The Fed's 'taper' and other fairy tales
As Japan's problems continue, investors worldwide are still largely convinced central bankers are in control. They're not. The market is.
As I noted last week, I am focusing much more than usual on Japanese markets, since I believe there may be important information to be gleaned from the action there in stocks and, particularly, in Japanese government bonds (JGBs).
The Nikkei 225-stock index was hit hard on Monday and Wednesday, making the cumulative pullback in Japanese stocks about 20% from their recent high. Yet the bond market has rallied only about six basis points from its worst level. Obviously, the Bank of Japan has its work cut out for it as it tries to create negative interest rates and a bond market that doesn't collapse.
As my friend the Lord of the Dark Matter summed up in a recent email: "We all get that (Bank of Japan Governor Haruhiko) Kuroda wants Japanese real interest rates to be negative, but achieving that without implied yen-rate volatility trending higher and Tokyo banks realizing losses on JGBs is going to be tricky."
Bond market to introduce 'start loss' orders
I would go one step further and say it's going to be impossible.
Basically, bondholders have to be willing to accept a negative real rate of return, and although that has been the case worldwide for quite a while, the bond market at some point is going to believe central bankers when they say they want more inflation, because they will get it (in fact, they have already).
Once the perception changes to inflation being the only outcome, life for central bankers is going to become incredibly complicated.
One reason markets have become so ebullient, particularly here in the United States: They have concluded that money-printing has created a Goldilocks environment instead of the stagflation or inflation I have long expected. Obviously, Goldilocks is a state of mind and can only last so long, but when you are in the money-printing "sweet spot," anything is possible.
I never would have dreamed it could last this long, nor gone to the extremes that it has, but, then again, we have never had the world's central banks printing this much money.
When you consider that the BOJ and the Fed together are printing $170 billion a month, and that only about $50 billion of liquidity provided by the Fed in the winter of 1999 blew the top off the stock market then, it is easy to see why insanity rules.
However, minds may be changing. David Rosenberg, of Gluskin Sheff, to cite one example, is now expecting stagflation. When the bond markets of the world collectively have the same opinion, the funding crisis will be upon us. (That is not yet today's problem, even though -- as I noted recently -- the very early stages may be occurring in Japan.)
Heading into negative knowledge territory
As a bit of an aside, I would like to make a point about the media and the 20% decline in the Nikkei. Most media talking heads know nothing about investing, yet love to talk about a 20% decline as the definition of a bear market, and other assorted nonsense.
The fact of the matter is that 20% doesn't mean anything. It is just a decent-size decline. It could be a correction or the early stages of a bear market (although that is quite unlikely at this early juncture for Japan). Nonetheless, a bear market is a bear market, but it doesn't become one when you cross 20%. You've quite likely been in one, and it might be over, or it might have been just a correction. In any case, thinking about things from that perspective is totally useless.
We have room only for the big picture
Speaking of wrong-headed, large numbers of investors still believe it is possible that the Federal Reserve will stop its quantitative easing efforts, let alone "taper" them. I continue to believe it is very unlikely that Fed Chairman Ben Bernanke will ever willingly taper.
After all, we've had five years of 0% interest rates, and the Fed can't even talk about an exit strategy that allows it to sell bonds, only buy fewer of them. The same sort of discussion has been held every year, but the masses fail to comprehend that, and get more excited with each QE-inspired rally -- with the latest goosed by the BOJ actions.
Once it is clear that tapering is not likely to occur, it will be interesting to see where the stock market is. It is quite likely to have a failing rally and, in the interim, stock market weakness might give us some insight into where the bond market might fail.
As I have noted, there are plenty of crosscurrents, and in this era, they can be incredibly violent. Unfortunately, when there is so much money printing going on around the planet, virtually all trades are macro.
On the air
In my latest interview with Eric King on King World News I talk about one of the most exciting investment opportunities I have ever seen in my career. Eric called it my "most powerful interview ever." Interested readers can listen to it here.
The party will last until all the booze and drugs (money printing) run out. We will still have to pay the rich (and getting richer) dealer back. Going through withdrawal will be sobering to those wishing to fool themselves by believing the fairy tale.
Can anyone seriously think that this will end positively? Thanks Bill for being one of the few journalists not drinking the Kool-Aid.
"The Fed isn't going to do anything to derail this recovery. Regardless of what all the talking heads and the hoi polloi keep mumbling about, the Fed will continue it bond and other asset purchases."
