WESTON NAKAMURA: Hi, everyone. Welcome to a special edition of the Real Vision Daily Briefing. It is Monday, December 27th, 2021. My name is Weston Nakamura in my apartment in New York, for which Ash Bennington has been squatting here for God knows how long at this point. If you recall the last time that this happened, he basically said that he needs to get his locks changed. And I respond by saying in a language that he might understand, Ash, not your keys, not your locks.
With that said, I'm just going to just do an overview of what I believe has happened in markets, global markets, cross asset over the past week, and this last week of the year. Because I have what I believe is a pretty differentiated view, at least from what I'm hearing, and something to think about. Now, obviously, because this is the last week of the year, we're in between holidays, Christmas, New Year's, there is a huge absence of market participants and there are also a lot of global market holidays.
In terms of market holidays in global equities, at least, today, we have Hong Kong, Australia, New Zealand closed for Asia, UK, Ireland closed for EM EA, and Canada closed for the Americas. Australia, New Zealand, UK, Ireland, Canada, they remain closed on Tuesday. Friday, which is New Year's Eve, we have a bunch of early closes in Asia and Europe, full day of trading in Europe, in the US and Japan is closed. Japan's also closed Monday after New Year's and reopens on Tuesday, January 4th, so a day later than the rest of the DMs.
Now, why does this matter? In general, I've said this time and again, but market holidays matter for so many reasons. But mainly, it's not really because of what markets are or aren't open for trading, but who is and isn't trading? And therefore, who is trading and, and who is given therefore a brighter spotlight absent these other players that are normally the active market participants with the market influence, the market moving influence.
For example, when there's a US specific, a US only holiday, those are days to pay attention to global markets cross asset, not just stock markets, because it allows you to see what market behavior is like absent US investor participation. All right, so it's not about what the SPX is doing versus SPX is closed, who cares? But it's what are Euro Stoxx doing? What's the Hong Kong market doing? What single stocks in Japan? What's the German bund curve doing? Absent the United States flow.
Take Thanksgiving, which the rest of the world calls Thursday, and Black Friday, which was the half day, and it was a half day for US markets but basically, it was still a US market holiday, because in terms of market participants, they weren't there. And then what happened.
In a 24-hour cycle, we had a minus 5% drop on the Nikkei index futures from open to close, and basically minus 3% to minus 5% down across Europe, both on massive volumes. That is significant, because not just because of the moves, but because it was absent the US flows. Now, would it have been different? Nobody would know. But it's interesting to watch markets and watch for who is not participating and who is, so be aware of these regional holidays for some of the major markets.
And then I do want to actually specifically talk about the Japan investor presence and the influence that it has on global cross asset markets. First of all, Japan institutional investors include the world's largest pension fund, which is the GPIF, Government Pension Investment Fund. It's about 1.6 trillion USD in assets. The total AUM for Japan pension funds exceeds $3 trillion. And then there are the private pensions and there's banks and insurance companies, each of those have also trillion dollars in AUM each.
Something like the GPIF is currently allocated quarter, quarter, quarter, quarter is what I say, like 60/40 type of thing. It's one quarter domestic bonds, one quarter domestic equities, one quarter foreign bonds, one quarter foreign equities. Those allocations for foreign assets, for foreign bonds and equities were step up over the last couple of years, and you're starting to see therefore much more of impact that they have on these foreign markets, such as the US Treasury market, and the S&P 500, and Euro Stoxx, and the entire European bond market, sovereign bond market, and then credit markets, and CLOs, and credit, credit and all of that.
The reason that there is negative yielding high yield credit, which is a crazy thing to say, the reason that that exists is largely because of a lot of these flows. Furthermore, half of these assets from Japan pension funds and all that, these are managed as outsourced to funds, and all the outsourced, half of them are domestic, and half of them are foreign asset managers. If you see a US asset manager trading in US markets, that doesn't mean it's US originated, that could very well be from Japan or some other funds.
It could be Norway, whatever it is, that has hired these funds to trade on their behalf. You have to keep that in mind. And you also have to keep in mind, obviously, global retail. It's not just Robinhood in the US, global retail had an explosion in 2020 and 2021. All things to keep in mind. The S&P 500, like I said, is not a US market. It is a global market with global flows, global participants. And you have to consider things like what are their respective currencies doing? How's the index performing in their local currencies?
The S&P 500 might be up 25% on the year, it is up 10% more than that in yen terms. Japanese investors that have been long the S&P year-to-date have outperformed US on their own index by at least 10%. Why? Because the yen has fallen against the dollar by more than 10% this year. Not everyone has the same 200-day moving average. Not everybody has the same amount of breakeven level. These are all things that you have to consider.
