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Japan Shocked the Investing World that it is Stepping Up its Asset Purchases and is a Timely Reminder not Everyone has to Follow the Fed.

Japan shocked the investing world that it is stepping up its asset purchases and is a timely reminder not everyone has to follow the Fed.  The BOJ stated it will increase the annual purchase of Japanese bonds from 50 trillion yen to 80 trillion yen and raised its target in annual expansion of its monetary base from 60-70 trillion yen to 80 trillion yen.

Wow!  The Yen sold off on this news and all global equity markets rallied.

As all know the US FOMC ended its QE program last week and in my view the BOJ change coupled with inevitable QE policy from the ECB, such should more than replace the reduction in global stimuli caused by US central bank policy.

When will it end?   Talk about the ultimate Ponzi scheme that would embarrass Bernie Madoff.  At some juncture buying sovereign bonds via borrowed monies to increase liquidity and economic activity and devalues the currency to make the country globally more competitive will end badly.  But when?

It is generally accepted that there are only two ways a person, corporation, country is able to escape massive debt; bankruptcy/restructuring or inflation.

Last week I commented about the difference between real and nominal GDP where today the difference is relativity insignificant given the lack of stated inflationary pressure.  This is a major reason why 3.5% GDP does not feel like 3.5% GDP.

In my view the global central banks are attempting to stimulate demand pull inflation via increasing demand by extremely low interest rates and massive amounts of liquidity.  To write the obvious it has not worked.

The global economies are massively restrained by regulation, social policies and archaic employment laws and tax policy that greatly hinder economic creation.

What is really needed is a 25% reduction in all of the above.

Tomorrow is the mid-term election.  Some are declaring tomorrow’s outcome will be “historical.”  Several weeks ago I opined the odds were about 60% the mid-terms would be of “great historical significance.”  The post WWII high of number of Republican controlled seats in the House of Representatives was 246.  Currently 233 seats are controlled by the Republicans.

Friday’s polls suggested the Republicans may pick up 12-15 seats, up from 5-7 thought just two weeks ago.

Regarding the Senate, it is all but concluded there will be a change in power but by what degree.  Referring back to Friday’s polling, results are now suggesting as much as a 10-12 seat pick up.  Wow!

President Obama is on the verge of setting a record no incumbent wishes to hold…the most congressional seats lost by a President.

Two years ago I was opining the country was on the verge of tectonic change, further stating progressivism is never a long term political phenomena in the US because of our culture and heritage.

Yes Virginia, based upon the President’s statements, his policies and agenda is on the ballot this fall.

What does the above have to do with the markets?

Everything for today I believe to ignore Washington is equivalent to ignoring earnings and interest rates.

I will viscerally argue if there is a change of power in Washington, the odds of congressional tax, entitlement and debt reform rises exponentially all of which will increase confidence and monetary velocity.

As noted earlier, I believe QE has not been effective because of overzealous regulations, archaic employment laws and strangling social policies that has completely crushed confidence and the spirit to take risk.

I must write that I should be careful in what I write for it may come true.  The world’s central banks are desperately trying to ignite demand pull inflation that could potentially increase nascent cost push (wage) inflation.

As indicated, there are only two ways to overcome crushing debt; bankruptcy/restructuring or inflation.

If confidence returns, I would argue so does the odds of demand pull inflation given today’s massive global cash balances, the result of all developed economies experimenting with QE.

Hopefully this QE experiment does not get out of control and too much of potentially good thing becomes overwhelmingly bad.

To write the obvious, this week’s major event is the election.  However there are numerous employment and manufacturing reports released that can greatly influence activity.

Last night the foreign markets were down.  London was down 0.47%, Paris down 0.50% and Frankfurt down 0.53%.  Japan was closed for a holiday and Hang Sang down 0.34%.

The Dow should open nominally lower ahead of a week that can be of great significance.  The 10-year is up 3/32 to yield 2.32%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.