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The Bank of Japan failed to announce any new policy initiatives today. The
reasons are financial and political.
From a financial perspective, the Bank of Japan is well aware that its
current tools cannot and will not generate sustained GDP growth. Bank of
Japan head Haruhiko Kuroda implicitly admitted back in January that
regardless of what he does, Japan has “potential growth rate of 0.5% or
lower.”
That is a HECK of an admission by a Senior Level Central Banker.
Politically, the BoJ’s other primary tool (interest rates) is also a dead
end. Japan’s foray into NIRP has proven to be a disaster from a political
perspective with a significant media and political backlash. This combined
with the fact that Japan’s first round of NIRP resulted in the Yen exploding
higher (exactly the opposite of what the BoJ wanted) left the BoJ with little
of note.
So the BoJ did what all Central Bankers do in these circumstances and
promised it would do more if needed.
Which brings us to the Fed.
The Fed will announce today at 2PM whether or not it will hike interest
rates. In the Big Picture, what the Fed does or doesn’t announce really doesn’t
matter. The markets have already adjusted as though the Fed was hiking
rates with bonds selling off and the US Dollar rallying sharply.
Indeed, few noticed, but the US Dollar just staged its second BIGGEST
single day rally of the year on Friday. The only other day in which the $USD
rallied more was on BREXIT when the entire global currency system came
unhinged.
This kind of move is a clear signal that something MAJOR is underway
“behind the scenes” in the financial system. My belief is that the “something”
is a European Banking Crisis. Multiple major EU banks hit new record lows
yesterday.
The EU Banking System is three times the size of the US’s and
leveraged at 26 to 1 (Lehman was leveraged at 30 to 1 when it imploded). THIS
is the big issue for the market today. Focusing on what the Fed does is like
focusing on the sink while your home is ablaze.
We believe the global markets are on the verge of another Crisis.
2008 was Round 1. This next round, Round 2, will be even worse.
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