter correction in Europe, EM and cyclicals reversed this week, after a benign China CPI. As argued last week, BRIC resources would be our preferred trade as a hedge against the "melt-up" risk.”