Nikkei 13,000? Why Not 36,000?
James Glassman made waves today when he (re)released his famous “Dow 36,000″ declaration. A 150% rally in the Dow seems a bit over the top, but who knows any more? After all, what we’re seeing in Japan is (at least temporarily) throwing conventional wisdom entirely out of the window. In Japan we have a government that has now pledged to do “whatever it takes” to get the economy going again. And that means everything from fiscal stimulus to aggressive monetary policy to currency devaluations to stock market “wealth effect” targeting.
In this case, Japanese officials have done something unusual by saying that they’d like to see the Nikkei at 13,000. I don’t know what you call that. Maybe “wealth effect targeting”. Who knows anymore? Certainly not me. But whatever is going on, it seems to be working to some degree as the Nikkei is up another 2.5% overnight to 12,250. For those keeping track, that’s up from about 8500 in Q3 or about 45%. Those Japanese sure are wealthy now!
But it makes you wonder. If economic “prosperity” is so simple then why not just have central banks name target prices all over the world? Then when a few thousand people place orders at those perceived prices we can all “feel the wealth”. Of course, here’s to hoping that everyone doesn’t try to hit the bids at the same time to cash out on the “wealth effect”. That would create a “poverty effect” and we wouldn’t want that. But hey, this is a fun experiment. Here’s to hoping it works out in the long-run. If so, maybe none of us can work in the future and we can just have a central banker tell us what underlying production of everything is “worth”.
PS – This should go without saying, but do me a favor and don’t short the Nikkei. At least not yet.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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38 Comments
Common sense would tell you that this wouldn’t work, but honestly, who knows anything any longer?
Interesting observations Cullen. I was brought up being taught when something sounds to good to be true,,, it is. This experiment of central banks orchestrating asset price targets seems to be built on a very shaky and untested foundation. If the worlds CBs state as policy that there is no free market, how can a fair price for assets even be determined? If the CBs magic experiment hits any of a number of potholes on the yellow brick gold we may be in for a very rude awakening IMHO.
The reason why this CB intervention is illusory by taking a simple example and illustration why it won’t work if the fundamentals are misaligned. Let’s take a worst case scenario:
Singapore gets hit by a thermonuclear bomb on Saturday. The next day its central bank says to restore confidence it wants its stock market to be up 50 percent in the next few months from the closing price on Friday. Won’t happen.
Let’s take a best case scenario:
Singapore scientists discovers fusion technology on Saturday. The next day its central bank says to prevent too much optimism it wants its stock market to fall 50 percent in the next few months from the closing price on Friday. Won’t happen.
Japan’s central planners are doing more than just declaring a target on the Nikkei. They are committed to buying whatever amount of stock is required to reach the targets. So they will reach the target. But if they are buying, you should be selling at their target price.
I think CBers are aware that they are creating an illusion of wealth, but their betting on the fact that most people will get fooled and actually start spending more, which could then, at least in theory, make the illusion a reality via more demand, employment etc. It’s kinda like borrowing actually. When you take out a loan, you’re not just borowing from the bank but also from your future self.
Let’s sit back and watch, shall we
I see it the reverse way. The central planners are aware that they are creating an illusion of wealth, so they are trying to convince people to NOT SPEND LESS. Spending more is impossibile because they have not money for that. All what they are doing is contrasting huge deflationary forces. I think they are going to fail because to spend money we need well payed jobs not MacDonald’s jobs and globalisation destroyed millions of well payed jobs in the west forever. If you want them back you need strong protectionism which implies a lot of other things.
I don’t necessarily agree with Japan’s plan, but there are reasons why it might work. Economies are complex systems, and it’s been well studied that they are subject to all kinds of feedback effects (crowding of trades, bubbles, etc.) By making a strong push toward the inflationary state, they may “tip” the domino so to speak causing the system to start moving to a different direction on its own power.
Think of the economy as a car stuck in a pothole (deflation) at the top of the hill. If you can push the car out of the pothole and just slightly over the hill, the potential energy (Japan’s still top notch engineering, stable society, and human capital) will take care of the rest.
Another thing that I believe is not just coincidence, is that their recent uptick is roughly 20 years (or one generation) since the bubble burst. This new generation probably has no memory of the asset bubble and thus aversion to stocks.
No, Cullen, “conventional wisdom” is that Japanese monetary policy has been a total trainwreck for decades. Conventional wisdom is that yes, the BoJ controls the Japanese price level, because they own a printing press. Just like every country around the world could raise their price level by devaluing against gold. Just like countries all around the world with inflation targeting central banks have failed to plunge into deflation since 2008.
