When Herding Cats Fails: A Visual Tale Of Two QEs

Tyler Durden's picture

Following last week's Japanese market fireworks, one thing has finally become clear: any ongoing collapse in the Yen, and corresponding surge in the Nikkei225 - supposedly beneficial "side-effects" of Abenomics impacting the Japanese economy - will send Japanese bond yields surging as more panic and sell their fixed income exposure, leading to further instability and volatility in the bond market, which in turn becomes a selling catalyst and so on in an escalating selling feedback loop. Because, as we have been warning, Abenomics "works" only as long as it only impacts stocks beneficially, i.e., sends them higher, but much more importantly as long as nobody sells their bonds. This is the reason for the surge in damage control out of Japan, desperate to "keep Mrs Watanabe's faith" in the wealth effect mechanism known as the stock market following last week's epic market crash best summarized in this piece by Bloomberg: "Kuroda Backs Japan Bulls After Stock Plunge Jolts Confidence."

So with Abe and Kuroda supposedly unwilling to take a break until long-term inflation expectations are anchored at 2%, this means the 10 Year JGB, most recently trading south of 1%, has much, much more downside. And as we explained before, the ongoing plunge in JGB prices means massive Tier 1 capital impairment for various Japanese banks which are the biggest holders of JGBs. It also means that as Kyle Bass has long been warning, the amount of Japanese tax revenues needed to fund interest will explode to nearly half of all. Although when the central bank directly monetizes the deficit, all sound math and logic becomes moot.

All that, and many other reasons why QE of the type implements in the US are impossible, have been explained extensively in the past on these pages.

However, the best argument why the type of Quantitative Easing imposed by Ben Bernanke, and the associated "necessary and sufficient" condition to exit this greatest of all monetary experiments, or eventually allow Ben and Kuroda to taper QE, i.e., the "great rotation" from government bonds into stocks (because otherwise both the Fed and the BOJ will be stuck monetizing and monetizing and monetizing until one day, soon, they own all government bonds), will never work in Japan is a simple one. And quite visual.

The chart below is a comparative study of the US and Japanese government bond markets: it assumes tota US government and Japanese debt of $16.7 trillion and $11.5 trillion, respectively, are indexed 1:1.

What is shown, and is far more important, is the relative size of the associated stock market, nearly $20 trillion for the US, but just a tiny $3.3 trillion in Japan.

And here lies the rub. Because while for the US the relative party of the bond and equity markets (delta of under 20%), the largest in the world, allows Bernanke to experiment with major moves in and out of the bond and stock market without major impacts to either class, in Japan the ratio of the bond to the stock market is a whopping $11.5 to $3.3 or a tiny 0.29x

Now, we won't get into the details of what happens when one tries to funnel liquid (because it literally is "flow") from a massive container into a tiny one, and the volatility that results on the margin as more and more contents from massive bucket A are transferred into tiny bucket B, but we don't think it is necessary. It is sufficiently intuitive.

The bottom line is that what may have worked for Bernanke up until now, will absolutely not work for Abe and Kuroda, who literally try to herd massive cats into a tiny trap, and where the bond and stock markets are literally worlds apart.

Of course, if Abenomics entire purpose is to destabilize global markets on the margin, create unprecedented stock and bond volatility, and ultimately crush faith in the Yen first, and then all other fiat, then he most certainly is on the right path.

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Thomas's picture

Here's Mauldin on same topic. With each passing year I become less convinced that anybody has a clue what the hell makes economies tick. They somehow think it is all pumped by money instead of such things as property rights, restricted government waste, equal access to the law (not necessarily equal outcome):


LetThemEatRand's picture

I think the guys with the $$ know.  The whole reason to be King/Queen is that you get to make the rules that everyone else (but you) must follow.  As Mel Brooks said, it's good to be the King.

Groundhog Day's picture

Ben is gonna be busy next week saving Japan. ...it must be hard saving the planet every few months.  Lets just hope he doesn't run into kryptonite

MiltonFriedmansNightmare's picture

Let's hope he does(run into kryptonite).

flacon's picture

Let's hope he (Bernanke) runs into a long vein of silver ore and it burns him like pouring acid in the eyes. 

sunaJ's picture

The chart is a great visual representation of the quantitative problem with QE.  Since we are keenly interested in the unintended consequences, we must also look at the qualitative.  As the currency is destroyed, it is destroyed much more homogenously than it is "created."  So fixed-income suffers orders of magnitude worse as the margins cannot handle the value destruction.  The new money coming in (and contributing to the homogenous destruction of the currency), is distributed in a heterogenous manner, meaning that it benefits those at the top even as general destruction of the currency is taking place, creating an accelerating disparity between the Haves and Have-nots, real-world manifestations of the difference between reality and fiality.  So, when this does implode, the social pump is already primed for explosion. 

piceridu's picture

“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it."


