So dollar up, Yen down, Euro down and down more soon.
This is the triad that will drive all the markets for a long time to come. As I write the rumor is Japan’s Abe will call an election next week after Monday 14th Japan GDP print, when it comes in even lower than expectations. A recent rise in sales tax smashed Japan’s GDP and when you think it is unlikely to have smashed the public sectors appetite to spend money, a 7% annualized drop in GDP appears to be an absolute hammer blow to consumer confidence. This from a rise of sales tax from 5% to 8%.
Abe does not want to repeat this economic concussion again next year when the plan is to raise sales tax from 8 to 10%. So the prediction is, he will call an election to underline his mandate. Once won, he will kill the extra sales tax hike and perhaps attack the entrenched deflationists for a final attempt to push them into retirement. The Japanese have no stomach for spending. They have a government to be delinquent on their behalf. Unlike the US, the spendthrift ways of the state are no reflection of a debt fueled population. The Japanese psyche is economically whipped. Try to make them spend more and they will spend less. Give them money to blow and they save it. Make interest rates negative and they will buy bigger socks to stuff with 10,000y note for under the mattress.
However Abe appears determined to push re-inflation until a new generation of upbeat risk takers arise. Once re-inflation is a fashion the Japanese may well embrace it. That is the plan. Note this is a long term plan. The means, Yen will be weak for a long time.
Meanwhile Europe hasn’t really got started. With a certain Japanese-ness, Europe is saying yes to QE while shaking its head. Mario Draghi boss of the ECB keeps saying, “you EU countries need to restructure into being fiscally responsible and wealth generation friendly.” If that is the price of QE most do not wish to pay it.
However the basic point form most of the politicians of Europe is that QE is to make sure this restructuring doesn’t happen. QE is a financial repression of the private sector that transfers private sector assets to the government in return for zero interest paying IOUs. This “Added Liquidity” was once called cash. In a nutshell QE steals the pensions of little old retired char ladies and pays out for the gold plated pensions of retired bureaucrats. It’s a silent chronic larceny that few understand and no one witnesses.
That aside, QE will start for the EU in the end because only Germany and a few northern auster-ities will need it to stay afloat and in the end the ECB will do what its told. This again is a long term issue and it means the Euro will also be weak for a long time.
Meanwhile the US is not QE’ing anymore. It might have some bigwigs say it should and might to try and stem the tide of dollar strength. However QE is over in the US unless another massive shock strikes. Without the US buying its own debt up it will suffer losing itself as the 800lb bond buying gorilla. This drop in demand will mean Interest rates to get sell new bond issues will rise. Whether the base rate stays low or not, corporate bonds and new long end bond yields will rise. The bond curve will bend up. The dollar will rise with it.
This too is going to be a long term process. None of these paradigms are going to end soon let alone reverse. It feels like the one way trade of a lifetime. Euro and Japan has been tasked and appear to have agreed to take on the QE role the US has maintained through QE2 and QE3, at least for a year or two. If the markets are to believed the game is well underway.
My guess is this new paradigm will go for at least 2 years. Likely more. It will define all market directions. Currencies and interest rates are the apex markets and these are being managed globally to continue to try and repair the economic damage of 2007-8-9.
At least with this process we are starting to leave the political level of the game. When disaster struck in 2008 the situation went from market control, to economic control to control by politicians. You might see that progression as one developing along the reverse order of competence. That said the economists rather than politicians are back in the driving seat. At some point, perhaps in 5 years, the markets may be back in command of setting prices and allocating resources but for now medium term moves will come out of meetings like the G20, Jackson Hole. The governmental Elites will continue to try to untie the Gordian knot that grows ever larger as public sectors consume ever greater shares of their economies GDP.