Wednesday, December 26, 2012

Me against Jeffrey Gundlach

I gotta confess, I'm long the yen. I know I'm crazy, but I'm long the yen.

You may have seen this: Jeffrey Gundlach is killing it being short yen.

So why am I going against this guy who's one of the world's best known money managers and who's currently, "killing it" being short the yen?

Here's why...

I'll start by saying that besides Gundlach, there are several other "well known" people who are short yen or who have been advising people to short the yen. They are people like Peter Schiff, Axel Merk and Kyle Bass. I'm sorry, but when those three stooges get together on a theme, wild horses can't keep me from betting against them. All I need now is for John Paulson to say he's going short the yen and I will mortgage everything I have to add to this position. By the way, they're all short because of...you guessed it...fears of BoJ "money printing" and insolvency.

And the three stooges have a lot of company. Open interest and short positions by speculators (including small specs, who are considered the dumb money) is just off record levels. Commericals are long.

Since the election the yen has sold off something like 500 basis points against the dollar, or about 6%. That's all been due to aggressive yen shorting.

The new government believes it is "out of money," so an outright fiscal expansion underpinned by printing yen, is out of the question.

Prime minister Abe has been pressuring the BoJ and the BoJ has responded by saying it will "buy more assets." Great...more QE, that is just an asset swap and does nothing to weaken the yen.

The new government is also very close to the corporate sector and it is believed that it will soon give the ok to restart the nuclear reactors, which have been shut down since the quake. If so, this will go far to reverse Japan's current trade deficit, which came about solely as a result of massive oil imports to meet energy needs.

The markets believe this to be true and imminent, as shares in Japanese power companies have been surging.

So...Japan and the BoJ are doing nothing to create net new yen financial assets. The nukes will be restarted soon and the dumb money is shorting the yen like crazy.

If that's not a prescription for a yen rally, a big, big, BIG, one, I don't know what is.

7 comments:

Matt Franko said...

Mike here is a comment you made in the past wrt Yen:

"The Fed is buying "scale down" and in effect, causing the selloff. They're doing this because they're fixated on quantity ($600 bln) as opposed to price (interest rate). I remember when I was a floor trader. I had clients in the oil business--big firms--who would sometimes want to protect a certain price. They'd give me an order that would be, "Buy 100 (crude), 'worst.'" That meant buy it up...aggressively. When Japan used to actively intervene in FX markets, they wouldn't scale down their dollar buying (or sell yen scale up), they'd buy dollars aggressively to put the USD/JPY exchange rate to a certain level. The Fed is not doing this. By signaling to the market that they will buy scale down, they are actually creating this selloff as nervous longs look to sell before the largest buyer lowers its bid again and as speculative shorts compete for a better price."

http://mikenormaneconomics.blogspot.com/2010/12/feds-poor-leadership-leaves-bond-market.html

Steve Briese in his "Committments of Traders Bible" looks at this situation (ie spec led sell off).

He looks at the specs vs "commercials". In this Yen situation, I try to make the case that the BoJ is like a HUGE Commercial in a commodity market, DEEP pockets and can sell on scale down virtually forever..

In the case where commercials are acting as large scale down sellers into a spec led sell off, Briese makes the case that these commercials can exacerbate the sell off. But, once the commercials exit the market place, the short specs can get crushed in a big reversal rally...

So it looks like Japan govt wants a lower Yen. but where do they think "it's low enough" and exit the marketplace?

Those idiots think "the yen will implode" due to "debt doomsday" or "money printing" or whatever... of course it will not "implode" as long as Japan collects taxes in Yen and imo these guys are vulnerable to a big reversal if BoJ exits...

Looks like the Japan govt is going to weaken it a bit and then if they think they can just leave it there without maintaining an active program of price setting they are mistaken and if they do not continuously sell Yen like you describe above, I would think the Yen will rally... it looks like without these CB continuous "interventions" the Yen goes A LOT higher... ie if the BoJ would just stay the hell out of it the Yen would continue to strengthen... same with the Chinese currency imo...

At some point it would seem the BoJ would be satisfied and back off and then probably a big rally...

rsp,

Detroit Dan said...

I like Mike's logic here. I'm tempted to follow his lead.

Thanks...

Matt Franko said...

Here is data on Foreign $NFA holdings:

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

You can see how Japan has had to buy dollars in excess of their Balance of Trade over the last year+ in order to keep a lid on the Yen..

http://www.census.gov/foreign-trade/balance/c5880.html

rsp

Detroit Dan said...

Thanks Matt...

Ryan Harris said...
This comment has been removed by the author.
Игры рынка said...

Hm, I actually think that Japan is undergoing a serious shift in the economy from exporting to importing. There are many trends coinciding at the same time. Like demographics (rotation of generations), squeeze of export markets (like Sony) and similar. However these are all longer term and trend dynamics. And these are all I believe strong reasons to be short yen.

Would be curios of opinions on this.

Mike Norman said...

Well, I must admit...so far I don't look too smart. :(