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Full Definition of INSANITY

1:  a deranged state of the mind usually occurring as a specific disorder (as schizophrenia)

2:  such unsoundness of mind or lack of understanding as prevents one from having the mental capacity required by law to enter into a particular relationship, status, or transaction or as removes one from criminal or civil responsibility

3 a :  extreme folly or unreasonableness

   b :  something utterly foolish or unreasonable

Of course we could also look at the “real definition” of insanity, “doing the same thing over and over again while expecting a different result”.  http://www.reuters.com/article/2015/04/01/us-japan-economy-boj-idUSKBN0MS36S20150401

Or, we could just look at a real life display of insanity to know what it is.  Its name is “JAPAN Inc.”!  Think of the above definitions, doesn’t Japan either financially fit each and every one of these or at least it’s their leaders hope that they do?  Think about what Japan has done over these last 25 years and now doing even more so?  They believe by simply printing money, they will be able to prosper and erase all foolishness …with of course more foolishness.

Specifically, Japan embarked on “Abenomics”, their version of American “QE”.  Currently the Bank of Japan is buying more treasury debt than their Treasury is issuing.  They have also been supporting their stock market since at least 2010, and doing it publicly.  At the current pace, the bank of Japan will own ALL ETF’s in little more than two years.  Next they will be targeting individual stocks to tuck away and into their portfolio.

There are some very unintended consequences to all of this.  If they keep buying sovereign debt, this will continue to reduce the amount of marginable collateral available and at the same time reduce liquidity even further,  http://www.zerohedge.com/news/2015-04-01/bank-japans-liquidity-crisis-one-chart .  Could it be that what started out as being a liquidity crises actually ends as a liquidity crises …made worse by their own actions?  While on the subject of debt, Japan initially balked at joining the AIIB, then applied …and now apparently has withdrawn.  Will they really be one of the very few Western nations not to join the party…and in their own backyard?

Moving away from finance and looking more toward the real world, Japan is considering building a 250 mile long “protective seawall”.  This  presumably to prevent any more tidal waves from crashing the island.  The last one as you remember breached Fukushima and caused a nuclear accident.  The response to this accident has been “insane”, they decided to pour sea water on the reactors to keep them cool …and then drain the radioactive water into the ocean.  Sushi anyone?  Now, it seems they have even “lost” one of the reactors and cannot locate it!

Asking a few common sense questions, would you lend money at virtually zero percent interest to someone who owed over 200% of their income?  This is the case with Japan, their debt to GDP ratio is over 200% and they can proudly say “they are the world leader” in this category.  The next question, if your proposed debtor told you they wanted to pay you back in a currency they would actively try to debase, would you do it?  This of course is the heart of Japan’s grand plan, devalue the yen …undercut your manufacturing competition …increase exports and as a side dish …pay your debt back with a currency worth less …or even worthless!  As a side note, Japan has been running trade deficits, so they haven’t even put a dent in their trade problems.

I wanted to bring Japan back into the picture because they have seemed to be hiding.  They are a huge problem but have been kept in the background.  They are the number three or four economy in the world and are also one of the top three holders of U.S. Treasuries along with China and of course the Federal Reserve.  Japan is the epitome of the West’s Ponzi markets with the Bank of Japan monetizing their debt over 100% plus supporting their stock markets.

Ask yourself this question, for what possible reason could the Bank of Japan be buying more treasuries than are being issued?  This is easy, but also very dumb.  The plan is to outright devalue the yen and also to pump liquidity into their markets by printing and spending the new money on stocks and bonds.  So far it has worked as their stock market has been on an upward trajectory with almost no corrections.  The problem is this, it has also sucked the liquidity right out of the system and in case you need the connection made, volatility increases as liquidity decreases.

While Japan is not currently considered a “fuse” like the greatest show on Earth (Greece, Ukraine and Austria), they are a very big powder keg!  Once one of these little flames start licking out, Japan, because they are so levered and thinly margined could easily go into a Friday close fat and happy …and just not open the following Monday.  Regards,  Bill Holter