Crazed Kamikaze Counterfeiters

Tim Knight from Slope of Hope's picture
Kamikaze2
From Slope of Hope: Well, my fellow Slope-a-Dopes, your selfless Idiotic Savant servant, whom is securely chained to his desk, has spent a significant part of the long weekend, perusing nearly every finance blog on the world wide web for you.  Therefore, I can reliably report to the SOH, that the overwhelming consensus out there in the financial blogosphere, which has now reached a nearly universal feverish pitch, is boldly & proudly heralding that a most encouraging new economic dawn is finally upon us.  It seems, a pristine permanent plateau of prosperity has been patently perfected.
                                                                                                                                              

According to many, we are leaving behind the hostile, unruly, nearly catastrophic financial crisis which began in early 2008, and replacing it with a new era of sublime, totally tamed, and completely captured capital markets.  All this, courtesy of our brilliant public authorities, who so astutely and capably swooped in to save the day for us all.

                                                                                                                
303_1swear_in_wideJust in case, you are still one of the few sage equity exchange participants, that remains unconvinced by the great

USA! USA! USA! capital markets comeback pompoms, we have arranged a special effects holiday treat to bring you on-board the super flagship of State. We sure hope you enjoy the show. The relentless media driven smoke & mirrors, incessantly producing red white and blue Wonder Bread & hypnotic Carnival Cruise circuses, are in full force this weekend. Capped off by the fanatical Obonga inauguration palapalooza, which has everybody in America enthusiastically and stupefyingly, utterly stoned silly. I curiously ponder what the venerable, eloquent, deep thinking MLK would really feel about all this spectacularly superficial, overly hyped, completely bogus, self satisfied apple pie splendor.  But, I digress.  Sorry, I just couldn't help myself.  Back to the party line......
                                                                                                                      
Sunshine_sunflower-Summer_romance_Feelings_1680x1050The warm glow of the sun is upon us again, and will soon shine as brightly as before, SPX 1700 here we come.  The main thrust of this new found optimism stems from the notion that the parched & wilting private consumption Crocuses of old, have effectively been replaced by a special strain of fast growing Government spending Sunflower shoots.  Our green thumbed Treasury & Central Bank planters, assure us that the fertile financial hybrid flowers will splendifferously bloom once again, with a magic turbo boost delivered by the new Miracle-Grow monetary & fiscal fertilizer. Most flower pot pundits are singing the same happy horticulture harmony.
                                                                                                                                                         
The melodic musical notes sound something like this:
  • The original culprit, the devastated & destructive housing sector has now bottomed out, and there should be further constructive smooth nailing ahead.  
  • The all important U.S. equity markets have soared back towards the heavens, like an unGodly shiny new Sphinx, up over 120% from the harrowing SPX 666 Lucifer hell hole, since the money mayhem of March 2009.
  • The sick expiring latin PIIGS, instead of ending up on Iggy's breakfast plate, are being fattened up at the ECB trough with copious free flowing OMT hog feed.
  • The chief EU emergency room cardiologists, have miraculously breathed life back into the flat-lining EKG of the EURO heart attack patient, using the latest LTRO defibrillation techniques.
  • The global Inflation lion has been skillfully slayed, and the neatly folded Origami paper tiger is about to ferociously roar once again in China.  
  • The Bond bubble will gently deflate its overly pressurized pent up air, right into an eagerly awaiting, warm and welcoming, stock market hot air balloon. 
  • Even the dismal job market is being jack hammered back into satisfactory street shape.

