Halloween Yen Shock: A(nother) Money Machine; Ruble Shock: Winter Withering

Many of us have been given pause by the US Federal Reserve Bank’s unprecedented creation of trillions of new dollars and then using them, monthly for six years, to buy up the lion’s share of the US home mortgage securities market while also financing most of the US Government’s annual deficits, via its purchases of Treasury bonds.

Today, at the peak of autumn, we annually practice the strange and ghoulish Halloween ritual in the US. But today in Russia and Japan, they are acting far more unusually than we. While we slept, The Bank of Japan’s board unexpectedly voted to increase its existing Fed-like money-printing program. It will create an additional annual 3/4 trillion dollars-worth of new yen with which it will focus on purchasing 7 to 10-year Japanese Government bonds. Similar toits European counterpart’s promise two years ago, the Bank of Japan said that its money printing/bond buying program would continue “as long as necessary”. So, today, Japan’s stock market roared its approval, treating itself to an amazing 5% one-day climb to a 7-year high.

And also overnight, the Russian central bank raised its base interest rate to 9%… a whopping 20% increase from yesterday’s 7.5%. Compare either one of these figures to the US’s 0.0% to 0.25% and the Eurozone’s minus 0.1% target. The dramatic Russian move is apparently intended to prop up the ruble which, has been recently hammered by three converging forces: (1) a broadly struggling domestic economy, (2) selective financial punishment of President Putin’s oligarch-allies by a large number of governments, attempting to reverse aggressive Putin policy and military adventures in the Ukraine and, more importantly, (3) the sudden, apparently not temporary 15+% swoon in the global price of oil that is Russia’s primary economic lifeline. So, how would we be reacting if we were your average citizen-Boris, earning a living and doing business in Moscow today? We haven’t seen any polls of Russian voters, but the likely economic impact of today’s interest rate-bump will amount to pouring boiling oil on a politically restless population that is progressively trapped in a complex economic morass. As winter’s short days and very long, cold nights spread over most of Russia, it appears that Mr. Putin is himself immersed in boiling water and, more importantly, the thermostat is probably beyond his reach.

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Posted in Investment Insights, Market Commentary

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