The central planners are
in a state of fear and panic. They are trying everything and anything
to create market validation for their policies, watching with trepidation as
their favored economic metrics fail to respond to all of their frenzied
efforts.
They are so far over the
tips of their skis right now that there's nothing they won't do. They've
summarily thrown granny under the bus because they have this idea that
negative real interest rates are the cure. The cure for
what? The massive amounts of debts and imbalances their prior policies
caused. So savers are punished in the pursuit of policy. You
know, 'for the greater good' and all that.
They've spurred the
greatest wealth gap ever in US history, greater even than at the extremes of
the Great Depression, apparently without the slightest concerns for Plutarch's
ancient admonition that "An imbalance between rich and poor is the
oldest and most fatal ailment of all republics."
They've even gone so far
in Europe as to now force negative nominal interest rates on savers,
dispensing with their usual slight-of-hand of letting inflation steal from
each unit of currency in their system. When you're panicking, there's
no time for subtlety.
They look the other way
as "someone" dumps huge amounts of gold contracts into the wee
hours of the night, seeking one thing and one thing only: lower prices.
But that's okay because the central banks destroyed price discovery a long,
long time ago. First by invalidating the price of money itself (by driving
interest rates to zero), and then in everything else -- most importantly
risk.
The Federal Reserve, the
Bank of Japan (BOJ), and the ECB have decided that they want you to take your
money out of your bank account and place it into the stock market.
Apparently they have models that say this is a good thing. Or
they just want you to spend it. And to be sure that you follow their
wishes, they don't leave you any better options -- and so virtually every
hard asset has been targeted for price suppression. Except real estate
because, hey, you have to borrow a lot of money from the banks for that, so
they encourage and cheer your participation there.
In short, everything the
central planners have tried has failed to bring widespread prosperity and has
instead concentrated it dangerously at the top. Whether by
coincidence or conspiracy, every possible escape hatch for 99.5% of the
people has been welded shut. We are all captives in a dysfunctional
system of money, run by a few for the few, and it is headed for
complete disaster.
To understand why, in all
its terrible and fascinating glory, we need look no further than Japan.
A Black Swan Flaps Its Wings
Back in 2012, Japan was
my favorite candidate to be the black swan of the year -- meaning it could
shock everyone and flip our reality to a new state. Of course, this has
taken longer to play out than I initially thought.
However, here in November
2014, the world finally seems to be on the verge of waking up to the
inevitable financial disaster that stalks Japan.
Japan is really in no
better or worse shape than the rest of the developed world. But is a few
chapters further along in the story, which means it holds both explanatory
and predictive power for most of the developed nations. This is why we
should study it closely.
The mystery, as always,
is how so many participants are willing to pretend all is normal with Japan;
merrily buying and holding Japanese yen and government debt instruments.
In a nutshell, every
single monetary, economic, fiscal and demographic trend is working against
the very goals that the Bank of Japan, in cahoots with the Japanese
government, is trying to attain.
To make this clear,
first, we're going to sketch the outlines of predicament and then, next,
examine what will happen when it all finally breaks down.
The Halloween Massacre
On Friday, October 31
2014 the Bank of Japan (BOJ) made a surprise announcement of a major new
policy move that was specifically targeted to have maximum impact on the
markets.
But it wasn't a unanimous
or popular decision:
Split Vote Shows
BOJ’s Kuroda Walking on Tightrope
Nov 2, 2014
TOKYO—The Bank
of Japan ’s surprise move to flood the economy with
more money boosted stock prices and gave a lift to its fight
against deflation, but a rare split vote over the decision means
further action will be difficult for Gov. Haruhiko Kuroda.
Those with knowledge of
the maneuverings behind Friday’s 5-4 decision to step
up the central bank’s yearly asset purchases point to growing
skepticism among the BOJ’s nine policy board members toward the
radical policy rolled out by Mr. Kuroda a year-and-a-half ago.
(Source)
The announcement
specifically was that the BOJ would increase its purchases of Japanese
government bonds to 80 trillion yen (up from 60 - 70 trillion) and triple its
purchases of stock funds to 3 trillion yen annually.