Again, I'm speaking specifically to US-based US investors, because they tend to be very US centric and US minded. The bond market is another perfect example. Oh my God, United States, 6% CPI, why is the 10 Year yield at 1.5%? Because the world of US Treasury market participants does not revolve solely around US inflation or even the Fed for that matter. Just again, Japan, the largest foreign creditor to United States. Japan has a 250% debt to GDP ratio, and it has JGB 10 Year yields pinned at 0% due to the Bank of Japan's yield curve control policy.
By policy, the 10 Year yield on JGBs are at 0%. What that means is that no matter really what the US Treasury market is doing, where the yield is, be it at 80 basis points or 190 basis points, US Treasurys are always yielding more in nominal terms and always more creditworthy and more safe than JGBs are, even with debt ceiling theater and all of that.
They always yield more. They are always technically safer. And with trillions of cash that needs to be invested, that need to find yield, you will always have a buyer of US Treasurys in the name of Japan. Again, on Friday, Japan is closed and on Monday, when the rest of the markets are open, Japan is still closed. That means that all of the yearend stuff has to get done by Thursday. It has to get done by Thursday.
If some massive asset manager in Japan is underallocated to US Treasurys, you might Just to get a crushing of the curve on Thursday, or the last day for Japan. It's not the last day for the rest of the world, it's the last day for Japan. Or you might see, let's say, a spike in US Treasury yields. Not spike, you'll see a move upwards in US Treasury yields on Monday. And then on Tuesday, Japan comes back, and they start to buy up US Treasurys at the start of the new year, and on Tuesday, you get a flattening of the curve.
Let's not attribute all these things to just simply, oh, this is the latest Omicron headline or Fed expectations, inflation expectations. No, it could be as simple as a major region, an active player, just stepped back into the markets. And look, again, none of these things could happen, potentially, but you just have to be aware of market holidays for that reason.
Let's talk Turkey. Over the weekend, I released another video on the Turkish Lira and the insane volatility from this past week. Not only has been incredible in swings, in price swings, but this is really the only global macro asset that's actually actively moving. Now, I'm not going to regurgitate my entire video that I just did, but I'll use some like excerpts from the video itself, rather than me summarizing myself. But I definitely encourage you to watch the video after this, if you haven't already, just to make sense of what's going on and what I'm talking about, because I'll probably skip over a lot of things here.
But the reason that I'm bringing this up here for this daily briefing is simple. I believe that the lira, the Turkish Lira, may have been the asset that put a floor under global macro risk assets across the board last week. And that still remains the case as of this recording, midday Monday, and may very well continue to be the market driver, or a significant market driver into this last week of 2021 when nobody else is at their desks trading anything actively.
Now, first of all, I want to stress something that again, this should be very obvious, but every time that I don't say this, I inevitably get this flood of very stupid pushback. Once again, here it goes. The following are my observations, they are not absolute proven things and events. These are not even definitive declarations from myself, these are just observations that I've made that many, many, many people have missed. Therefore, I'm merely flagging this alternative possibility of a scenario.
And my objective, obviously, is to be correct but my ultimate goal is to simply just share a perspective that gets you thinking, and even if I'm wrong, if it sparks some new idea, or opens up a new horizon of thinking for you that may not even have any bit of relevance to this particular topic, then that's what I aim to accomplish. That's the first thing. Second thing, there is no such thing as one single driver of security or a market particularly in global macro, with global investors, with highly diverse objectives and views and strategies and risk tolerance and capital and so on.
Anytime that I or anyone would suggest a potential driver of a market, at no point, am I ever saying this is the one and only thing, so for those of you who are going to comment like, no, that's not what move markets. This is what move markets, I say, how about they both had potential influence? And how about even further, there are far more things going on that we probably don't even know about than the two things that we've identified combined. But with that said, let me just establish the following.
Last week, I didn't see anyone with a definitive explanation for market price action, certainly not one with a clear cut defined catalyst like say a 50% record reverse rally in the lira due to President Erdogan's new policy announcement and the central bank subsequently blasting FX markets and intervening immediately after this policy announcement in order to create an illusion of markets endorsement of this new policy framework. Here's a clip from the video.
Why the V-shaped risk-on? Was it Omicron headline No. 87 of this past week that did it? Was it growth and inflation sentiment change No. 373 of the past month or the past hour? Or how about it's the week of Christmas, fund managers are not only not working for home, but they've long closed out their books for the year? Who's opening new positions now in the institutional side?
That means that a greater proportion of cross asset market activity can be attributed to other market participants, such as the ever-growing, massively levered retail community and this systematic community, both of which don't turn off, or take a day off or not trade because it's near holidays. The only people who don't trade because it's holidays are people who trade for their primary work, or active institutional investors. Find me a retail trader and I mean a serious individual investor who says, well, it's the holidays, I'm not checking markets.
