Don't fight the Fed, right? That's the battle cry. That means the global Fed right? There is no Fed to fight in the US, they gave up and are tightening. If you pay attention to what Japan is doing they are about to sell bonds after a spree of buying bonds. Hmm, that is opposite from easing that, as far as markets are concerned, is tightening. That's why we give this the 'ol official Pay Attention Rating. Avoid the cobwebs of past thinking and pay attention to the events that are taking place before your eyes. Major stock market (NYSEARCA:SPY) stilts have been removed or are in process. Pay attention.
First, let's all agree that the global CB push has artificially held markets up.
1) Can we all agree that the market has been held up by every pump owned by any central bank? 2) Can we agree that without that this global GDP of 1-2% growth would be negative? 3) Can we agree that if the Fed, ECB, and JCB had not pumped everything they had into the markets, they would have crashed a long time ago?
Now that we are all in agreement we want to ask a very simple question.
If CBs slowed easing and started tightening, what would happen to markets?
What would happen if CBs instead of easing started to tighten? Wouldn't that be big news? We think it would...
In fact, we think it IS big news. It's happening now.
That's why we say again, pay attention. All the calls now by analysts and traders that the market broke-out and that means it goes higher is usually true. But this market, as we all agreed in points 1, 2, and 3 above has been held up by CB bicycle pumping.
This report is here to clearly say that CBs are pulling those bicycle pump fumes that have held up markets. We think that catalyst that has artificially held markets up for several years is now being pulled from under us.
Who's going to be left holding the bag?
(Picture: Fresh out of the package, last ditch global central bank efforts.)
Japan about to tighten. Their new strategy.
We'll show you simply that Japan is done easing the way they have since 2013 and are about to tighten. We think this will raise the yen because selling is done. We think this will raise yields because JCB buying has peaked.
Japan announced a fiscal stimulus plan this week that needs funding. How are they going to pay for it? They are going to issue bonds? So what's new? There are reports that they are going to issue 40 and maybe 50 year bonds.
The linked report says Japan's Finance minister said, "While keeping the amount of Japanese government bonds sold to the market at 147 trillion yen a year, we'll carefully exchange views with market participants and decide whether to increase super-long JGBs with maturity of 40 years."
Wait a minute, I thought the fiscal package was supposed to stimulate the economy. If they swap current shorter term maturities for longer term maturities and keep the amount the same they don't have any more money than they had before for their new bigger fiscal plans. How is the same supposed to be better? (Quick math: same does not equal more) We ask again, how do they pay for it?
We think several things are about to happen.
1) These longer term bonds will raise yields. To get a longer term you have to offer a higher yield.
2) JCB is saying we want to take the trade that rates are too low now and we want to lock them in because we think they are going higher. What's that tell you? Rates are too low. Investors are smart. They will not want to be on the other end of that trade. That can cause these auctions to go poorly pushing up yields.
3) This will rob demand from their other bonds tying up money for longer which will drop prices of other bond sales. That will raise rates. If lower rates lift markets (in today's day and age) higher rates what??? drop markets, excellent. We think these 40 year bonds sap liquidity from the market which causes selling.
4) We think, and here's where our heavy analysis comes in...We don't believe Japan will keep their amount of sales at 147 trillion yen like they say. They have to pay for a NEW fiscal plans that requires MORE money. How do you leave your bond sales the same? That makes no sense. We think they will need to issue MORE paper. That will sap MORE money from the bond market.
Wait minute Elazar I think I'm starting to see the picture. Are you telling me while since 2013 Japan has been huge bond buyers liquefying markets, adding cash to markets, they are now going to flip and be a big bond seller sapping money from markets.
That's right, you understand. You got it.
Even more incredible analysis, selling is the opposite of buying.
This major crutch holding up this limping economy and stock market is about to turn upside down. An upside down crutch (picture it) hurts the patient. This patient, the market, is going to be in pain when the crutch has been flipped over.
For clarity (because I'm excited about this)...
Bond selling is the opposite of bond buying!
Amazing Elazar that is simply genius.
Bond buying (past) lowers rates and raises markets.
Bond selling (Japan now or in September) raises rates and what?...lowers markets.
But But Elazar, what about the don't fight the Fed and global quantitative easing story?
It's ending, it's peaking. You see it in the news.
The US is also selling their bonds back to the markets.
So now you have the US and Japan CBs selling. What do you think will happen to markets?
Remember again, we'll have to explain this very difficult concept, selling is the OPPOSITE of buying.
Selling does the opposite of what buying does.
Buying lifts markets (or barely holds them up), selling, again....what? crashes markets.
We recently showed that the Fed had their biggest selling of bonds last week than any time in a couple of years.
So two-thirds of the major global CBs are SELLING, or about to.
