Is Japan About To Cause A Global Financial Crisis?

Is Japan About To Cause A Global Financial Crisis?

[Music] Welcome to the risk reversal podcast. Guyadami joined by Elizabeth Thomas. She of course of SoFi. She of course of the state of Wisconsin. She of course of the Green Bay Packer fan Wisconsin. And I will tell you uh the Packers are playing some good football there. Elizabeth. Yeah. Eight 83 and one I think is the record now. And you know Yes. That tie just sticks out like a sore thumb. It’s and it’s hard to look at. It just makes everything confusing. And anyway, but things went well on Thanksgiving and I’m happy. I’m thankful for that. Yes, you are. We just have to keep keep on plugging for the rest of the season. We had, you know, we had a couple setbacks this season. There are injuries. There were a few games that we lost that we really should not have lost. No, but you know what? As as a as a um student of the Jesuits, I’ve learned that there are no straight lines in life. So, you know, sometimes you take the circuitous route, but right now I will tell you, and I think you would agree with this, that the Packers of Green Bay are playing some solid football, and they’ve they’ve basically included themselves in the conversation for an NFC Championship, which I sort of dig. Anyway, that’s that. Now, before these shows, you and I often chat and you know, what’s on your mind? And a lot of times, what’s on your mind is what’s on my mind. We’re talking about markets, by the way. People don’t get any weird ideas, but we both came to the conclusion that Japan is a thing and something that we’ve been talking about for a while. So, why is that sort of on your or continues to be on your radar screen? Yeah. So, there are a couple points that I want to make here. One that we’ll talk about after this first piece, which is the relationship problems piece. Not as much of a relationship problem anymore. However, what’s going on today is that some speculation over Japan hiking rates heated up and we saw their 2-year yield, their 10-year yield spike up in response. I think the 2-year yield hit its highest point since 2008 today. So, Japanese stocks are under pressure. The yen happens to be appreciating. So this is interesting because what what you and I had been talking about up until maybe this point is that it was peculiar that yields were rising in Japan yet the yen was depreciating right it would have made more sense that yields rising made it more attractive more demand for yen so on and so forth I put that in the relationship problem category well now we’ve got the yen appreciating expectation of a rate hike increasing yields in Japan rising quite strongly and equity markets are are getting skittish. Now, one thing I want to point out in Japan is that exports are really really important, right? So, the Japanese economy depends on exports in order to survive. So, when the Japanese yen is strengthening, it makes exports less attractive to the rest of the world, in which case the equity market gets hit. Because I think there probably are some investors out there thinking, well, wouldn’t we want a stronger US dollar? In the US, that’s different. We import more things. So, we want things to be we want our currency to be stronger. And that’s what the difference is here. Let me ask you this following question, and you’re obviously spot on as usual. But to me, I don’t know if this is sort of a a jawbon intervention uh in terms of the currency or if they’re actually going to move forward. I think they probably have to in terms of the bond market because they’re sort of at the mercy of the bond market now. But I would have thought maybe incorrectly that a dollar yen, a yen that had been weakening now considerably since the April low. I think we got down to about 140 or so in late April. We just traded up to 157 and a half. Not in a straight line, but in a pretty systematic way. the appreciation of the yen today is not as robust as I think people would have hoped for. So you’re right to point it out, but I think me pointing out that it’s not a dramatic move yet, I think is also important. Yes, absolutely. And if you look at a chart, I’m looking at one right now. I know I’m not showing this to anybody, but if you look at a chart of the depreciation of the yen, it had sort of grinded lower, so gotten weaker and weaker since April of 2025. And just recently there’s this little move in the opposite direction. So the appreciation of the uncertainly not even scratching the surface of the depreciation that’s already occurred. So you are absolutely right to point that out. I’m just saying that the relationship that we’ve been talking about saying you know what this doesn’t make a lot of sense. Something’s got to give. One of these variables has to move in the other direction to get this relationship back in line. Perhaps that’s happening but that doesn’t make it a good situation for Japan as I mentioned before. So, we’ve got maybe this relationship with the yen strengthening and yields rising back the way that it should be, but it’s putting pressure on their equity market at a time when the government, the Bank of Japan is trying to stimulate the economy and get things