Tuesday, November 18, 2014

QE is a bull’s best friend

Japan recedes, the New York Times reports—during summer, no less!

Japan’s economy unexpectedly fell into recession in the third quarter, a painful slump that called into question efforts by Prime Minister Shinzo Abe to pull the country out of nearly two decades of deflation.

The second consecutive quarterly decline in gross domestic product could upend Japan’s political landscape. Mr. Abe is considering dissolving Parliament and calling fresh elections, people close to him say, and Monday’s economic report is seen as critical to his decision, which is widely expected to come this week.

Rising sales taxes have been blamed for triggering the downturn by deterring consumer spending, and with Japan having now slipped into a technical recession, the chances that Mr. Abe will seek a new mandate from voters to alter the government’s tax program appear to have increased significantly.

The preliminary economic report, issued by the Cabinet Office, showed that gross domestic product fell at an annualized pace of 1.6 percent in the quarter through September. That added to the previous quarter’s much larger decline, which the government now puts at 7.3 percent, a slightly worse figure than in its last estimate of 7.1 percent.

The surprise recession underscores the difficulties faced by Mr. Abe, who won power two years ago on a pledge to reinvigorate the economy and end his country’s long streak of wage and consumer-price declines. His agenda, dubbed Abenomics, has focused largely on stimulus measures, in particular an expanded program of government bond purchases by the central bank.

Surprising to whom? Japan has been engaged in this kind of behavior for 20 years. The results were predictable: a bottomless market bubble, low money velocity resulting in near-deflation, and stagnant wage growth. Reaping temporary “growth” spikes (see 2013) through fascist financialization and currency devaluation is a political move designed to hide the fundamental flaws of demand-side economics. Since 1992, Japan’s economy has grown at a 0.85 percent annual rate.

(At least from an ecological perspective, Japan’s demographic death spiral makes sense. There would have been a revolution by now if they were procreating above the 2.1 children per woman replacement rate. The woeful economy appears to be bountiful enough to feed the incredibly shrinking country.)

Japanese stocks rose on the announcement of an official recession Monday. This is opposite world, after all. In opposite world bad economic news assures more money printing to support the bull market. Read wealth manager Hugh Hendry tell his investors about how he would be remiss if he didn’t play along with this new anti-reality:

My premise hasn’t really changed since I published my paper explaining why I had become more constructive towards risk assets this time last year. That is to say, the structural deficiency of global demand continues to radicalize the central banking community. I believe they are terrified: the system is so leveraged and vulnerable to potentially systemic price reversals that the monetary authorities find themselves beholden to long only investors and obliged to support asset prices.

...Investors are perhaps misconstruing rising equity prices as a traditional bull market spurred on by revenue and earnings growth, and becoming fearful of a reversal, when instead the persistent upwards drift in stock markets is more a reflection of the steady erosion of the soundness of the global monetary system and therefore the rise in stock prices is something that is likely to prevail for some time. There is more to it of course, as I will attempt to explain, but not much.

This should be a great time to be a macro manager. It is almost without precedent: the world’s monetary authorities are targeting higher risk asset prices as a policy response to restoke economic demand. Whether you agree with such a policy is irrelevant. You need to own stocks. And yet, remarkably, the most contentious thing you can say in the macro world today is “I’m bullish”.

Because the economic fundamentals read disaster. The natural instinct is to cut and run. But Keynesian central bankers continue to blow the bubble up. So, while people with jobs wary of what the near future holds in store get hit with tepid growth and low savings rates, institutional investors with disposable income let it ride in a rigged market. Who knew liberals had perfected the recipe for inequality?

The difference between the United States’ quantitative easing and Japan’s quantitative easing is roughly 3 years and a factor of eight. Now would be a good time for reporters to dust off the “Winter chills economic growth” template.

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