The Bank of Japan embarked upon the latest experiment in money printing in early April. This scale of money printing has never been attempted in a modern, industrialized economy. The BoJ will be purchasing $75bn worth of JGBs per month for the foreseeable future. If the Fed were to pursue its QE program with the same gusto, it would be purchasing close to $200bn per month of treasuries and mortgage bonds, over double the current clip of $85bn per month.
Unlike the Fed, the BoJ confines its open market activities to only a few days per month resulting in increased volatility in Japanese markets on the off days. If this plan has any chance of being successful, the BoJ will have to smooth out its purchase schedule. A constant flow will create a consistently rising market, and then the Japanese can even have their own version of Turbo Tuesdays.
Treasury yields have plummeted since the beginning of May when a raft of strong US economic data was released. Strong economies usually increase the demand for money raising its price, the interest rate. This dynamic is absent in the new normal. The economy is not as strong as the buoyant stock market and increasing yields indicate. Moreover, there is a shadow inventory of cheap money waiting on the sidelines to keep rates in check. Those bonds will rally again and trade within a range of 1.6 – 2.2% as long as the Fed is running the magic money machine.
This is all you need to know about the wacky paradigm created by massive money printing:
U.S. stocks advanced, following the Dow Jones Industrial Average’s biggest drop in four weeks, as weaker-than-expected data on economic growth and jobless claims boosted speculation the Federal Reserve will maintain stimulus.
Weaker data should equate to weaker profits driving the market down, but the exact opposite is happening. Or maybe this is just a random price move, and it doesn’t mean anything.
Compare and contrast. The first quote is from Bloomberg
and the second from the WSJ regarding the same exact data:
Businesses and consumers in the 17 nations that share the euro were less pessimistic about their prospects in May, the first improvement in sentiment since February, although one that is unlikely to herald a substantial pickup in economic growth in coming months.
Now, examine the chart illustrating the survey over time. A rating of 100 indicates the confidence of an expanding economy. Despite the happy talk from BBG, the confidence number overwhelmingly indicates a further contraction in the coming months despite the small improvement in May as illustrated by the chart above.
Bloomberg editor, here’s free rewrite of the first line of your article. It’s what we call “accurate” here in the real world:
Economic confidence in the euro area increased in May, but the survey indicates a continuing recession for the Eurozone. The rise in confidence was the first since February, but Europeans remain pessimistic about future economic prospects.
This was a bad idea, the chief product of the Eurozone. Fortunately, cooler heads have prevailed, and the tax will be scaled down and its implementation delayed. As to why it is a bad idea, click this link:
“I am sure that we are entering a phase of greater supply of credit to Portuguese companies and even adjustments to its price,” Nuno Amado, chief executive officer of the country’s largest listed bank, Millennium BCP (BCP.LS), told a conference hosted by Reuters and TSF radio.
The headline is based on a quote by someone who is paid to say optimistic things about his business. There is no evidence that credit is rising in the Portuguese economy. As usual, the chart dispels happy talk. The best case scenario in play is that Portugal has hit the bottom. While I do not agree with that analysis of the data, it is at least plausible. Claiming that the supply of credit is increasing is not.