- Frederic Bastiat

Double.Eagle.Gold's picture

Thanks for the enlightening quote. I did a little reading on Bastiat, impressive life contribution.


dunce's picture

This is a good description of islam. Mohamed robbed caravans to fund his life style. Jizya is no more than organized theft under the color of law.

disabledvet's picture

"he who hesitates is lost." i remember quoting that vis a vis Chancellor Merkel and Greece. "policy went dark" right at the moment when action was required. and so it is here seems to me. "we're going wobbly." when dealing with something at the level of State policy...that says to me there aren't many people who have signed off of on this thing. "there's no consensus" or "we're out on a limb here." QE is an instrument of STATE policy. by definition it is political and once implemented no longer has anything to do with the economy but "workability" from within the context of other policy choices. well...i toss it out to the rest of the ZH community...if this thing "implodes Japan" does the USA then double down on QE? Or end it? hell..."what say all of you Wall Street?" haven't heard a FRIGGIN' WORD from them either! anywho...just some idle thoughts on something that has yet to pass. "must not be a big deal after all."

kliguy38's picture

QE is NOT primarily for the "state"......it benefits primarily the banks and the cabal that controls the Central Banks....this is the "tip" of the "tip" of the pyramid and it is but a handful of nameless trillionaires.....you are only an insignificant pawn or cannon fodder in their eyes.......the "state" is NOTHING to them but a means to an end and QE is purely a means to keep their system afloat.....The "state" will DO and perform as instructed.......

WonderDawg's picture

They aren't nameless, their names are available as public information if you dig a little. I'll throw out a few: Rothschild, Rockefeller, Morgan, Lehman, Loeb, Warburg... This isn't speculation, here's the org chart:


drdolittle's picture

That chart is confusing but looking at the shareholders of the bank shows it. Jeez.

dunce's picture

Investors have fairly good memories of who led them astray when they lose money, when they make money they credit their own genius. Wall street guys make a living being right and earning trust. They do not want to go on record as having anything to do with this folly. Guys like Peter Schiff are ridiculed in the financial press even though he called the housing bust while most of the so called gurus were  being lemmings.

SafelyGraze's picture

market cap = schrodinger's cat

hft and low volume --> any value you want



U4 eee aaa's picture

There are really only two things that make for healthy economies

Incentive and deterrence

Mess up either and everything goes bad

Kirk2NCC1701's picture

@ Thomas "With each passing year I become less convinced that anybody has a clue what the hell makes economies tick..."

"If you can not proceed on reliable information or trust, then you must proceed on Principle."  

No matter what chatter, noise or fanfare the Bull or Bear Circuses emit.  Hedge & plan accordingly. 

I hedge on the immutable reality that the world will keep spinning, the sun will keep shining, and that >7 Billion people and counting will need the essentials of life.  You can't manipulate that.  Hedge & plan accordingly. 

dunce's picture

You just put your finger on the reason for obama's serial failures, he does not have a principled bone in his body, trusts no one, and is ignorant of almost every thing. It is our sad state that his failures are something we must cope with.

El Oregonian's picture

It only gets BITTER from here...

hairball48's picture

Blah blah blah...I don't give a shit. I'm continuing to buy PMs, ammo, food and toilet paper :)

Deo vindice's picture

I don't think many of the most ardent 'preppers' have a clue of just how bad a total economic, societal and moral meltdown can be. And make no mistake about it, all three are connected.

greatbeard's picture

>> I don't think many of the most ardent 'preppers' have a clue

I'd don't know about the ardent ones, but certainly the vast majority of the prepper groupies, which make up the bulk of those you hear from don't.  It's always the same old blab about guns and ammo, never medical supplies or sustainable food supplies.  Apparently these folks fantasizing about a collapse are under the impression lead only flies in one direction, or that their cape will keep them safe.   A dozen rounds would be enough ammo to keep most of these folks fully loaded unitl they themselves catch a round. 

I've got more than enough ammo, and it ain't much.  What I have done is sharpen my garden and preserving skills. 

