BOJ End Game & US Hike

Whilst bets on a September US rate hike are now down to 30%, that is still nearly a third of the market betting it will happen despite the realities we describe on the US economy and the world in which is belongs.  Recently Zero Hedge hypothesised why the Fed may be in a hurry to do so despite their economy still limping.  It’s worth repeating [we’ve added explanations for newer readers]:

“When considering that by 2018 the BOJ [Bank of Japan] market will have become the world's most illiquid (as the BOJ will hold 60% or more of all issues), the IMF's final warning is that "such a change in market conditions could trigger the potential for abrupt jumps in yields."

At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.

But ignoring the endgame for Japan, and recall that BofA [Bank of America] triangulated just this when it said that "the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation", what's worse for [Prime Minister] Abe is that the countdown until his program loses all credibility has begun.

What happens then? As BNP [French bank BNP Paribas] wrote in an August 28-dated report, "Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09."

And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.

But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ - the one central banks whose bank monetization is keeping the world's asset levels afloat now that the ECB has admitted it is having "problems" finding sellers - will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.

It's all downhill from there, and not just for Japan but all other "safe collateral" monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails”

This is a great commentary not just on why we may see a rate rise but more broadly the flawed nature of long term central bank market intervention to the extent we’ve seen.  Further to yesterday’s article, no wonder people are keeping their gold closer to hand on COMEX….