You know why you're not going to find that? Because it's your own money at risk taking around in live markets, there are no such things as holidays or sick days or half days, the institutional community, that doesn't apply to them. It's work for them. Nobody's trading right now except for lira traders. The lira traders, a lot of them cross hold Bitcoin and equities, and systematic flows further glue cross asset flows together. Did the lira reversal put a floor under global risk assets, or at least select major global risk assets?
I say, reasonably possible, could be a coincidence. But either way, I didn't draw these charts by hand. These happened in markets. Let me just blast through a couple of charts, cross asset comparison between the lira and various risk assets just to show you my observations of why I believe that the lira put a floor under risk assets in the past week, because we saw not just a reversal of lira, we saw a reversal to the upside in risk assets across the board.
And all these, by the way are going to be based on USD/TRY inverted on the chart. In other words, USD/TRY, when that goes up, that means that the lira is weakening. What I've done is I've just flipped the y axis so that it's inverted, so that directionally, if you see this white line going down, that means the lira is going down. If you see it going up, that means the lira is going up to make it easier to visualize. All right, so let's just blast through these charts. All these have USD /TRY inverted.
Bitcoin. There's lira, there's Bitcoin. And pay attention, not just that V point that matches up, but leading into it too. That selloff in the lira, why the Bitcoin sell in the first place? Well, it could very well be, and it certainly looks like it, that the lira, which by the way, Turkish citizens are very active in the crypto community. But it could very well be that the lira had driven it down as well as up.
As I flip through these, make sure that you look at not just this V point where they both meet but the price action around the pinnacle point. And then on to equities. Here are e-Minis, S&P 500 index futures. If you're wondering why US stocks V-bottomed and possibly why they even sold off in the first place, this could be it. An even tighter correlation is the Russell 2000.
And you can also see on the way down, at first, they have nothing to do with each other as they shouldn't fundamentally, but there are moments where it actually starts to get more and more correlated as it reaches this reversal point. And then this is the Hang Seng Index in Hong Kong. And this is the Nikkei in Japan and look at the price action following the reversal. They're glued in lockstep, and just watch the video and you'll know why. I'll explain why.
And then just to wrap up on equities, from a volatility standpoint, for the VIX index, if you just look at this, this is basically USD/TRY, this is not inverted. This is how it normally is, USD/TRY. And this is how the VIX also normally is. And you can basically see what those two looks like stacked on top of each other. In fact, if I zoom out even more, basically over the past quarter, you'll see the VIX climb, that looked like it might have been also a trigger from around 9 to 13 that it did in November.
This is during these unnecessary rate cuts, cuts, yes, cuts that the CBRT, the central bank of Turkey was doing. That's it for equities. And now, let's just take a look at the Treasury market. These are 10 Year US Treasurys versus the lira. This is the frontend. These are 2 Year US Treasurys. And then finally, crude, here's crude. We've looked at crypto, looked at equities, various equity indices, we looked at equity from a volatility standpoint, what that US Treasurys and commodities, crude.
Once again, there's no one in their offices trading right now and so these flows have more of their moment to shine because all of the other flows are absent and so they could have more of an impact on the markets. Because who is trading right now? Who's opening new positions? What active fund managers are doing any of this? They're not. Lira traders are the ones that are active and you have just a whole ecosystem of systematic flows and algos and ARBs that basically correlate risk assets together, and they just need some fuel.
Well, this is the fuel. This is what I believe is by and large, what's been driving cross asset markets. Now, I could be totally wrong, it could be totally something else, it could be all a coincidence. But it's something that I believe should at least be put out there. Nobody's putting it out there. Here I am putting it out there. Now that it's out there, if you want to put 0% of importance or weighting to it, or credibility to it, that's totally fine.
As long as you're now aware that this has occurred in markets as well, then I've basically done my job. My job is not to convince you that this is what to agree or anything like that, it's just to make you aware. Now, since the release of that video on the lira over the weekend, Bloomberg had come out basically confirming this wacky conspiracy theory of mine. And in which, it's not actually Bloomberg confirming anything, it's the Turkish officials that were coming out saying that they really screwed the little guy, their local individual, I don't want to call them individual investors, they're just the citizens of Turkey that are being forced to be these day traders by basically creating this insane volatility.
And last point I'll make about the lira and my lira video is just something I forgot to mention in the video itself, that I got a lot of questions about afterwards. By the way, everyone else, thank you very much for all the feedback and the questions and all that. But the CBRT flow that came in, that $7 billion worth of FX interventions that came in, the CBRT may be out of ammo but that doesn't really mean anything. That doesn't mean that it's game over for the lira or anything like that, either.
Because the central banks, their objective was not to push the lira the entire way upwards. The goal first and foremost was to stop the bleeding, this 100% decline versus the dollar that it had. The goal was to stop that. And then to just smack the market the other way and slingshot it back. And hopefully, from that momentum, the domestic Turkish citizens and depositors will then take it from there.