The Floodgates Have Opened: Central Banks Collaborate on Record Printing

In this week’s Letter, Ivan Lo talks about the world’s four biggest developed-market monetary authorities collaborating on the world’s biggest monetary injection, how to play Japan, America’s declining labour participation force, how gold is slipping through Italy’s borders, and what’s happening in North Korea.

Dear Readers,

The world is once again on the edge of a cliff. I don’t say that lightly.

Take a look around. North Korea tensions are heating up, while Cypriots beg to pull their money out of the banks. Job data in the U.S. grows increasingly concerning, despite the record amount of money injected into the financial system.

On the other side of the world, Japan has now officially opened the floodgates for one of the world’s biggest stimulus packages ever.

Open the Floodgates

The BOJ officially announced plans to purchase 7.5 trillion ($74.8 billion) yen of bonds a month and double the monetary base, which includes cash in circulation, in two years. This would mop up 70% of newly issued government bonds in the nation and is equal to printing 15% of its GDP each year in new money. It also plans to expand its asset-purchase programme to include riskier bets such as exchange-traded funds (ETFs) and real-estate investment trusts (REITS).

(Government intervention in the free markets is direct manipulation. When a country or central bank can directly influence the price of stocks, and now even indexes through ETFs, fundamentals stand little chance. Funny how people are getting arrested for manipulation and insider trading, yet the governments around the world are directly manipulating the capital markets. Some food for thought.)

For a country that hasn’t grown in the last 15 years and already mired in debt, it seems borrowing more money is their solution. Go figure.

And if you haven’t already learned over the last few years of reading this letter, and always reaffirmed by the Fed, front run the central banks aggressively. Japanese bond prices soared and yields on the country’s long-term securities tumbled to record lows near zero.

I said this would happen weeks ago, so it’s no surprise.

It seems that now the BOJ has officially announced its record stimulus, investors are finally piling in. But if you were smart, you would have already prepared for this.

Back on February, I wrote that Japanese equities would rally as a result of the new BOJ governor, Haruhiko Kuroda coming into power.

The Nikkei is now up over 10% since that time.

nikkei 225


Continue front-running the BOJ by borrowing yen and invest in productive assets outside of Japan; or short yen and long Japanese equities.

If you’re looking at Japan ETFs, I prefer ones that hedge against the yen while providing exposure to Japanese equity markets, such as WisdomTree’s Japan Hedged Equity Index (DXJ) or the MSCI Japan US Dollar Hedged Index (DBJP). These two ETFs provide great exposure to Japanese equities but also benefit from a declining yen; it’s like a double whammy of betting on Japanese equities while shorting the yen against the dollar.

Side note: The frenzy of BOJ front-running has just been acknowledged by the CME Group. Just like the precious metals, (see Prepare for Upside) it appears the CME is so worried about the leverage associated with the BOJ’s actions that they proceeded to hike margins across the entire Yen future spectrum between 19% and 33%.

Central Banks Collaborate on Record Printing

The world’s four biggest developed-market monetary authorities — the Fed, the European Central Bank, the Bank of England, and the Bank of Japan — are now all aligned in their money printing/inflation-inducing policies.

These powerhouses deny their race to debase, yet they have openly stated they want inflation. Do they believe we’re fools? How do you print to inflate without devaluing your currency?

Since the 2008 crisis, the Fed, the ECB and the BOJ have more than doubled the combined size of their balance sheets (the Fed tripling theirs), expanding them by more than US$4.7 trillion. Given the recent actions by the BOJ, that amount will likely increase by at least US$1.3 trillion by the end of 2014, and nearly US$2 trillion when combined with the Fed`s US$85 billion/month.

Meanwhile, the Fed continues to add to their balance sheet, and the ECB has just hinted at another rate cut and further asset purchases.

In the UK, Carney’s appointment as the BOE’s next governor starting in July has already raised the possibility of more easing, while their government has already loosened the central bank’s mandate to give it flexibility in reaching its inflation target.

The world’s printing presses aren’t stopping anytime soon. I’ve said it so many times before; it doesn’t matter if the Fed hints that it might stop or slow down, they won’t.

The threat of inflation and reckless monetary policies by the big four creates major tension over exchange rates and capital inflows with emerging markets including China, Brazil and South Korea. In essence, the big four’s monetary policies would be considered cheating and illegal in any other form.

The effects on trade from the BOJ’s actions are going to be very detrimental for the Koreans and the Chinese. As a result of the mass printing from the world’s largest monetary players, many credit markets, such as corporate debt, are already showing signs of potentially excessive risk-taking.

As I mentioned before, the four biggest developed-market monetary authorities have overleveraged themselves and now have to resort to more leverage in attempts to fix the situation. As they do this, emerging markets will suffer unwanted inflation as they attempt to keep up with the money printing by the big four monetary authorities.

In order to fix the problems that led to 2008, the world’s strongest economies needed to deleverage. Instead, they have gone in the opposite direction and are now more leveraged than ever.

For the BOJ to even come close to their 2% inflation target, the yen will have to devalue much further than where it’s at now. That means more economic experiments through money printing will take place.

Will the G7 nations tolerate this? Will emerging markets?

Americans Give Up

The unemployment rate for the U.S. dropped to a four-year low of 7.6% in March from 7.7 in February.

