Market Alert - Japan Cracks

The Japanese stock market cracked on Wednesday, plunging -7% in one session. Money printing is not a risk-free solution to unsustainable government debts and deficits. The Nikkei 225 Index of Japanese stocks rallied over 80% in local currency terms in the space of 6 months and ended in a parabolic upside move that broke down and mini-crashed this week. Accelerations higher (or lower) are typically ending patterns in stock markets.

Nikkei surged 80% higher in 6 months following the Bank of Japan's announcement to start printing money at lite speed.

The JPY/USD currency rate has also had an enormous move, in the opposite direction. The JPY has plunged by over 30% versus the USD over the same 6 month time frame. These are historic moves and a sign of things to come for capital market investors.

The Japanese Yen has plummeted by 30% versus the USD since November 2012.

Japan's gross government debt/GDP is over 230% and rising. Efforts made by the Bank of Japan to create enough inflation (targeting 2% p.a.) in order to reduce the nominal value of the debt they are carrying could have disastrous consequences if Japanese government bond yields rise above the 2% level. Above 2%, the tax revenues collected by the Japanese government would be insufficient to meet the interest payments on Japanese government bonds as they fall due. Yields have spiked from 0.30% to 1.00% over the past six weeks. If this upward trend continues, we may see fireworks across a whole range of global equity and bond markets. In the end, money printing is no panacea for fiscal irresponsibility and creates many more problems than it solves.

Japanese government bond yields have surged from 0.30% to 1.00% in 6 weeks. A rise above 2% bankrupts Japan.

Market Alert - Stocks or Bonds?

The persistent uptrend in equity markets in 2013 has been a sight to behold. Equities are now accelerating higher and due at least a short-term pause. Accelerations are typically ending patterns in stock markets. The S&P 500 closed today (Tuesday 21st May) at 1,669, a full 26% above its long-term 200-week moving average. Equities are heavily overbought in the near-term and quite overvalued relative to bonds, as the following chart shows. Be patient about adding to your stock portfolio at the present time.

Equities are now quite overvalued relative to bonds. The S&P 500 is trading 26% above its long-term moving average and pricing in an awful lot of good news here.