Everybody loves a free lunch, myself included, and many in Japan would like free sushi too. Despite the short term boost in Japanese exports and Nikkei stock prices, there are no long-term free lunches (or free sushi) when it comes to global financial markets. Following in the footsteps of the U.S. Federal Reserve, the Bank of Japan (BOJ) has embarked on an ambitious plan of doubling its monetary base in two years and increasing inflation to a 2% annual rate – a feat that has not been achieved in more than two decades. By the BOJ's estimate, it will take a $1.4 trillion injection into economy to achieve this goal by the end of 2014.
The market has been engaged in a balancing act for six weeks now between being made optimistic by 1st quarter earnings that are mostly beating Wall Street's estimates, and concerns about 1st quarter economic reports that are consistently worse than forecasts and indicate the economic recovery is stumbling again.
As a result, while the market gets high marks for its resilience and ability to shrug off the negative economic reports, it has also made almost no further progress over the last six weeks. The Dow closed yesterday (Thursday) just 1.1% higher than six weeks ago on March 14. The broad NYSE Composite closed Thursday just 0.7% higher than on March 14. Even the usually more volatile Nasdaq closed at 3,258 on March 14 and just 0.9% higher on Thursday. Meanwhile, the DJ Transportation Average and Russell 2000 are 3% and 2% below their levels of six weeks ago.
"If these worries become really serious, . . . [s]mall savers will take their money out of banks and resort to household safes and a shotgun.".
-- Martin Hutchinson on the attempted EU raid on private deposits in Cyprus banks
The deposit confiscation scheme has long been in the making. US depositors could be next . . . .
On Tuesday, March 19, the national legislature of Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout. Reuters called it "a stunning setback for the 17-nation currency bloc," but it was a stunning victory for democracy. As Reuters quoted one 65-year-old pensioner, "The voice of the people was heard."
With trillions in cash sitting in CEO and private equity wallets, investment bankers have been chasing mergers & acquisitions with a vengeance. Unfortunately for the bankers, investor skittishness has slowed merger activity in the boardroom. Rather than aggressively stalk corporate prey, bidders look more like deer in headlights. However, animal spirits are not completely dead. Some board members have seen the light and realize the value-destroying characteristics of idle cash in a near-zero interest rate environment, so they have decided to go elephant hunting. During a nine day period alone in the first quarter of 2013, a total of $87.7 billion in elephant deals were announced:
Over the last few years, the Washington D.C. fear du jour has migrated from debt ceiling to elections and now from fiscal cliff to sequestration. A better term for the $85 billion triggering of automatic spending cuts (sequestration) may be "se-frustration" due to Congress's annoying inability to agree on a responsible approach to reducing our country's burdensome debt and deficits. The forced cuts getting crammed down our government's throat taste like bitter medicine, especially when the economy is limping its way back to a slow recovery (revised 4th quarter GDP growth of a meager +0.1%). Although the $1.2 trillion in cuts over 10 years may gag growth to an intensified slowdown, the good news is that the cuts will assist with the long-term health of the economy – even though most reasonable people agree there are more appropriate medicinal regimens to be offered.
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