You have to love the
coded phrase used in the above article -- "gave a lift to its
fight against deflation" -- which decoded means "they
partially wrecked the yen which makes import prices go up (and which is not
the same thing as the inflation they seek)." When you wreck
your currency, all you do is steal purchasing power from savers and transfer
it somewhere else, in this case to those most indebted and/or leveraged --
the biggest of these beneficiaries being the Japanese government and large
speculators.
Also the 5-4 decision is
quite telling. It indicates that this bold -- or reckless -- policy
(depending on your point of view), is already not very popular, suggesting
that it's more of a last desperate. Patience is wearing thin.
While some still question
whether the US Federal Reserve is monkeying about directly in US equity
markets, there is no such uncertainty with the BOJ: it openly buys equities
under the pretense that a rising equity market is somehow good for the
Japanese economy. This is a rather indefensible view, because the
relative elevation of the Nikkei has nothing to do with how the economy will
perform, as it's a derivative of the economy (or is supposed to be)
not a driver of the economy.
After all, once a stock
has been launched into the stock market, all that happens when a stock moves
up and down is that money flows from one set of trading accounts to some
others as people buy and sell. By buying equities, the BOJ has
effectively said it wishes transfer an even greater amount of money from its
accounts to others.
It's merely a gift to
current holders of Japanese equities, which is a subset of the Japan
population. Again not a terribly defensible, rational or fair policy. But
there you have it.
Immediately on the news
of this next round of wealth transfers and money printing, the Nikkei index
leapt 1700 points and the yen plunged:
(Source - ZH)
The virtual lockstep
nature of the falling yen and rising Nikkei tell us that we are living in an
age of massive and rampant speculation where financial markets react in
concert to the newly-unleashed liquidity floods.
All that matters in
today's "markets" is how much more money the central banks are
going to throw into the system. That's all the gigantic speculators
care about, and fundamentals and long-range issues are not even remotely near
the top of their list of important trading variables.
Unfortunately, like most
market moves these days, the recent plunge in the yen and the rise in the
Nikkei provide few useful clues as to Japan's actual current and/or future
economic prospects.
What This Really Means
Okay, it's time to face
some unpleasant facts. Ignoring the market gyrations because those have
pretty much lost all of their true signaling capabilities, the most recent
move by BOJ governor Kuroda smacks of sheer desperation.
It's important for all of
us frogs sitting in this nice pot to recall that even five years ago such a
move by the BOJ would have been utterly shocking. It would have commanded our
thoughts and actions for weeks to come. But today, like the rest of the
world, I'll bet you've already lost it into the din of other accelerating
events barely a week later.
That Kuroda, just one
man, can bet so much on an untested and radical experiment is mind-boggling.
If he succeeds, he gets to claim honor and success. If he fails he
ruins the 3rd largest sovereign economy in the world, along with its
inhabitants' future dreams, for a very long time. How can such power be
entrusted to a single person?
Unfortunately, this gamble
cannot succeed over the long haul, and he has to know this. So perhaps he's
simply focused on keeping things hanging together until he leaves
office.
Here's how the
ever-colorful David Stockman described the Halloween Massacre:
This is just
plain sick. Hardly
a day after the greatest central bank fraudster of all time, Maestro
Greenspan, confessed that QE has not helped the main street economy and
jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even
then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4
vote. Apparently the dissenters——Messrs. Morimoto,
Ishida, Sato and Kiuchi—-are only semi-mad.
Never mind that the BOJ will now escalate its bond purchase rate to
$750 billion per year—-a figure so astonishingly large that it would
amount to nearly $3 trillion per year if applied to a US scale GDP.
And that comes on top of a central bank balance sheet which had
previously exploded to nearly 50% of Japan’s national income
or more than double the already mind-boggling US ratio of 25%.
(Source)
Yes, my fellow frogs who share this increasingly warm bath with me,
Kuroda's move is pure madness. The BOJ has jumped the monetary shark
and we need to keep that firmly in view as we make our decisions about where
all of this is headed, and how likely it is to create a future financial
accident of global and unprecedented proportions.
