Updated: 4/11/2013 10:00 PM ET|
What happened to inflation?
There are scenarios that could cause inflation expectations to run amok. But even in a worst case, investors assume they'll have time to move to the exits.
It puzzles a lot of you, I know, from your emails and your posts on my websites. Frankly, it puzzles me. And I'd say that anyone who says this doesn't puzzle them has more ego than sense.
The world's central banks have flooded the global financial markets with cash -- and they're still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.
And yet there's no inflation. There's no sign of inflation. Investors aren't afraid of inflation. And inflation hedges such as gold are sinking like a stone.
Does this make any sense?
You can find a potential key to unlocking this puzzle in "Turning Japanese," the 1980 hit by The Vapors featuring the line "I'm turning Japanese I really think so."
Let's start by trying to understand the logic of the Japanese market at the moment.
A lethal dose of fugu
Last week the Bank of Japan announced it would double its current stimulus effort and buy $80 billion a month in bonds. The effort will expand the Bank of Japan's balance sheet by roughly 1% of gross domestic product a month. And the overt goal is to increase Japan's inflation rate to something like 2%.
That would be quite an achievement. Japan's inflation rate was an annual minus-0.7% in February. That is, the country experienced falling prices instead of the rising prices that make up inflation. Deflation in January ran at a 0.3% rate and at 0.1% in December. In fact, you have to go all the way back to May 2012 to find a month that showed an annual rate of inflation. And even then, the annual rate was just 0.2%.
If you believe the Bank of Japan will achieve its goal of 2% inflation anytime soon -- heck, even if you believe it will attain 1% inflation anytime soon -- you would not buy a Japanese government bond at anything like the current price.
If you bought a two-year Japanese government bond at the closing price on April 10, you'd be locking up a yield of a whopping 0.13%. That's a losing bet if you believe inflation is headed to 1% or 2% over the next two years.
The five-year Japanese bond yields 0.26%, hardly a significant improvement. Go out to 10 years? The yield is just 0.58%. Even at 1% inflation you lose money every year on these bonds. Go out to the 30-year bond -- 30 years! -- and the yield goes up to 1.46%. Over 30 years you would beat inflation if it rose to 1%. You've lost money if the Bank of Japan hit its goal of driving inflation to 2%.
Let's assume that the Japanese and foreign investors who buy these bonds -- foreign investors held 8.7% of Japanese government bonds in December 2012, up from 7.4% in December 2011 -- haven't been driven completely insane by a nearly lethal dose of fugu. In what belief scenario does buying a 10-year bond yielding 0.58% make sense?
It has to be built on three beliefs.
The Bank of Japan will fail
First, most investors in Japanese bonds have to think the Bank of Japan will fail. Perhaps not immediately or spectacularly. But eventually and fundamentally. No matter how much money the Bank of Japan pumps into the Japanese economy it will not achieve, these investors believe, 1% inflation, let alone 2%.
I think there's a good chance that this belief is correct. It's hard to see how Abenomics presents a solution to the effect of globalization on the still relatively closed Japanese economy, or to a lethal combination of a quickly aging population and disproportionate political power, or to Japanese corporate structures that are distinctly shareholder-unfriendly, or to the inefficiencies of Japanese capital spending and labor practices. (As Martin Wolf pointed out in an April 10 piece in the Financial Times, Japan has invested more in fixed business assets as a portion of GDP than the United States over the past 10 years -- 13.7% of GDP per year versus 10.5% in the United States -- but has badly trailed the U.S. growth rate during that period.)
Second, most investors -- and many people who think the Bank of Japan will fail -- believe that even if the central bank succeeds, there will be plenty of time to see the turn coming and to reposition portfolios. Inflation won't replace deflation overnight, this belief holds, so there will be plenty of time to organize an orderly exit. But there's also no rush to head for the exits, since turning Japanese deflation into inflation will take years.
