On the heels of the Fed’s decision not to raise interest rates in the United States, the floodgates have now opened to unlimited monetization and QE4.
By Bill Fleckenstein President Of Fleckenstein Capital
September 21 (King World News) – Last night the Bank of Japan took another giant step down the road of monetary insanity — a path it and other central banks have been traveling for quite some time — when it tweaked its money-printing program such that now it will print a potentially unlimited amount to try to target interest rates and make sure the yield curve looks the way that BOJ leaders want it to…
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“Get To the Choppa!”
What the BOJ has basically said is that it will suppress rates along the curve anywhere it sees fit and use as much money as required until it gets inflation above 2%. In theory, Japan would like to get the longer end of the curve, i.e., north of 10 years, to rise, thus allowing its financial institutions to make some money by borrowing short and lending long. I seriously doubt it can thread the needle so precisely, but the important fact is that the doors have been thrown open to unlimited monetization, which could be a feature of QE4 once we reach that point here in America (although that is not today’s business).
In the wake of the decision by the BOJ, world equity markets were a bit higher, with Japan leading the charge as it gained a couple of percent. World bond markets were not quite so happy, as they mostly lost ground, including JGBs. Of course, the market action one day after a new wrinkle such as this doesn’t mean much and it will probably take some time to figure out exactly which markets intend to do what on the basis of the BOJ.
Once More From the Top
As for the U.S. stock market, whether it was thrilled with Japan or anticipating a “nothing done” from the Fed I can’t say, but it managed to rally about 0.5% through midday, as bulls (subsidized by the Fed’s irresponsible actions) couldn’t wait to place their bets as to how investors and speculators were going to vote in the wake of no rate hike yet again. Post the FOMC announcement, in which the Fed kicked the rate-hike can down the road, the stock market at first rallied, then gave it all back before blasting off once more to close about 1% higher.
Away from stocks, the early going saw the yen as the flavor of the day in the confetti arena, U.S. bonds were a bit weaker, oil gained a couple of percent, and the metals were stronger, with silver leading the way once again as it gained 2% to gold’s 1%. Then, after the FOMC, bonds turned green, oil climbed to up 3%, while the dollar lost a bit more ground. Silver and gold gained 3% and 1.5%, respectively.
Included below are three questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: I hate the Fed with a passion but, if truth be told, I expect unscrupulous behaviour from those types of people. What concerns and disgusts me MUCH more deeply is a society where the market as a whole is knowingly complicit. In light of history, I guess it also should not come as a surpise that that an entire population is willing to turn a blind eye to evil as long as the gravy train keeps rolling.
PS – Speaking of economic war criminals, how about one of the biggest dirtbag of them all… Hank Paulson?
Answer from Fleck: “Hank Paulson doesn’t even come close to the Fed members or Dick Fuld, Frankin Raines, etc. etc, IMO.”
Question: Bill: Pardon my ignorance, but could the Fed engineer a series of cycles where they raise interest rates followed by QE if stocks drop, then after stocks go up again and stabilize raise rates again until a more normal interest rate environment is obtained? What would be wrong with that?
Answer from Fleck: “It’s an extension of a failed strategy, and at some point markets won’t cooperate. But really all these “what if” games aren’t too useful. We won’t really know anything new til we get QE4 IMO, as I have said.”
Question: Bill – While “the wait and see what the Fed does” mentality has been persistent and seems to weakening, how long do you think the CBs can keep everything going? Deutsche Bank is down over 20% in the last 2 weeks and down over 75% the last 2.5 years while spreads widen which can’t be good. We have had signs of cracks along the way but relative stability overall for the last 7 years and I am guessing that another 3-5 years would not be out of the question. I mean gold could be at $3,000 and the S&P at 3,200 but overall stability would be ok. I would imagine it being like Japan but worldwide. Anyway, I am trying to adjust my thinking for a longer term approach and avoid trying to capture any short term upside. Thanks for all you do.
Answer from Fleck: “I can’t know, nor can anyone. But I just don’t feel that it can be another year, though we really won’t know anything till after QE4, IMO.”
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