Tuesday, March 15, 2011

Show me the Money!

It's hard to make sense of the markets following the unprecedented events we are witnessing in the world today.

I can't help but think of the video below as I watch the BoJ respond to their crisis by turning on the printing presses:

"The central bank, for its part, eased its policy on Monday by doubling to 10 trillion yen a fund earmarked for purchases of assets such as government and corporate bonds in hopes that together with money market cash injections will improve sentiment, since it lacks the authority to directly buy shares to prop up prices.

Under the scheme, the central bank can buy exchange-traded funds, or trust funds investing in stocks, but the money set aside for such purchases is far too small to make a sizable impact on Japan's stock market."

Quick Take:

Greattttt...Now we have two drunken central banks dropping money out of helicopters.

I don't blame the Bank of Japan for taking this approach.  They had no choice.  What worries me is Japan's 200% debt versus GDP was already twice as bad as the USA's fiscal situation before the quake.  The cost of cleaning up this disaster is going to make this number considerably worse.. 

My question is how can Japan afford to rebuild??  As Jerry Maguire famously says above..."Show Me The Money!".   We already know the answer to this one...The money simply isn't there but one has to ask does it matter anymore?

It seems as if no country is held accountable for their spending by the bond market .  I guess the PIIGS have to some extent but that's about it.  Everyone else is allowed to spend money that they don't have without any consequences.

The Bottom Line

At some point the bond market will hold these insolvent governments accountable.  If they don't then inflation is going to continue to rear it's ugly head and create more chaos around the world.  We got our first glimpse of it in the Middle East.

Next up is Europe and the USA.  If you've filled up your gas tank in the past week you have already gotten a wiff of it.  Japan will likely get a pass for awhile, but I can't help but think they are about to experience some type of inflationary or hyperinflationary event down the road.

The inflation genie was placed temporarily back in the bottle thanks to the horrifying events in Japan.  Commodity prices have pulled back as the world's 3rd largest economy(and third largest user of oil) experiences a collapse in demand.

Don't expect this to last.  In fact, as Japan starts to rebuild over the next year I expect oil prices to soar as demand for oil sky rockets.  It takes lots of energy to rebuild a country, and we are about to head into the oil peak demand months of summer.

I wouldn't be surprised to see $5 gas as we head into June as a result of the events that have taken place in the past week.  If the Fed decides to continue QE3 during this time then gas prices could get worse if the dollar falls.

Enjoy the break in prices as Japan get it's act in order.  The way I see it we are in the eye of a Category 5 inflationary hurricane, and we are about to head into the back of the storm as we head into summer.

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