With stocks soaring and the price of crude oil breaking below $45 before rallying, below is a key piece which highlights something incredibly dangerous that has never been tried in the history of the world, until now.
By Art Cashin Director of Floor Operations at UBS
January 13 (King World News) – Japan: Another View – In his latest letter, my good friend, John Mauldin, reviews several different situations around the globe. Here is some of what he wrote on Japan:
One of the basic rules of markets is that you can control the quantity of something or the price of something but not both. The Japanese are increasing the quantity of money in the markets, and therefore the value of that money is dropping. The Japanese yen is already down 50% from its highs of just a few years ago. Some would point out that Japan has not disappeared, so why is this a bad thing?
If you are a Japanese consumer, you have seen your disposable income fall as your food and energy costs have risen. Which is why there has not been an explosion of consumer spending or any appreciable inflation so far, though both were part and parcel of the plan of Abenomics. Japan desperately needs to see nominal GDP growth in the 3% to 4% range, but it is nowhere close. Since the deficit is higher than 3% to 4% and will likely to remain so for the next few years, total government debt-to-GDP is rising every year. Wrong direction.
While the Japanese government can occasionally back-slap the currency markets with the odd policy correction, long-term they have no choice but to continue to monetize the debt. Not to do so would be to accept a deflationary collapse, something that I think everyone pretty much agrees must be avoided. The time for Japan to make good choices was 15 to 20 years ago, when they should have avoided increasing their debt toward the level where they find it today. Today they have no good choices. They simply have a choice between Disaster A and Disaster B. They have chosen Disaster B, which is to devalue their currency. If I were in their shoes, I would make the same choice. Home team rules and all that.
How low will the yen go? I have said 200 to the dollar, but in reality that is just a guess based on my back-of-the-napkin calculation of how much I think they will need to monetize. I have some very smart friends who think 140 is probably the final number. I have other very smart friends who think 300 is the final number, because they think the government of Japan will lose control over the markets. The reality is that none of us know, as this experiment has never before been tried in the history of the world.
Will Japanese consumers (read voters) accept ¥200 to the dollar over the next 10 years? We will see, but I honestly see no choice for them. If I were Japanese, I would be buying gold and assets not denominated in yen and getting my money into the dollar or other foreign currencies. I will touch on this in later letters, but there is so much opportunity here. Japan provided my single biggest personal source of returns in 2014. Go Abe and Kuroda.
Consensus – Déjà vu all over again. Just like Monday pre-opening, U.S. futures are higher and crude is falling. Let's see how the comparison plays out. Resistance in the S&P is at 2035/2038 and then 2044/2047. Stick with drill – stay wary, alert, and very, very nimble.
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