The financial markets are now being almost entirely driven by activity in Japan where the Great Global rig of the last five years is finally hitting a wall.
As noted in last issue, the Bank of Japan or BoJ has provided the playbook to Central Bankers for dealing with the deflationary crisis of 2008. All told, the BoJ has launched QE plans equal to over 40% of Japan’s GDP.
The “shock and awe” plan announced last year ($1.4 trillion) has put the bond market into revolt. But it’s done more than that; it’s shown the “limits” of QE.
This was the first “tell” that the Central Banks are losing control of the markets. The second “tell” occurred yesterday when the BoJ announced that it is not implementing any new stimulus.
Let us put this into perspective: the BoJ just announced that it would monetize $605 billion per year in early April 2013l… and by the summer traders are looking for the BoJ to announce more measures?
This is possibly the single most important “tell” that things are beginning to deteriorate: that the single largest QE policy ever announced by the most debt-saturated country in the world not only resulted in a stock market drop but that only two months later investors are looking for more stimulus.
We get additional indications of the end of Central Bank rigging in Europe where supposedly “unlimited” mega-bailout program called the Outright Monetary Transactions program or OMT hit a wall yesterday.
For those of you who do not recall, it was the OMT program which held the EU together last year. Starting in June 2012, ECB President Mario Draghi hinted at the ECB providing “unlimited” bond buying for European Sovereign nations (essentially a massive multi-country QE program). The ECB formalized this program in September 2012… but has yet to release any details regarding how precisely it would be implemented and what exactly it would do.
Put another way, ECB President Mario Draghi promised he’d engage in a massive QE policy… but didn’t actually do anything from a monetary perspective. Indeed, he didn’t have to… the markets took care of everything for him as investors piled into EU sovereign bonds based on the belief that the ECB had put in a “floor” under the bond market.
The end result? Spanish and Italian bonds rallied, forcing their yields (or borrowing costs) lower and EU politicians proclaimed the crisis “over.” All based on a vague promise from the ECB.
There are definite limits to what QE can do. Now that even Bill Dudley and other Fed officials admit that the Fed doesn’t understand QE, it’s only a matter of time before the market begins to crumble.
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