Bank of Japan

When tin-foil-hat wearing digital dickweed blogs first suggested that Central Banks were actively buying stocks, the mainstream media scoffed at the idiocy and un-independence of such an idea. However, it is clear the central banks themselves are now not only actively buying stocks but are activley encouraging it and propagandizing their efforts to lever this last policy tool left in the toolbox. As Bloomberg reports, 23% of central bankers surveyed said the bank owns shares and plans to buy more. From the Bank of Japan to the Bank of Israel and with the SNB and the Czech National Bank now at over 10% allocation of reserves to stocks, is it any wonder there is an inexorable bid under the 'free' markets. Rick Santelli is rightly concerned that, "there is a danger that everyone is loaded in the same direction," asking what happens if all the Central Bank pump-priming does not work, given these equity valuations, "who gets caught holding the bag? What chairs are left when the music stops?"

Pity the wise money manager these days. Our juiced-up financial markets, force-fed liquidity by the Fed the other major world central banks, are pushing asset prices far beyond what the fundamentals merit. If you see this reckless central planning behavior for what it is - a deluded attempt to avoid reality for as long as possible - your options are limited if you take your fiduciary duty to your clients seriously. Bill Fleckenstein of Fleckenstein Capital has a difficult time seeing other assets to own besides the precious metals. There are confidence bubbles in stocks, bonds and the fiat currencies that will break - not may, but will -  and when they do, he sees no safe harbor for investment capital save gold.

Between an 87-year-old Italian, a bearded American, two Japanese sociopaths, and a world in desperate search of 'yield', the yields on Spanish 10Y debt have collapsed in recent days to 4.50% - its lowest since November 2010 (and Italy at around 3.54% also close to 29 month lows). With the backdrop that no harm can ever come to another government, corporate, or high-yield bond ever again, the $660 billion in excess Fed and BoJ liquidity needs to be invested and why not grab the riskiest stuff there is. European stocks ended mixed with Italy and Spain soaring and the rest in the red or unch. Corporate credit rallied, outperforming stocks, but Swiss 2Y rates remained at 3-month lows. Europe, market indications aside, remains very unfixed; but given the leadership's insistence that the market knows best, we assume we should not expect more austerity or belt-tightening as 'investors' are willing to take the bankers' promises as gospel. Just as a reminder - we saw this kind of 'confidence' before in 2011, did not end so well...

Caterpillar just can't catch a break. First, in January the firm was punk'd by a Chinese acquisition fraud, forcing the company to write off half of its Q4 earnings. This, of course, in the aftermath of the miss in both Q3 and Q4 earnings. And now we get the latest disappointing news from the firm as Q1 numbers are reported lower across the board.

• Q1 EPS $1.31, Exp $1.38; this includes a tax benefit of $87 million
• Q1 revenue: $13.2 billion, Exp. $13.8 billion
• Guides much lower, with revenue now seen at $57-61 billion, compared to $60-68 billion previously
• CAT forecasts profit per share of $7.00, compared to $7.00-9.00 previously.
• Operating cash flow of $900MM, but all of it generated from net working capital, i.e., inventory liquidation
• And when you can't spend on capex, you spend on buybacks: CAT to extend buyback through 2015

So much for that.

The main take away from events in Japan is that the BOJ shifted from a tactic of interventions (under former Governor Masaaki Shirakawa) to one of monetary policy (under current Governor Haruhiko Kuroda) . What strikes us is that the monetary policy is precisely to... well, destroy their money and in the process any chance of having a monetary policy. In our view, it was exactly because the Fed’s (undisclosed) intention was to engage in never ending Quantitative Easing, that Japan was forced to implement the policy undertaken by Kuroda. Coordination with the Fed was impossible. With Mr. Kuroda’s policy, we now have the BOJ with a balance sheet objective, the Fed with a labour market objective (or so they want us to believe), the European Central Bank with a financial system stability objective (or a Target 2 balance objective) and the People’s Bank of China (and the Bank of Canada) with soft-landing objective. It is clear that any global coordination in monetary policy is completely unfeasible. The only thing central banks are left to coordinate is the suppression of gold.

In a world in which one bank after another has scrambled to downgrade its outlook on gold, both before the recent bank CEO huddle with Obama last Thursday - the day the bottom fell out of the gold market - but especially after, when the real onslaught on gold truly started, it has been an outright blasphemy for the sellside to even hint at having a bullish outlook on gold. After all, how dare someone allocate capital to the barbaric metal at a time when the US is recovering nicely (it's not), and when the US currency is one again deemed safe (with the Fed diluting its monetary base by 3% per month every month until the end of 2014 and likely forever, it isn't), any deviation from this latest script which desperately attempts to push savers out of the safety of gold into the fiat paper, where the proceeds are invested into stocks or simply spent (a la what happened in Cyprus and the latent fear of deposit confiscation everywhere in Europe), is not permitted. Yet this is precisely what CLSA's Chris Wood, author of the famous Greed & Fear, which is never afraid to be contrarian or to break the lemming mold, has done. His brief take on the recent gold plunge? "This is a buying opportunity too good for investors to miss." Buyers of physical gold everywhere in the world agree.

Mistrust claims of knowledge of contemporaneous activity by Japanese investors. The most recent country specific data is from February. In this context net flows are more important than gross flows. In addition, many observers have ignored/forgotten the high currency hedge ratios on purchases of foreign bonds.

Investors take note, the global economy appears to be contracting again. China’s recent GDP miss is the just the latest in a series of economic surprises to the downside. And stocks are always the last asset class to realize this.

According to Central Banker thinking, if something doesn’t work for 20 years the only answer is to do even more of it. So the Bank of Japan attempted a “shock and awe” move with an unprecedented QE equal to $1.2 trillion. Japanese bonds, already strained as investments by the demographic and economic issues plaguing Japan, have since become extremely volatil

The lesson from the events of 2007-2008 should have been clear: Boosting GDP with loose money can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover. The crisis that commenced in 2007 was therefore a massive opportunity: An opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance. That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.

The Treasury Department planted a "dirty bomb" at the Bank of Japan, and tossed a grenade at the Swiss National Bank.

There was little in terms of overnight newsflow to spook algos, but the tone is decidedly sour this morning following a lack of either the now traditional Japan or Europen-open buying ramps. The primary reason for this may well be the ongoing decline in the USDJPY which failed to breach the 100 barrier yesterday, coming as close as 99.95 before the Mrs. Watanabe onslaught had to be called off despite some more jawboning from Kuroda whose headlines are now summarily ignored, and which appears to have set a line in the sand for Japan, whose market naturally closed lower following this strengthening in its currency. Similarly troubling was the dip in the SHCOMP which closed down -0.58%, this despite the epic M2 and credit injection reported yesterday: if new liquidity can't send the market higher, what can?

Typically the public enters the market after a large run up, in time to buy at the top. Not there yet. 

These are certainly days of miracle and wonder. Well, of absurd and extraordinary financial experimentation, at any rate. Last week, for example, saw the Bank of Japan abandon any last pretense of restraint and topple headfirst into a gigantic pile of monetary cocaine. It would be difficult to overstate the drama of this monetary stimulus (although we favour the word debauchery). Yet as the Japanese monetary authorities declare a holy war against deflation, it would only be fair to draw attention to the colossal opportunity being presented as the antidote to monetary intemperance, namely gold and gold miners. There is a clear mismatch between the prices of gold and silver mining shares and spot prices of gold and silver. But as to why the miners are trading so poorly relative to the physical is unclear to us.

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A discussion of what investors who are being displaced by BOJ purchases are going to do. It may not be as simple as rushing to buy foreign assets that people are anticipating.