The Greatest Financial Experiment Ever

This article is a follow up to emails I received after my segment on CNBC’s Squawk Box last week regarding the unexpected news from Japan. Here is the link. Japan in Recession… Who Cares

Japan has been in the news of late with the unexpectedly poor economic report indicating their economy has fallen back into recession. As I discussed last week on CNBC as well as Yahoo Finance, it really doesn’t matter at this stage. Japan has embarked on the greatest financial experiment of all time and they will just forge ahead with more and more quantitative easing or QE. In layman’s terms, that means the Bank of Japan is printing money to buy assets.

This tactic is not new there nor is it here, but Abenomics as it is referred to after their Prime Minister, Shinzo Abe, takes what our Fed has done and puts it on steroids, to a factor of 10. Abe is committed to printing and printing and then printing some more. And when that’s done, guess what? They will buy more ink and print again.

The Japanese are going to print money until either their economy awakens from its multi-decade slumber or the bond vigilantes push back and force interest rates higher. That’s going to be a big problem for the vigilantes because the Bank of Japan has essentially become the entire government bond market in Japan. It’s often said tongue in cheek, but never fight with the guy who owns his own currency printing press.

The end result in Japan, which is years away, will be fascinating. In a country that does not want or really allow immigration, demographics are so upside down that the youth cannot support the aging population. It has been the most widely predicted and anticipated disaster for decades, but now the rubber is meeting the road, hence the massive QE or money printing.

So far, the biggest mistake the Japanese made was to raise the consumption tax from 5% to 8% in hopes of raising money to combat sharply lower tax receipts. That’s always a tactic that makes me go “hmmmm” with incredulity. Although I am never really in favor of raising taxes, there is a time to do it and a time to certainly not do it. It’s pretty clear that governments should not raise taxes or balance budgets during challenging economic times. That’s when stimulus is needed most. The Abe government shot itself in the foot by allowing political opposition to win the tax increase. They printed money on the one hand and took it away with the other. That’s just plain stupid in my opinion.

News this week out of Japan that phase two of the consumption tax increase has been shelved with the poor economic report. No kidding?!?!

Japan’s economy is in an untenable position. Unless they open their borders or remilitarize, both very unlikely, their hopes to end 25 years of economic malaise rests solely in Abenomics and massive amounts of money printing. The world is watching; history is being made; and economic textbooks will be written on the outcome.

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One Door Closes Another Opens

On Wednesday, to no one’s surprise, Janet Yellen & Co. ended the Fed’s 5+ year experiment of purchasing assets in the treasury and mortgage backed securities market, also known as quantitative easing (QE) or money printing. I won’t rehash all of the reasons why I continue to believe this is a misguided strategy, but it is.

Before the ink was even dry on the statement, the Bank of Japan completely caught the markets off guard last night with another ramp up of their own QE, buying more bonds, extending maturities and really ramping up their purchase of stocks using ETFs and REITs. I have said this since Abenomics (Japan’s version of our QE but on steroids) was launched in Japan, this will go down as the greatest financial experiment in history. Japan is going to print until the world runs out of ink!

And the European Central Bank (ECB) isn’t far behind.

Many are left to wonder what our markets and economy are left with in a post QE America. In a vacuum, the end of QE is headwind, however, with Japan going on even more steroids and the Europe about to begin QE, I don’t view it as a negative just yet. That time will come down the road.

For now, my thesis remains the same. Markets gave us a golden opportunity to buy a few weeks ago and I hope people took advantage of that. It was easy in real time and I wrote about the bottoming forming as it took place. The bull market is old, wrinkly,  but still very much alive. Rallies should get more selective from hereon and it will be interesting to see where leadership comes from.

Markets really need to see the high yield sector step up and rally! Odds favor it will.

Happy Halloween! One of my favorite holidays. Can’t wait to take the kids out tonight and then come home for some adult beverages.

Enjoy the weekend and be safe…

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