But that most certainly doesn’t tell the whole story.

First of all, people without a job who stop looking for one are no longer counted as unemployed. The United States Bureau of Labor Statistics just showed that many Americans have given up looking for jobs. The percentage of working-age adults in the labor force – what’s called the participation rate – fell to 63.3% last month. It’s the lowest such figure since May 1979.

That’s why the U.S. unemployment rate dropped in March despite weak hiring.

U.S. Labour Participation Rate

U.S. Labor Participation Rate
Source: United States Bureau of Labor Statistics

More than 496,000 left the labor force last month; if they had still been looking for jobs, the unemployment rate would have risen to 7.9% in March.

While some argue that part of the drop reflects the baby boom generation’s gradual move into retirement, I say it’s because there’s no new jobs out there for Americans.

Even in the prime working age group – 25 to 54 years old – are dropping out of the workforce. Their participation rate fell to 81.1% last month, tied with November for the lowest since December 1984.

(Canadian participation has been slowly declining from 67.7 in 2008 to 66.7 in 2012.)

That means despite the record printing, unemployment is showing no big signs of improvement. Earnings are also looking bleak as the cost-cutting strategies from the big corporations are starting to show signs of stalling. When corporate earnings stall, so does the ability to hire.

Bernanke has made it clear that aggressive asset purchases won’t stop until we see signs of employment truly improving, and even still, will continue to print for some time after.

It’s full steam ahead.

Gold – Massive Manipulation

All of the recent events should have boosted gold prices. From Cyprus banks losing billions of savers money and imposing capital controls, to the BOJ`s record stimulus announcement. Yet, here were are, and gold has been slammed.

I want to make one thing clear: Physical gold is different from its paper manifestation. Just like currency, stocks, and derivatives, anything that trades electronically and via a paper form can, and will, be manipulated. Don’t mistake a gold ETF for physical gold when protecting your wealth.

Federico Ghizzoni, CEO of Italy’s Largest Bank, UniCredit SpA, went on record last week stating that he is perfectly okay with confiscating money from uninsured deposits, as long as everyone else in Europe is doing it:

“Cutting large deposits in failing banks, along with other liabilities such as bonds, to offset losses is acceptable as long as small savers’ funds remain protected…it is acceptable if it becomes a European solution.” – Federico Ghizzoni, April 4, 2013

This type of mentality already has wealthy Italians scrambling to remove their wealth from the country. Just last week, Bloomberg caught wind of someone trying to smuggle their gold, worth over $6 million dollars, across the Italy-Switzerland border.

gold seized
click to play

The gold was confiscated by Italian police. You have to wonder that for every car that gets caught moving across the border, another hundred cars might go through undetected. How many cars go by our own borders everyday not declaring their purchases made aboard?

Last week, I talked about Texas wanting their gold back. It seems the media has heard and is now finally covering the story

Not only are European citizens worried about their gold and wealth being confiscated, states within the U.S. are as well…

North Korea

Not only is the U.S. deploying stealth and B-1 Lancer strategic long-range bombers to North Korea, but it is also apparently in the process of deploying the E-6 Mercury “Doomsday” planes, which are among the pinnacle in US Airforce nuclear war preparedness, according to investigative journalist and technologies expert Steve Douglass.

Whether it’s true or not, the situation surrounding North Korea grows intensely.

According to China’s official Global Times, Chinese military activities were concentrated in Jilin Province, which shares the longest border with the North. Forces were reportedly ordered to raise the alert status to the highest level on March 19:

“Large groups of soldiers were seen on the streets in Ji’an, a city in Jilin, amid reports that the [Army] had been ordered to combat readiness status,” the daily added.

“Heavy armored vehicles, including tanks and armored personnel carriers, were reported moving near the Yalu [Apnok] River that separates China from North Korea.”

Meanwhile, defectors from North Korea have been caught by the Chinese and sent back. While most of us believe nothing major will happen, soldiers in the area believe otherwise.

Via Reuters:

“As you all know, on the Korean peninsula, it is not a matter of whether we will have a war or not, but whether it will take place today or tomorrow,” an unidentified soldier said.

“This is a situation like being on the eve of a big explosion. Every minute, every second counts. We are right now set to march, once the order is given.”

Everyone seems to be getting hacked these days. And now, so has N. Korea.

Here’s a picture uploaded by hactivist group Anonymous that has apparently hacked at least two of North Korea’s government-run online sites yesterday. It was posted directly on N. Korea’s Flickr site. Underneath, the text reads: “Threatening world peace with ICBMs and Nuclear weapons/Wasting money while his people starve to death.”

Spread the word. Spread the picture.

Next week, as a result of undergoing some major changes and facelifts, the Equedia Letter will be sent to you under the name, “The Equedia Letter.” It will no longer be sent under the name “Equedia Weekly.” Please update your email address book to ensure proper delivery.

Until next week,

Ivan Lo

Equedia Weekly

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Disclosure: I will likely be trading in and out of Japan ETF’s such as WisdomTree’s Japan Hedged Equity Index (DXJ) and MSCI Japan US Dollar Hedged Index (DBJP). I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies. Our reputation is built upon the companies we feature. That is why we invest in every company added to our Equedia Select Portfolio. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will.

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