Pre-market futures on a tear this morning, as the dollar index is rallying and gold is selling off. The Currency Devaluation War is heating up as the U.S. sits idle heading into the mid-term elections. We should expect the equity and bond market to rally, dollar rally, and disinflationary pressure as the BOJ and ECB continue to unload their broadsides.
The pre-market futures are roaring higher as we see the Japan’s index rally strongly after the Bank of Japan (BOJ) fired off a surprise volley of SUPER QE.
The Bank of Japan (BOJ) announced the latest broadside of QE.
Courtesy of wikipedia
Breakdown of their new QE broadside:
- Ramping up from the 50 trillion yen ($450 billion U.S.) cannons to the new 70 trillion yen ($715 billion U.S.) cannons.
- These new improved 70 trillion yen cannons now have a range of 7-10 year (bond duration).
- The BOJ will triple their purchases of Exchange Traded Funds (ETFs) from 1 trillion yen ($9 billion U.S.) to 3 trillion yen ($26 billion U.S)
The BOJ admiral of their flagship “Abeonomics” announced they will continue their barrage as long as necessary to push up and maintain 2% inflation levels, as well as asset prices.
Japan to hike taxes – again!
The massive broadside, including the amazing support of actually buying their own ETFs, will certainly drive equity markets higher. The massive accommodation increase is expected to be coupled with a second national tax hike, raising taxes from 8% to 10%. The new QE wealth effect is helping the government justify another tax hike.
What Japan is now doing seems like a desperate action, not only are they buying a full spectrum of bonds out to the 10 year to flatten the curve and sending short-term rates NEGATIVE, they are now directly buying their own financial markets to drive them higher.
Japan has completely lost sight of the free market and capitalism, this is full interventionism and one could even say Socializing/Nationalizing their stock and bond market. If you are an investor in Japan you HAVE to buy stocks – they are FORCING you to do so. Bonds pay nothing (perhaps negative) and the government is now buying their own stock market to drive it higher. If you were Japanese you might also want to start taking any free capital and getting it out of the Yen as fast as possible as they devalue their currency rapidly.
U.S. Market Reaction!
The Yen is tanking again against the dollar, helping shoot the dollar index up higher (over 87 in the pre-market).
Courtesy of Silexx
Let me be perfectly clear, the U.S. stock market and bond market massive rally this morning is not coming from earnings (which have been mixed with lower forward revenue guidance), not from economic data (GDP consumer and business was weaker, housing weaker, jobless claims up, weak consumer spending), and not from the FOMC statement (which some believe had a slightly hawkish tone). It is coming from a massive volley of Japanese money printing – of unprecedented scale. They are buying any and all assets (bonds and even stocks).
The European Central Bank (ECB) has announced they have loaded their own guns and speculation has been that they will fire their broadsides of QE in February. However, with this early surprise attack by Japan, we may see action sooner.
Keep in mind, from the last FOMC minutes and recent Fed members, they are very concerned about a stronger dollar and the impact it will have on exports and GDP growth. Yesterday’s GDP headline seems great, but when we look into the make-up we see consumer spending weaking down to 1.8%, which only added 1.2 points to the 3.5% GDP. The large boost to the headline GDP number came from a surge in government defense spending, the largest gain since 2009. If the dollar continues to strengthen, we will certainly see Yellen and the Fed ready to return fire with more QE (or something similar) because interest rates are already at zero – there is nowhere to go but negative rates.
Following Japan’s Footsteps
I have stated since the start of the crisis that our nation would follow in Japan’s footsteps.
I first predicted that rates would go back to the Greenspan lows after the Dot.com bubble of 1%. I was called a fool, yet here we are at zero interest rates for years.
I then predicted that in a 1% rate environment coupled with higher deficit spending that the Fed will have to somehow monetize bond purchases, again I was told to take off my tin-foil hat, yet here we are just wrapping up QE3 and over $2.5 trillion in bonds sitting on the Fed’s balance sheet.
I even predicted that QE2 was a mathematical inevitability after QE1, based on interest rates, bond purchase participation, and deficit spending – I even directly questioned in person one of the Fed governors, who reluctantly skirted the question by saying not if Congress lowers the deficit. Again I was told that more QE wouldn’t happen and that what I was predicting was absurd, yet here we are at the end of QE1, QE2, Operation Twist, and QE3 and now the Fed is just using their $2.4 trillion balance sheet (debt) as it comes due to repurchase more. The circle is now complete.
I am NOT trying to boast that I have some keen insight that no one else has, because I don’t. One only has to look across the Pacific and watch Japan – because Japan has already done everything and my only prediction has been that we would follow in their footsteps. Since 2009 we have been walking step-by-step in their foot-steps.
Japan took rates to zero, the U.S. took rates to zero. Japan started buying their bonds to support deficit spending and flatten the yield curve, the U.S. started buying bonds supporting the deficit and flattening the yield curve. Japan is now buying ETFs and supporting their financial market, will the U.S. eventually follow suite? My answer would be yes, not simply because they HAVE to follow Japan’s foot-steps or that they are – the answer has more to do with math, supply & demand, deficit, and debt.
No where to go when you get to zero!
Once a nation takes their interest rates to zero and flattens the curve, they can’t go any lower – they are floored. Perhaps they could take them negative, but that is really trusting in the hope that a nation can continue to sell the “faith” in their currency. So the only logical next move to devalue and inflate their way out is to print money and increase the money supply, as well as buy bonds. After a nation is at zero rates and now the largest purchaser of their national debt (buying bonds), the next move is to directly inflate asset prices – and buy the stock market directly. Japan just took that bold move – openly. Are we next?
