Is Japan Signaling the Beginning of the End?

Since The Bernank spoke last week, the Japan markets have been in turmoil. Stocks have fallen over 12% in just a few days, and, most troubling, bond rates have risen sharply. See chart, courtesy Zerohedge:

Is the Bank of Japan losing control over rates? The theory of QE is that the central bank can manage rates down by purchasing bonds, but the bond vigilantes in Japan are pushing back.

In the US the fear is that the Fed will be unable to taper off QE. The Bernank's remarks last week were of a taper, and yet in the US the 10 year has spiked above 2%. There is a concern that if rates go above 2.2-2.25%, the biond portfolios will begin to rotate their mix of long and short bonds, essentially causing a spike in the ten-year which might shoot it to 2.5% - the so-called Bond Convexity. If this happens, expect the Fed to stop the taper and jump back in with (say) two months of QE in one month, to drive rates down. 

This would be quite a good buying opportunity of the ten year. It also may signal that even the Fed will face issues in trying to taper and avoid losing control over rates. 

Comments

[Walter Wolf]

Any good news to share?

The whole world isnt doom and gloom you know. There is some positive news out there you could comment on at least once in awhile (to balance out the imminent doom news).

[yelnick]

Walter, the good news is that we may be about to go into another US tech boom. There really is no place in the world to get yield, and the Global Scramble For Yield will soon look at tech IPOs as a new game. I will write about that as it happens. RIght now we have the risk of Japan driving UST up, USD up, and soon US stocks down. Could be a rough summer.

[cobran]

Yelnick,

Thank you for your market postings. I enjoy reading them. I hope the frequency increases like it used to be before. :-)

[Taz]

Hi Walter

Could you kindly share what positive news you are talking about? I am not trying to pick a fight here, just pointing out that with the mainstream media with its blinkers on, such positive news may already be completely discounted by the market, and therefore, be totally irrelevant.

Taz

[yelnick]

cobran, kind of you to say. I am in the VC biz, and it is 1997 all over again - not yet the crazy period, but definitely the third big tech boom after microprocessors/PCs (78-83) and dot-coms (94-00). in other words, busy busy. I continue to watch the macro environment - most VCs don't, other then to watch IPOs - and the scramble for yield seems destined to send capital into tech. Last year's IPOs (Facebook, LinkedIn) were so last decade so to speak - they started in the early 00s. This year's IPOs, such as Tableau, are of more recent vintage. So far they are doing well on IPO day and in the after market. A lot of tech companies with serious revenues ($100M and up) are lining up to go out; and some even have losses, shades of 1998. If they do well, the floodgates should open in 2014 even if - and maybe especially if - the macro environment sucks wind. So we get beta in tech. The VCs like me search for alpha. The combo should deliver outsized returns - the better of the new breed of funds are doing 30%+ IRRs.

[?]

Walter,

I think one good piece of news is that the QE programs helped numerous leveraged companies and others with poor business models. For example, Tesla Motors stock price allowed it to repay the Treasury back. This helps the taxpayers.

BTW, welcome back Duncan. It is nice to see your posts every so often.

[google]

Thank you for your blog post.Thanks Again. Really Cool.