Not sure how a rising Nikkei increases the wealth of the average Japanese citizen when stock ownership is somewhere in the range of 3% to 4% of assets. Besides, this recent rise is a blip on the screen for any long-term holder (if there are any) of Japanese equities. They’ve been there and done that.
I can see where weakening the Yen adversely affects their wealth by making imports all the more expensive.
Regardless, shorting JGB’s continue to be a “widow-making” trade and I’m not so sure how long this weakening the Yen policy remains in place considering future adverse effects (destabized bond market maybe, rising cost of living) may begin to outweight the benefits.
“We wrote in the introduction that “it is impossible to predict how long it will take” to get to 36,000.”
A perpetual call option on vindication!
The secret to successful forecasting is to do it frequently.
Clowns
If things are so great in Japan now, why is the 30 JGB at 1.70%?
As the US experience shows, peaks in [Market Cap]/GDP aren’t sustainable if wage share of GDP is declining; you can’t eat a stock certificate (ha ha, that shows you how old I am!). I wonder what the Japan data looks like.
Another great macro call by Gundlach.
If Gundlach were a great macro multi-asset manager then this fund wouldn’t suck. I know he’s not the lead manager, but he definitely has input since the holdings seem to reflect his ideas.
http://finance.yahoo.com/q?s=DMLIX&ql=0&desktop_view_default=true
Isnt there somme accounting identity which can give us a concrete answer to what will happen in japan.
I suppose if the Fed can set the prices of short and long term Treasuries it’s only a matter of time before someone decides they should set a price target for equities, much like the BOJ just did. The question is what happens when the NIKKEI gets to 13,000–do they raise their price target?
Here’s a radical idea–instead of trying to stimulate spending and inflation by pumping up asset prices (which only benefits those who own the assets), why not take the same money and hand it out to the general populace, who will actually spend it. . .
That’s the “debt jubilee” idea. See Steve Keen. That’s also the “helicopter money” idea of Milton Friedman (perhaps, anyway… if that’s what he actually meant by his famous “helicopter” statement). Of course “Helicopter Ben” doesn’t really deserve the title, since that’s not what he actually did.
I think Steve Keen was talking more about forgiving debt. To me, the problem with the current central bank policy is that they have increased asset prices but not cash flow to investors. Low interest rates combined with increasing retirees means that, in the aggregate, assets get sold to fund current consumption. I think this is why previous BOJ equity purchases haven’t done much for the NIKKEI in the long run–the central bank may be buying but there are plenty of natural sellers.
Sending money directly to citizens would do more to fuel consumption that the “wealth effect.” I have many qualms about the corrosive effect of giving people money for nothing, but it would be more efficacious than the indirect methods the Fed is currently employing.
Keen wants a debt jubilee. I think I saw Cullen describe that as hitting the reset button on a video game because you’re losing.
But we are losing!
Who is “losing”? The USA has 92.3% employment. A private net worth that puts the average American in the top 1% of the entire world. We produced as much in the last 10 years as we did in the entire last 2000 years combined. Our standard of living might have stagnated a bit in the last 10 years, but that’s mostly thanks to stupid Fed policies that have steered a boom/bust cycle. I know it’s not all roses, but come on. Describing the world as “losing” it a bit much.
http://vimeo.com/50652818
Median income down, retirement assets stagnant since 1999, full-time workers being downsized to part-time, upper 20 percent making gains, middle class stagnant, working class getting its ass kicked.
No debt jubilee for widows and students, but Ben frantically pressing the reset button for lenders.
Come on. That’s not all true. Household net worth is up 45% since 1999.
http://research.stlouisfed.org/fred2/series/TNWBSHNO
And median wages have held up fine. Certainly compared to inflation. Most of these “declining living standards” stories are from people with an agenda and no facts. You want facts? See the St Louis Fed data above and the Social Security data in the post below. There are no fabrications there. If you want to argue that living standards have been stagnant for 10 years because per capita wages have been weak then fine. But that’s no unusual over a 10 year period. Especially considering the magnitude of the crisis we just went through….
http://pragcap.com/the-mythical-collapse-in-american-living-standards
I used to hit the reset button on the Nintendo all the time. My older brothers crushed me in everything.