back on track. So, so let me let me ask you this because this is going to be the next question that people ask in their own minds. Elizabeth Guy, why should I care about this here in the United States? It seems like it’s just a Japan problem, which by the way, I understand people saying that. I completely disagree though that it’s just a Japan problem because I’m pretty convinced if this continues, it’s going to make our way to our shores visa v the equity market and our bond market. Yeah. And well, and I don’t want to draw a a clear correlation to our equity market today. We’re recording this on Monday. Equity markets are down in the US. Not very sharply, but they’re down nevertheless. But what is interesting is that the the yields on our 10-year bond and our two-year bond are also up today. And I can’t find any other reason that’s very clear besides what’s going on in Japan. So there are definitely interconnected pieces of this and it could affect our bond market, probably more our bond market before our equity market, but our bond market in general. So, we’ve got yields rising and and they’re up actually eight, let’s call it 8 to 10 basis points uh in the twos and the tens. So, if that happens due to something that’s going on in Japan and affects what perhaps the Fed is watching as a signal, perhaps what the equity market is watching as a signal and just borrowing costs in general, it definitely matters. The other thing that we have been talking about now for a few years is the carry trade. So the carry trade general premise being it had been cheaper much cheaper to borrow in Japan and then invest elsewhere. Well with yields rising as the and if the yen continues to appreciate it’s less cheap to borrow in Japan and everything that’s owed now in Japan has become more expensive to pay back. So that’s what happened back in August a couple years ago. That sort of thing could could heat up again. I am of the mind that much of that had unwound already. We’re not nearly as exposed to the carry trade as we had been before, but it’s still an element of all of this. Yeah, I agree with that. I think the leverage is probably not nearly as um as elevated as it was in the summer. Guess it was August. Was it August of 25 24? I think that’s right. But with that said, you know, here we are. What I’ll also say, and I think you probably agree with this, there’s a you can draw maybe not a straight line, but you can get to where if this continues in Japan, there might be liquidation of our treasuries on the back of a number of different things, which you sort of referenced in terms of our bond market today, but it’s obviously something that the administration doesn’t want. So the next question without getting political is at what point does the United States sort of acknowledge this behind closed doors and somehow not come to the rescue but do something that’s going to sort of stem the tide a bit to the extent that they can. Right. Okay. So so let’s back up and and make sure that everybody understands where that’s coming from. So one of the things that could happen is Japan has been a big buyer of treasuries. Obviously we know China is also a big buyer of treasuries. But if Japan is holding treasuries uh in its sort of coffers and they’re under pressure, their bond market is under pressure, maybe they need to raise cash in order to support liquidity. They might have to unload treasuries in order to do so. So that could be another relationship that we’re seeing here affecting our bond market. At what point does the government step in? I I don’t know. I think the Fed probably steps in first and and doesn’t necessarily say that it’s because of this, but there’s already a couple of firms out there talking about the Fed needing to expand its balance sheet again come later this month or even in January because of the liquidity that’s dried up in some of the overnight lending markets. So, and and I’ve talked about overnight funding, overnight lending a few times. We’ve seen tightness there, which is to be expected, but it might be getting uncomfortably tight for the Fed, in which case they will act in order to support liquidity of markets because one of their mandates, and it’s not one that’s talked about very much, but one of their mandates is financial stability and the proper functioning of markets. So, if they need to do something to support just those overnight funding markets to create liquidity just for the banks, I think they will. Yep. Fair. And that it’s it’s absolutely worth watching. is something I obviously read about over the weekend, something we both have been talking about. Now, the fact that it’s getting into the mainstream, I don’t know if that’s a good thing or a bad thing, but it’s clearly a thing. Something else is a thing. And you talk about relationship problems and and you’ve talked about this now more and more people are coming to that realization. There is no correlation that I can find between Bitcoin and gold. And on a day like today that’s proved positive. Again, just a sort of, you know, little refresher for people, Bitcoin traded below 80,000 last week. I think towards the end of the week and over the weekend, we were north of 90 and as we’re