Bloomberg's Willaim Pesek described it this way, and I think quite
accurately:
Japan Creates World's Biggest Bond Bubble
Nov 4, 2014
In announcing that it will boost purchases of government bonds to a record
annual pace of $709 billion, the central bank has just added
further fuel to the most obvious bond bubble in modern history --
and helped create a fresh one on stocks. Once the laws of finance, and
gravity, reassert themselves, Japan's debt market could crash in ways
that make the 2008 collapse of Lehman Brothers look like a warm-up.
Worse, because Japan's interest-rate environment is so warped, investors
won't have the usual warning signs of market distress. Even before
Friday's bond-buying move, Japan had lost its last honest tool of price
discovery.
When a nation that needs 16 digits in yen terms to express its national
debt (it reached 1,000,000,000,000,000 yen in August 2013) sees benchmark
yields falling, you've entered the financial Twilight Zone.
Good luck fairly pricing corporate, asset-backed or
mortgage-backed securities.
(Source)
If I lived in Japan, I would, under no circumstances, ever keep my money
in yen. If you live there, get out of yen as much as you possibly can.
Your central bank has said it wants to destroy the yen and their actions so
they are quite serious about doing exactly that.
Imagine if the Federal Reserve was monetizing $3 trillion a year, which
pencils out to some $250 billion a month(!). A proportional amount of
money is being dumped into the Japanese financial system under the new
policy.
And so naturally, stocks rose and the yen fell, which makes some (twisted)
sense. But gold fell heavily on the news, which makes no sense at all from a
fundamental standpoint. However, it makes all the sense in the world if you
understand that extreme central bank policies cannot tolerate even the
slightest whiff of challenge.
Rising gold prices would signal doubts about the central banks' course of
action. Conversely a falling gold price signals utter faith in the central
planners. And so a falling gold price is what we get (but true demand for
gold and silver demand another matter entirely).
The reason for all of this extreme central bank panicking and fear, we're
told, is because Kuroda has a white whale he seeks, which has '2% inflation'
stenciled on its side.
But inflation is not what central banks actually seek, even though the
press consistently tells us that's what they want. Inflation is not a cure
for anything and the banks know it (and our press really should know it by
now, too).
Instead what the central banks desperately want, and know the banking
system and over-extended governments need, is negative real interest
rates. That is, they want to force upon savers the condition
where their saved money is getting a lower rate of interest than the rate of
inflation, which is what we mean by a negative real return.
We wrote about this
extensively as a process in this article about the Fed
purposely attacking savers. But the mechanism and rationale is the very same for the BOJ as
it is for the Fed..
Briefly, when running
this program of financial repression the BOJ (and the Fed, et al.) do not
care if inflation is 6% and bonds are 4%, or if inflation is 2% and bonds are
0%, as both offer negative real interest rates. Negative real rates serve to
confiscate purchasing power from the general population and transfer it to
other parties. Those parties include the big banks. But perhaps that's
just another happy coincidence in the game that central banks and bankers
like to play with us which they call 'heads we win, tails you lose.'
But let's not be fooled.
By the time a central bank Is behaving as recklessly as Japan, it's time to
edge towards the exit, because the chance of a flash fire in the building has
grown uncomfortably high. That is, instead of providing comfort, these most
recent moves should invoke greater worry for those of us alert enough to see
them for what they are: acts of panic.
There's just no other way
to interpret the equivalent of $3 trillion of thin-air money besides an overt
act of desperation. No, things are not okay. Yes, the risks for a
disaster are growing.
Whether we call this the
largest bond bubble in history, "reckless", "mad" or
"insane", Japan has truly jumped the monetary shark. There's no way
back and no way forwards that will be pain-free and this terrifies the BOJ.
The best advice I have is that when you see your central bank panic,
you should panic too and avoid the rush.
In Part 2: What
Will Happen When Japan Breaks, we delve into the only questions that really matter: When will
it happen? And how deeply painful will it be?
And last, but certainly
not least: How much of the rest of the world's financial system will come
crashing down with Japan's because they are all so interlinked now?
Click here
to access Part 2
of this report (free executive summary; enrollment required for full access)