By now, it should be apparent to anybody with a functioning cerebellum that our political and economic policy leaders are abject failures. After years of impotent monetary policy at the hands of the Fed, decades of incompetent foreign policy by several administrations, a dormant and corrupt Congress, and an activist Supreme Court rewriting the Constitution, the world is going to hell in a handbasket.
It is timely, therefore, that Mike Judge’s 2006 comedy Idiocracy is celebrating its 10th anniversary with special nationwide screenings beginning October 4th. The film tells the story of two people who participate in a top-secret military hibernation experiment. They awaken 500 years later to an America where advertising, commercialism and anti-intellectualism run rampant and where the president is a former professional wrestler with severe anger management issues. These characters are luckier than the rest of us – they had to wait 500 years to live in a world governed by idiots. We were not as fortunate.
Some central bankers are finally starting to acknowledge their failures – but it’s too little, too late.
Here’s why their wishful thinking has led to disaster – and of course, how you can profit.
Japan and Europe Are Finally Realizing That Tinkerbell Isn’t Going to Show Up
The Bank of Japan is surrendering its Peter Pan fantasies of reviving inflation by committing to a 2% inflation target. Readers will remember BOJ Governor Haruhiko Kuroda, charter member of The Committee to Destroy the World, telling an audience a couple of years ago with respect to his attempts to defeat the deflationary mindset among Japanese consumers that, like Peter Pan, “the moment you doubt whether you can fly, you cease forever to be able to do it.”
We might be willing to give Mr. Kuroda the benefit of the doubt and chalk up this comment to a bad translation but for the fact that he has operated the most reckless monetary policy in history over the last few years in Japan, buying not only most of the Japanese Government Bond market but also huge amounts of Japanese equities and ETFs. That is something that only someone who believes in fairy tales could possibly believe makes good sense.
And now, a couple years later, Mr. Kuroda may be starting to acknowledge his delusions, admitting that consumers are most heavily influenced by their experiences than by central bank wish fulfillment fantasies: “the mechanism of formation of inflation expectations in Japan tends to be heavily influenced by the course of the past inflation rate.”
After years of Herculean policy efforts to promote inflation, core inflation in Japan (all prices minus fresh food) is running at -0.5%, far from the 2% target. The Peter Pan playbook clearly isn’t working. As Kazuo Momma, until recently an assistant Bank of Japan Governor, concedes: “The Bank of Japan has been doing what is written in economics textbooks. The poor results pose a problem not only for Japan but for economics as a whole.” Maybe it’s time for someone other than former tenured economics professors to run things.
In Europe, European Central Bank (ECB) President Mario Draghi also warns that his Peter Pan powers are at an end. Having pushed down interest rates across the Continent below zero, he reiterated a message he has sounded before that keeps falling on deaf ears (though it didn’t stop him from engaging in reckless easing policies), calling for European governments to adopt pro-growth fiscal policy reforms to complement his easy money.
Arguing that low interest rates are a symptom of weak economies, not merely the consequence of ECB policies, he warned about the adverse side effects of keeping interest rates too low for too long. He still claimed that ECB stimulus efforts are working, but try telling that to European banks that are suffocating under low interest rates and bad loans.
The Germans remain properly skeptical of ECB policies. In advance of a September 28 meeting with Mr. Draghi, German lawmaker Hans Michelbach summed up their concerns: “We don’t see that this policy has been successful in any way, either on budget deficits or on economic growth. We want clear answers on what monetary policy has achieved, apart from an expansion of joint liability in the euro zone.” With a menu of bailouts looming before them (Deutsche Bank, Greece, etc.) and a slowing economy, the Germans have a lot to worry about.
Here’s How to Profit
The monetary mystery of the year remains the stubborn strength of the Japanese Yen, which is trading around ¥100 to the U.S. dollar. A strong yen is not what the Bank of Japan or the Abe government bargained for and throws a serious wrench into their plans (even Peter Pan can’t save them). For reasons that escape me, investors treat Japan as a safe haven when it is precisely the opposite and has the potential to seriously disrupt global financial markets.
Readers should keep an eye on Japanese bond yields. I would maintain my Yen short position (with options); despite their failure to cheapen the currency, Japanese authorities will keep trying. I recommend that you buy puts on CurrencyShares Japanese Yen Trust ETF (FXY) and iShares MSCI Japan ETF (EWJ).
The Euro isn’t doing much either and is trading at around $1.12; maybe the accelerating crisis at Deutsche Bank will shake it up (er, down). It too is overvalued and I would stay short. Get my Euro recommendation here.