Friday, October 29, 2010

Japan Outlines Plans for Newest QE, Including Purchases of Corporate Bonds and ETFs; Moves Up Next BOJ Meeting to Combat Helicopter Ben

We continue to see some amazing things out of the developed world's central bankers in the global 'race to the bottom'.  Early in the month Japan's central bank (BOJ) announces a sweeping new QE - not so much in size, but in terms of what they would buy.  Details were made clear in the past 36 hours and it's quite astounding... they are trying to out 'banana republic' Bernanke.   But if the U.S. continues down it's current path, just as we have followed Japan down the path of QE, I expect the central bank to begin buying many of the same sort of things.  Indeed, one might argue it is already happening - the Fed just uses the primary dealers as the middle man and to keep their hands "clean".

[Please note, a few astute commentators - and indeed a few of our own commentators - believe QE2 is laying the groundwork for the next backdoor bailout, that is buying MBS and CMBS from the banks during the next leg of 'don't call it a recession' & 'housing recovery'.]

The latest Japanese QE (I have no idea which version they are on, as it's been going on for a decade) is $61B USD; a 'modest' sum (as we've become numb to large numbers) in a $5T economy.  To put into perspective this would be equivalent to QE of $150B in US economy terms.  We should get $150B in a month and a half of QE2.  But it's not how much that is astounding, but "what".

Via AP:

  • ....the Bank of Japan left interest rates untouched and offered new details of a $61 billion asset purchase program intended to spur lending to companies. 
  • The BOJ's governor, Gov. Masaaki Shirakawa announced a "comprehensive monetary easing policy" on Oct. 5 that consisted of the rate cut and a pledge to maintain the zero rate policy until prices start rising again. It also included the creation of a temporary 5 trillion yen ($61 billion) fund to purchase financial assets such as government securities, commercial paper and corporate bonds in an attempt to stimulate the economy by lowering longer-term interest rates and risk premiums. 
  • The Bank of Japan outlined details of the program Thursday. It will buy up to 3.5 trillion yen of Japanese government bonds and treasury discount bills. The rest will be used for commercial paper, corporate bonds, exchange-traded funds and Japan real estate investment trusts.

So there you go - rather than transferring money into the primary dealers and letting them do 'what they see fit' with the liquidity (wink wink) as in the U.S. - Japan is removing the middle man and going full Argentina.  One should pause here and think how remarkable of a point we have reached.


Almost as fascinating is the change in the next meeting date to immediately after Ben launches QE2 onto the world.
  • The central bank also moved up its next meeting from Nov. 15-16 to Nov. 4-5, a couple days after a Federal Reserve meeting
  • "The change of the policy meeting schedule clearly indicates the (central bank) may react promptly once the Fed's decision has a significant impact on the markets, especially on accelerating the yen's appreciation," said Junko Nishioka, chief economist at RBS Securities Japan, in a note to clients.
As readers know, Japan intervened in the currency market for the first time in 6 years in the past month - it has done little to stop the relentless rise in the yen.  Japan is an export dependent economy, much like Germany.  The rise in yen is crippling any recovery as exports become uncompetitive.  

The world has 3 major currencies - yen, dollars, and euros.  The fact the US dollar is the most weak amongst these 3 losers says a lot about the state of the United States and Bernanke's reckless nature.  On one hand we have a region full of countries which require an IMF backstop and a central bank buying sovereign debt (Europe).  On the other hand, we have a country that has effectively been in a 2 decade recession/depression and has "QE'd" itself to "prosperity" for a decade.  (Japan). And the currency of the U.S. is seen as worse than the other 2?  Nice!

In truth it means to me, the world views Bernanke as the most hell bent on using the world as an experiment for his infamous "helicopter drop" paper of 2002.  Or, depending on your view, they view this man as the most reckless of the group.  Either way, it is amazing that Japan feels it will need to respond immediately to the hell Bernanke unleashes - watch these currency markets, they will be fascinating.  

As you pull back from staring at the trees and looking at the forest you should be able to make out where this is all heading and why many smart people are wedded to gold as a 'store of value'.  To compete with the U.S.'s constant devaluations, Japan needs to go bigger and bigger.  They will be desperate to weaken the yen.  Then the U.S. will need to respond.  At some point the ECB needs to respond if the euro begins to ramp substantially further.  Which will mean Japan needs to print.  Which means.... 

Well you get the picture... somehow every country thinks it is going to export its way out of this mess, in a zero sum game.   Simply hard to be bearish on gold long term in this environment of mad scientists.  What might be truly scary is what happens if the major developed markets ex-Germany actually HAVE a recovery.... if the velocity of money in USA, Japan, UK et al begins to pick up, the inflationary aspects are going to be astounding as we know central banks are always late at response.  I don't expect this type of recovery, but frankly I don't know what to fear more, nowadays.

Anyhow, back to drinking Kool Aid, attaching myself to the matrix, repeating dogmatic nonsense, and buying stocks in mindless manner ... not thinking is so much less taxing mentally.  Ahhh....there we go: "QE will save us all."

Long Powershares US Dollar Bullish (and sweating) in fund; no personal position

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