A Smart Money Bet Against the Central Banks

The smart money is using this dip to buy gold.

Why?

Because the world’s major stock markets…currencies…and economies all depend on reckless measures by central banks. In the short run, the central banks can make things appear safe and stable.

How?

By making lending money at ultra-low rates the norm. It’s hard for major players to go broke; they can just refinance.

But in the long run, those same policies can lead to instability, bubbles…and disaster.

Too bad, but you can’t buy prosperity. You can’t print prosperity. You can’t borrow prosperity. You can’t ZIRP, QE or OMF (‘overt monetary financing’, a phrase that is bound to become current soon) prosperity, either. Prosperity comes from hard work, saving and discipline.

That is, it comes from responsible policies, not reckless ones.

Paul Krugman says that economics is ‘not a morality play’. But he’s wrong. That’s exactly what it is.

And Japan is going to prove it first. Yes, it may be a good thing we congratulated ourselves when we did. If we’d waited a few days, our Trade of the Decade wouldn’t look so good.

The important news came from Japan. Bloomberg reports:

‘Japan’s Topix index tumbled almost 7%, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial firms slid amid rising bond yields. Nikkei 225 Stock Average futures traded in Osaka and Singapore fell in after-hours trade, signaling further declines.

‘Every company in the Nikkei 225 retreated for the first time since April 2005…

‘”Rising interest rates is the story today,” said Tomomi Yamashita, a fund manager who helps oversee the equivalent of $5 billion at Shinkin Asset Management Co. in Tokyo. “There’s also a lot of profit-taking going on. When volatility is high, investors want to take off risk.”’

As you know, Japan is always ahead of us. Its go-go economy peaked out in 1990.

The US dot-com boom peaked out 10 years later. Japan’s stock market hit a high in 1990. US stocks reached a high 10 years later (though prices hit nominal highs later). Japan resorted to bailouts…ZIRP and QE in the 1990s. The US began these experiments in the following decade.

And how about this?

Japan’s population has been falling for years. America’s women only recently began reproducing at below-replacement levels.

There are differences, to be sure. In the US, we read left to right, front to back. And we eat our meat well-done! But in important matters, the Japanese are always ahead of us. And now they’re being even more reckless than the Federal Reserve — increasing QE at a rate that we’ve never seen before. From Pragmatic Capitalism:

When a central bank commits to being “credibly irresponsible,” it’s not unusual for market participants to take it at its word. And the commitment to support equity prices gives traders a false sense of confidence that can then lead to a sort of Ponzi environment that leads to a huge boom.

By committing to being “credibly irresponsible,” the central bank can actually contribute to the boom, which then creates the imbalance that results in the bust.

This is almost a ‘Volcker moment’ for Japan. That is, Japan’s central bank has changed direction. Investors take note.

But the Bank of Japan’s new governor, Haruhiko Kuroda, is no Paul Volcker. He’s more like Gideon Gono of the Reserve Bank of Zimbabwe. Volcker was incredibly responsible. Gono was credibly irresponsible. And when the markets realized how irresponsible he was…they went wild.

Mr. Kuroda announced that he will double Japan’s monetary base. Investors have been buying stocks enthusiastically ever since. Which is why our Trade of the Decade — ‘Buy Japanese Stocks. Sell Japanese Bonds’ — looks so good.

Stocks have gone up. Bonds have gone down. Does this mean that Japan’s troubles are behind it? Not at all. It means only that when you’ve got a reckless central banker, stocks are a better buy than bonds. Stocks will be lifted on a ‘rising tide’. Bonds will always go in one direction: down.

Japan’s real crisis is still ahead. That’s what last week’s big selloff signals — trouble. And there’s more trouble coming for the US, and Europe too. Most likely, they’ll want to follow Japan as it heads for disaster.

The new governor of the Bank of England, Canadian Mark Carney, has just proposed that his bank imitate the rapid money-printing policies of the Bank of Japan. From the Financial Times:

QE may have done its job as far as propping up the financial sector goes, but… For the economy to really recover, and for it to avoid another massive shock, there is still an urgent need to redirect much of the liquidity that’s been created — currently chasing risk assets — to those frozen out of the economy more permanently.

Print more money! Drop it from helicopters!

Regards,

Bill Bonner
for Markets and Money

Join Markets and Money on Google+
 

From the Archives…

How a Slowing Chinese Economy is About to Hand Australia a Pay-Cut
24-05-13 – Greg Canavan

Your Forefathers’ Pain Can Be Your Gain
23-05-13 – Vern Gowdie

The Fatal Flaw at the Heart of Modern Economics
22-05-13 ­– Bill Bonner

The Warning Signs for Australia’s Economy
21-05-13 – Greg Canavan

A Simple Interpretation on Gold for Times of Monetary Madness
20-05-13 – Greg Canavan

Urgent Investor Report:

Global Financial Crisis 2017: Three Crisis Scenarios, and How They Could Impact on Australia
Markets & Money Free ReportMarkets and Money editor Vern Gowdie reveals the three crisis scenarios that could play out as the next credit crisis hits Aussie shores…and ways you could potentially navigate profitably through the troubling times ahead.

You’ll learn:

  • Watch out! Trouble in this debt-fuelled market could spark a worldwide financial panic: Stocks won’t be the only markets that crash as Global Financial Crisis 2.0 sweeps across the planet. There’s another, multibillion dollar credit market relied upon by companies — as well as local, state and national governments — that’s poised to collapse once the credit bubble pops. And the fallout could severely impact your wealth.
  • The presidential decision that paved the way to our six decade-long debt binge: Australia — and the rest of the world — is living a lie. Debt has funded our lifestyle, NOT production and savings. Today’s global debt stands at $200 trillion. That scary number is the official debt level. The real debt tally will spin your head…
  • What happens when Australia’s gigantic credit bubble goes ‘pop’: We’ve experienced two previous credit bubbles from 1880–1892 and 1925–1932. The current credit bubble has been building since 1950. A 65 year build-up. What happens when this bubble finally pops? As Vern will show you…it’s not pretty.

To download your free report ‘Global Financial Crisis 2017: Three Crisis Scenarios, and How They Could Impact on Australia’ simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

To have Bill's reckonings delivered straight to your inbox subscribe to Markets and Money for free here.

Read more

Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

Be the First to Comment!

Notify of
avatar
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au