Get Rich Quick … Japan Anyone?

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Q Wealth Co-editor Adam Richardson here…

Today’s post is a look into world of “Cheap Money”, which may or may not be what you think!  Regardless, there are investment implications that should be taken into account.  Anytime you are dealing with a distorted market it pays to know the game you are playing.


Towards that end my friend Nigel Bolton Shaw just wrote to me on exactly that subject.



Get Rich Quick … Japan Anyone?

invest in japan
Markets As Distorted As A Funhouse Mirror   credit


by Nigel Bolton Shaw

In the article, “A World of Cheap Money,” The Economist magazine writes that the “Federal Reserve is making a better job of it than the European Central Bank.”

But that is not the real “take away” of this article, or not from an investment standpoint anyway.

The message being sent is one The Economist glosses over in favor of sociopolitical and economic analysis. According to The Economist, central banking stimulus has been more aggressively pursued by the Fed than by other such banks. But cheap money is not an unmitigated blessing. It has to be administered properly or the benefits will not spill over from markets to the larger economy. Here’s more:

Unfortunately, the effect on output has been more muted. America’s GDP is showing signs of accelerating. But Europe’s economies are flat or shrinking. Overall, rich-world growth is likely to be barely over 1% in 2013, little better than in 2012.

For the Economist, “The link that has proved most elusive is between cheap money and corporate investment.” Even in the US, firms use low rates to issue new debt but that debt does not translate into new jobs and new factories. There is no direct connection between easing and higher employment. In fact, Western businesses are literally awash in cash, with US companies hoarding some $1.8 trillion alone.

Nonetheless, the article points out that there are signs of growth in the US economy not seen in Europe, especially Southern Europe, and that may be because borrowing costs are about four percent lower in the US. As a result, “Europe can learn from America in three ways.”

First, boldness pays. It is no accident that the most aggressive central bank (the Fed) has seen the biggest impact on spending by households and firms—nor that the most timid central bank (the ECB) has seen the weakest growth.

Second, not all unconventional policies are equal. The Bank of England’s focus on buying government bonds helped households less than the Fed’s purchases of mortgage-backed bonds. Central banks should put their money where the problem is. In the euro area, that means reducing borrowing costs for firms in the crisis countries of the periphery.

Third, and most important, monetary policy does not operate in a vacuum. If you simultaneously tighten fiscal policy (as Europe has done and America is now starting to do), it will soften the effect of cheap money. America has also restructured its banks far faster than Europe has, and its economy is less tightly regulated.

This is interesting no doubt but for our purposes the article’s main point lies in how even indications of aggressive stimulus can have an effect. This is reportedly the case in Japan:

Japan’s Nikkei index is up by 40% since Mr Abe promised bold stimulus in November. America’s S&P 500 index and the Dow Jones industrial average are both at record levels. Frothiness is back as investors search for higher returns, whether in junk bonds, African government debt or the new “structured credit” products dreamt up by the same investment banks that sliced up mortgages in the bubble years (see article).

We are not fans of cheap money as are Economist editors.

In fact, quantitative easings are highly distortive and yield effects that are unanticipated. But even a cursory look at stock markets around the world reveals that printing money has an almost predictable upward effect on averages.

The mainstream press is reluctant to report too aggressively on the linkage between money printing and stock market elevation because it gets in the way of the story that stocks are most sensitive to fundamentals of individual companies. But that is obviously not the case.

If the past five years show us anything, they show us that securities are inordinately sensitive to monetary policy and if you can find a major stock market and get in while its exposure to a stimulus program is just beginning, then you may have a chance to ride up significantly with those averages.

Japan anyone?

Nigel Bolton Shaw specializes in international Austrian economic analysis and writes for numerous publications including Without Borders newsletter. Please see here: Articles provided to Q Wealth are original compositions not to be found elsewhere. He welcomes your comments at [email protected].

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1 thought on “Get Rich Quick … Japan Anyone?”

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