Only the ECB is still buying. But they don't have anything left to buy. That is another sign of a peak.
Why would buying push markets up? Because you actually buy something right? Simple. What if you can't buy anything? That push is over.
We showed many times that the ECB will need to either break the law or change the law to buy what they need. There is nothing left.
That is also a material peak to this CB quantitative easing story.
Hmm, this is starting to make sense. That's why Japan bonds had their worst rout in a few years.
That's why bonds went down in Japan. Japan doesn't have any more bonds to buy. In fact, they are about to sell a whole sloth of bonds for their fiscal policy to the market.
More supply of bonds does what to bond prices? It sends them down.
What happens to market yields when bond prices go down? Yields go up? What happens to the stock market when yields go up?
At these low low rates, stocks should go down as people find safety for the first time in HIGHER yields. Investors jump out of stocks that have declining earnings as soon as they can get some yield. Higher yields will drive investors from stocks (down earnings) to bonds (higher yields).
And now you have a catalyst.
You want more proof? Japanese officials are telling you they are deeply concerned that the Yen is telltale.
This is going to be fun.
You've just been hired to be the head of the Japan CB. You know what's going on. You know EVERYTHING. You know you are maxed out and can't buy any more bonds. You know you can't ease any more. You are maxed. You know you can't try to get the yen down any more to ease. Nothing worked. Quick question. Do you now worry that the yen will jump after all your artillery is used up?
Definitely you do.
Remember you are on the inside of the JCB now. You know everything. You know you are done. What do you worry about? The yen spiking higher right?
Well the JCB just showed all their cards. Listen to this.
Here's what the Wall Street Journal reported Japan just said about the yen move (oh I love this), "My understanding is that there have been movements that are quite biased, one-sided and speculator-driven. We will pay the closest possible attention [to the yen] and watch it intensely to ensure that speculator-driven movements won't accelerate, and if necessary, we will take firm action," Mr. Asakawa said.
Oh my, I love that. They told you they expect speculative momentum to accelerate. The JCB, the one with all the info and no ammo just told you that they are officially worried this yen buying is going to pick up steam and send the yen sharply below 100.
Japan's insiders of insiders just told you they expect the Yen to go up.
That is a huge sign to us that they know we know they are done, peaked, maxed and now about to sell. Selling is a sign they have no more tools to ease and buy. Selling, remember this amazing fact, is the opposite of buying.
(I think this is the first report in the history of mankind to belabor that point).
Japan knows we know and they are worried.
We have many reasons that if the yen cracks 100 it will be a negative catalyst. For one it will likely be a cross over to cause Japanese investors to sell more aggressively their losing dollar-denominated assets. That causes selling pressure. Selling pressure means which way? Down.
But Elazar I want to be long because I'm bullish about the breakout.
Breakouts and bubbles need to be respected. The 90s "bubble" however was driven by earnings and GDP growth. High valuations were driven by....something. This one is not. It is driven by CB pumping which is turning, peaking and rolling back down.
That is a serious risk. Don't get sold on the breakout and pay attention to what one of the key drivers of that breakout is doing, they are selling.
Who's going to be left holding the bag when they sell? We think technical traders that are sold on the breakout will be left holding the bag.
(Sorry technical traders but we love you. Really, but you have to look at fundamentals a little bit. How about this. We have a great idea. JUST look at what the CBs are doing, buying or selling, then the rest of the time look at charts. Ok? Pay attention to that one data point at the very least. They are selling, or about to.)
We never knew being bearish in an up tape could be so much fun. But the key driver for this up tape is turning down. While many aren't paying attention of that core driver turning negative you are.
Be safe. We're medium term bearish.
Elazar Note To Readers
Because we write reports through the week doesn't always mean we expect the market to go down because we wrote a report. There are a few reports that we write that say "short term" or "near term downside" which is to emphasize that we DO think in those reports there could be imminent downside.
Other reports are to build an information base so that when the move happens you are informed ahead of time. The key is, we think, to be prepared (like in any business or sport) ahead of time. The more knowledge you have, when you see it materializing (game-time) you will be better prepared to react and know what is happening.
Thank you for all the positive feedback.
This article focuses on the medium term. Check out Your Trading Team to get Elazar Advisors, LLC's help handling the moves, risk and mind games of the market in the short, medium, and long term.
If you want Elazar's analysis on Seeking Alpha, scroll to the top of the article and hit "Follow." Elazar also writes real-time pieces as news is reported. If you want to be among the first updated check the box for "Real-time alerts on this author" under "Follow."
Disclaimer: All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Chaim Siegel, Elazar Advisors, LLC, bestideas, their related parties, and its authors harmless. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, $uup, #elazaradvisorsllc,
Disclosure: I am/we are short S&P 500, AND LONG YEN, WHICH CAN CHANGE AT ANY TIME.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.