Actually Keen’s “modern debt jubilee” idea is for the Federal gov to cut EVERYONE a check for the same amount, with the provision that debtors pay down debts with it first. Savers just get the money! That way it’s “fair” to everyone. Unintended consequences? Probably, but an interesting idea nonetheless.
Keen also has a couple of other ideas that seem interesting to me. One of which is to put a trade limit on stocks (using Biblical type numbers… for fun I guess): He suggests that equities can only change hands 7 times, after which they become good for a maximum of 50 years before “expiring.” The idea is to limit speculative run ups in price I think.
This is no surprise. This is what central banks have been doing since 2008, mostly to the cheers of investors.
When the MBS market collapsed, the Fed stepped in, bought a bunch of usless assets — some observers say at least $1 trillion worth.
When Fannie Mae bonds were selling at 60 cents to the dollar, the Fed bought up the U.S. mortgage market.
To keep interest rates low, the Fed began putting U.S. treasuries on its balance sheet. Did this keep T-bonds from falling value — hmmmm.
Also, this is no mere ‘wealth effect.’ If a central bank wants stock prices to go up, that’s money in our pockets.
Boy, you got to hand it to the world’s central bankers. There are masters at behavioral economics. Draghi states he will do whatever it takes to support the Euro and wham, the Euro Crisis is over! Abe talks inflation targeting and walla, the yen moves lower without any physical intervention. Bernanke speaks of dovish interest rates and this moves deflationary money back into risk assets-wheres the talk of disinflation?
So assets are re-levering. Whether this evolves into long term organic growth and income gains remains to be seen.
Call me crazy (or early), but I am starting to sell some of my large-cap stocks. The last time I purchased stocks in a significant quantity was in Feb 2009, so I’ve made a good profit and my allocations are currently off significantly. I’ve been hearing all sorts of positive chatter about US stocks lately, so it seems that the wall of worry is deteriorating.
Call me crazier (trying to catch a falling knife), but I’m planning to take some of that profit (maybe worth 1-2% of my portfolio) and purchase the GDX gold-mining ETF. There’s been virtually no chatter about this market segment for over a year, real interest rates are still negative, its price level is the same as when gold was ~$600/oz., and it currently pays a higher dividend than 5yr T-notes.
My stock purchases in 2009 seemed crazy at the time, so I guess I’m going to stick with what works. Opinions and comments are welcome.
From my vantage, this plays out in one of two ways.
1. Absolute value – Valuations, organic growth and true macro fundamentals come back into focus and we put in a long-term top near these levels.
2. Relative value – Market participants decide to ignore fundamentals, focus on the cheapness of stocks versus cash/bonds and praise the Lord Bernanke as their savior. Profits stagnate, but multiple expansion leads the markets higher. The further the disconnect between value and price, the higher the likelihood of a massive bubble (ala 1999) grows…and grows…until POP!
I’d take a good look at a gold chart. Gold’s at a critical level, if GLD falls below 149.50 or so, could be a disaster. I’m waiting to short at that level. Go to PeterLBrandt’s website, he’s pretty sharp and wrote a good article. Good luck to you.
Thanks Michael,
I will check it out.
Sounds like a plan. Stick with the crazy!
Once again, CB’s have only been doing this type of thing because the fiscal decision makers are either doing nothing, or doing the exact wrong thing (austerity). They’re looking at an anorexic die of starvation while everyone else sits and watches, so they say “we’ve got unlimited chocolate, and its better than nothing so lets shove it in her mouth until she’s fat”. Crazy – yes, but what’s the alternative?
Japan has demographic issues. They also have a culture of keeping their money in Japan. Money has been fleeing and retirees need something. Rising equity prices retards capital flows as well as give retirees something to hope for besides a mattress.
I can’t help by wonder why Japan is being accused of creating an illusion of wealth by propping assets when the rest of the world has been doing the exact same since 2009 ?!
We can only short the Nikkei when their finance minister places a lower end of quarter price target.
PPS. Don’t buy the Yen, at least not yet. The rise in the Nikkei has been partially offset by a decline in the Yen, and any wealth effect would be partially offset by a reduction in Japanese purchasing power abroad.
I took the Nikkei comments to be just another case of the BOJ attempting to alter expectations, like the announced 2% inflation target, not wealth targeting. Unfortunately, Japan’s problems are as much demographic as they are monetary and I don’t hear any talk of reform there. But I applaud them for trying something different.
My bet is on 42000 Dow
http://dobrisratings.com/index.php?option=com_content&task=view&id=149795&Itemid=111