Under the stewardship of Shinzo Abe, the nation of Japan has become a
global leader in debt, currency devaluation and inflation. Unfortunately for
the Japanese, Abenomics is also leading Japan into a hyperinflationary
depression, as the first of his three arrows has shot right through the yen
and put a gaping hole in the wallets of every Japanese citizen.
The Bank of Japan (BOJ) has placed all its chips on the bet that inflation
will cure all the nation's economic problems. Making deflation public enemy
number one is rather convenient when your country's public debt to GDP is the
highest in the world. In order to end deflation, the central bank has
purchased 70% of all newly-issued Japanese Government Bonds. All this money
printing is intended to get prices rising, and it has been very successful.
Japan's consumer prices rose 3.1 percent in August from a year earlier.
Prices for fuel, light and water rose 6.4 percent on the year. But as real
wages continue to fall, the bull's eye appears to be directed on destroying
the Japanese middle class.
In the nonsensical world of Abenomics--where inflation is viewed to be the
progenitor of growth--the 3.1% CPI reading is deemed to be insufficient. This
is because the core rate of 1.1 percent was far shy of the 2% read they are
aiming for. So, as expected, there are calls coming from the lobotomized
economic experts in Japan for yet more money printing from the BOJ.
Japan's "experiment" with Abenomics would be much more
interesting if we didn't already know how it all ends. This so called
experiment of massive debt monetization has already been tried in countries
such as Weimar Germany and, more recently, in Zimbabwe; with disastrous
results. The misguided policy of using inflation to create growth is
predictably causing asset bubbles in JGBs and stocks. The BOJ is tirelessly
printing money to monetize nearly all of the Japanese government's enormous
debt load and also to buy stocks. This has ballooned its equity portfolio
alone to be an estimated 7 trillion yen ($63.6 billion). However, all this
has done nothing to boost real GDP, balance trade or boost real wages. In
fact, Industrial production shrank 1.5 percent month-on-month in August and
spending among Japanese households fell a steeper-than-expected 4.7 percent.
The Japanese economy has reached the point of no return. The BOJ will
continue to print yen until the citizens of Japan, unable to take any more
pain from intractable inflation, insist on a change of course. The real
solution for Japan will be to explicitly default on its monstrous debt.
The major beneficiary of Abenomics has been the value of the U.S. dollar.
But this will not be the case for very much longer. There currently appears
to be a trenchant divergence between the monetary policies of the BOJ, and
that of the Fed. The market has become convinced that the Fed will soon be
raising interest rates, while the BOJ continues to reckless print money. This
has caused a large increase in the value of dollar vis-à-vis the Yen.
The dollar is going higher because of the misperception that the U.S.
economy is strengthening. Markets are also convinced that the Fed will have a
graceful exit from QE and a smooth transition to interest rate mean
reversion. But this could not be further from the truth. The US economy is
still highly susceptible to even slight interest rate hikes. This is why Q1
GDP was a negative 2.1 percent. The 10-year note went from 1.6% in May, to 3%
by the end of 2013. Keynesians blamed snow for the negative first quarter,
but the truth is that our over-indebted economy falls apart once debt service
costs increase -- even from such low levels.
As the Fed exits QE and prepares the market for rate hikes, we see the
Case-Shiller home price index fell 0.5% in July, the biggest drop since
November 2011 and the third month in a row of such declines. The Russell 2000
is down 12% from its March highs, and half of the NASDAQ is in a bear market.
Commodity prices are crumbling as the economic data is weakens. Pending home
sales, the ISM Manufacturing Index, Construction Spending and Factory Orders
all recently came in worse than expected.
QE's purpose was to boost real estate, equity and bond prices. After six
years of successfully re-inflating assets, the Fed has duped itself and the
markets into believing it can exit monetary manipulations with impunity.
Therefore, get ready for the resumption of plummeting asset prices like we
experienced in 2008.
But remember, central banks' number one fear is deflation. The Fed under
Chairperson Janet Yellen is certainly not the exception, and she will do
whatever is necessary to curtail the dollar's strength. This is why the Fed
will not be aggressively hiking rates in 2015; and could even start another
round of QE in the near future.
Much like the BOJ, our central bank firmly believes that inflation can
somehow lead to prosperity. After asset bubbles crumble and the Fed
re-engages, the true anemic state of the dollar will be revealed.
Most importantly, it is crucial to understand that the intrinsic value of
the dollar is not rising. Real interest rates in the United States are still
very much negative and the money supply is growing far faster than real GDP.
Therefore, the dollar is only rising if measured against those countries
whose central banks are actively trying to depreciate their currencies. And
the U.S. Fed is about to rejoin in that effort.
Japanese citizens -- if they have any discretionary investment income left
-- should be aggressively selling their paper money and buying gold. And it
won't be long before all holders of fiat currencies are forced to do the
same.
