...But before we get to that, today's economic numbers were dismal in regard to GDP with the fourth quarter coming in at 0.7%, considerably below earlier estimates. Depending on whether you are an optimistic or a pessimistic economist, comments were all over the lot. One optimist blamed it on lower oil prices and the weather, promising an uptick as both change. Of course thanks to El Nino the weather in most of the country was the mildest it could be and oil ain't going no where, but I guess that's what makes markets. On the other hand, manufacturing figures, while not great, were better than expected surprising many people including me, and Consumer Sentiment held relatively steady.
In the face of all of this equity markets went screaming upwards everywhere. Overshadowing all the economics was the fact that the Bank of Japan stunned almost everyone by introducing negative interest rates overnight, mirroring the ECB, Switzerland and independent Euroland countries. The move leaves the Fed hanging out to dry as it is the only Major--heck, the ONLY--central bank in the world whose stated policy is to gradually increase interest rates; whether they follow through with this is another story, but I wouldn't look for another upward move in March as has been suggested.
The move is clearly designed to stimulate the Japanese economy by encouraging the banks to take money out of the central bank and put it to work in the economy. (Curiously, in the classic Japanese manner of consensus and compromise, not all deposits were made subject to negative rates). Now some may question whether this is going to work or not--it hasn't worked anywhere else save Denmark--but what cannot be questioned is that it will certainly reduce the value of the Yen and aid Japanese exporters who, by the by, have been doing rather nicely, thank you very much. Japan is a big, BIG Export nation. In Asia it is the second largest next to...China.
The Chinese have yet to comment on the BOJ's move but they cannot like it one bit. However, if the Chinese are disturbed, think of the rest of the Asia. The fear is of course that the Chinese will once again move to devalue the Yuan in order to stay competitive which will force competitive devaluations across the region, loss of markets, inflation and currency collapse. But those are not the greatest fears. At some point, some currency is going to become a target of the George Soroses of this era---or Georgie himself--and with the resources available to this lot these days no smaller county can withstand a concerted attack. China, yes. Japan, probably, but they are the elephants and if they dance the "Bugger your neighbor's currency polka," someone is going to get crushed.
These things rarely end well. The crash of '87 if one recalls had its genesis in mass over-liquidity followed by currency collapses. Funny, those two element are here today along with a good deal more worrisome signs which have been around for a while. Emerging markets, which have been dreadful for the past year may become positively toxic and there is little doubt that capital flight will accelerate. The 10 year closed today at 1.92% with the price of the Note moving up a full half point. That is an enormous move...a true flight-to-quality move...an 'I'm scared as hell" move. The surge in equities--about which I say again I know nothing--had to have had a goodly element of short covering. And so comes the weekend. 50 degrees in the fly-over zone. Down-right tropical for the end of January. Grass is green, water holes are full. A lovely time in the middle of the veld. One can almost hear the sound of trumpeting. Be interesting to see what Monday brings.
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