Bank of America has an idea they're excited about. Want to know what it is? Have a look:
"Trade of the week," they're calling it. Now I'm not sure exactly what time the note hit on Monday, but it would have been nice to get that call last week, because... well, because this:
As I noted on Monday, that's what's propelling US stocks (NYSEARCA:SPY) to new record highs. The reason the yen (NYSEARCA:FXY) is tankan' (Japan economic data pun contest alert) is the sneaking suspicion that Prime Minister Shinzo Abe, emboldened by voters' apparent Good Housekeeping stamp of approval for Abenomics, is about to unleash helicopter money. Here's Nikkei:
Former Federal Reserve Chairman Ben Bernanke on Tuesday urged Japan's Prime Minister Shinzo Abe to keep pushing to decisively defeat deflation, according to an adviser to Mr. Abe.
The adviser left it vague whether Messrs. Abe and Bernanke discussed a radical step involving a central bank directly financing government spending---a measure known as "helicopter money" that Mr. Bernanke has advocated.
But Mr. Hamada said the issue "may have been discussed" by Mr. Bernanke with Japanese officials during his latest visit. Mr. Bernanke has met BOJ Gov.
Yes, such things "may have been discussed." One imagines they also "may" be discussed in other locales. "Greater global reliance on fiscal stimulus will boost neutral real rates in the short term [and] a pivot toward fiscal policies also opens up door for 'helicopter money'," Nordea's Martin Enlund wrote in a note out Tuesday. "Such a shift would be very helpful in Europe."
Recall what I said on Monday about this debacle:
...at a certain point, absurdity is absurdity and it's readily apparent even to the simplest of simpletons. "Radical" helicopter money risks alerting 'Joe the plumber' to the absurdity of what's going on. Once they "get it," it's Weimar Republic time.
In the interim, it's risk on!
Here's Deutsche Bank speaking to the former point (my emphasis):
In helicopter money, a concept proposed by US Nobel Laureate Milton Friedman, the central bank would finance public debt by increasing currency issuance or purchasing outstanding bonds and posting them as perpetual interest-free debt on its balance sheet, therefore effectively eliminating the debt. In order to avoid future risk, this would require meticulous management to reduce the fiscal deficit over the medium term and tighten policy if inflation should become a threat. Some Japanese academics argue that the BoJ's QQE is already basically a helicopter money policy or very near that state. At the same time, many market participants argue forcefully that once this policy is allowed, it could become politically impossible to halt, opening the way to hyperinflation. The yen would weaken, but bond prices would fall and the JGB ratings would be downgraded.
And here are markets speaking to the latter:
Click to enlargeAll. Time. Highs. Baby. And this time, yields are rising in sympathy (i.e. acting like they're supposed to when risk-on dominates sentiment). Here's CNBC's Melissa Lee mocking the bears:
Anyway, Citi thinks the helicopter money talk might be overdone. Partly (and ironically) because they're already doing it:
The government will most likely issue new JGBs to finance fiscal spending, for the first time since fiscal 2012.
We are getting inquiries from foreign investors on whether the upcoming supplementary budget will be a kind of helicopter money. Our answer to this question is no. While the current situation is already not materially different from helicopter money, as the BoJ purchases more JGBs than are freshly issued, the government is unlikely to cross the line by letting the BoJ directly and institutionally finance fiscal spending, which would at least requires a new legislation for the abolition of Article 5 of the Public Finance Law.
What's that you say Citi? You doubt Kuroda-san's mettle? Care to say that again?
For their part, Credit Suisse thinks the world may be "underestimating" the possibility that central banks are about to start the cash paradrops. Here's an excerpt from a note out last month on the subject:
In our opinion, the likelihood of some form of fiscal QE by one of the G4 central banks over the next 3-5 years is high, for the following reasons: i) given the age of the US cycle, history suggests there is a 60% chance of a US recession within the next three years; this would require real rates to fall by 5%, which is very hard to achieve; ii) conventional QE is having increasingly unwelcome side-effects (e.g. banks' NIMs falling, 'zombie' capitalism, and potential housing bubbles); iii) fiscal QE is effective (the multiplier on government spending is 1.8x, and there is a shortage of infrastructure investment in many developed markets); iv) it's more acceptable politically, as it can target the median household via construction jobs and tax cuts/incentives; and v) we believe that strong structural disinflationary forces (technology, China) will continue to make it hard for central banks to hit their inflation targets.
Clearly, once governments embark on some form of fiscal QE, the issue quickly arises whether there needs to be some form of cancellation of government debt.
The major central banks own up to 36% of their outstanding domestic government debt. It is possible that a central bank could just swap its holdings into very long dated zero coupon bonds or even zero coupon perpetual bonds and thus the central bank holdings of government debt would have no financing impact on government funding.
Japan: probably straight 'helicopter money.'
Japan is most likely to resort to this sort of policy, in our view.
In other words: "It's raining yen, hallelujah, it's raining yen."
Enjoy it folks.
h/t to Sleepless In The Alps for the title idea
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.