Given the dizzying moves in the market during the past couple of days/weeks, I felt that it would be better to link back to my February 1 appearance with Rick Santelli on CNBC.
As I was watching Fed Chair Yellen testify before Congress for the past two days, I saw the shine of the all-knowing Fed Chair fade. Yellen was extremely uncomfortable as she bore the brunt of Congress’s slings and arrows. The anger of Main Street has manifested in victories for Trump and Sanders, which has sent the ineffective “leaders” in Washington searching for culprits to blame. Chair Yellen was tied to the whipping post, especially in the House of Representatives.
The adoration of the Maestro and Bernanke has sunk to levels of the German two-year note. But while the Congress scapegoats Yellen, the markets cast stones at the ENTIRETY OF GLOBAL CENTRAL BANKERS. President Mario Draghi has seen his stature diminish as the ECB has proven to be nothing more than a confidence machine as Draghi had so proudly proclaimed just a month ago. The problem is that all con men wind up being tarred, feathered and run out-of-town. Draghi has been very quiet of late while the EURO has rallied and the present negative rate and QE program of the ECB has failed to provide the stimulus needed to depreciate the currency and support the banks. Equity values in Europe are a barometer of Draghi’s success.
The impact of the Bank of Japan’s recent attempt to stimulate the Japanese financial markets, and hopefully inflation, has failed miserably. It risks the ire of a Japanese electorate being financially repressed by the policies of Abenomics. When Kuroda tried to shock the markets by embarking upon negative nominal rates–when a week before he said the BOJ wouldn’t go negative–Kuroda’s three arrows have failed. THE STOCK MARKET HAS DROPPED MORE THAN 10%. THE YEN, WHICH GOVERNOR KURODA HAD HOPED TO WEAKEN, HAS RALLIED 7% and Japanese BANK STOCKS HAVE BEEN CRUSHED IN VALUE. Kuroda’s surprise has left Japanese and international investors shocked and awed by the dismal failure of the BOJ‘s effort.
In today’s Financial Times there’s an article titled, “Mrs. Watanabe Burns Her Fingers On Japan Post Bank.” The term Mrs. Watanabe is slang for the Japanese retail investors because so many of Japanese investments are controlled by housewives. Since the giant Japan Post IPO, retail investors have lost 34 percent of their initial investment in what was deemed a very conservative stock. The BOJ’s QQE program has pushed pension funds and typical JGB buyers into riskier equity investments as the NIKKEI is approaching 2013-2014 levels. The 200-week moving average in the Nikkei is currently around 14,850, which will be important for investor sentiment. Today it closed at 15,240.
The conservative Japanese saver has been forced out of JGBs and into risk. This is the trigger for financial repression. More importantly, prior to the advent of ABENOMICS, the average Japanese investor buying a ten year JGB was rewarded with a positive real yield as nominal yields were low but prices on daily goods was falling. Now with inflation rising to 0.5% and JGB yields at 0.005%, the average saver is seeing negative returns. Bottom line for Kuroda, Yellen and Draghi: The world is growing weary of the wisdom of central bankers. Last week’s Santelli appearance presaged the coming investment climate. Much more to follow.