DaddyO's picture

>>>I don't think many of the most ardent 'preppers' have a clue

I call them resupply points, the vast majority of those who call themselves preppers think if you have a few 5 gallon pails of freeze dried meals stashed you're good to go!

I think returning to a more self sufficient, self sustaining lifestyle is far more insulating than just putting back a little lead or TP.

As far as protecting one's "stuff", I subscribe to the I'll "abandon" my 'stead and let you in, but the only way you get out is in a body bag!


dunce's picture

Some of the preppers have some stores to last until they can harvest their first crop at least.

Peconic Bay's picture

So, if holders of JGBs are confronted with the decision to sell due to inflationary pressures, the question will be: To whom?

Thisson's picture

The same entities that were purchasing Greek sovereign bonds because they were steeply discounted.  You know, smart folks like Corzine.

OpenThePodBayDoorHAL's picture

It's always a question of price. If I were Japan Post I might step in and buy JBGs at, say, 4% yield. LOL.

Buckaroo Banzai's picture

Before 1913, the global economy just WORKED. It didn't require anyone to "understand" it.


"Daily Bell: Are banks necessary in a free-market environment?

Antal Fekete: That's just it, they aren't. In the original model of Adam Smith the existence of commercial banks is not postulated. Real bills circulate hand-to-hand as cash through endorsement, while the discount is calculated and taken out of the proceed. Commercial banks cropped up because of the convenience of bank notes denominated in round figures as compared with the face value of real bills in odd figures. Moreover, bank notes eliminate the nuisance of endorsing and the calculation of discount. For this convenience clients are willing to forgo the discount due to them. In my interminable debates with the American Austrians I have failed to convince my opponents that if they want to knock real bills, they must not refer to bank fraud because real bills do indeed circulate in the complete absence of banks."


OpenThePodBayDoorHAL's picture

As one commentator reminds us: "In 1900 an English gentleman could travel anywhere in the world with no documents or ID at all. He could move his money wherever he wanted at any time, with no controls. He could invest anywhere in the world with no restrictions. He paid no income tax to any government anywhere in the world."

And the world ran pretty well. Reminds us that Ron Paul is deeply and convincingly right.

The threat to everyone everywhere is the creeping metastasis of the State. Now we arrive at a point where the State owns more and more of the world's economic activity. It's a grotesque form of hyper-communism, but the distribution of spoils is concentrated among the very few.

Reminds me of friends of mine who lived in Hong Kong in the 1980s. There were plenty of generals from the Red Chinese army who showed up and simply said "um oh I have a bililon dollars I need to invest". Say, what, Comrade?

dark pools of soros's picture

wow you mean like using bitcoins today?

New World Chaos's picture

Bitcoin has been creeping up again ever since the Nikkei crash.  Wait till you see what it does when Japan has a bank holiday + bail in + capital controls.  Japan is 100x bigger than Cyprus.

Size of the silver market on this graph = smaller than a pencil eraser.

Size of the bitcoin market = sub-pixel.

OpenThePodBayDoorHAL's picture

I'm very bullish on BTC and just got back from the BTC Global Conference in Silicon Valley. Just 25 created every 10 minutes, with millions in Silicon Valley money going to make the user experience easier & better, including Google Ventures. Technology adoption curve just starting the hockey stick. I just bought something online by aiming my smartphone at a QR code on the screen: zero fees to banks, merchant got paid immediately with no exchange rate risk.

BTC is the friggin' red pill. Buy.

GVB's picture

Thanks for the link. I've read this article some time ago. And it's good to bring it back into the picture. Also the comments at the very bottom of the page are very interesting.

I very much agree with prof. Fekete. What if the manipulation of gold and silver indeed was orchestrated by bullion banks (under FED supervision), then it was only done as an act of fear with no other intention than to safeguard the status of the dollar as a world reserve currency. Also think about this, QE (debt monetization) has raised questions with people. More and more people are starting to realize that the act of creating money out of thin air is - ethically - wrong. They just don't get it. They have to work for it, but someone else can create it out of thin air? Not if, but WHEN more people start to realize this, than - indeed - price of gold will be not of any importance anymore. You just own it our you don't. I think this could explain why Bernanke was very nervous when testifying for congress. These are smart guys. He's not stupid, he get's the total picture. 

Daily Bell: Where is the price of gold headed from here?

