Bank of Japan
It took a while, but three months after we wrote "How The Petrodollar Quietly Died, And Nobody Noticed", someone finally noticed.
The Abe administration nominated a major proponent of reflationary monetary policy to the central bank’s board, buttressing Governor Haruhiko Kuroda’s efforts to save the nation from the dread of deflation. As Bloomberg reports, economist Yutaka Harada, who will replace Ryuzo Miyao, has said Japan can beat deflation by printing money in a 2013 book "Reflationary Policy Revives Japan’s Economy." So far that is not working so try harder... “The nomination is a good news for Kuroda... he will keep a majority on the board and win what he wants." Why such good news? As deputy director at the finance ministry’s Policy Research Institute, Harada exclaimed, "we just need to print money."
This was the “Rubicon” moment: the instant at which Central Banks gave up pretending that their actions or policies were aimed at anything resembling public good or stability.
UPDATE: You know it's getting bad when Abe and Kuroda double-team the confidence-inspiring headlines: KURODA: BOJ'S BOND PURCHASES HAVEN'T FACED PROBLEMS, DON'T THINK JGB LIQUIDITY HAS PARTICULARLY FALLEN
Japanese government bond yields continue to surge. The last 7 days have seen yields on long-dated JGBs soar at the fastest pace since 2003 - accelerating after the most recent (weakest bid-to-cover in 19 months) bond auction. Following the 18th month in a row of negative YoY real cash earnings (1 short of the record 19 months in a row from 2008/9), Japanese bond yields are surging to their highest since early December. Is The BoJ losing control?
ZIRP in essence is deflationary in nature, it becomes a self-fulfilling, reinforcing slippery slope of “Monetary Extremism” and should be rejected at all costs!
Until now, central banks have restricted monetary policy to domestic economic management; this is now evolving into the more dangerous stage of internationalisation through competitive devaluations. The gold price is an early warning of future monetary and currency troubles, and it is now becoming apparent how they may transpire. The ECB move to give easy money to profligate Eurozone politicians is likely to have important ramifications well beyond Europe, and together with parallel actions by the Bank of Japan, can now be expected to increase demand for physical gold in the advanced economies once more.
Moments ago, in the illiquid Sunday night pre-market, BofA's "Stolper" was just stolpered stopped out as the USDJPY just tumbled well below 117 on concerns about Greece and the biggest Chinese economic slowdown in 2 years, dropping to the lowest level since the SNB announcement in just 3 trading days after Curry's initial recommendation, which incidentally is a record short period of time for a "Stolpering", even the original Tom Stolper. So here's to you, MacNeil Curry: keep those "recos" coming because in the absence of illegal chatrooms and muppet slayers it was getting a little difficut to make riskless profits day in and out.
Recent market actions, the rapid decline in interest rates, earnings deterioration and plunging energy prices have made many less comfortable being long the market. While the "buy and hold" crowd suggests this is all rubbish, it should be worth remembering that every single one of that group never saw the corrections in 2000 or 2008 until it was far too late. Their only excuse was "no one could have seen it coming." The truth is that many did see what was coming. Paying attention to what is happening at the margin leads to an understanding of when the "tides" begin to shift.
In the QE era, monetary policy has lost any semblance of discipline and coherence. As Draghi attempts to deliver on his nearly two-and-a-half-year-old commitment, the limits of his promise – like comparable assurances by the Fed and the BOJ – could become glaringly apparent. Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face.
Suppose you could print up counterfeit dollars, euros or yen that were identical to the real things. Fun, you think? Here's how it plays out.
The fear of deflation has become the cornerstone of Keynesian economic thought. However, it is the height of hypocrisy that Keynesians use the specter of deflation to frighten us into believing we need to endlessly dilute the value of our currencies and take the rate on our savings to zero percent; but then, at the same time, take every data point that points to falling prices as another reason to be bullish on markets and the economy. Their mantras are: Lower commodity prices–a boost to the consumer, plunging interest rates–an increase in mortgage refinancing. How can Keynesians celebrate deflation, while at the same time use it to scare us into accepting ZIRP forever? The easy answer would be, they are, by definition, cheerleaders for the stock market...
We are happy to report that the P&L drought may have finally ended, and we have none other than the man many have suggested could be next in line for the title of honorary "Tom Stolper" of the FX realm: BofA's technical strategist MacNeill Curry. Moments ago, Curry came out with a trade reco which is, not surprisingly, just in line with what the vast consensus, and not to mention the Bank of Japan, thinks: long USDJPY.
This morning both the SNB stunner from two weeks ago, and the less than stunning ECB QE announcement from last Thursday are long forgotten, and the only topic on markets' minds is the startling surge of Syriza and its formation of a coalition government with another anti-bailout party - a development that many in Europe never expected could happen, and which has pushed Europe to the bring of the unexpected yet again. And while there is much speculation that this time Europe is much better positioned to "handle a Grexit", the reality is that European bank balance sheets are as bad if not worse than in 2014, 2013, 2012 or any other year for that matter, because none of ther €1+ trillion in NPLs have been addressed and the only thing that has happened is funding bank capital deficiencies with newly printed money. You know what they say about solvency and liquidity.
Since its inception in 2008, easy monetary policy has created very few positive effects for the real economy — and has created considerable (and in some cases unforeseen) negative effects as well. The BIS warns of financial bubbles. While economic policymakers should take a closer look at Japan, China, and yes, the United States, when debating the limits of monetary stimulus and the dangerous nature of financial bubbles; sadly, the discussion is happening too late to be anything more than an intellectual exercise.
Curency wars are zero-sum. Interest rate race is not.