Japanese contagion

No shortage of drama in the markets as of late. Adding to the growth scare I had discussed, we have seen a meltdown in the Japanese stock market, down 12% last night. Apparently this has been fueled by the unwind of the yen carry trade which will had spill over effects to global markets. The narrative basically goes like this: investors had been borrowing in Japanese Yen at 0% for years and had re-invested this money globally to take advantage of higher rates. This trade will work so long as the value of the Yen stays the same or declines. For the past 3 years the Yen has been in a steady decline and so this trade was a a huge money maker, but in the past 4 weeks the Yen has had a surge due to the BOJ raising rates from, get this,  0.1% to 0.25%. LOL!  But I believe that expectations for the US Fed to cut rates imminently after that weak July jobs number fueled the fire even further and may be the bigger factor. As crowded as this carry trade may have been, I have serious doubts that it was one of the main things underpinning the run in US stocks which is is a narrative that I'm seeing. Sure seems like the unwinding of this carry trade is a lot of hyperbole to me. And if this carry trade was being used to buy global assets, i.e. US assets, why is it that the Japanese stock market got hit the hardest? Beware taking market narratives at face value. 

The VIX tagged 65 this morning. Wow.  You got to back to the depths of the COVID panic to find a similar spike and before that, the depths of  the GFC. So far the markets have clawed back a lot of the initial morning losses but I won’t hold my breath . I mentioned the unwinding of the excesses in my previous post. Well, today should pretty much rinse out all the excesses. Fear greed hit 18, put/call ratio has surged and the VIX has moonshoted. The weak handed momo types are now flushed out for sure after today.  Lots of people crying for an emergency Fed rate cut. Not sure to make of that, as this. On one hand it could provide a psychological boost as most investors are monetarist zombies and Fed is indeed behind the curve right now. On the other hand, if this sell-off is being fueled by the carry trade unwind, cutting rates would make it theoretically put more pressure on the yen carry trade unwind as it would lower the value of the US dollar (at least initially). The solution IMO, would be for the BOJ announcing some sort to intervention or signal to calm the market.   

In my July post I mentioned that I believed we were late cycle in this bull run but not done yet. If I'm wrong about this and July was in fact the top, then there will likely be another rebound still left whereby the market retests the recent high or comes close to it. Coming into 2018 was a time which I had warned about the complacent condition of the market. The market had a sharp drop in February but then  eventually recovered all the losses by the summer, then the market eventually rolled over in the fall and made new lows by the end of the year. In August 2007 the market had shown the first major crack which ultimately led to the GFC. This is when Cramer famously has his "they know nothing" rant. But by October the market recovered all the losses and actually made an all time high before peaking for good. So, my point is that it's likely that if a major correction or bear market is in the cards, the market would likely still give you a better opportunity to exit as tops usually take a lot of time to form. In my opinion, we did not see enough conditions met for a major top and this current decline appears to be a correction, but as I said, I think we are late in the cycle and so I'm open minded to the possibility that I could be wrong and that we are in the process of forming a major top.