The red sun on the flag of Japan symbolizes its position as the land of
the rising sun. However, during WWII that round shape was pejoratively
referred to as a zero. And now, since Japans economy is emitting so many
zeros it can, unfortunately, once again be referred to as the land of zeros.
Prime Minister Shinzo Abe's economic plan known as Abenomics consists of
three arrows. The 1st Arrow is aggressive money printing known as QQE in
order to bring about yen depreciation. The 2nd arrow is massive deficit
spending. And the 3rd arrow is structural reform, which is political claptrap
for feckless growth proposals like increasing workforce diversity.
Therefore, the core strategy of Abenomics is to derive growth by increased
government spending and flooding the world with the yen. If Abenomics were
only about yen depreciation it would be considered a huge success. The yen
lost 35% of its value between 2012-2015. Likewise, if the goal were to run
huge deficits Abenomics has also achieved its goal. Since December of 2012
fiscal deficits have ranged between 6-8% of GDP.
What did the Japanese citizens get for losing 35% of their purchasing
power? A ten year note that has hovered around 0% for most of this year.
Inflation that has been stuck around zero percent and growth that has been
virtually zero for years. But most importantly, in an example of how addicted
asset prices have become to Japan's perpetually increasing stimulus, The fact
that BOJ president Kuroda didn't expand on his 80 trillion yen annual bond
buying spree caused the Nicki Dow to drop over 1100 points in the 2 trading
days following his announcement.
Japan isn't the only nation with a zero economy.
The Fed printed 3.7 trillion dollars since 2008 and has artificially
pushed short-term rates near zero percent for almost 90 months. Yet, all we
have to show for this massive intervention in markets is 0.5% annualized GDP
growth in Q1. And Q2 doesn't look any better. The usual Wall Street
predictions of a Q2 rebound don't look all that promising as the Philly Fed
(-1.6), ISM Manufacturing (50.8), Productivity (down 4 of the last 6
quarters) and ADP employment data (156k) all disappointed the Street and pointed
to an economy that is merely bouncing around that anemic 0% level. The weak
US economy has caused the Dollar Index to fall below 94; a place where it has
found support 6 times in the past year.
The weak data in Japan, China, Europe, the United States and the rest of
the world should be clear evidence that interest rate manipulation and money
printing cannot produce viable growth. Therefore, the big surprise for dollar
bulls still lies ahead. While short-term rates are near 0% across the globe,
the U.S. is the only nation in the developed world that has been able to
produce core inflation of 2.2%. Therefore, real interest rates in the United
States are the most negative among all our major trading partners and the
level of real interest rates is the primary driver of currency values.
That key 94 support level on the DXY was recently breached and there is no
real support until it retreats back to 80 from where it first bounced in July
2014. The main point is while there are no central bankers in the world that
are anxious to raise nominal interest rates, the US is the only nation that
has been able to achieve CPI above the new 2% goal universally adopted by
Keynesian central bankers.
We have a condition of stagflation here in the US. This is occurring in
the context of a record $45.2 trillion total non-financial debt, which is
growing at an incredible 3.44 times GDP. This is the truth as to why the Fed
cannot normalize rates. If it did bring the Fed Funds rate back towards the
pre-Great Recession level of around 5%, asset bubbles would collapse along
with the tax base of the economy. This would make that already unsustainable
ratio of debt to GDP growth explode even higher. You and your portfolio
should be on high alert, the market chaos has just begun.
