Winter is coming...to JapanWinter is coming...to Japan

The yen weakened against the dollar at the same time bond yields rose. This shouldn’t happen if investors have confidence in the government’s ability to maintain the purchasing power of their filthy fiat currency and stop deficit spending.

I don't buy bonds. But my brother-in-law is a bond salesman. He tells me that high yields attract buyers. If Japan is offering high yields on their bonds, you might think lots of people would scramble to get yen so they can buy the bonds. So yields go up should also mean yen goes up. As Hayes points out: when this doesn't happen, it may be a sign that investors are losing confidence that Japan is gonna pay their bills.

Eternal September of the printerEternal September of the printer

Hayes thinks the NY Fed is gonna (or is already) backstopping the Japanese government bond market. Here is how he describes the mechanism that does this:

1. The New York Fed creates a bank reserves liability, which are dollars, with a primary dealer bank like JP Morgan.
2. JP Morgan sells dollars and receives yen in the FX market on behalf of the NY Fed. The yen appreciates against the dollar.
3. The New York Fed may invest its yen into suitable securities, of which JGBs qualify. The NY Fed instructs JP Morgan to purchase JGBs with its yen for its SOMA.[3] JGB yields fall.

Why would they want to weaken the dollar?Why would they want to weaken the dollar?

Hayes lays out an almost too perfect story for how backstopping Japanese government bond sales fixes all the US Treasury's problems:

Beautifully Effective

This yen and JGB market manipulation by the Fed solves many financial problems for the Trump administration.

Strengthen the Yen

This will strengthen the yen against the dollar, which will help US export competitiveness.

Lower JGB Yields

Lower JGB yields will dissuade Japan Inc. from selling treasuries to buy JGBs. Japanese Prime Minister Takaichi can roll out a massive stimulus program funded by increased bond sales to placate Japanese plebes. Understandably, the average voter doesn’t relish the fact that their nation got nuked and then turned into an American colony. Prime Minister Takaichi can also increase defense spending and purchase more American-made weapons of mass destruction.

Increase Dollar Liquidity

The Fed can expand its balance sheet by printing money and with a straight face claim it’s not QE. Asset prices will rise and keep the wealthy American political donors happy.

Strengthen the Euro

If you couldn’t tell, Trump and his lieutenants have no love for the Europooreans. To fully cuck Europe requires a strong euro. The dollar will mechanically weaken against most currencies, especially the euro, as the Fed prints billions of dollars to fund the purchase of yen and JGBs. A stronger euro castrates German and French exports, handing more global business to American firms.

Strengthen the Yuan

The yuan will strengthen against the dollar for the same reasons as the euro. If the yuan appreciates too quickly for Chinese President Xi Jinping’s liking, the PBOC will expand domestic credit to arrest the yuan’s rise. An increase of yuan credit helps global asset prices. Some of this credit will leak into US stonks as the Chinese state and private sector are among the largest holders of US equities.

As always, Hayes has a knack for timing. He put this out on a day when the dollar did a nice dump. If he writes his newsletters over a week or two before hand, he's got a lucky feel for timing. If he writes theses things live, as it's happening, I'm impressed by his ability to pump it out. If it's all just coincidence, well, he's got good coincidence-ness.

Signs of winter (which is actually spring)Signs of winter (which is actually spring)

Here's how we can test him this time:

I bet that the Fed whisperer reporter Nick Timaros from the Wall Street Journal will receive a “leak” from a Fed insider that the institution is actively buying JGBs. The Fed will confirm these purchases because it wants us traders to invest alongside. The more investors buy, the less the Fed has to, and because these schemes create significant FX and interest rate risk for the Fed, less is more.

Really all Hayes is interested in is going skiing and Fed dollar printing because that's what he thinks will be the herald of the new number go up time. So, here's his signpost:

If the Foreign Currency Denominated Assets line item on the Fed’s balance sheet rises w-o-w then it’s time to increase my holdings of Bitcoin. I stopped myself out of my long Strategy (MSTR US) and Metaplanet (3350 JP) trades before the yen moves thankfully. I will re-enter these levered Bitcoin proxies if my hypothesis is correct.