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TheBRRR’s Thoughts 

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Time to lock in, it looks like we’re entering the banana zone. The money printers are humming and it looks like risk assets are primed for another leg higher.

With the BOJ officially throwing in the towel on rate hikes the yen is getting smoked and sending the carry trade back into full swing. But that’s just one part of the story.

The real juice here is the ongoing surge in global liquidity, which is now hitting levels we’ve only seen twice in the last 50 years.

The Fed’s back on the easing train with rate cuts, China’s pumping out stimulus, and the dollar is sinking faster than a stone. Translation: there’s a tidal wave of cash out there looking for a home, and risk assets are in the spotlight. The G10 excess liquidity is soaring, and history tells us that this kind of cash flood tends to end with assets popping off in a big way.

Sure, we know the risks – overvalued markets and all that – but let's be real: this is the kind of environment where money gets made.

The carry trade is back, the Fed and BOJ are practically begging capital to flow into the markets, and every sign points to a risk-on party that’s just getting started. So while everyone else is clutching their pearls over bubbles, we see it as an opportunity.

Bottom line: keep your leverage low and sit back. A liquidity-fueled rally is starting to unfold.

Liquidity Conditions Dictate It’s Time To Go Risk-On

Synopsis: Global liquidity is surging, with excess liquidity in the G10 reaching levels seen only twice in the past 50 years (2001 and 2020). The U.S. is the primary driver of this increase, fueled by falling inflation, rising money growth (M1), and a weakening dollar. Meanwhile, China's stimulus measures are expected to add further momentum. This influx of liquidity risks creating speculative bubbles in risk assets.

The Details:

• G10 Excess Liquidity: The G10 excess liquidity indicator has spiked sharply, reaching a level only breached in September 2001 and April 2020. Historically, such peaks have led to major market moves, either in the form of significant rallies or corrections.

• U.S. M1 Growth: The U.S. M1 (demand deposits) has rebounded from its all-time lows after a period of contraction post-pandemic. This increase indicates a higher availability of cash for spending and investment, suggesting more liquidity flowing into markets.

• Weakening Dollar: The declining trend in the U.S. dollar amplifies global excess liquidity as it increases the USD-denominated value of other countries' money supply. This tailwind historically benefits risk assets, especially in emerging markets.

• China's Stimulus: New stimulus in China is poised to elevate global liquidity further. Although China doesn't directly feed into G10 excess liquidity, its contribution to global money growth has historically been significant. The renewed growth in Chinese liquidity may create a "sugar-rush" effect in the markets.

• Global Financial Conditions: The Global Financial Tightness Indicator (GFTI) shows a continued easing trend, signaling that central banks worldwide are cutting rates and adopting looser monetary policies. The Advanced GFTI, which predicts future GFTI trends, suggests this easing will persist in the coming months, promoting additional liquidity.

Why It Matters: The current surge in global liquidity creates a highly supportive environment for asset growth, indicating that stocks and other risk assets may continue their rally in the short to medium term. However, the combination of abundant liquidity and stretched valuations raises the risk of speculative bubbles, which we believe we are at the precipice of.

Zerohedge

China Delivers Stimulus Sending Chinese Stocks Soaring

Synopsis: Japan has signaled an end to its short-lived rate hike cycle as new Prime Minister Shigeru Ishiba announced that the economy is not ready for further rate hikes. This decision has sent the yen crashing to its weakest level against the dollar, reviving the yen carry trade. With Japan's debt-to-GDP ratio around 450%, further rate hikes seem off the table, making the yen's decline inevitable.

The Details:

• The Bank of Japan (BOJ) tried to boost the yen with surprise rate hikes earlier in the year, but market pressures forced a quick policy reversal.

• The yen has fallen sharply following the announcement, with USDJPY expected to return to 160, levels seen just two months prior.

• Japan’s inflationary period has quickly shifted to concerns over deflation, mirroring its ongoing struggle to find economic stability.

• The BOJ's indecision reflects pressure to protect the wealth effect, i.e., stock market performance, while managing inflation and currency stability.

• The yen carry trade is resurging, as Japan's low-interest environment entices investors to borrow yen cheaply to invest in higher-yielding assets abroad.

Why It Matters: Japan's end to its rate hike cycle signals to traders that the yen's weakness will persist, paving the way for a robust yen carry trade. This move could create opportunities for traders looking to capitalize on low-yielding yen funding to invest in riskier assets elsewhere. However, the situation also underscores the risk of Japan falling back into a deflationary trap, which could have broader implications for global markets. The BOJ’s inability to normalize policy amidst its debt burden might indicate similar struggles for other nations with high debt ratios.

Bullet Points:

• Yen crashes: USDJPY headed back to 160 as Japan halts further rate hikes.

• Debt-GDP ratio: Japan’s 450% debt/GDP restricts monetary policy options.

• Carry trade returns: Yen's renewed weakness revives the yen carry trade.

• Deflation risk: Japan shifts from inflationary concerns back to deflation fears.

• Market volatility: Potential entry points for long USDJPY amid the BOJ’s rate halt.

Reuters

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The BRRR is meant for informational purposes only. It is not investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.ll