Well, you get the picture...............it's all coming up roses!                                                                                                                                                                                           

Are we really to believe that persistent and massive government spending, from the fiscally bankrupt Nation States of the developed world, combined with their Central Banks' perpetual programs of counterfeit money printing, can actually make for a sound and sustainable new global economic paradigm in the 21st century?  You can't be serious, can you?  Can we really print & spend our way to prosperity?  Yes we can!!!!  Break out the Obonga bong & Pakalolo, we have found the holy grail.                                                                                                                                            
You mean to tell me that the popular Dire Straits lyrics; "money for nothing and your chicks for free", is to be the new economic business model for the United States of America.  Can this frantically fabricated financial fairy tale actually materialize?  Are we really ready to sound the all clear?  Nothing but cloudless azure skies ahead, they tell us.  Our economic leaders would have us genuinely believe in this delightfully dazed panorama, which conjures up much the same feeling one gets, right after a torrentially drenching, early afternoon tropical thunderstorm, abruptly lifts & clears, as the sunny bright blue sky stunningly unveils itself once again, for all to enjoy.   Can this really be?                                                                                                                               
Something is clearly amiss in this deluded depiction of bliss.......                              
       
Private+Planes_wallpapers_240Your most skeptical Idiot Savant is definitely not buying into this "sunshine day dream", to quote another musical lyric, this one from the all American band The Grateful Dead.  I really wonder, if that very same, warm and comfortable, sun filled feeling, gloriously graced the quiet islands of Hawaii on the Pacific morning of December 7, 1941?  I trust you can see where I'm going with this Kimosabe-son?  We are in dire straits alright.  Tora! Tora! Tora!
                                       
As you can see from the captivating header post art work displayed above, Japan is where this artiste is applying his brush strokes today.  To me, the land of the rising sun is the most intriguing landscape to paint at the moment. The newly elected prime minister, or should I say prime printer, crazed Kamikaze pilot Shinzo Abe, may well be the man that strikes the match which lights the stack.  He was put into office on a platform that was primarily based upon forcing the Bank of Japan to ramp up its stimulus efforts, indeed to run what amounts to unlimited easing until inflation hits 2%.  Make no mistake, this stimulating samurai most certainly means business, as the Yen is down a head spinning 12%, since he drew his razor sharp, double edged sword.
                                                                                                                                                         
So, let me get this straight.  This honorable, devoted, suicidal dive bomber, is somehow convinced he can print the Yen into oblivion, all the while, maintaining the lowest yielding major bond market on the planet???   How, in this glowing Blowfish Japanese sea world of his, does manufactured inflation not bring on higher interest rates?  Just one look at the diagram below, should scare the living sushi out of you!  Hara-Kiri anybody?  Once Japan falls, all the California rolls follow.  
                                            
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Japan now has a breathtaking 230% ratio of government debt to GDP (the last estimate I have seen), and it is growing at 10% plus a year.  The government will borrow nearly 45% of its budget this year.  Has there ever been a more clear disaster on the horizon?  Holy Tsunami!  Once interest rates get away from the BOJ, even in the slightest, BOOM goes the Bonsai!                                                                                
John Mauldin knows the score, he coined the phrase; Japan is a bug in search of a windshield:   

"The new Japanese government, led by Prime Minister Abe and former Prime Minister and now Minister of Finance Aso, have very explicitly demanded that the Bank of Japan target 2% inflation. They have made clear their intention to replace the governors of the current BoJ board with members who agree with this policy. They have the political clout to do so. Whether at the upcoming meeting or after April, when a new head of the BoJ is appointed, that is going to happen. These moves mean there will be a massive printing of yen. In response, the yen has already weakened by over 10%.

 

You can control the quantity of money or the price of money but not both. (Yes, I know that one influences the other, but I am referring here to large-scale printing of money.) One has to assume that the law of gravity will not be repealed and that investors will want something more than 2% on the ten-year bond if inflation is at 2%. If the ten-year bond were to rise by 2%, Japan would soon be spending over 50% of its tax revenues on the interest carry alone. I submit that this is not a workable business model.

