Eager to Wreak Havoc

Life on the ranch: Fatima, a girl of 10, has asked to learn English. She wants to be able to talk to an aunt who lives in New York. What an unexpected pleasure – for us, not for her – it is to give her lessons. We’ll let you know how it goes. Now, back on our financial beat …

Wow! We never thought we’d have so much help from central bankers. At the start of 2010, for example, we announced our new “Trade of the Decade.” The idea: Sell short Japanese government bonds, which are doomed, and buy Japanese stocks, which are likely to catch a break after decades in the doghouse.

In the event, the break the Japanese stock market caught came to it from the Bank of Japan – more eager than ever to wreak havoc on the economy and its financial markets.


NikkeiThe Nikkei has been on a tear for the past three years – click to enlarge.


A Wild Ride

We have never seen anything like it. Well, nothing outside Zimbabwe and Argentina, where the authorities put a gun to the economy’s head and pull the trigger once every few years. We didn’t expect to see it in Japan. Or Europe. Or the US. But in all three developed economies the custodians of the banking system seem hell-bent.

Which is, of course, where they belong. Too bad they have to take us with them! But it’s going to be one wild ride. On Wednesday, the Dow fell 128 points, or 0.7%. Gold barely budged. It’s lodged at $1,146 an ounce this morning. But there is a powerful tailwind behind stocks – the hot air and hotter credit provided by the world’s leading central banks. They are driving up stocks, while practically guaranteeing that their nations’ debt becomes worthless.

First, this report from the Wall Street Journal:


So far this year, $36 billion has flowed into European equity funds and $7.6 billion into Japanese stock funds, with $15 billion going to “international” developed-market equity funds, said fund tracker EPFR. The three categories together more than offset net outflows from US and emerging-market equities, which had previously enjoyed strong gains….

Behind these numbers are the asset-buying programs – also known as quantitative easing, or QE – instituted by the Bank of Japan and European Central Bank.

The BoJ’s purchases of both bonds and stock index-based exchange-traded funds are topping up Japan’s financial system each month with an average 6.7 trillion yen, or $56 billion.


BoJ assetsAssets held by the Bank of Japan – click to enlarge.


Free Money!

The backstory is that central bank policies, which were sold to the public as a way to “stimulate” their economies, have been a total failure. A complete washout. An unequivocal flop. Japan limps along after 25 years of stimulation… with an economy that is not a yen larger than it was two decades ago.

Europe has some bright spots. But it has dark spots too. Put them together and you get 50 shades of dull gray – with bond yields that are perverted and sick. Together, they suggest the continent is being dragged down into a black hole from which it can never return. What else could happen when governments can borrow at a rate of less than zero?

How will they say “no” to citizens who want more health spending… better pensions… and a municipal pool? It’s FREE MONEY, for Pete’s sake. And if they can’t say “no” to free money… where will the spending – and debt – stop if not at the bottom of some dark and depressing hole somewhere?


Hotter Than Napalm

Meanwhile, the brightest spot on the planet is the US economy and its unbelievably brilliant, shiny and sparkly dollar. Heck, it’s hotter than napalm. And more attractive than an unexploded grenade. But is it something you want to play with? Here’s Bloomberg with a surprise:


It’s not only the just-released University of Michigan consumer confidence report and February retail sales on Thursday that surprised economists and investors with another dose of underwhelming news.

Overall, US economic data have been falling short of prognosticators’ expectations by the most in six years. The Bloomberg ECO US Surprise Index, which measures whether data beat or miss forecasts, fell to the lowest since 2009, when the nation was in the deepest recession since the Great Depression.

This month alone, personal income and spending, manufacturing as measured by the Institute for Supply Management, auto sales, factory orders, and retail sales have all come in a bit weak.


Let’s see – more than two decades of failure in Japan… six years of failure in the US (we won’t mention the decades of flops and foolishness that preceded the crisis of 2008)… and in Europe, Mario Draghi promised “whatever it takes” to revive the ailing economy.

But whatever it took was apparently not what it got. Now it’s going to get more of it. Draghi is pumping in another trillion euro by way of QE. All over the developed world, the policies that failed are not being thrown out; they’re being stepped up.

“Stooopid,” we said to Fatima.

“Stoopeed,” she replied.

We recognize that our views sometimes seem contradictory. For example, we see central banks pushing up stocks. But we still advise readers to get out. Tomorrow – we attempt to explain ourselves. Stay tuned…


DRAGHI NON MOLLA PRESA, DECISO CONTRO RISCHI DEFLAZIONEMario Draghi metaphorically indicating the pile of money he will add to the euro area to ensure bond yields will remain at perverse levels.

Photo credit: DPA


Image captions by PT.

Charts by: BigCharts, St. Louis Federal Reserve Research


The above article is taken from the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




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