Yesterday was a prototypical example of TPTB attempting to prolong increasingly tenuous “recovery” and “de-escalation” propaganda by attacking “unfavorable” markets like PMs, while supporting “favorable” ones like equities. I mean, how many times can the “Dow Jones Propaganda Average” be supported by a 10:00 AM EST “dead ringer” algorithm, and PMs attacked at “key attack time #1” with naked shorting before the entire world gets it?
This is what we wrote of in yesterday’s “Financial Achilles Heel,” which will inevitably and perhaps imminently be exposed. This morning, the same games are being played; but again, are being thwarted by reality. Across the board, economic data is going from bad to worse, which is precisely what we’re discussing today. That is the upcoming “decision time” of the world’s leading Central banks, which will be shortly forced to overtly acknowledge “QE to Infinity.”
Yesterday, Germany’s all-important sentiment index plunged for the seventh straight month, prompting expectations that tomorrow’s 2Q Eurozone GDP report will be negative and 3Q worse. This morning, Eurozone Industrial Production unexpectedly declined, and the top European financial press items are “Crisis stalks Europe again as deflation deepens, Germany stalls” and “Data from Germany, Italy and Portugal put pressure on the ECB to act.” Meanwhile, Japan reported an astonishing 6.8% decline in 2Q GDP, including the largest consumer spending decline in the nation’s history. The below two charts depict exactly how bad things are in Europe and Japan – where cumulatively, 30% of global output is generated. And by the way, for those asking “if things are so bad, why is the Nikkei rising?,” here’s your answer. The BOJ has not only been supporting the Japanese stock market in recent weeks, but doing so overtly!
Here in the States, economic data and market manipulation mechanisms are far more advanced, which is why the Miles Franklin Blog spends so much time “debunking” them. That said, at some point the “rubber must hit the road” in TPTB’s ongoing battle against reality; you know, the one depicted by Gallup’s latest poll in which 62% of Americans believe the economy is weakening. Yet again, the Fed covertly attempted to prevent recognition of “the most damning proof yet of QE failure” (i.e, plunging rates amidst so-called “recovery”), by goosing yields late in the day via the “new hail mary trade.” However, yet again, horrific real data has pushed yields down to the low 2.40s this morning; starting with another decline in mortgage purchase applications to a new 19-year low, and “unexpectedly” flat retail sales. Throw in this morning’s lower than expected Chinese industrial production data, and news that Dubai’s hotel occupancy rate has plunged to an 18-year low, and it becomes crystal clear that on a global basis, “need or want, demand is dying.”
Which brings us to today’s topic, as numerous Central banks are on the cusp of historic, hyperinflationary junctures. To that end, let’s start with Japan, where Abenomics’ two-year plan to double the nation’s money supply ends in April. In other words, we are just eight months from the Bank of Japan being forced to decide whether to increase the level of money printing, maintain it or shrink it. As noted above, Japan’s economy is contracting at an historic pace, whilst its CPI is at a 32-year high, and Shinzo Abe’s approval rating a new low. What will Japan do, as the perfect storm of a collapsing economy, hyper-inflating currency, exponentially rising debt, and “demographic hell” collide? No, it’s not a trick question. The answer is always the same as all fiat currency Ponzi schemes require exponential expansion to survive.
Meanwhile, the ECB is under heightened pressure to unveil the $1 trillion QE program it claimed to have been “preparing” when it unveiled negative interest rate policy and £400 billion of new “LTRO” loans two months back. Clearly, the odds of announcing QE at their September 4th policy meeting have rocketed higher; and frankly, I’d be shocked at any other outcome. Not to mention, Europe receives nearly a third of its natural gas from Russia, and by sanctioning Russia for its Ukrainian involvement, fears of winter gas shortages will likely catalyze further economic weakness throughout the Fall. Now that the German Constitutional Court has essentially given the ECB the “green light” to act as it chooses, the abyss of a new hyperinflationary monetary initiative appears imminent.
In China, it’s become crystal clear the PBOC is “QEing” at an unprecedented rate – particularly since it introduced its subtlely-named “Pledged Supplementary Lending” program last month. The Chinese call money printing “social financing,” but a printing press is a printing press no matter what you call it. At least China has the world’s largest currency reserves, manufacturing market share, and (likely) the largest gold reserves. And thus, when all is said and done, it is they that will be still standing, irrespective of the bumpy road they’ll travel from point A to B.
Which leaves us with the world’s other serial money printers, the BOE and Fed. Both claim their economies are “recovering” – although in the former case, yesterday’s news that GDP growth is expected to be just 0.7% for the next two quarters sharply refutes that notion; much less, a declining property market. Here in the United States of Economic Collapse, we have soundly refuted the notion of a “4% GDP world” – which today’s ugly data staunchly validates. In fact, the odds of dramatic second half weakness appear extremely high; let alone, if any of the countless circling “black swans” reveal themselves – from the Ukraine, to Iraq, Gaza, Argentina, Portugal, and countless other places.
The Fed claims it will end QE3 this Fall; but after that, what? Clearly, they cannot allow rats to rise in the world’s most debt-infested nation, nor exit a $4.5 trillion portfolio of toxic assets, which only becomes sicklier as the housing bubble bursts. The Fed has been purposely vague in its assertion that rates would not be raised until roughly mid-2015, but as far as we’re concerned, “mid-2015” is no different than “sometime in the future.” And by the way, “raising rates” doesn’t mean a lot if we’re talking 0% to 1%. Now, 0% to 4% would mean something; but then again, we’d be in a full-fledged 2008 redux the second they attempted such foolishness.
We have long noted how what the Fed does is far different from what it says; and when it comes to QE, all that matters to their policy-setting committee is what markets are saying. Thus, it will be quite amusing to watch them fumble with the issue of ending ZIRP if the PPT can maintain bubble-like equity valuations when QE ends this Fall – particularly as more likely than not, real economic activity will be significantly weaker. Let alone amongst its global trading partners where even hope of second half improvement is rapidly dissipating.
In other words, the world’s largest Central banks are headed for major “decision times” this Fall; perhaps, before it even starts in late September. History tells us what they must do to kick the can its maximum distance, so the only questions remaining are how and when. In our view, the universal recognition of worldwide “QE to Infinity” is a fait accompli by year end; and if not, shortly thereafter. And when this occurs, as it must, you had better have already taken precautions to protect your net worth.