- The helicopter discussion is going to matter.
- The BOJ has been hosing all of this cash without evident effect (except that we can’t know how ugly Japan would be without it), and Japan will soon have to go to the next ditch. If not the last, getting there.
- As media everywhere have latched on, annualized 2nd quarter U.S. GDP grew by only half of estimates only 48 hours old -- 1.2 percent.
- The even deeper surprise: consumer spending is still hot, in the second quarter rising to 4.2 percent annualized from 3-percent-ish in prior quarters. The GDP drag is caused by sick investment of all kinds, not just transient inventory and trade adjustments.
- That picture feels like unsustainable hollowing-out. Nobody wants to invest in new productive capacity because China is overdoing it for the whole world.
If it was Silly Season last week, it’s back to deadly serious now — complete with substantial surprises after a sleepy summer Friday.
All of us thought the big deal on Friday would be the Bank of Japan (BOJ) and new stimulus. Would the BOJ go helicopter? Not that it is not already, but there is a technical argument about helicopter vs. standard means of printing money.
The BOJ element
The BOJ did come through, but in more timid fashion than the most timid estimates. The BOJ will increase its annual purchases of Exchange Traded Funds from 3.3 trillion yen to 6 trillion.
Thanks to the yen conveniently trading just above 100/$, to convert 6 trillion yen to dollars, just drop the last two zeros off the back of trillion, and you’ve got $60 billion, the new increase less than half of that.
Now, $60 billion ain’t small sushi in an economy less than one-third the size of ours (ours grows; theirs hasn’t in 20 years). But, the BOJ’s other stimulus is buying Japanese government bonds, 80 trillion yen annually — that’s $800 billion per year, roughly 15 percent of Japan’s gross domestic product (GDP) and equal to most of federal spending there.
Relative to that operation, today’s new stimulus is an accounting error. The results: a stronger yen, which no one wants, and more deeply negative bond yields, which pulled ours down, too.
The helicopter discussion is going to matter. The BOJ has been hosing all of this cash without evident effect (except that we can’t know how ugly Japan would be without it), and Japan will soon have to go to the next ditch. If not the last, getting there.
The two things about which all central bankers agree today: Act in a way to be sure the next depression is not named after you, and if something really crazy has to be done, rope in the politicians. Kuroda-san has done the first part, but today’s timidity says he wants Abe to fly the helicopter.
Here’s the fine point. Central bankers and theorists (that’s everyone, as we’ve never tried any of this before) say that to buy bonds with printed money in the secondary market is not a helicopter operation, it’s quantitative easing (QE).
The owner of a bond surrenders the bond for cash. Helicoptering would involve buying bonds before they ever get to market — just take an IOU from the Treasury directly and send cash.
This fine point feels political, not economic, but we’re going to find out. QE reached limits long ago. Negative rates have been a bust, failing to drive cash out of banks and into loans and spending. Next up: somebody is going to try a big shot of government spending funded entirely by a central bank.
If that succeeds in creating inflation, that would push up Japan’s bond yields, and ours, too? Yes to the first, no to the second. If Japan destabilizes itself, trying to create growth where there can be none, then all the more money will pile into US bonds.
So what’s up with U.S. GDP?
Which leads to the big surprise Friday. As media everywhere have latched on, annualized 2nd quarter U.S. GDP grew by only half of estimates only 48 hours old — 1.2 percent. And the prior two quarters were revised down to 0.8 percent and 0.9 percent respectively.
The even deeper surprise: consumer spending is still hot, in the second quarter rising to 4.2 percent annualized from 3-percent-ish in prior quarters. The GDP drag is caused by sick investment of all kinds, not just transient inventory and trade adjustments.
That picture feels like unsustainable hollowing-out. Nobody wants to invest in new productive capacity because China is overdoing it for the whole world. No investment, no increase in productivity.
Consumer spending is hot because stocks and houses are hot, both lifted by exceedingly low rates, caused far more in the last three years by overseas conditions than the Fed.
And the Fed must now sit still, at least until it has figured out what is going on, while looking back at epic forecasting error on its own part.
10-year US T-note in the last week, consequences of surprises clear. The slide began with new tightening hints by the Fed at its Wednesday meeting, paused on Thursday, then the BOJ and GDP whammy Friday.
10-year US T-note in the last year, downtrend very much intact, bottom not evident.
The 2-year US T-note in the last two years. These are the most predictive of future Fed action. If you’re the Fed, and threaten to hike, and rates long and short then fall… you have it wrong.
In the great land of “be careful what you wish for,” if Abe and Kuroda really do succeed in getting inflation going, a hell of a lot of yen are going to leave Japan and Japan’s securities in a hell of a hurry.
A flat-line economy while the BOJ prints more cash than anyone ever thought possible? Japan will not surrender, it will not allow the immigration it desperately needs, and will not default — not without trying the helicopter
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at email@example.com.