Around the Globe 11.05.2013

BOJ Gov. Kuroda Calls Easing Steps Successful –

BOJ Struggles to Convince on 2% as Abenomics Shine Fades – Bloomberg.

Japan Salaries Extend Fall as Abe Urges Companies to Raise Wages – Bloomberg.

Japanese Incomes  Japanese GDP Performance Through 2Q2013

Japanese Inflation Rate


Printapalooza throughout the world continues, but the Bank of Japan is leading the world in money creation.  Printing inflates asset prices while deflating labor costs, i.e. wages.  In the first chart, note the trend of Japanese wages since the BoJ began printing over a decade ago.  It is not surprising that the Japanese economy is weak, because consumers have been on a slow, inexorable wage reduction for almost 15 years.  The current round has proven ineffective at raising GDP growth, as illustrated in our second chart.  Indeed, Japan witnessed stronger growth in the aftermath of Lehman than it is under Abenomics, which is also the last time Japanese inflation exceeded 2%.  If you examine the third chart, you can see what happened after the last three times the mainstream financial press called an end to Japanese deflation.

In the meantime, the export and stock market gains fueled by the weak yen have probably peaked.  The USDJPY exchange rate is highly correlated to the ratio between BoJ and Fed assets.  As our last chart details, the market has already priced in the more rapid expansion of the BoJ’s balance sheet.  A reduction in Fed purchases, the dreaded taper, will allow the yen to depreciate further.

BoJ to Fed Balance Sheet Ratio vs. JPYUSD


Service Industries in U.S. Grow at Faster Pace Than Forecast – Bloomberg.

Service sector exapnds more than expected in October: ISM.

U.S. service sector growth quickens in October: ISM | Reuters.

ISM NMI 11.2013

The economic data continues to tell a tale of stagnation.  The MFP is breathlessly reporting that the services PMI beat the consensus forecast despite the “shutdown.”  Numbers above 50 signal expansion, but a 55.4 is nothing to write home about.  Expected GDP growth at this level is below 2%, which is far below the 3.5% growth required to stir the labor market.

Pressure mounts on Draghi following eurozone forecasts –

Rehn Confident Greece to Meet Targets as Troika Talks Resume – Bloomberg.

EU Forecasts Sluggish Growth as Austerity Continues –

EU cuts euro zone growth forecasts for 2014.

Uncertainty over ECB caps moves in shares, euro | Reuters.

Euro Fair Value at 1.37


Everyone is trying to predict what the ECB will do on Thursday: will it cut rates or not? Most commentators seem to believe that the ECB will cut its discount rate, because the EU just cut its Eurozone growth forecast for 2014 to 1.1%.  The EU has been relentlessly cutting growth forecasts since 2010, so there is no crisis here.  The only thing you need to know about how the ECB will conduct monetary policy is contained in the chart above.

As long as the euro remains weak enough to promote German exports, there will be no rate cut to lower the euro exchange rate.  If the euro attains and maintains the low $1.40’s for a time, then there will be a rate cut.  At the current rate of $1.35, Germany is benefiting from both low inflation and a weak currency.


Around the Globe 04.22.2013

Bernanke to Skip Jackson Hole Due to Scheduling Conflict.


The reason Bernanke is skipping the annual Fedapollooza is because he will not serve a third term after 2014.  It will be interesting to see who leads the Fed at the annual J-Hole conference, because this may telegraph the next Fed head.  My money is on Janet Yellen.

Caterpillar Earnings, Revenue Fall Short; Slashes 2013 Outlook.

CAT 04.22.2013

Caterpillar serves as a bellwether for the mining industry and China.  CAT’s story today is that profits are 45% less than last year’s first quarter results while revenues plunged 17%.  The metals bubble seems to have burst sapping demand for CAT’s mining equipment.  CAT is a China play, and decreaAT.

Barroso Calls for Growth Over Austerity –

Eurozone Economic Performance

The EU is beginning to play a different tune.  The reason for the policy shift is not a deep concern for countries of the periphery but reality.  As the article makes clear, budget cuts are not leading to smaller deficits.  The periphery and even core countries like France and the Netherlands have no hope of attaining a 3% budget deficit anytime in the near future.  Leaving that goal intact would merely serve as a reminder that the eurocrisis continues.

Spain to Pull Back on Austerity –

Spain Budget Deficits

For some reason, the mainstream media continues to report that Spain had a 7% budget deficit for 2012 excluding its bank bailout from the final number.  There is no good reason to omit the cost of the bank bailout.  Spain is in the midst of a bursting property bubble, and as property values decrease non performing loans shall increase.  The banks have received money from the central government for the last three years in a row, and don’t be surprised if more capital is required sometime this year.  The bank bailout is an ongoing cost and should be treated as such.

Hollow Victory for Italy as More Turmoil Looms.

Giorgio Napolitano

Continued ttempts to form a government in Italy will fail despite the reelection of Giorgio Napolitano to the presidency.  The left bungled the election and post-election bargaining so badly that Berlusconi and Grillo must realize that they have a chance to win a second round outright.  Additionally, the Democratic Left’s popular new leader, Matteo Renzi, believes that he could do better than outgoing leader Pier Luigi Bersani.  It seems like we are heading full speed ahead to new Italian elections this summer.

BOJ’s Kuroda Wins Over G-20 –

Japanese Debt to GDP Ratio

Kuroda must have told his fellow central banksters the truth:  that Japan is on the brink of ruin, and this last ditch plan to print astronomical sums of yen is the only chance the country has.  I hope the G-20 leaders have also discussed what to do in case Japan fails.

Greece, Cyprus May Be Forced to Exit Euro: Citi.