sitting here today, we’re either side of 85,000. Clearly, there’s something going on in crypto. The flip side of the coin is silver’s on its horse in a pretty meaningful way and gold is sort of reacelerating to the upside and it’s to the extent that anybody believed there was a one to one correlation I think you can throw that out the window. So I guess my question to you is first is is crypto bitcoin specifically telling us anything in terms of risk off because I’ve always thought it’s just a correlary for the NASDAQ. Well it has been a correlary for the NASDAQ for the the last two years. If you look at just the correlation between Bitcoin in particular and the NASDAQ, it’s been pretty tightly positive. So, it has been an indicator of risk on riskoff behavior as it relates to tech investors and optimism particularly around the AI trade. What’s happening right now is peculiar because over the last, let’s call it couple months, crypto is down quite a bit. Even even over the last month, it’s now hit a draw down of about 30%. with NASDAQ flat over kind of the same time period. I tweeted about this today. So what’s peculiar is that that relationship has changed. So if we were looking at the NASDAQ and crypto as being one to one, this is figurative, onetoone correlation, that’s not the case right now. So is it indicative of riskoff behavior? I don’t think it’s very clearly indicative of riskoff behavior because that’s not really showing its face in the markets as clearly. What I think it’s more indicative of is liquidity. So, there’s a few things going on here. We obviously just talked about Japan. I don’t think that’s helping the crypto trade because if you think about crypto as being obviously not tied to one particular country, if you start to see liquidity problems, yield spikes, rate hikes across a number of different places in an equity market, a bond market as large as Japan’s, that could be sparking some of this. The other piece of this is that which hasn’t been talked about very much but today there was a lot of corporate bond issuance and what we have talked about over the last month or so is some of the debt usage in even the AI hyperscalers. Now it’s not concerning debt usage. These companies still are very cashrich. They’re generating cash flow. I’m not saying that this is a concern but there has been more debt usage. So add all of this together and you’ve got increased leverage in the system at a time which like I just talked about before when overnight funding markets are feeling a little skittish. The Fed’s balance sheet had gotten small enough that now we’ve got bank reserves in that sort of in between zone of ample. So we’ve got liquidity that has dried up compared to what it’s been for the last year or two years. So I think crypto is feeling some of that pain. you and Mario obviously doing work in terms of the look ahead for 26. I guess part of it is sort of trying to figure out if there is a seasonality thing and and what does it mean as we’ve entered December? Is is this just sort of now a sort of a free pass for the market as people start to chase to the extent that people are behind the curve or can strange things happen this month? I mean, strange things can always happen, but I think there would have to be some sort of surprise catalyst or a catalyst in general because yes, I do think December at this point feels like a little bit more of a free pass, especially with the expectations of a Fed cut back up in the 90s. The last time I checked, 90% or so uh for next week. Now, there’s been a lot of volatility in that over the last couple weeks. So that of course could change, but we’re getting closer and closer to the meeting and feeling more certain that we’ll get another cut in December. So I think that helps. That makes it a friendly environment. Some of the support that we’re expecting in 2026 isn’t going to happen until maybe the middle of the first half, maybe not even be effective in the market until the second half. But there is optimism about that. There’s some fiscal support coming expected to have some more supportive monetary policy. And obviously, we’ve got a midterm election year coming up, which usually is a little bit tough for markets, but could also create a buying opportunity. And Mario and I were just talking this morning as we worked on the outlook that yes, there are things to worry about. Margin debt is one of those things. Yes, there are things to worry about, but this idea of investors still coming in to take opportunities to buy during pullbacks is quite strong. And does it mean that people are complacent? Perhaps. But for a while here, it’s been clear that investors are still willing to take on risk even in the face of some of these headwinds. So I think in December, as we still see the chase continue, and as and investors have gotten an opportunity to buy after some of this volatility, I think we still see a a good potential for a year-end rally. Notice I did not call it I did not call it a Santa Claus rally. Thank you. And you know something I appre you know that I appreciate that despite the fact that you just mentioned it anyway but but duly noted because you’re going to be hearing more and more of that