Make My Day

The BOJ continues performing the cute routine, once again issuing a thinly veiled warning to the carry trade crowd. BOJ pudding boy Fukui said the central bank needs to act “in advance, moderately” because prolonging low borrowing costs may spur excessive capital investment and inflate asset prices. Duh! He goes on to say:

“We are very alert about the fact that a sudden unwinding due to an abrupt change in future expectations for interest rates could cause various distortions, which would be a very serious risk,” Fukui told a parliamentary committee today in Tokyo. “We are always communicating with the market to ensure that that doesn’t happen.”

Now I must seriously ask Riskloves the following question about your “cozy” relationship with Mr. Fukui,

“This is a Magnum 44, the largest handgun in the world, and it can blow your head clean off. You’ve got to ask yourself one question: ‘Do I feel lucky?’….Well? Do ya, punk?”

Long as the right people get shot.

The Democratic takeover of Congress on the same day China announced record trade surpluses with the US, suggests a shift in the sands in the tired, old symbiotic “relationship”. Some observers claim that basic globalization trends started under Clinton are still in play. I think that ignores strident anti-globalization beliefs among not just new members of the US Senate such Sherrod Brown, but also Majority Leader Harry Reid. This speech last year is representative of the later’s view. And it’s not just Democrats, but key Republicans such as Graham and Grassley that are backing sanctions against China. Counter-globalization winds should not be underestimated at this juncture.

The initial Chinese response to this prospect is from classic Sun Tzu, “Art of War”, and that’s to employ a not so subtle threat aimed right at the heart of the enemy’s self inflicted weak point, his addiction to economic subsidies, and Ponzi finance. The Chinese diversification talk about using gold, is a small part and ruse to the real response, and is code word for diversifying generally away from US Old Maid Cards (Treasuries, agencies, MBS). The threat is in reality, hardly subtle, although Riskloves in this market may be clueless about it. From Sun Tzu:

Reduce the hostile chiefs by inflicting damage on them;

Chia Lin enumerates several ways of inflicting this injury, some of which would only occur to the Oriental mind:–

Foment intrigue and deceit, and thus sow dissension between the ruler and his ministers. By means of every artful contrivance, cause deterioration amongst his men and waste of his treasure. Corrupt his morals by insidious gifts leading him into excess.

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