Spanish Yield 04.22.2013

Citi is every pessimistic on the continued viability of the Eurozone.  While it forecasts Greek and Cypriot eurozone exits, it goes beyond this headline to Spain and Italy, which it predicts will both require bailouts this year.  I do not agree.  While the fiscal and economic fundamentals point to exits and bailouts, do not underestimate the effect of central bank money printing in maintaining the current status quo.  As the BoJ purchases bonds on the open market, piles of cash will continue to seek yield, and there is plenty to seek in Europe.  Note sinking bond yields in Italy and Spain since the BoJ announced its latest policy.


Around the Globe 04.17.2013

IMF Sees 20% of Corporate Debt Unsustainable in Parts of Europe – Bloomberg.

Spanish Bankruptcies

This is exactly why low interest rates lead to bubbles and malinvestment.  When companies see these low interest rates, they just cannot help themselves.  They begin gorging on debt whether or not they have worthwhile projects to invest in.  The excess debt does not create as much revenue as is needed to service it despite the low rates.  Eventually, this leads to bankruptcies and defaults, as in Spain depicted in the chart above.

Not Concerned About Hard Landing in China: IMF.

The IMF has a poor economic forecasting record. According to the fund, Cyprus needs only €17.5bn, not €23bn and rising, while Greece should have returned to growth two years ago. Since the onset of the GFC, China has relied on a credit boom feeding unproductive projects such as ghost cities and roads to nowhere. This is unsustainable. Moreover, the implication of denying a hard landing is that China is not in the midst of a bubble. None of these entities, whether they be NGOs or central banks, ever spot a bubble forming until it bursts.

BOJ official: mulling increasing frequency of JGB purchases | Reuters.

JGB Volatility

For some reason, the BoJ clusters its bond purchases over five or six days of the month resulting in increasing volatility in the market (chart above). The Fed spreads its purchase out over the entire month (chart below).

POMO Schedule April 2013

Sliding Yen Could Herald New Asian Currency Crisis: Albert Edwards.


Mr. Edwards has come to the conclusion that the cheap yen will find its way to markets throughout the world as Japanese investors cash out of their JGBs and chase yield. Interestingly, the euro has appreciated nicely since the BoJ’s announcement, and periphery bond yields have fallen as exemplified by Spain.

Spanish 10yr SB 04.17.2013

Bundesbank Chief Weidmann Says Europe Recovery Could Take Decade –

The PIIGS have already endured a few years of misery and have a decade of more of the same to look forward to.  The euro will break up long before the promised recovery materializes in ten years.

Stock Surge Linked to Lobbyist –

XLV 04.02.2013

A former Congressional staffer receives tips from his former colleagues 180° away in the revolving door. Then, he passes them along to the people who pay him to lobby Congress. Healthcare stocks mysteriously rise shortly thereafter.

I predict that in a few months, when no one is looking, the SEC will quietly close their investigation without finding any wrongdoing.

HEARD ON THE STREET: This Trend Is No Friend to Goldman –

GS 04.17.2013

The main point to glean from this article is that Goldman’s profit rise is unsustainable in the face of falling revenue. An artificial bull market stoked by money printing is creating profits in underwriting and investing and lending that will end once the market turns. GS and its TBTF brethren will be in for a rough ride once this happens. Furthermore, expenses have already been cut to the bone, so profit gains from operational cuts will begin to wane as well.


Bank of Japan Accelerates Money Printing



BOJ to pump $1.4 trillion into economy in unprecedented stimulus | Reuters.

BOJ Throws In Kitchen Sink in War With Deflation.

BOJ Doubles Bond Purchases in First Kuroda Easing Salvo – Bloomberg.

BOJ Launches Bold Plan to End Deflation –

The Bank of Japan is embarking on a final effort to stoke its economy by turning up the Yen printing press to 11.  After all, Japan must keep up the race to debase with its trading partners.

Virtually all the world’s central banks are Keynesian, which is more akin to religious rather than economic doctrine.  Religion is based on faith.  If one follows the religion and does not receive the desired effect, the problem cannot possibly be the divine doctrine meaning it is not being followed in the proper fashion.  If praying is not working, then it is because one is not praying enough.

So it is with the Keynesian cult.  Money printing is always the answer.  If this is not working, it is because money is not being printed on a grand enough scale.

As such, the Bank of Japan is taking the following steps to promote a 2% inflation rate in its economy:

  1. Switching the target from the overnight call rate to the monetary base
  2. Doubling bond purchases from ¥3.8tr to ¥7.5tr
  3. Purchasing all durations of debt rather than just the shorter-dated issues
  4. Increasing ETF purchases by ¥1tr per year and REITs by ¥30bn
  5. Removing the limit on debt holdings to outstanding currency

This is not a new plan, merely a souped-up version of previous episodes of money printing.  The new head of the BoJ, Haruhiko Kuroda, believes that this round of money printing will finally be the one to revive Japan’s moribund economy after nearly two decades of stagnation. The goal of the plan is to create a wealth effect for Japanese consumers that will induce them to increase their spending.

If the Bank of Japan succeeds, it will initiate the Japanese debt crisis.  The benchmark JGB pays less than a half a point a year in interest. With a deflation rate of 2%, this is a good return.  Under a 2% inflation rate, JGB yields will have to rise to compensate the lender for use of his capital accordingly.  Japan cannot afford to pay a higher interest rate on its debt.

This is the problem.  An interest rate of 2% on JGBs effectively doubles the interest costs for the government, and it cannot afford this.  Japan will become insolvent, and it will happen quickly.

Japan is too big to fail.  As such, there will be a coordinated central bank rescue that may succeed in kicking the can down the road a little further.  Remember this when placing those bets against the ¥, the Nikkei 225 and JGBs.