On the heels of the Fed’s decision not to raise interest rates in the United States, here is a powerful note from Bill Fleckenstein’s source the “Lord of the Dark Matter.”
By Bill Fleckenstein President Of Fleckenstein Capital
September 23 (King World News)
They Should Be More Committed
The Fed, BOJ, ECB, and Bank of England, along with a couple of others, are acting similarly insane, but it has been the Japanese — after sort of coming to the game rather late — who have really taken us to a whole new level of recklessness. For a thoughtful recap of just what the BOJ did I am going to turn the column over to the Lord of the Dark Matter, but before I do I want to emphasize that what can be said about Japan can also be said about any of the other crazy central bankers. It’s just that, for the moment, the BOJ seems to be leading in the race to see who can have the most maniacal policies possible or (in the words of the LODM) who has the biggest, “commitment to monetary irresponsibility.”…
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He goes on:
“This is a monumental step into the unknown: any remaining pretense of monetary dominance in Japan is now dead. Responding to Kuroda’s generous invitation, it may be only a matter of time before Abe chooses to assert his fiscal dominance.”
Spending Spree
What he is referring to here is that the BOJ has set the stage for the government to come up with a fiscal scheme to help ratchet up its wrong-headed goal of inflation. As an aside, all of these idiot central bankers keep talking about inflation when what they should really be focused on is real growth in the absence of inflation, which is amazing to me. Although it is no more amazing than their confusing the concept of deflation with a depression and their lack of understanding how the former does not lead to the latter but the latter almost certainly leads to the former. And as long as I’m discussing unexplainable though seemingly obvious phenomena, billions of people worldwide seem to think these central bankers know what they are doing.
Turning back to the LODM: “The message Kuroda is sending Abe is clear: if you want to hit your inflation objectives you need a wages policy…I know speculators get excited about helicopters and outright monetary financing and so on, perhaps in the hope that the central banks will continue to underpin their portfolios.
“In the case of Japan, however, the debate over helicopters and the like may no longer matter; yesterday represented a big step toward the endgame. We’ve long known that there was no exit for the BOJ with regards to their JGB holdings, but should Abe now deliver with fiscal policy (e.g., wages policy) it makes it much more likely that the BOJ makes substantial, rapid and perhaps shocking progress towards its inflation objectives.”
Their Own Best Enemy
Said differently, all these kooky policies are either going to deliver enough inflation or change the psychology about inflation such that they will destroy the very bond markets that have been used to walk financial assets up around the globe. That is the real endgame, and as I have said for nearly the last decade, only the bond markets declining in the face of central bank actions/commands can stop the central planners.
The sweet (though sad) irony of all of these policies means that if these central planning clowns are successful in hitting their misguidedly desired inflation targets, it will eventually mean a shattering of stock and bond prices and damaging economic activity all at the same time.
Blank Checks, No Balances
Getting back to the potential end of the activist central bank era, which looks to be led by Japan, the LODM makes a couple of other important points:
“Never has any central banker — well, with the possible exception of Rudi Havenstein — made it so easy for fiscal authorities to assert their dominance. All in all, I believe yesterday represents a tremendous step towards the endgame in Japan; which entails higher inflation, great pressure on JGBs, a much steeper curve (BOJ purchases or not), a weaker yen, and a broadly higher Japanese stock market.”
He continues: “I regret I have no insight into when Abe may now play ball, defined as announcing a wage policy, or additional stimulus, or perhaps an unexpected announcement from the MOF that they will issue a zero-coupon perpetual. What I am seeking to convey to you is that if my analysis is roughly right, the momentous decisions taken yesterday by the BOJ, and the probability of the BOJ now making a substantial, rapid and perhaps shocking progress towards its inflation objectives is not priced in. Anywhere.”
Just a Few Finishing Touches
So there you have it. You can see the recipe for an endgame for the financial madness. I have been asked a million times, “How can the bond markets decline if the central banks are buying?” Well, when psychology changes, the market is always bigger than the central banks. We have not been able to get to that psychological moment, but perhaps now we have some signposts to look for and the revolt of the bond market may start first in Japan, although it does not have to. Nonetheless, looking at what the Japanese have done and what the LODM so eloquently recapped and the certain key points he elaborated on will give people some sort of a framework for how this may all end. Once you have that you can have some idea of what you might be looking for to understand that the countdown has actually begun.
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