Bank of Japan

It’s a big mistake. Maybe some might say that the Fed altogether is a mistake itself. But, it’s made some big, ugly mistakes that don’t bare thinking about and yet there’s no understanding why they took those decisions.

"Without realistic figures, a real debate on fiscal reform can’t begin”

The Fed and other central banks have accomplished a huge feat: a worldwide tsunami of hot money. Which is now receding.

This isn’t just any trendline. This is THE trendline. Take it out and the 10 year will likely be yielding 5-6% in no time… which by the way is where it was for most of the ‘90s and very early ‘00s.

So let's pretend for the moment that the Federal Reserve gets everything it has stated it wants.  And even further: that Washington, D.C. gets everything it wants, too. The credit markets are repaired, and massive new loan growth flows out the door.  Loans are made to businesses that hire gobs of new people.  Consumers borrow and borrow some more to go to school and buy homes, cars, and gadgets. Inflation remains low and job growth explodes.  Tax receipts climb and the deficit falls.  The stock market goes higher and higher, gold falls and then falls some more, as confidence in the system, its masters, and its institutions grows. The Fed wins and D.C. wins. But in reality, we all lose. It's all just a matter of timing (and un-sustainability).

After 2000 years, why do we not know which economic theory is correct: Keynesian, Marxism, or Hayek-Friedman? Surely, there is a demonstrably, statistically correct answer. It appears not. Then why do we have cargo-cult faiths (Keynesianism) instead of demonstrably correct models of economic behavior.

Traders and investors do not respond to sea changes instantly. The smart ones take note and begin adjusting their portfolios and hedging their bets. This doesn’t result in massive market moves as these investors are sophisticated enough to move out of old positions and into new ones without drawing too much attention

As the Fed gets ready to taper ‘QE’, UBS' Larry Hatheway warns investors to brace for a period of increased international policy tension. Previously harmonized - but not coordinated - monetary policy stances will give way to conflicting objectives and new strains as adverse ‘spillovers’ occur. As Hatheway notes, we are about to rediscover several inconvenient truths. First, the Fed is the US, not the world’s, central bank. Second, international policy coordination is desirable in an interdependent world but, third, it is no more likely to materialize now than in the past. The world, it seems, is destined for a less comfortable policy co-existence in the coming few years.

There is no doubting the massive reserves of fossil fuels still lying close to or just beneath the earth’s surface. One of the key points made in the first edition of Insight back in February is that we must factor in the cost of processing those fossil fuels before they can enter the energy market. The future of energy production is as much as about the economic cost of processing those supplies as it is about the extraction. 

With all eyes fixed on GDP and unemployment data this week (and all their revised and propagandized unreality) for more hints at if (not when) the Fed will Taper; the dismal reality that few seem willing to admit is that it is when (not if) and that the announcement of a "Taper" has nothing to do with the economy. There are three key factors driving this decision: Bernanke's bubble-blowing and bond-market-breaking legacy, the political 'clean slate' his successor needs, and, most importantly, the fear that QE will be discovered for what it is - monetization. As BoJ's Kuroda admitted last night "if QE is seen as financing debt, this could lead to rise in yields." With deficits falling, the Fed's real actions will be exposed (unless QE is tapered) and as Kyle Bass has explained before, it was out of the hands of the BOJ (or The Fed) and entirely up to market psychology.

At this point the Central Bank has one of two options: 1)   Monetize everything OR 2)   Let the bond market fall to where it deems rates are appropriate given the new default risk.

We take a new look at Japan from the 1980s to today in order to decipher what “Abenomics” might do to this fragile nation. We argue that moving Japan from its current stable, but unsustainable equilibrium, through activist monetary policy risk a run on the sovereign. We present part I and part II here today. We hope you enjoy it.

Over the past several decades, people around the world have become so brainwashed that few people really give much thought anymore to the safety of their currency. It’s not something people really understand... there’s apparently some Wizard of Oz type figure at the top of the hill pulling all the levers of the monetary system. And we just trust them to be good guys. This power rests primarily in the hands of four men who control roughly 75% of the entire world money supply. So, how are they doing?

“We welcome the ruling party’s victory,” said one of the faces of Japan Inc. Others chimed in. They’d been handed a huge gift.

CEOs have a primary job: manipulating up the stock of their company. But why they now wallowing worldwide in 2009-like gloom about the economy’s future?