The Fed already derailed the economy by giving psychopaths $85 billion monthly to control us with. It should occur to everyone that printing $170 billion/month instead of generating it through effort is the economy killer. In Andrew Dickson White's book: Fiat Money Inflation in France, he chronicles that the People, when left out of the Inflationists' initiative (over-printing) resorted to sub-economies. As I read your take, Bill... I was not surprised by your reference (and equal awe) that, instead of admitting that this is all a dismal failure and Japan is a dead radioactive island off the coast of Oblivion, they are now concocting impossibilities and other Central Bankers and rallying behind them. Why? Because there's every chance of the globe wiping them out- the minute they throw up their hands and says- oops, we were wrong. For America and real Americans, there is a pariah on every corner and two more near-by to go through his wallet and clean it out. The "shift" toward sub economic survival has two legs- first, organized finance can't constructively follow it, and second, from it comes the stabilization (effort) that is sorely needed. Building houses for the destitute is a noble charity but not an economy reviver. Building a sub-economy out of the destitute that benefits as many as who want benefit over stagnation is the key. Growing, making, reconstituting it is how we restore the American Way, not printing it. Yesterday's 200+ point gain was a direct reply to the potential selling off of stocks and shifting of organized investment to lower risk anticipated Friday. They obviously went 'over the top' in compensation for it, so we were treated to how scared they really are about being revealed as mistake-makers. There was no other legitimacy for doing it, the job creation thing was phony and they are only creating a no-credibility factor now.
The truest statement: "The individual investor has the most power right now." Getting them to see that and use it responsibly to snuff out Central Bank bamboozling is what this coming week is all about. SPEAK, America, before the wool pulled over your eyes is a coffin lid of your own making.
One curse of ultra-low interest rates is that once they start rising from a low base (like they have in the last few weeks) the value of underlying investments falls much more quickly. A half percent hike in interest rates from 5% to 5.5% is no big deal to the underlying market value of a bond. A half percent rise in interest rates from 1.5% to 2% is a very big deal to the underlying bond market value. The Fed is holding trillions in Treasury bonds on its balance sheet which change in market value with interest rates. I’m curious, what interest rate rise across the yield curve would make the Fed technically insolvent? I wish one of those congressmen at the next hearing with Bernanke would ask him that question, instead of complaining about all the money he is printing for them to spend.
The talking Heads act as if a 10% correction solves everything, well it doesn't. Until a living wage is enacted and Corporations stop hoarding loads of Cash, the economy will never truly recover. This Global Money Printing is literally a ticking Time bomb. Bet that's a trigger word for the Gov't snooping. Well anyway, When a bomb ticker gets started, there is usually one final result, things go BOOM!
between us and japan, 170 billion a month out of thin air ....poof there it is. A trillion dollars every 6 months. Most of this isn't making its way down to the average joe it's just rolling through the financial institutions and a lot is just sitting there. That's why we haven't had inflation from this. Yet anyway.
Have a friend with 30 plus years in banking and asked the same question as someone did below about when Bernanke will stop this crazy printing. He laughed. Then said maybe a slight taper, but stopping.....ha.
5 years of this isn't enough? Nobody in Washington wants the funny money to go away. Interest on the debt will crush us when it does and within 10 to 15 years the dollar will cease to be the international currency basis.
1)Sell some the Assets on it's Balance Sheet.
2)Sell all the Assets on it's Balance Sheet.
3)Hold all Assets to Maturity, that would effectively monetize the DEBT left on it's balance sheet.
Regardless, it's weird how the FEDs can buy via Credit, then collect Interest Payments which it gives back to Uncle Sam. Last year, it paid Uncle Sam about $90Billion from interest via assets bought on Credit. Now that's the ultimate Ponzi Scheme.
Always confused and overwhelmed by all of this money stuff I recently stepped out of our Vanguard high yield bond fund. Sad and hard to do as we had some nice gains over the past year adding shares back some 4 years ago when it was in the dumps. But I've lost faith in the bond market, well at least for now.
On the brighter side were having a yard sale this morning. Going to see if I can make some real money. Hey Big Ben wants us in the market so were going to spend the day marketing away.
dave1230, these obamaites, believe you can borrow and spend your way out of debt, and that the path to prosperity is to TAX and Print.
You cannot talk economic sense to them. Japan has been practicing Obamanomics for 25 years. In that time their bond market has tanked, their stock market is one third of its all time high, their middle class has been turned into poor, they run massive deficits, their growth has been sub 1%. The Japanese have a debt to gdp ratio topping 200% and more than half their budget goes to debt payments.
Do they really think people will lend the Japanese government money for a 2% fee per year? Would you pay someone 2% to watch your money all the while it is inflated out of existence? If I were in Japan, I would convert all my Yen holdings to stocks or specie, or better yet move it all overseas where their socialist government cannot seize it. And I recommend the same for US citizens while you have the freedom to do so.
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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