Free Money Friday- Japan Goes Negative And 'Saves' Asia (For Now)

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Includes: BXUB, BXUC, EPS, IVV, LLSP, RSP, RWL, RYARX, SDS, SFLA, SH, SPLX, SPUU, SPXL, SPXS, SPXU, SPY, SSO, UPRO, VFINX, VOO
by: Philip Davis

Summary

The BOJ has gone negative on their reserve rates.

We discuss the purpose of this policy and consider the repercussions.

Some quick notes on GDP and market valuations for 2016.

Click to enlargeMore free money?

No, the BOJ did not increase stimulus this morning. What they did is join Switzerland, Denmark and Sweden in the negative reserve club after dropping their rate from 0.1% to -0.1% this morning. Excess reserves are, simply, the bank reserves deposited in the Central Banks by their members in EXCESS of the reserve requirement set by the Central Banks. Usually, they are paid a deposit rate for these ultra-safe, ultra-liquid funds so what the negative reserve rates are TRYING to accomplish is to get the banks to do something else with the TRILLIONS of Dollars the Central Banks have handed out over the past 7 years.

Hopefully that something will be lending money to the bottom 99% (the Top 1% already get all they need), who can use it to refinance debt or actually build things - rather than the endless, non-productive, financial engineering that the Top 1% has been using all the free money for in the past 7 years - stagnating the Global Economy while increasing the wealth gap substantially.

The problem with Corporations (also legal citizens of the Top 1%, thanks to the Supreme Court) is that they use the low-interest debt to buy other companies and then downsize production so they can raise prices and increase margins. This lowers the amount of available jobs and raises costs to the consumers. They also use cheap money to buy back their own stock, which does nothing at all to grow the business (or the economy) but makes their earnings per share LOOK better, which tricks the sheeple to BUYBUYBUY at higher multiples (something we've been warning our Members away from all of last year).

Click to enlargeAll the money that's been created going to the Top 1% and put to no particular good use has led to the VELOCITY of that money dropping precipitously - down almost 50% from where we were before the crash. So the Fed and their fellow Central Banksters can print all the money they want but, if they don't get it into the hands of people who will actually spend it on things that GROW the economy - it's all a big waste of time.

Negative reserve rates don't happen by accident - they are the Central Bank's version of a time out for their member banks and, the more they misbehave, the stiffer the punishment has become. So far, after being burned to the point of insolvency back in 2008, the banks have been very reluctant to write loans to people who actually need them and instead have focused on finding new ways to convince rich people (and Corporations) to borrow more money instead - as they generally run a lower risk of repayment.

That's partially the Government's fault because they bailed out the "too big to fail" Corporations but did almost nothing to help the average homeowner or business who defaulted so loans to those people are considered "risky" by the banks while money given to the Top 1% is almost a risk-free loan.

No wonder we can't get the banks to lend out those massive piles of cash they are sitting on! Central Banks are trying to address this issue by penalizing the banks who don't put their money to work but, as usual, they are doing nothing to direct the money where it's truly needed - so don't expect any great effect - just a little relief rally that will quickly fade.

8:30 Update: In fact, we just got our first look at Q4 GDP and, not surprisingly, it is down from 2% in Q3 to 0.7% in Q4 and that's 22% below the 0.9% expected by the usual economorons. That gives us a 1.8% GDP growth rate for 2015 to $18.128Tn, up from last year's $17.616Tn. So that's an increase of $512Bn of goods and services in the US economy during 2015 and half of that was IPhones!

This is why stocks are no higher today than they were at the end of last year - our economy isn't actually growing so on what basis should they be higher? Sure, some sales moved from one company to another and the collapse of the energy sector has made approximately $400Bn available to go to other sectors but, netting it out for the whole S&P - it's been a wash and, if we continue to grow at this anemic pace - then you have to question the wisdom of the current high-growth multiples so many companies are still enjoying (AMZN, NFLX, TSLA, etc).

To some extent, they benefit from those Consumer Discretionary Dollars that have not gone into the gas tank but, on the other hand, that makes them very vulnerable to a bounce in energy prices that forces that money to go right back up in smoke! That's why we stuck to our seemingly low S&P target (1,850) last year - even when it seemed it was getting away from us at 2,100. Keeping our eye on the big picture kept us very profitable in 2015.

Now that we've tested 1,850 again, we are playing for a bounce and the good news is that no one (but us) is factoring in the strength of the Dollar, which averaged less than 90 in 2014 and about 97.50 in 2015 so those 18.128Tn GDP Dollars we generated this year would have been $19.6Tn in a constant currency (+11.4%).

That means the US is actually doing a lot better than you think only, as I mentioned above, the gains are not going to the right places. We need to channel that money towards wage growth so the bottom 99% can benefit and we need to get the Government back to infrastructure spending and put those Trillions of Dollars to use creating jobs. Meanwhile, we're comfortable calling 1,850 the bottom of our range for 2016 but we're not expecting much from here - just a gradual drift to make up that 11.4% (2,060) that marks the high end of the range on our Big Chart - the same range we predicted back in 2013 - and we've still had no reason to revise it:

Click to enlarge

Have a great weekend,

- Phil

Disclosure: I am/we are long SPY, DIA, USO, UCO, IWM, QQQ, AAPL, FCX, ABX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bullish mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at www.Philstockworld.com - a Membership site teaching winning stock, options & futures trading, portfolio management skills and income-producing strategies to investors like you.