Weekly Market Update by Retirement Lifestyle Advocates

          To continue in the vein of last week, when I discussed the trade-offs of managing inflation through tighter monetary policies versus providing economic stimulus to the economy at the expense of currency devaluation, also known as inflation, this week I want to share how the end game might look by examining the recent action of the Japanese central bank.

          Past guest on the RLA Radio program, John Rubino, published a commentary this week titled, “Japan Enters Its Death Spiral”.  It does a nice job of explaining the decision that, in my view, every central bank in the world will eventually face:

          Choose which you will save – the economy or the currency – you can’t save both.

          Here is a bit from John’s article (Source:  https://rubino.substack.com/p/japan-enters-its-death-spiral):

Confronted with both a plunging yen and rising interest rates, Japan was recently forced to address one of those potential crises. It chose to protect the yen by raising short-term interest rates and using the dollars in its foreign exchange reserve to buy yen. This arrested the yen’s decline.

But remember, Japan is in a box where fixing one crisis exacerbates one or more others. In this case, a resurgent yen makes Japanese exports more expensive, threatening to tip the economy into recession. Japanese stocks, in response, are now plunging:

A rising yen also threatens the “carry trade” in which businesses borrow yen at low interest rates and use the proceeds to fund AI data centers and leveraged Treasury bond speculation and all kinds of other cutting edge things. Eliminate this source of cheap funding and related activity grinds to a halt, causing trouble for everyone.

            Mr. Rubino then cites an “MSNBC” piece on the topic.  (Source:  https://www.cnbc.com/2024/08/02/carry-trade-how-japans-yen-could-be-ripping-through-us-stocks.html)

The rising yen has fueled speculation about whether this could mark the end of the popular so-called “carry trade” — wherein an investor borrows in a currency with low interest rates, such as the yen, and reinvests the proceeds in a currency with a higher rate of return.

“The now evident vulnerability of US equity prices to a rise in the Yen exchange rate warns of the consequences for US asset prices and developed-world asset prices in general from monetary policy changes in the east,” Napier said in the Tuesday report.

He cited the recent rally in the Japanese currency as an example where selling pressure from investors seeking to repay their yen debt had pushed prices of U.S. equities down, while yields on U.S. government debt continued to decline.

“That the US equity market should react so negatively to this rally in the Yen is the shape of things to come, and an indicator to investors of how inter-related US equity valuations are with the global monetary system,” Napier said.

U.S. stocks kicked off the month sharply lower, as fresh data prompted fears of a worsening economic outlook. The weak data led investors to worry that the Federal Reserve may be behind the curve in cutting interest rates to fend off a recession.

The Dow Jones Industrial Average on Thursday fell nearly 500 points, or 1.2%, while the S&P 500 shed 1.4% and the Nasdaq Composite slipped 2.3%.

Cedric Chehab, global head of country risk at research firm BMI, said Friday that a combination of factors have been at play over the past roughly 10 day-period. However, he insisted “corrections like this are absolutely normal” at this time of year.

“First of all, the hawkish Bank of Japan caused an implosion of the carry trade over a short-term basis. We also had bad manufacturing data out of the U.S. and some employment sub-indicators which scared markets,” Chehab told CNBC’s “Street Signs Asia” on Friday.

“And then overnight, we saw a lot of volatility in some of the major earnings. And all of that helps push equity markets, which had been quite expensive, even lower,” he continued.

            While the gentleman quoted in the MSNBC article, Mr. Chehab, probably believes this is a ‘normal’ correction (although there is no universally accepted definition of the term ‘normal correction), I’d disagree with his assessment.

          Here is just one reason why.

          Warren Buffett, who is not known for making many mistakes when it comes to investing, just might see the current market differently.  Seems Mr. Buffet just unloaded a whole lot of Apple stock, one of the darlings of Wall Street.  This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/buffett-calls-top-berkshire-quietly-dumps-half-its-apple-shares-amid-record-liquidation):

When yesterday we said, when discussing Buffett's ongoing liquidation of his Bank of America stake, that "Berkshire's rising cash stockpiles merely reflect the firm's inability to find deals in today's overvalued and weak economic environment", little did we know just how accurate that would be, because fast-forwarding just one day later we find that far from only dumping Bank of America, the 93-year-old Omaha billionaire had been busy quietly dumping his most iconic holding in an unprecedented selling spree that sent Berkshire's cash pile soaring by a record $88 billion to an all-time high $277 billion at the end of Q2.

As shown in the chart below, in the second quarter (which ended June 30, and thus just two weeks after the Apple's Developer Conference which took place on June 10 and which was - at least on the day of - a total bust), Berkshire sold a net $75.5 billion worth of stock, the bulk of which we now know, came from Buffett's liquidation of half his Apple shares.

While there was no 13F filed yet to go with the Berkshire's 10Q, the company did provide a snapshot of its top holdings, revealing that as of June 30 it held only $84.2 billion in Apple stock, down sharply from $135.4 billion as of March 31 and $174.3 billion as of Dec 31, 2023. This translates into just 400 million shares of AAPL held as of June 30, down almost 50% from 789.4 million as of March 31 and 905.6 million at the end of 2023.

          Perhaps Mr. Chehab is correct, but I’ll bet on Mr. Buffett. 

          The world economy and stock markets have long been propped up by currency creation.  Perhaps we are now on the verge of all that changing.

          This week’s RLA radio program features a ‘best of’ interview that I conducted with Mr. Mark Jeftovic, publisher of “The Bitcoin Capitalist”.  Mark and I discuss the current state of the US economy and investing markets.  We also discuss the growing role of cryptocurrencies in the financial system.

          The radio program is posted on this site, just click on the "Podcast" tab above to listen.  The weekly Headline Roundup newscast is also posted there.  If you haven’t yet done so, check out the free resources available on the website.

“When there is a single thief, it’s robbery.  When there are a thousand thieves, it’s taxation.”

                                             -Vanya Cohen