The collision of global markets and social mood

Wednesday, May 22, 2013

Mrs. Watanabe And The JGBs

Sounds like a cool band but it isn't.

Reuters is digging deeper into the Japanese JGB story, with good reason. If Japan's bond market is having "issues," Abenomics will have a very rough ride.

While the government's aggressive policies have sent stocks soaring to 5-1/2-year highs and the yen tumbling to a 4-1/2-year low against the dollar, turmoil in the Japanese government-bond market in recent weeks has cast a cloud over the effectiveness of the BOJ's easing, a key element of "Abenomics" that is showing early signs of lifting the world's third-largest economy from a two-decade funk.

Mrs. Watanabe, the metaphorical forex-speculating, JGB-buying Japanese housewife, has just seen her purchasing power decline by 35%. This means she is 35% less inclined to buy JGBs. She's also 35% more pissed off at the Japanese monetary authorities, and has 35% more "issues."

If Mrs. Watanabe has issues, so will the JGB market. And so will the yen.

So will the S&P.

For now, though, I see higher prices in the yen and the Nikkei, and the S&P too, unless 1662.67 fails. Here's a quick back-of-the-napkin scenario:

I'm riding this with SPY 167 and 168 calls against SPXU. I'm also buying OTM OEX monthly puts and some October VIX calls.

If it's wrong, I'll roll out of the calls at a nice profit and dump the SPXU for a smaller loss, and the OEX and VIX options will probably go out worthless. What if it's correct?

My bet is 1550 for starters.

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