There's a lot to talk about and I want to start with Japan, where last week I spoke about the government's intention to front-load this year's public-works spending in an effort to get the economy going. That's roughly about $109 billion in current foreign exchange terms, which may not be huge, but it's not small either.
In my opinion, the fiscal package will accomplish two things: First, it should put a lid on the yen's rally, which has been ferocious over the last three months, and second, it should trigger a good rebound in the Nikkei thanks to what I believe will be improving economic data.
The yen is likely to give back some or much of its February-April gains, especially given the fact that speculators are long yen futures by the highest amount in four years on the CME. We could see some pretty impressive long liquidation in the coming weeks.
Japanese officials and the Bank of Japan have been trying to bring down the yen in all the wrong ways, using tactics such as negative rates (actually bullish for the yen) austerity or just plain jawboning.
These strategies have just increased upward pressures on the yen, which had been building for a while. The fiscal stimulus, however, should do the trick at least for the next several months, giving us a very tradeable correction.
With respect to the economic and stock market prospects in Japan, I think the stimulus will similarly lead to stronger aggregate demand, and that will show up in the economic data over the next four or five months.
Japanese stocks should respond positively. You may want to consider buying some iShares MSCI Japan (EWJ) or Honda (HMC), both of which are reasonably priced and could see some good upside.
Be forewarned, however, that there is exchange risk, so if you start seeing big moves in the Japanese stock market and these instruments are not keeping pace, it may be because of the translation from a weaker yen. Even so, you should still get some nice upside if the situation in Japan improves.
Did anyone notice that gold broke out of its several-weeks-long slumber, right after that Japan stimulus was announced? I was not surprised, yet it is interesting to me how gold bugs missed the connection.
Gold bugs seem to miss all the important connections and instead prefer to point out "connections" that don't really exist, like how monetary operations lead to hyperinflation. (Not!) Either that or they simply repeat over and over that gold is going higher, like someday the Earth will stop rotating around the sun, which it will. (But is that really useful?) Call me crazy, but I also think it's good to have an idea when and what causes these things. Yes, there is a connection between fiscal stimulus in a big, important economy like Japan's and movements in the gold market. You just saw it.
In doing my research over the weekend, I noticed that loan growth in the U.S. is slowing. Total loans and leases outstanding at commercial banks, which are just off their highest nominal level, are nonetheless showing a very significant slowdown in the rate of growth.
From the Fed's own data, we see loan growth is occurring at the slowest pace in seven months. That is not necessarily a bad thing, however. Actually, the slowdown in loan growth might be due to improving financial sector balance sheets, and if that's the case you can thank a newly expanding federal budget deficit.
I have explained here numerous times how the government's deficit equals the private sector's surplus (to the penny). When the government grows, the deficit it adds to the income and savings of the private sector and that additional stock of financial wealth may reduce the private sector's (households, firms) need to tap credit.
That's good, but maybe not so good for the banks, which could see earnings weaken. It's reasonable to expect some market rotation out of banks and financial stocks at this time and into industrials, commodities and materials.
On that last note, let me just say something about Alcoa's (AA) earnings, which were released last night to mostly disappointment despite the fact that the company blew away profit forecasts.
Alcoa blamed falling aluminum prices for its revenue miss, however, all forecasts that I have seen, including Alcoa's own, show aluminum prices bottoming this year and moving higher through 2025. That's another reason to be bullish on the stock.