The Japanese economy has reached the point of no return. The Bank of Japan, or the BOJ will continue to print yen until the citizens of Japan, unable to take any more pain from intractable inflation, insist on a change of course. The real solution for Japan will be to explicitly default on its monstrous debt, reports Michael Pento of Pento Portfolio Strategies, TalkMarkets.


The major beneficiary of Abenomics, the economic policies advocated by Shinzo Abe, has been the value of the U.S. dollar, but this will not be the case for very much longer. There currently appears to be a trenchant divergence between the monetary policies of the BOJ and that of the Fed. The market has become convinced that the Fed will soon be raising interest rates, while the BOJ continues to recklessly print money. This has caused a large increase in the value of dollar vis-à-vis the yen.

The dollar is going higher because of the misconception that the U.S. economy is strengthening. Markets are also convinced that the Fed will have a graceful exit from quantitative easing, or QE, and a smooth transition to interest rate mean reversion. But this could not be further from the truth. The U.S. economy is still highly susceptible to even slight interest rate hikes. This is why Q1 GDP was a negative 2.1 percent. The 10-year note went from 1.6 percent in May, to 3 percent by the end of 2013. Keynesians blamed snow for the negative first quarter, but the truth is that our over-indebted economy falls apart once debt service costs increase—even from such low levels.

As the Fed exits QE and prepares the market for rate hikes, we see the Case-Shiller home price index fell 0.5 percent in July, the biggest drop since November 2011 and the third month in a row of such declines. The Russell 2000 is down 12 percent from its March highs, and half of the NASDAQ is in a bear market. Commodity prices are crumbling as the economic data is weakens. Pending home sales, the ISM Manufacturing Index, Construction Spending and Factory Orders all recently came in worse than expected.

QE’s purpose was to boost real estate, equity and bond prices. After six years of successfully re-inflating assets, the Fed has duped itself and the markets into believing it can exit monetary manipulations with impunity. Therefore, get ready for the resumption of plummeting asset prices like we experienced in 2008.

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