You heard it here first, and then it actually happened. The Japanese yen cratered last night and so did the Nikkei and so did S&P futures.
The Nikkei sold off over 1000 points, falling 6.8% as the yen strengthened. In the globex session overnight, S&P futures fell as much as 1.58% before recovering slightly.
Here's how CNBC described it:
"A perfect storm of yen strength, a spike in Japanese government bond yields and new evidence of weakness in China's economy were behind a major sell-off Thursday in Japan's equity markets, said experts."
I see it differently. I see this:
This is the Federal Reserve's own data showing money velocity has plummeted back to levels last seen in the 1950s, back when the Dow Jones Industrial Average was in the triple digits.
So the big news from Bernanke yesterday was not that tapering might begin earlier than expected. It was that it doesn't really matter. In his own words (emphasis added):
Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets.
In other words, deflation. As in, we're in it right now and we're not getting out.
Any wonder why gold went down yesterday while the dollar shot up? While 10s and 30s sold off? Why the yen got stronger and the Nikkei imploded? The market is telling us something that's not part of the usual narrative. This is why it's important to keep your eye on Japan, as they know all about deflation, having experienced it for the past 20 years. Lucky for them, they got to experience it while the rest of the world was largely doing well.
What would deflation be like without the benevolent effects of global trade buoyed by persistent asset inflation and monetary stimulus?
Last night was the answer, but not likely the last word.
Do I think that's it, that's the top, it's all downhill from here? Not exactly.
But if one thinks there can't be any deflation because gas and milk and bread prices are higher, one will need to learn why they're higher. One will need to learn about credit and debt and the velocity of money. That is the world in which we live.
As far as what it all means for the markets today, probably not as much as one might think. Even with the futures down hard, the S&P will still open above the 38% retracement of the April low, which is just one of a series of swing points back to the October 2011 low of 1074.77. So really nothing has happened yet.
Oh, and that 38% level is 1629.44.
Instead, yet again, as the market moves lower I'm seeing sloppy subdivisions in the waves that require too much creativity to count as impulsive. This can change of course, and quickly too, but it's yet another red flag to me.
There was also a new high made yesterday on high volume. That can often suggest a retest of the high.
The high itself was sloppy (ok, butt ugly) and looks unfinished.
I do have some areas of interest such as 1550. 1600 might be better. But I'll hold off on those until I see how the week closes out.
Today I'll be dumping the OTM OEX puts I bot. They're June 705s, and ought to return 65% or so, but they're too far OTM. I'm also cashing in some left-for-dead SPY puts that are now ITM. Holding SPXU with both hands and will look for spots to hedge it with long delta (either calls or ES or SSO or UPRO) but am in no rush.
I would rather savor the fact that the markets, in the face of all the reckless efforts of central bankers worldwide, are still bigger, and still in charge.