Antal Fekete: The price of gold is headed for extinction. I for one don't believe that the price of gold is headed for five digits. Long before that might happen, permanent backwardation* would shut down the gold futures markets. Gold could no longer be purchased at any price. Gold would only be available through barter. World trade is facing an avalanche-like transformation flattening out monetary economy into barter economy. Practically all economists, financial writers and market analysts have missed this possible scenario. They don't see the greatest economic contraction ever staring them in the face. They don't see the coming tsunami of unemployment. Very few see deflation as indicated by the progressive disappearance of cash gold. It never occurred to Bernanke that the new Federal Reserve notes he is printing galore could also go to purchase physical gold, causing the gold basis to shrink. Once the gold basis* goes permanently negative, the total U.S. debt, all $16 trillion of it, will not be worth one ounce of gold. That will pull the rug from underneath the international monetary system. Barter is the ultimate in deflation, and that is what the world economy is getting.

Temporalist's picture

Found this interesting:

Brazil 'to write off' almost $900m of African debt

"Brazil has announced that it will cancel or restructure almost $900m (£600m) worth of debt with Africa.

Oil- and gas-rich Congo-Brazzaville, Tanzania and Zambia are among the 12 African countries to benefit.

The move is seen as an effort to boost economic ties between the world's seventh largest economy and the African continent.

Official data in Brazil show that its trade with Africa has increased fivefold in the past decade."


i-dog's picture

Oops...There goes $100 billion of 'liquidity'. Only a few $100 trillion to go.......

smacker's picture


Brazil's President Dilma Rousseff - as a socialist with unspoken past links to communism - is quite generous with other peoples' money. She also recently offered several hundred $million to upgrade Cuba's airports. Since Brazil's own infrastructure is appalling, we can see why.

dunce's picture

I have to wonder where the corrupt political leaders in those countries put their  10% of all that money, in Brazilian banks or cayman island accounts. The countries have little or nothing to show for all that money.

The Invisible Foot's picture

You forgot the box that has infinity=stock market explosion in market cap.

koaj's picture

so once the fed owns all the government debt, we can just cancel it right?

NoDebt's picture

That appears to be the plan.  30% and rising fast.

espirit's picture

Cancel the Fed?

I'm all for it...

orez65's picture

"...so once the fed owns all the government debt, we can just cancel it right?"

If you cancel the "government debt" then the Federal Reserve Notes that are backed by that debt become worthless.

In the bizarro world of fiat money debt (of taxpayers) is the collateral of fiat money.

espirit's picture

It can't be quantified if it can't be tested.  Any said tests performed of late have been ~ epic fail ~ , but the scorers are on the take so pretty much the released data is just Matrix Metrics.


NoDebt's picture

10 gallons of shit into a 5 gallon hat.  Good luck with that.

What I really wonder about is the stuff they're NOT telling us.  Yes, I know it's very fashionable for central banks to speak of being "open" about the policies they are undertaking so that nobody gets spooked (and so everyone can front-run them), but as we know "when stuff gets serious you have to lie."  Looks pretty serious in Japan right now.  Wonder what they're lying about or hiding right now.


WTFUD's picture

"wonder what they're lying about or hiding right now"
Excellent point NoDebt.
In the case of japan their property market sucks like spains.
Their leadership in electronics /industry has taken a huge hit with redundant product ( SK/China etc plus remember the creative a/c at Olympus and sacking of british ceo plus 20% economy relies on china and relations kaput).
Ssunami power nuclear industry semi kaput so huge energy imports
Eco system fallout all that tuna /landetc is radiated
The population is aging and stillborn sick newborns
The economy is approx 70% service industry ( employment prospects must be slim ).

Ben B / EU gave them this free pass to devalue as they are heavily invested. So with regards to what we don't know sirely things cant be much worse Or Maybe!

Seeking Aphids's picture

A huge write-down of global debt seems inevitable if the world does not want to implode economically.........how else can the problem be dealt with? Inflation, if they can get it up (sounds like an erection problem and I guess it is....), is not going to solve the problem it is just going to lessen it slightly while creating other issues (demands for increased wages will reduce profits and hurt markets, etc.). It may be Japan that defaults first..........that may be their end game........they must have one, right?..........

espirit's picture

Debt swaps are nothing new, it's just that EVERYBODY has to play the game of "pass the hot potato"...

...because nobody wants to be left holding.

Xue's picture

Japanese's stock market will be the best performer this decade, but your entire portfolio will buy you 3 sushi.

ArmyofOne's picture

My trillion dollar Zimbabwe dollar bought me some chicken bones.  That and some spit and I'm a fortune teller.  Hey, we are all going to need some kind of occupation when chasing 100x PE dividend stocks is over.