Macro Madness in the Land of Rising Sun. Say Konichiwaaa!
1/x - Why macro is down bad
1/x - Why macro is down bad
2/x - Why should you care? Crypto and equities track the macro markets. Interest rates determine the cost of borrowing. Broadly speaking, you arent going to find money to buy dumb computer coins when interest rates are at 10%
3/x - Before sloth started working at macs, sloth dabbled in a bit of macro. But really, im just pretty much an idiot. On the bright side, that means i'm good at explaining to idiots.
4/x - So what's going on in Japan now? Sloth was excited to see USDJPY so high..that means its cheap to go japan and spend on maid cafes! Except...it's still pretty much closed. But wtf happened that made the currency surge by 18% this year?
5/x - USDJPY isnt crypto. JPY 1y vol was at about 6.7% at the start of the year. Having a currency surge by 18% is huge news. For context, the red box is covid. So some shit really happened.
6/x - The answer is badum badum. Japan's yield curve control strategy. Basically, it's 10 year bond yields are only allowed to move between 0.25% and -0.25%.
7/x - In economics, there is this thing called the impossible trinity. You can only pick 2 out of the 3. Either you have free movement of capital, interest rate control or exchange rate control.
8/x - As inflation ravaged the entire world, central banks worldwide (Fed, SNB even lol) hiked rates to combat against a descend into an inflationary spiral
9/x - However, the BoJ refused to do so and maintained their YCC policy. That meant that all that pressure had to released through another valve - their exchange rate. Prompting the yen to devalue massively.
10/x - Defending their YCC has not come without costs. The BoJ owns virtually half of the entire JGB market - June is not over yet, however it has already bought 25% more JGBs this month than in any other month
11/x - Meanwhile, insurers and private capital in japan are extremely overweight JGBs. Bag holding this together with the BoJ
12/x - Japan however is a net importer of raw materials and energy. This are exactly the times that are surging at this point in time. With their currency devaluing, this MAGNIFIES the impact of inflation on the people.
13/x - However, if they abandon YCC - rates would shoot up. Bond math is a bitch. There is an extreme amount of convexity at the zero bound. If 10y rates in japan approaches that of the US, the price of a JGB bond would fall by 25%
14/x - This would inflict huge losses on the BOJ as well as on private investors. More importantly, liquidity which is already terrible in JGBs will become absolutely abysmal as the market tries to figure out the situation.
15/x - The difference between this bear market and the rest is that there is literally no place to hide. Bonds and stocks are both getting pummeled. In previous bear markets, as risk sentiment tanked, bonds would at least cushion the damage
16/x - An inflationary bear market corrects the cost of capital and makes non cash generative business go bankrupt (hey tech) as they are ill able to raise capital.
17/x - Japan has been an interesting case study, particularly because the size of its QE program has vastly outstripped any other after being adjusted for GDP. I dont know what's going to happen
18/x - This will take time to play out. For us to have risk on sentiment, we will need the macro stars to aligned. For now, we are still at the edge of the precipice. We have not yet been pushed down.
19/x - tldr - japan macro bad. macro bad. no money to buy computer coin. computer coin down bad.
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