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"I am going to go on the record," says Halcyon Asset Management chairman John Bader, speaking at the WSJ's Heard on the Street conference. "Japan is an accident waiting to happen ... I don't think this is today's or tomorrow's business, but I think in 10 years this blows up big time ... you can't operate with a debt to equity level like that."
Turning domestically, Bader - viewing a stock market "gone to the moon," the end of the 30-year bond bull market, and high yield "priced to perfection," - sees a lot of risks right now. He's positioned to make money be shorting REIT indexes and other similar instruments.
As expected, the Bank of Japan has left its policy unchanged and maintained its target of expanding the monetary base by ¥60-¥70T ($720B) a year.
The BOJ again said the economy is "recovering moderately," noting that corporate capex has been rising as profits have improved.
However, the BOJ is concerned by risks from overseas, including Europe's debt problems, emerging markets and the pace of the recovery in the U.S.
The decision came just days after Japanese Prime Minister Shinzo Abe announced that the government would go through with a planned rise in sales tax to 8% from 5%, which has caused uncertainty about the impact on the economy.
European shares and U.S. stock futures are mostly lower as investors start to get more than a tad concerned that the government shutdown in America might drag on longer than expected. Markets are also focusing on an ECB policy meeting later, when the bank is expected to leave interest rates at 0.5%.
Japanese shares dropped 2.3% as the yen rose against the dollar, and investors analyzed the government's sales-tax increase and stimulus package.
Stocks rose elsewhere in Asia, though, helped by a strong ISM manufacturing report in the U.S.
Hong Kong +0.6%.
EU Stoxx 50 -0.3%, London -0.9%, Paris -0.7%, Frankfurt -0.6%, Milan +0.9%, Madrid -0.1%.
U.S. stock futures: Dow -0.5%. S&P -0.7%. Nasdaq -0.5%
As widely expected, Japan will go through with a plan to raise sales tax in April to 8% from 5%, a move that is set to raise ¥8T.
Prime Minister Shinzo Abe is expected to unveil a ¥5T stimulus package later today to offset the effect of the tax rise. The measures will reportedly include a cut in corporate tax and further public-works spending.
Still, the VAT rise is Japan's first serious attempt in 15 years to rein in its public debt, which recently topped ¥1,000T and is more than twice the size of GDP.
Japanese Prime Minister Shinzo Abe will reportedly announce tomorrow that he will go ahead with a planned rise in sales tax to 8% from 5%, but he will also unveil a stimulus package designed to cushion the impact of the increased levy.
While the VAT increase is seen raising ¥7.5T for the Treasury, it will spend ¥5-7T on the stimulus measures. Unsurprisingly, there's plenty of noise about the apparent paradox of it all.
The package will include tax breaks for companies but not a cut in income tax, as well as investment in public works and cash handouts to those on low incomes.
Meanwhile, Japan's real interest rates seem to have dropped below zero, with inflation rising to 0.8% in August and the yield on 10-year bonds dropping to 0.69%. The hope is that bond-holders will look for returns by moving out of bonds and into assets such as stocks, loans, property or overseas assets, a trend that will eventually feed into higher prices and further help the battle against deflation.
S&P 500 (SPY) futures -0.8% on mounting concerns of a partial U.S. government shutdown after the House voted to tie federal government funding to a halt on key provisions of Obamacare. Adding to worries is what may be the imminent collapse of the Italian government.
DJIA (DIA) futures -0.7%, Nasdaq 100 (QQQ) -0.6%, Russell 2000 (IWM) -0.9%. Italian FTSE MIB futures (EWI) -1.2%.
Japan's Nikkei is off 2% in the early going and Australia's ASX 200 is down 1%.
Gold's little-changed and WTI crude oil is down 1.1% to $101.72.
"I'm lost ... I don't play when I'm lost," says Stan Druckenmiller, explaining to Bloomberg TV why he doesn't have any big bets going right now. He believes the market is topping right now, but his main focus is on who the new Fed chairman will be, and he's willing to wait a few weeks to find out. The takeaway from that comment looks to mean Druckenmiller will be buying on a Yellen appointment, selling on Summers.
As long as the Fed is printing money, he says, there's no chance of a bear market, but "if you tell me QE will be removed in 6-9 months ... that's a big deal." For those who don' think so, he says, look at June - the mere hint of removal caused havoc. What do you think might happen when tapering actually begins (Has the Ted Williams of global macro forgotten markets anticipate?).
On again, off again short bonds for some time now, Druckenmiller admits to missing the big move down in Treasurys this summer after waiting for it for years.
For now, he's long a few Japanese stocks and short the yen.
Taking a page out of the Fed's book, many BOJ board members "expressed hope that the government [will] steadily promote steps to achieve fiscal consolidation," minutes from the central bank's August 7-8 meeting show.
Members also noted that long-term rates remained "more or less flat throughout the intermeeting period."
Nevertheless, "one member pointed out that, if the government's stance in terms of fiscal consolidation were to weaken ... long-term interest rates could rise", hindering the central bank's efforts.