Dear Reader,
Prepare for a monumental event next week - one that could upend markets and shake the economy to its core. At Flashpoint Trader, we're already looking ahead to this pivotal moment, as it just might become the biggest story of the year.
Fukoku Mutual Life Insurance, a Tokyo-based company, may not ring a bell for most people. Nevertheless, they're set to make a move which could have dramatic implications for our wealth.
This event has been more than 10 years in the making, and the time to get prepared could quickly run out.
So, here's the deal with Fukoku
For years, the Bank of Japan has run an easy monetary policy, consistently expanding its balance sheet with a "significant" amount of quantitative easing in a bid to control interest rates and yields, heat up the country's perpetually frosty economy, and gin up inflation.
Of course, the US Federal Reserve and most of the rest of the world's big economies' central banks, by contrast, have recently begun unloading their balance sheets and tightening up policy to fight inflation. They're selling. There is a direct causal relationship between the performance of the S&P 500 and these major bank assets. The banks act as the buyer of last resort for bonds, providing liquidity to the system. Ultimately, this money indirectly finds its way into risk assets.
Companies like Fukoku Mutual Life Insurance have been hedging foreign debt to generate more yield than what's available in their public markets. This has been a massive carry trade. However, when the Fed and other central banks raised interest rates, the returns on these trades diminished to the point of unprofitability.
This is driven home by one of the most important charts I've seen so far in 2023; BOJ bonds offering higher yields than hedged foreign debt.
In Japan, central bank money meisters have finally got the inflation they've spent decades looking for; it's running at around 3.3% there currently. The economic weather is changing. Now, incoming Bank of Japan Governor Kazuo Ueda is planning to chair his first meeting as BOJ governor next week.
For what it's worth, Ueda has said he's not planning a quick about-face, and I believe him; tightening could take months or even years to play out.
Of course, what the BOJ does is less important than what market participants do. They've already put plans in motion to unwind their big foreign bond trade.
For example, Fukoku plans to unload $65 billion in currency-hedged foreign debt holdings. If more companies follow suit and unload foreign bonds, the relevant central banks will be in a tight spot.
The question that concerns you and I: Who will end up holding US debt moving forward? Around $7 trillion is held by foreign entities.
If these foreign institutions start to dump foreign debt - including our own, of course - because the Japanese 30-year bond becomes more attractive, it can create liquidity problems for bonds worldwide. In response, the Fed or the European Central Bank (ECB) may have to buy this debt as the buyer of last resort (quantitative easing) or find another solution. Unfortunately, the US Department of the Treasury has admitted that their buyer of last resort will likely be the US taxpayer, which could lead to various "difficulties" moving forward.
This is shaping up to be a Flashpoint unlike anything we've seen so far - the potential for volatility is extreme, but if you're prepared, so is the potential for profit.
I want you to get the chance to be ready, so call Gabe and the team to learn how you can get Flashpoint Trader. You can reach them at 877-212-9163 or go here and check out Flashpoint for yourself.
Today's Momentum Reading
WORLD'S BIGGEST INDICATORS
Broad Market: Yellow
S&P 500: Red
Recap: The World's Biggest Indicator (Momentum) is Red...
This week's sluggish performance drags on into Friday, with both the S&P 500 and Russell 2000 indices slipping downward. Having gathered a full week's worth of earnings data, it seems the market is growing uneasy about future profit prospects. But fear not, fellow traders! Today has already gifted us with five fantastic opportunities to capitalize on market reversions. As a result, the trading range of the SPY is expanding, which hints at an interesting close, especially since we're facing a significant options expiration. Keep a close eye on the 412.50 level for the SPY; if we're going to witness a late-day surge, traders will need to conquer that crucial threshold.
What You Missed
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Cheers,
Garrett
The post $7 Trillion In U.S. Debt Could Hit Markets Like a Ton of Bricks appeared first on Midday Momentum.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.