Why now and not sometime during the past ten years? I see a number of factors coming together this year:

 

1. The Japanese had a 15%+ savings rate in 1990. That is now down below 1%. (Exact numbers are difficult, because Japanese data on this topic has severe lags, and thus my number is an extrapolation but a reasonable one, I think.) Due to the nature of their retirement system, they have channeled the vast bulk of these savings into JGBs. When the savings rate goes negative or is no longer sufficient to buy all the issued debt, the choice will be to monetize the debt or cut spending. The latter choice does not appear to be part of their national conversation. Cutting spending by the amount required will mean a serious recession and further deflation, an option the new government explicitly rejects.

 

2.  Both the trade deficit and the current account have recently turned negative. The vaunted Japanese export machine seems to have hit a wall, and this will limit options in controlling the price of the yen, even if the government wants to. Understand,  inflation targeting is also currency-valuation targeting. They clearly want the yen to devalue. I have been writing for years that the yen would eventually be 125, then 150, then 200 to the dollar. It has been 300 in my lifetime, and unless the Japanese change direction, there is no reason it can’t get there again. This means that Mrs. Watanabe will see her energy bills double. This will call into question the Japanese decision to close their nuclear energy plants – something that Abe is already reconsidering.

 

Think the Koreans will be happy when you can buy a Lexus cheaper than you can buy a Kia? (Disclosure: I love my Japanese Infiniti, the first “foreign” car I have bought, except for a two-month dalliance with a disaster of a Volkswagen 30 years ago.) Think Samsung and LG will be happy when Panasonic and Sony can eat their lunch pricewise? Welcome to the era of real currency wars."

 

This note is worth about $11 today. In the future?  Not so much.

 

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All four major central banks of the developed world (FED/ECB/BOE/BOJ), are now entrenched in full tilt printing mode, with no end in sight.  Can you say currency wars?  The zero sum global warfare has begun, and beggar thy neighbor is the battle cry of choice.  No growth?  Pas de problème says La Banque Centrale Européenne, we can export our way out. Massive external debt?  No problem say the Federal Reserve & Bank of Japan, we can devalue our way out.  What's wrong with this picture?  If we all devalue together, as an ensemble, aren't we simply spitting in the wind, whistling dixie.  Got Gold?
                                                                                                                                                     
First come the currency wars, then come the resource wars. Take a quick look at oil & other basic commodities today, smell the inflationary warheads my friends.  Military conflicts in Iraq, Afghanistan, Libya, Syria, Mali, etc.....Iran?  Do you really think the non western nations of China, Russia, India, Brazil,.....etc, are simply gonna stand down, as the developed, so called "civilized" world, blatantly abuses it's global reserve currency status, while simultaneously plundering the globe's natural resources?  Can you say WWIII?  The intensifying China vs. Japan sabre rattling is just the beginning mes amis. Rest assured, along with the ensuing destruction, will come an inevitable economic depression of epic duration.  That is the true score boys & girls, and don't you doubt it for one minute.  As my fellow frogs are fond of saying;  Les jeux son't fait!                                                                                                                                                                    
As for the stock market, although, I do believe we are due for a shallow correction in the very short term here, the U.S. can continue to paper things over for a while longer, and yes we can, and probably will continue to drift higher in the intermediate term.  Please be advised however, that this is certainly NOT because your average investors have suddenly found exuberant optimism in the dubious global economic developments of today's modern industrialized world, as the pundits would have you believe.
                                                                                                                                                         
The actual faux fantasy reason that this market continues to listlessly drift higher, is mostly due to the fact that investors have nowhere else to turn.  The bond market is DOA, saving account CDs have been practically neutered, the USD is being systematically devalued, real estate is dicey at best, and the art market is a freak show.  Let's face it, the capital markets are completely upside down & FUBAR.  The Bernanke and the rest of the global kamikaze money printers, are determined to force you into higher risk equity assets.  So far, they are succeeding beyond their wildest dreams, in this rapacious incendiary dooms day endeavor.                       
                                                                                    
Remember the tranquility of Pearl Harbor, just before the flying bombs appeared in the sky........................
                                                                                                         
Evil Plan 105.0........................Beware the Ides of March!
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         BDI Slope of Hope's Idiot Savant