It’s all about Japan, and it probably shouldn’t be as worrisome for American investors as a lot of reports are making it out to be
Most of the stories I’ve been reading about the US market decline are only getting it 1/2 right.
Because here’s what’s happening in a nutshell. And it has very little to do with the US.
It’s like if there was a volcanic eruption somewhere of a long dormant peak and some ash started floating over the US and people started thinking oh, we can’t see the sun clearly for a few days so we should reevaluate our entire lives when really very little on the ground has changed.
For years, it cost nothing to borrow Japanese yen. Because the Japanese government held interest rates around zero in a futile yet remarkably stubborn effort to rekindle a moribund economy. It didn’t work. So they kept doing it because.
Remember, or maybe you didn’t already know: Japan is effectively a one-party system so stupid policies can linger for years without any real political risk.
So Japan kept at it and It continued not to work. Except to provide investment opportunity to big money players around the rest of the world who of course didn’t reinvest in into Japan. Then something else happened: the yen weakened tremendously, largely because Japan’s economic policy was so stupid, and not working, yet everybody smart knew the Japanese government wasn’t going to do anything about it and just be super-stubborn.
So lots of speculators took advantage of this idiocy, borrowed yen for nothing and pumped it into whatever investments seemed to offer the most upside from zero, which remember is what they were paying for the cash. This was perpetuated for years and trade upon trade.
Until people in Japan started getting really mad that the government had let the yen get so weak for so long and so the government just kind of willy-nilly decided to raise rates. When you raise rates, you’re making the value of your currency more expensive, because it costs more money to borrow it, and therefore it should boost the value of the currency. Problem is, no one really wants to borrow yen if they have to actually pay for it. So this move might be viewed as equally or even more dumb, and while it’s too soon to really tell if it’ll work in the long run (it won’t, but then again who the hell really knows; there’s almost always a chance a hand you shouldn’t have played pulls a winning card on the river), it’s real simple to see the impact in the short term: it was a really stupid move. And the reason global markets didn’t anticipate it is they never thought anyone would ever do anything that dumb that unexpectedly and decicively, especially when they seemed totally married to their previous totally dumb policy.
That doesn’t mean the effects aren’t real. They are.
But as I said, where a lot of reporters are getting the story wrong is in thinking there’s more to it. And a myriad of players with their own motives and machinations. There isn’t. Except for self-defense. That might be a factor in terms of how other people and institutions are responding. But really, there isn’t. I’m sorry: it’s just Japan being doubly stupid and frustrating. That’s it.
So while the sell-off in tech stocks, is really a sell-off in techs stocks, it’s not really about tech stocks. Those were just the most reliably high flying places in which to put free money. So the sell-off has little to do with the stocks themselves. Yeah, there were a couple of lackluster earnings reports, but nothing that would’ve knocked anything off-kilter at all given the incessant trend upward that has lasted for years. So to point to a couple of bad but not horrible earnings reports is folly. Sorry, it’s all about Japan. And the people who are in charge of Japan’s monetary policy handling it very stupidly for years, and when they got tired of being called stupid, did something equally if not more stupid.
Now? Well, the ball is in the US Federal Reserve’s court. Lowering interest rates right now might do the trick. But the Fed just met and didn’t. But that was before Japan did its dumb thing. And the Fed indicated it probably would cut interest rates soon anyway. So why not do it right away? Because with market moves like this, perception could be easily 9/10ths of the game. So if the Fed moves too quick, so their cut is perceived as an “emergency” cut, investors could start thinking there’s a real global problem, and then there could actually become a real global problem. Not just Japan being dumb and then dumber. So the Fed will absolutely cut rates after they wait a bit so it doesn’t look like it’s an emergency, which would probably make things worse. And then hopefully, that will be the end of it.
The only other aspect of the story maybe with any teeth is Warren Buffett apparently dumping a lot of stock. And he’s usually right. But the stock market has been overvalued for years. I mean as I’ve pointed out, it was completely insane that the market even soared the first year of COVID, when nobody except Amazon was really selling much of anything, and it continued to soar when inflation went through the roof and people couldn’t afford to buy anything.
There’s a lot that hasn’t been rational. But the baseline economic numbers have stayed pretty solid and they still are. Few months ago, nobody would’ve blinked an eye at a weaker than expected jobs report, that in fact added hundreds of thousands of new jobs to the economy. Just not as many as economists — who have become increasingly bad at predicting things — predicted.
Of course Wall Street’s advice at times like this is always for investors to stay the course. But part of that of course is because because if people don’t stay the course that in itself could get you a real gigantic market crash. So I always view that advice too with a grain of salt. But here, given the stark facts and obvious lines that can be drawn from cause to effect, which are really incredibly obvious and simple, that advice does kind of actually make sense.