Keeping the Faith
If you believe, like I do, that a majority of the asset value increase is artificially created by zero interest rates and massively expanding the monetary base, then in order to keep it a loft a nation that is already all-in on bonds with zero interest rates, needs to move directly into the assets (equities) to keep the balloon aloft. Japan announcing more bond purchases with already zero interest rates is not going to buoy their market, they needed to purchase stocks (ETFS) to keep it going. They did and look at the Japanese stock market and our own.
Goldman predicted 1150 in the spot gold price, gold will continue to fall as long as the dollar rallies. If one believes that the Fed will eventually be forced to launch their volley of QE or some other accommodation, anything to boost inflation and bring the dollar back down – then we could be heading into a great buying opportunity for Gold. We are getting close to Goldman’s price target in gold.
Courtesy of wikipedia
Also we must remember that many foreign nations have demanded their gold reserves, but the U.S. was unable to fore fill those demands because we had lent the gold. The Fed announced a 7 year redemption policy, so the Fed needs to purchase gold in order for them to make those physical deliverable demands. At some point gold will be very attractive for the Fed to fill their coffers. Is Goldman in the know?
Greenspan even recommended gold pruchasing yesterday, is he telling us we are getting to the bottom? For those that didn’t know Greenspan in 1966 wrote a paper defending the gold standard, ironic since he became Fed Chair after the nation dropped the gold standard to become a fiat currency. Greenspan’s paper: Gold Standard and Economic Freedom. Is he going back to his roots and telling us something he couldn’t tell us as the Fed chair?
I am not sure when the Fed will take action, but I am sure they will not sit idle as we see the dollar rally, exports decline, weaker manufacturing job growth, pressure from K-Street, and disinflation (deflation) with the CPI declining. Not to mention if we see any increase in deficit spending, how much will the current rolling of bonds by the Fed be enough? The Fed has a meeting in December and I don’t think they will take any action unless we get another surprise broadside from Japan or the ECB. They may ride out the dollar rally a little longer. Another factor is the ECB salvo, which now is expected in February – but that could move up based on the BOJs surprise attack. That leaves January as a possibility for Fed action.
The Fed will be monitoring the GDP, but the 4th quarter will not be known until after the 1st of next year. They are also watching the CPI, it will contract again – my guess is a 1.5% print at the next reading. They can take some pain now and wait until January before taking more accommodation.
The Hawk talk and hike in interest rates is absurd in my view. How can the Fed raise interest rates while the CPI is falling and the dollar is rallying. How can they raise rates as consumer spending and the core (non-government) GDP readings are weakening. Yellen said only a few short weeks ago, “here STILL is and the statement says it … SIGNIFICANT underutilization in labor resources and a very modest pace of wages which has picked up very little.” Then the FOMC statement changed to read “underutilization of labor resources is gradually diminishing” in spite of the weaker wage growth and higher jobless claims. The Fed has a plan, they always do, despite economic data.
Courtesy of the NY POST
First there are the mid-terms, we can’t dismiss the Fed’s role in the optics as they were all appointed by the current sitting president. To think they don’t is like thinking that Justice Kagan who was appointed by Obama would support a Pro-Life position. These people were selected because they have a similar ideology – as to be expected.
The second part of the plan is to help fill the coffers for the gold redemption, we can’t dismiss the reports of several countries requesting physical delivery and that our own Fed has pushed out redemption dates by 7 years. The reserve holdings have also been lent out, which is no secret as it operates on a fraction-reserve lending (much like the banking system). The Fed has to purchase to increase the reserves to make those deliverables, so gold prices should go lower – the strong dollar is seeing to that.
Lastly there is the optics that the Fed is objective, even though all the sitting governors appointed by the President are Keynesian Doves. They have to create the optics of hope that they will normalize, plan to, that their policies are working, that they can end this years long absurdity of zero rates and money printing. However, I think it is more window dressing that reality.
This is nothing more than a timing issue, boosting consumer optimism, voter optimism, boosting asset prices, and giving some room to deflate commodity prices so one can accumulate more quantity at a lower price. It not a conspiracy and it is not some random act – it is a smart and well developed plan that serves the people, the government, and the Fed. I have to give credit were credit is due, I may disagree with their policies – but they have orchestrated their current QE and ZIRP policy very well, not to mention creating a massive wealth effect (unfortunately it erodes the middle class that need capital, credit, and jobs the most).
Support & Resistance
The premarket futures are on a rocket ship and we could see 17,300, 17,400, who knows. Right now the BOJ just gave a green light to get long equities.
Rocket ship to 4150 which was my upside target this week. We could be setting up to go parabolic into the holidays/
The VIX should break below 15 and the SPX can hit 2020 or higher – if we can keep up the money printing momentum. Send a thank-you card to Japan!
We could see a gaping jump to 1200 if we continue to see huge monetary injections and government’s buying their own stock markets. Devaluation is the game right now and Japan just launched a massive volley.
Currency War (Devaluation) heating up…
Those that don’t believe we are smack in the middle of a Devaluation Currency War have not been paying attention to the western central bank’s actions and policies. They are all trying to boost exports, asset prices (bonds, stocks, housing, anything) – because they can’t take rates any lower. There is no nowhere to go.
This will be a great holiday season for the equity markets and bonds, but I am not sure that earnings are going to reflect that as we have already seen in the GDP consumer spending weaken and the Commerce Department this morning just confirmed that consumer spending declined .2% last month as demand for goods tumble and service spending is weak. Companies are warning and lowering projections.
The Fed is right, they should be concern with top-line revenue declines and more weakness to the GDP – you can’t keep growing strong as you get blasted by the BOJ and ECB as you sit there and allow your own currency to rally, disinflation take hold, and as the labor market continues to have structural problems.
What is the Fed to do ?