1. JPY weak
I could not believe it when the JPY surged last Friday. OK, I understood the Yen repatriation argument but does the market really trade on such strictly short-term factors, even though it's in complete contradiction with the much more potent and certain longer-term forces? I didn't buy it. I'm not buying it. In any case, I'd like to thank the market for giving me some cheap FXY puts (some may prefer YCS).
Then there's the "disasters are bullish" argument, with which I wholeheartedly agree on the philosophical level. And I have no doubt Japan Inc will rebuild after the disaster. But the overriding factors are undoubtedly:
- Japanese economy, in terms of both production and consumption, has suffered a significant blow. This is bearish for the currency.
- BoJ just announced a JPY 15 trillion liquidity injection. This may not be money-printing technically. But it at least demonstrates that BoJ will not shy away from it if it comes to that. And with surging energy import requirements to substitute nuclear power, infrastructure rebuilding, and disaster relief, on top of the already world-leading deficit- and debt-to-GPD ratios, it is probably just a matter of time before BoJ has to go far beyond liquidity injection.
- I don't care what Japanese officials say, but a weak Yen is one of the few good things that could happen to Japan now.
2. Nikkei weak
At typing time the Nikkei (NYSEARCA:EWJ) is down >6%. But the intermediate-term bottom is likely much lower. If both Nikkei and JPY go down, shorting EWJ would give you double gains.
3. JGB weak
Retail investors have no way to short JGB. But I mention this in light of the well known pending disaster of Japanese public debt. JGB has been the supercat with infinite number of lives. Could this be the last straw that breaks it? Even if bond vigilantes cannot find the heart to raid JGB now, either such an inviting opportunity will prove irresistible at some point or, when/if panic triggers, no conspiracy theory is necessary. The intriguing question is: if domestic retail investors have been the pillar supporting JGB so far, how much the pillar will be weakened as they sell for cash out of necessity?
If Japanese government funding becomes an issue, it would be another global disaster.
4. US equities weak
As the earnings season winds down and the end of QE2 fast approaching, US equities have been losing steam in recent weeks. With the Japan earthquake, I expect an across-the-board risk-off tsunami. Or at least that's how it should be, unless of course QE3 pushes everything up except in real value. But I have stopped trying to understand the US equities market since a few months ago, at least on a daily basis.
5. Precious metals strong
With JPY liquidity about to explode and all the negatives providing the Fed more cover for QE3, precious metals will be stronger than ever. We're truly in the last throe of the fiat currency system as everybody has now dropped the last shred of pretension of fiscal responsibility.
6. Commodities uncertain
I've never bought the supply-demand argument for the current commodities bubble. It is clearly driven by speculative hot money, with incidental supply-demand factors used as excuses. No doubt the supply-demand excuse will be used now to "explain" whatever moves the commodities market decides to make. But the real driver will still be the flow of speculative money. In a risk-off scenario, specs would cash out and cause a pull-back in commods, possibly a severe one. But even so, the real driver for the current bubble has only grown as BoJ joins the printing business in earnest. As soon as the risk-off ends, commods would surge back again.
Disclosure: I am long GLD, SLV, PHYS, DBA. I'm short SPY, FXY.