With continued wild trading this summer in global markets, it’s all about Japan, helicopter money, cold fusion and the disastrous endgame.
By Bill Fleckenstein President Of Fleckenstein Capital
July 14 (King World News) – Overnight markets were all higher and the world was once again a-twitter over the concept of “helicopter money.” But once again, the pundits and the press are getting the descriptions wrong. Just like they talk about minimal inflation rates as “deflation” because they are scared of a depression, which is what they think deflation means, or refer to a 20% move as a bull or bear market, they are now mindlessly labeling the next step in monetary debasement as helicopter money…
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The problem is, we’ve already had helicopter money for the last eight years as we progressed from QE1 and QE2, Operation Twist, then QE3 here in America, only to see the Japanese up the ante by buying assets besides government debt (QQE). Not to mention, in addition to monetization, we’ve also seen ZIRP and NIRP.
BOJ to Offer Free Refills
As I began musing, between last March and May, it seems that the Japanese are now about to take the next step in an even more radical direction, that being so-called cold fusion (which is in fact what most people are now calling helicopter money) and ultimately debt forgiveness.
To keep our terminology straight, “cold fusion” means when the government comes up with a new unfunded program, i.e., deficit spending, and the central bank just steps up and monetizes it. Using the U.S. as an example, let’s say the government decides it is going to create a $1 trillion make-work project such that every state gets enough money to shower down spending in a way that touches every citizen and that $1 trillion is funded by the Fed. That would be cold fusion, and is apparently part of what is being kicked around in Japan.
More importantly, it also would appear that Japan is now thinking about getting right to the endgame, which is the functional equivalent of debt forgiveness, whereby the government (in the form of the Ministry of Finance) sells a perpetual rate bond, which obviously never has to be repaid, at essentially a zero-rate coupon, which is in fact literally money for nothing, forever. A no-interest or tiny interest “perp” is not so different from the 200-year piece of debt at 10 basis points, which is what I offered as an example on May 27 when I discussed this as a possible outcome.
In summary, all of these insane policies are on a continuum, but we appear to be rapidly approaching the most radical phase, which amounts to debt forgiveness, or its twisted twin sister, perpetual bonds with de minimis coupons. At some point the world’s bond markets and people in general are going to realize a point I have been making for several decades now: when you have a printing press you can’t have deflation.
When Money Loses Its Mind
Lest we forget, the colored paper we carry in our wallets is not really money at all, it is just a promise that is worth something (and is in fact a liability of the U.S. government). Belief in its worth is all about psychology, which can change, and will change. With Japan in the lead in employing these radical experiments designed to incinerate their currency, and ultimately their bonds, it will be the place to focus for the most likely first manifestation of unexpected negative consequences, but right now people are in the joyous celebration stage.
With that update of the monetary debasement scorecard out of the way I can turn to the action here. The U.S. stock market followed the script of other world equity markets and rejoiced over the concept of cold fusion in Japan, with the indices gaining about 0.75% in the first hour. Over the course of the day the market then drifted more or less sideways. Away from stocks, green paper was mixed, with the yen 1% lower and fixed income was smacked.
On the subject of fixed income, regarding my earlier points, if in the future we are only going to see the more radical policies I discussed, at some point the bond market is going to take an incredible beating. When that starts I can’t say, but we are in the very late stages of this great bond bubble, though it could last for many months still. Turning to the precious metals, it was a bit of a head scratcher as silver lost 1% to gold’s 1.5% loss.
Land of the Golden Sun
One might have expected on the notion of even more radical policies gold might have been higher, but on any given day anything is possible. No one knows what variables are being kicked off with so much motion and Venezuela imploding by the hour. Nonetheless, I thought it was interesting that Japanese firm Tanaka Holdings is buying Swiss precious metals refiner Metalor Technologies. It would appear that at least someone in Japan thinks that maybe the Japanese may develop a strong yen for gold (pun intended), which is a phenomenon that is most likely to see continued acceleration from investors worldwide as this race to debase nears warp speed.
Included below are three questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: Fleck, I am reading that Japan’s Central Bank is printing Yen and buying foreign bonds. How does this help the Japanese economy?
Answer from Fleck: “Who says printing money helps any economy, no matter what they do? It doesn’t work. Period.”
Question: Bill, does it make sense to you that at this stage of this new gold bull market, the news of the Bernanke helicopter money meeting with Japan has had such a negative effect on the price of gold? I would think that, given the recent positive sentiment on gold, this news would have had an extremely positive effect on the price of gold. Thanks very much.
Answer from Fleck: “No, it doesn’t make any sense, but look, on any given day anything can happen. Different entities are all doing different things. Maybe Venezuela puked a bunch, who knows? Markets are not perfectly rational or transparent.”
Question: Hi Bill, I would say I`m about 1/2 way into the position I`d like to have in the Miners. I have the capital ready to invest but after this run up I`m struggling with the timing. Would you wait for a pull back of 10-15-20% from these levels and then come in big…. or come in in tranches regardless of price? THANKS!!
Answer from Fleck: “You have no good choices now. Having waited this long, you just have to decide what will bother you more, buying and catching a correction, or doing nothing and missing the next leg up. Maybe you should have a plan to take some action, as well as deciding what you will do if, after you act, the market races up or down.”
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