It's hard for me to tell how much of this group believes in the "orderly exit" versus the "plenty of time to exit" scenario. My guess, from living through the market busts of the past decade, is that this belief group is probably dominated by the "orderly exit" folks. If we've learned anything from the busts of the past decade, it's definitely NOT humility. The market is still dominated at the institutional level by folks who believe they can either build a derivative that will insure them against the bust or that they are smart enough to get out ahead of the rush.
Not going to happen tomorrow
The real problem in the current market is that it looks as if there's a big hunk of time between now and when the Japanese market and economy might turn toward inflation. It's not going to happen tomorrow, if it happens at all.
And with the eurozone at the edge of recession, Chinese growth unlikely to return to the heady days of 9% to 10% annual rates and a U.S. recovery that's much slower than the historical norm, it's reasonable to think that any turn would be in 2014 or 2015, at the earliest.
And who wants to lay in a supply of inflation hedges now (and take the punishment until they pay off) or give up a year or two of profits from their current positioning?
Third, most investors don't believe the current scenario could blow up on them. Yes, the Bank of Japan might succeed, against odds as they calculate them, but that won't create a bust. And, of course, there will be plenty of time to find the exit. When you're calculating the risk of your current positioning, therefore, you don't need to factor in the possibility of another market bust.
Unfortunately, I think ignoring the possibility of a bust is wrong.
More from MoneyShow.com:
VIDEO ON MSN MONEY
"I remain a reluctant and worried participant in the market"
That just about sums it all up.
The inflation is in the stock market and real-estate, once the bubble bursts, then we will see the other inflation when every dollar will be dear for anything we want.
1929 all over again and the adjustment and aftermath will be the same. Over stimulation by the government only makes some people rich while stealing from the majority. Over stimulation leads to speculation since all other means of making wealth do not return as much on investments. Lose the faith in the investments and the wealth disappears. .
As a note..... even a six pack of beer has gotten smaller! (in some cases). One of my favorite imports, Stella Artois is bottled using the metric system. So... each bottle only contains about 11.5 ounces, not the traditional 12.
Note two. We should all remember that all these finance wonks and fiscal talking heads don't consider the real inflation that everyone else sees. They only consider the official Government inflation numbers (LIES) and look at things like savings rates, bond rates, mortgage rates, etc. as they spew their rhetoric!
I think inflation is hiding in plain sight in the stock and bond market right now. That’s where almost all of Bernanke’s and other central bank’s new funny money is going, which is why the market indices are shooting to the moon. We’ll see inflation move more obviously into consumer product prices if and when the magical Wealth Effect ever occurs. Of course, that will then make this whole money printing stimulus game self-defeating for the average person. It’s one big massive fail for the Central Banks unless their goal from the outset was to transfer wealth from the poor and middle class to the rich. And that’s why the rich and powerful like it sooo much.
"By Monte Francis, NBCBayArea.com
Three teenage boys are under arrest in connection with the alleged sexual assault of a 15-year-old California girl who later took her own life. Audrie Pott committed suicide on Sept. 10, 2012, eight days after she was allegedly assaulted. Attorney Robert Allard, who represents the girl’s family, says the teen committed suicide after photos of the alleged attack were published online. “Based on what we know, she was unconscious, there were multiple boys in the room with her,” Allard said. “They did unimaginable things to her while she was unconscious.”
THIS IS PART OF AN ARTICLE ON MSN TODAY. IT'S A SHORT ARTICLE WITH A BIG GOOGLE ADS BOX IN THE MIDDLE OF IT. THE ADS ARE FOR SEX PILLS AND FEATURES THE BIG ASSS OF A WHORRE. WE NEED TO END BOTH MSN AND GOOGLE TODAY. WE DON'T NEED SUCH BIG COMPANIES THAT CAN BE SO CRUEL INSENSITIVE AND CONTINUOUSLY CRAMMING THIS CRAP DOWN OUR THROATS FOR THE PROSPECT OF PROFIT.
Change... this wasn't it. God rest this poor girl's soul. God take those who did it on film (and thus are not alleged are they?) so America won't have to pay their incarceration for a lifetime or worse, see them released in 3 years after juvenile detention.
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Equity indices opened with slim gains, ... More
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