over the next couple weeks and it absolutely makes me crazy as I think we’ve all come to learn. With that said, I mean seasonality is definitely a thing and people are definitely going to chase. But to your point, there’s always things that can happen seemingly out of the blue. Let me ask you this. What’s been happening not out of the blue but makes sense is this rotation and all of a sudden now you get some retailers starting to get off the mat as we’re sitting here today. That’s right. Walmart which you know makes an all-time high. I don’t think that comes as any surprise. But some of these other tertiary names are seemingly doing well on retail data that suggests the consumer is continuing to spend regardless of whether or not I think they should be. What’s interesting about the consumer right now is if you look at the consumer sentiment surveys, particularly the UN University of Michigan, which is at a a real low point right now, it doesn’t match up with what consumers are actually doing. So, it’s almost like begrudgingly consumers have continued to spend. And we’ve gotten some preliminary data about the holiday weekend and spending. Obviously, today is Cyber Monday as we record this, so we don’t have data on this yet, but holiday spending over Thanksgiving weekend was still pretty strong. and and I want to say I saw something about it being 4% above last year. So, so far the holiday season is going well from a retail perspective. Also, consumer staples and consumer discretionary are two of the bottom performers in sectors in the S&P this year. And I think this rotation that we’re looking at is investors trying to find other ways to make money and other ways being outside of technology names. So, and in consumer discretionary, we have to remember Amazon and Tesla make up a large portion of that particular index. But if you look at even the retail stock index and take those out or look at other ways to express a consumer discretionary tilt, things have perked up a bit. And I think number one, that’s a good sign for cyclicality. It’s a good sign for 2026 and perhaps consumer sentiment improving. But the other thing I would say is this consumer sentiment read from the University of Michigan is not consistent across all metrics that you look at. If you look at conference board, it’s not quite as bad. If you look at what’s called the misery index, not quite as bad. So, it’s not consistent that consumers are feeling terrible. I think this is unfortunately one of those representations of inflation is still hurting, but we are spending and the K-shaped economy that we talk about a lot. [Music] I think, and you’ve been coined this, and I don’t like to sort of pigeon hole you because you’re far more than just one thing, but a lot of people associate the small caps with Elizabeth Thomas for whatever reason. And I think, and you can at me if I’m wrong, but I do think the IWM, which is not the greatest ETF of all time, but that’s what people look for, the mid small cap, you know, midcap, small cap, midcap, that made an all-time high, I think the week before Halloween or so. I think it was like 252. We proceeded to fall off a proverbial cliff and it really looked like things were deteriorating only then to have it rally in a meaningful way since November 20th. That sort of reinforces um what we’re seeing in terms of the consumer. So maybe the small caps trying to sort of peak their head up here are trying to tell a bit of a different story than some of the other concerns. I have thoughts on that. Yeah. So a lot of times people look at small caps to confirm the strength that we see in the economy or the strength that we see in the large caps. In this case, I think the large caps are so dislocated from many other things given the predominance of technology, the predominance of even those top seven to 10 names. So I don’t think that you can draw that same analogy in this case. But the big bounce since late November in small caps, I think number one is indicative of if as you look into 2026, if we have a reaceleration in the economy, small caps should benefit from that more perhaps than large caps can. They also should benefit from increased or at least durable consumer spending. And then recently, now this is just in the past week or so, if we do have the expectation that the Fed is going to cut rates again next week, small caps tend to borrow more than large caps do. So their interest expense is just higher. As rates fall, their interest expense falls and obviously their cost structure changes. So rate cuts typically do benefit small caps more than they benefit large caps. The concern I would have is even when you’re just looking at the chart of this bounce that’s happened since mid to late November in small caps is it’s been pretty straight up. And I think as we know from experience, those straight up moves don’t tend to persist in a straight up fashion. So perhaps we give a little bit back here before we resume more upside in hopes of an accelerating economy in 26. Something we really don’t talk about, but I think we should talk about given the important it had a couple a month or so ago was the challenger numbers. We have one coming out this Thursday, December 