We’ve been exploring how the credit bubble resolves itself. Inflation? Deflation? Are we locked in to a long, long period of stagnation, slump and economic sclerosis?
What’s happening in Japan? We ask because, in the race to financial catastrophe, Japan is ahead of us. And this week in the Financial Times Japanese prime minister Shinzo Abe gave us an update. You may recall, dear reader, that Abe came into office on a reform ticket. He had three arrows, he said. One for fiscal policy. One for monetary policy. One for other things that were never clearly identified but nevertheless needed to be killed. As bold as he is dumb, Abe has let his arrows fly. Among his achievements so far, he claims his monetary arrow hit its mark.
We are still reeling. Yesterday, we reported that central banks are major buyers of stocks. Their policy of suppressing yields on bonds has pushed them to stretch for higher returns in the stock market. A recent report by a central bank research and advisory group called the Official Monetary and Financial Institutions Forum (OMFIF) calculates that central banks around the world have lost out on $200-250 billion in interest income on their bond portfolios. In other words, central banks are victims of their own depressed interest rates. Feeling the pinch, they move more and more of their portfolios into equities.
Two days ago, we promised a look, not at where we are going, but at where we are supposed to be. Japan, that is. First, a quick look at the markets: The Dow down 109 yesterday; gold up a few bucks. What’s ahead? “Tokyo now, Buenos Aires later,” is still our best guess. “America will follow Japan’s lead,” we predicted as the crisis began in 2007. Japan doesn’t have a runaway stock market, you will protest. True, but America doesn’t have a government debt equal to more than 200% of GDP either. Or girls who wear those Wicked Witch of the West stockings and pigtails.
Dow down 159 on Friday. Gold up $18 an ounce. Remember, it’s just a matter of time until US stocks begin to fall. How much time? Darned if we know! We spent Friday cosechando (harvesting). We were on our knees going through the vineyard at the family ranch, harvesting grapes. The going rate for such work is 5.70 Argentine pesos (or about $0.70) per gamela – the plastic bin we dragged along after us. This was the first time we had ever worked as a grape picker.
Well, there’s the bounce. The Dow up 181 points yesterday. Gold off $3 an ounce. The end will come – sooner or later – for the big bull market in US stocks… and for the debt bubble. But it didn’t come yesterday. Will it come today or tomorrow? We don’t know. All we know is you want to be prepared. (Unlike bonds, gold has no counterparty risk.) Today, we explore the time that land forgot. That phrase doesn’t really make any sense, but we wanted to try it out anyway.