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As stated previously, our contention is that the Fed wants inflation. Yes, that sounds counterintuitive and likely draws patronizing responses from pontificating academic "elites" and other "experts". The way we see it, the final options are rather simple if you can break away from the nonstop noise and clutter. Option 1 - hard default eventually. Option 2 - soft default. Soft defaults are much more palatable, and we fully acknowledge the inflation resulting from such a policy pursuit is bone crushing to many on this planet. Hard default means the whole thing comes crashing down in an epic, deflationary tsunami and collapse.
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Enter YCC (Yield Curve Control) and the real time experiment the BOJ is running right now. The Bank of Japan will soon own half of the JGB market. So, what's the plan? BOJ gobbles up the entire thing and then defaults . . . . . . on itself? Who knows, but we do know that defending that 0.25% on the ten year will require a ton of Yen printing, and the BOJ is already cranking it up to ever higher amounts that when conflated to U.S. Fed policy would amount to about $300 Billion/month in QE
Here is a chart depicting how the BOJ is eating up more and more of the "free market" for Japanese government bonds:
Even Bloomberg subtly notes in the headline to the graphic that the BOJ "will be first" to the 50% threshold strongly implying others will follow. We agree.
So how are things progressing with the lovely experiment of the Euro? The ECB recently held an "emergency meeting" to ultimately say very little but oh so much. Spreads are starting to blow out in Italy and other countries, and at a minimum we have some sort of economic weakness hitting the entire world at the moment. Yields blowing out and tax revenues declining. What do you think is going to happen? Look for more stimulus though they may come up with a new, cute acronym or name to try and hide that it is QE.
Which brings us back to the Fed, which is now monitoring a lowering of expectations for more rate hikes just as the entire nation is now talking nonstop about rate hikes and interest rates in general. Perhaps the ruse all along was to show the Fed has ZERO ability to "fix" the price of gas and oil when the problems are structural and logistical in nature (and intentional??? We'll let you decide). So if the fed can't control the price of oil in the current setting then what is the point of hiking rates that add lighter fluid to a deflationary collapse of assets (which crushes capital gains receipts) and causes rising unemployment (which IS in the fed's mandate)?
Debt/GDP in the U.S. is about 120%ish currently. This is nominal. How can the Fed get this number well below 100% so that interest payments on the debt outstanding don't gobble up more and more of annual Federal tax receipts? Reset the currency and cut the dollar in value by 30-50%. We won't predict this dramatic move but mathematically it could work. A more likely option is to pursue YCC and "allow" inflation to run well above desired levels so that nominal GDP rises substantially against a fixed (though rising higher likely) amount of debt outstanding. Voila! Now you have debt/GDP in a more manageable position. Remember, when the Fed went Volcker debt/GDP was below 50%. The market is already telling you the hikes are most likely to end in September.
YCC and QE. Tune in to CNBC where someone will tell you this is a "conspiracy theory" but don't be shocked if it happens.
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