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Story of the Year
The theme this year is all about world indexes making new highs as a result of the growing currency war.
Without a doubt, the market rally has been fuelled by the exponential printing of currency; I have said this many times over the past years, calling for a continued upward movement in the major indexes of countries engaged in the act of reckless debasement.
Last month, I said Japanese stocks will rally as a result of the massive stimulus plans announced by new Japan Prime Minister, Shinzo Abe. This Friday, the Nikkei closed above the 12,500-mark, setting a new four and a half year high.
Abe wants to see Japan’s inflation rate at 2% and has told the Bank of Japan (BOJ) to hit that target by printing more money and doing whatever it can to stimulate the cause.
But for a country that has been stuck in a deflationary state for most of the last 20 years – and never even reaching close to 2% inflation – the task of reaching Abe’s target will require an extremely massive amount of newly created Yen.
Ben Bernanke II: Haruhiko Kuroda
In just a few days, Abe’s ultra-loose monetary agenda and fiscal stimulus will begin to take place.
Next week, Haruhiko Kuroda will become the new BOJ governor. Kuroda has already boldly promised to attain the BOJ’s 2 percent inflation target within two years, in a “whatever it takes” mentality.
That means Kuroda will likely begin purchasing longer-dated government bonds as well as assets that come with much higher risks, such as stocks and derivatives. This is a rare move by a central bank, but follows in the footsteps of the U.S., whereby the Federal Reserve acquired assets, including derivatives such as credit-default swaps and interest-rate swaps, as part of its 2008 rescue of Bear Stearns.
Kuroda has also stated that the BOJ could purchase trillions of dollars (not yen) in assets under his leadership. For a country whose GDP is nearly three times smaller than the United States, that’s a crazy bold statement.
The scary part is that the BOJ is already creating huge amounts of cash; so much that it will boost the cash and reserves held by banks to 170 trillion yen (~$US1.8 trillion) by December. That’s 29 percent more from a year earlier and represents roughly 36 percent of Japan’s nominal GDP.
The value of current account deposits placed by banks with the BOJ – a measure of spare cash in the economy – is set to almost double by the end of the year from the current 44 trillion yen to 85 trillion yen (~US$890 billion). That’s more than double the peak level during the BOJ’s five-year quantitative easing policy of 2001-2006.
The number of people receiving welfare benefits in Japan has already hit an all-time high for the eighth consecutive month in December, totaling 2,151,165. The number of households on welfare hit 1,570,823 – also a new record. The country is already the world’s most indebted nation; so much that it spends nearly a quarter of its tax income on interest payments alone at current zero percent interest rates.
Their only way out is to make the debt bubble Ponzi scheme even bigger. Let the money fly.
Risks of the Nikkei
A lot of economists say the risks for investing in the Japanese markets are too grand given the nature of Japan’s economy. But I am going to say the same thing I said about the US markets last year: The Japanese markets will continue to make new highs — despite the recent run up.
The Nikkei is at a four-and-a-half-year high, while the yen is at a three-and-a-half-year low. The correlation speaks for itself.
Never make short term bets against an entity that can print unlimited amounts of money. Unless you’re short the currency, that is…
Currency Wars to Intensify
With the record amount of printing about to take place in Japan, the currency war will intensify – especially with Japan and China. Tensions are already growing between the two countries and the continued massive and aggressive printing of Japan will likely be met with serious and public opposition by China.
The next BOJ meeting will be scheduled for the first week of April. Be prepared for a more substantial and concrete announcement of yen devaluation.
Japan’s Domino Effect
While the media may have already brushed aside Japan’s monetary actions, you shouldn’t.
Here’s just one small reason why: Germany.
Exports to China have been a driving force for Germany’s recovery since 2008, especially with the devaluation of the euro.
Since Germany and Japan target similar markets, with seven out their top-20 trading partners being the same, Japan’s devaluation could take away from Germany’s growth and give Japan an unfair competitive advantage.
Germany is Japan’s fourth most important export market, while Japan is Germany’s 10th most important export market. As the yen is devalued against the euro, Japan will benefit from more exports to Germany, while Germany will suffer from fewer exports to Japan.
China is the most important export market for Japan, while Germany’s exports to China have fueled amazing growth for the country. Germany is China’s number-one trade partner in the EU: nearly half of all EU exports to China come from Germany. That means Germany will likely suffer from a lower yen as Chinese businesses find it more cost effective to deal in yen, then in euro.
Japan is currently the fourth largest trading partner for the U.S; Germany’s second biggest export consumer is the United States. You can see how a devalued yen would affect trade between these two nations.
If Germany, the strongest player in the Eurozone’s economy, suffers from declining exports, the ECB will be forced to debase just to keep up. Recovering world economies will follow suit.
Growing countries, such as China, will then suffer from inflation as they are forced to print to keep up (see America’s Gold Wiped Out). China cannot afford a strong yuan, nor can they afford rampant inflation. In both cases, China’s growth will stall, leading to a worldwide economic decline.
This currency battle is a lot worse than the media will have you believe. Don’t be fooled.
The Gold Trade
How can I talk about currency wars, without talking about gold?
It seems the media sentiment for gold continues to weaken. We just saw the biggest net short position in gold futures and options since 1999. As a matter of fact, over the past two months, exchange traded funds have sold 140 tons of gold, with February seeing the largest monthly outflow on record.
While that may seem like a lot, I should point out that 140 tons is only 0.082% of the world’s gold supply.
While worldwide gold ETF’s control a big portion of the gold market, the mere outflow of 0.082% is like a grain of rice in a paddy field, especially when liquidated over a span of two months.
However, mass theory dictates the near-term price. And with gold sentiment moving down, the short term price will continue to see downward pressure.
One question I get asked a lot is, “If central banks continue to buy and hoard gold (physical, not its paper manifestation) at record pace, why isn’t the price of gold moving up?”
Let me answer that with another question: “If you know the price of something will only increase over time, would you not want to buy it at the lowest price possible?”
The governments and central banks would much rather quietly buy gold at lower prices (just like the Chinese have done with their sovereign wealth funds); having the manipulators force the price down only helps their cause.
I have been talking about gold and silver price manipulation for years. It seems that finally the government is taking notice — at least publicly anyway.
The CFTC is once again “discussing internally” about the possibility of whether the daily London gold and silver price fixing is open to manipulation.
From the WSJ:
“The Commodity Futures Trading Commission is discussing internally whether the daily setting of gold and silver prices in London is open to manipulation, according to people familiar with the situation.
No formal investigation has been opened, the people said. The CFTC is examining various aspects of the so-called price fixings, including whether they are sufficiently transparent, they said.
Gold prices are set twice daily by five banks via teleconference, while three banks set silver prices. The fixings are then used to determine spot prices world-wide, including jewelry and sales from mining companies to refineries. The prices also help determine the value of derivatives tied to the metals.
The London gold market fix dates from 1919, and now sees twice-daily conference calls involving units of five banks: Barclays, Deutsche Bank AG, HSBC Holdings PLC, Bank of Nova Scotia and Société Générale.”
I am sure the media and government will brush this investigation aside. But know that there are forces at work here that prove gold’s worth on the world stage.
Gold is not about making a quick buck. It’s about preserving wealth and protecting against worldwide debasement.
As Bill Gross said, “They say that time is money. What they don’t say is that money may be running out of time.”
I am not saying the dollar, yen, yuan, or the euro will disappear or fail (even though all fiat currencies have failed throughout history); I am simply looking at it from a purchasing power perspective.
I can buy gold and silver now, wait some years, and then likely trade it for a lot more paper money than I could today.
It really is that simple.
Until next week,
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