4th. And the reason why it was important last time is because we weren’t getting any government data. I’m curious as do you think it has any import this time? I think it absolutely is important this time especially because the labor report from November got delayed to December 16th. So we will not have labor data uh from the BLS before the Fed meeting, but we will have this data. So what it showed last time was a big spike in job cuts. It was like 175% higher than last September. It was a really big spike. It was a notable move. And then something that I created a chart for and and showed on market call uh from one of the blogs was companies also report why they’ve cut jobs. And this particular period, the one in October was because of cost cutting first and foremost, which was a departure from what they’d been saying all year. So the reasons for cutting jobs started to be that they were managing basically their profit margins and needing to lay people off. And we’ve talked about this a number of times. companies will wait until the last thing, right, in order to cut jobs. They don’t want to do that at all. So, they will wait until they don’t have any other options. So, if that sort of thing persists, I do think that this particular data is going to be meaningful this week. Normally, it kind of flies under the radar, but I do think that it’s important this week because of the still lack of data from the BLS, but also because of what happened last month. The the last thing that’s I think well there are a couple things this week but the other thing that I I think is worth watching is Michigan consumer sentiment the preliminary one this Friday at 10 a.m. Eastern time. Yeah. So I mentioned this before Michigan consumer sentiment recently has been just down in the dumps and it is concerning. It’s a flag for sure. Consumer sentiment from the University of Michigan is skewed more towards inflation. So the worse people feel about inflation the worse that data is going to be. So there is a high correlation between the two. conference board is skewed more towards the labor market. So, I would expect that the preliminary data to still be pretty poor. I don’t expect that we’re going to suddenly see a big jump because nothing has changed all that much in inflation. And in fact, some of the data that you can look at shows you that price pressure continues to build. So, I do think the University of Michigan data will continue to show a consumer that doesn’t feel great about the economy. And the component that has showed that the most is they ask basically how do you feel about today, the present situation. They ask about how do you feel about the future and the present situation is what people say that they feel the worst about. So I would expect that to continue but again it seems like they’re still spending money begrudgingly still spending money. If you can’t get enough of Elizabeth Thomas here you can find her on the SoFi website. The important part that’s your podcast. Can you tease when this work that you and Mario notice how I said that I not Mario when when will we when will we get to sort of glimpse that our our outlook will be out mid December. We do have a date in mind but I want to make sure it gets through compliance first. Julie noted so yes mid December you will get our outlook. We are super excited to release it. We’ve chopped a lot of wood on it and there should be some interesting stuff in there. Did you chop wood as a young lady or was that some No, no, I’ve never chopped wood. By by the way, I’m sorry. Amanda’s doing great. By the way, axe throwing apparently is like a real thing. I’ve done that. Yeah. You throw an axes. Yes. It’s very fun. Yeah. It’s just a It’s a dangerous It’s a weapon those axes. Well, yeah. I mean, you do it in a controlled environment. It’s not as dangerous then. And I’ve heard people who really like to chop wood as some sort of like release. Yes. Well, it’s there’s something there’s something cathartic about it. You’re out in there, fresh air, crisp fall air, you’re swinging an axe, but you got to be careful. By the way, there is a difference between an axe and a tomahawk, but that’s for the next show that we do together. Okay? I don’t know the difference. We will discuss next week. She’s Elizabeth Thomas. I’m Guyadami. She’ll be back with us on Market Call this week. We’ll see you later, folks. [Music]

Guy Adami hosts Liz Thomas of SoFi, discussing various topics including the current performance of the Green Bay Packers, Japan’s economic situation, and its potential global impact. They delve into Japan’s rising bond yields, appreciating yen, and how these factors could influence global markets, particularly the US bond and equity markets. Elizabeth explains the potential implications for US investors and highlights interconnected financial systems. They also examine cryptocurrency behavior, consumer sentiment, small-cap stocks performance, and the importance of upcoming economic data. The episode concludes with a discussion on Elizabeth’s upcoming mid-December outlook report with Mario.

Timecodes
0:00 – Japanese Impacts
9:40 – Gold & Bitcoin
17:30 – Small Cap Outlook
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