One of our favorite strategists, SocGen’s Andrew Lapthorne, has penned an interesting piece looking at a core distinction between the US and Japanese QE, and how the former will ultimately prove “toxic” whereas Japan’s monetary experiment, while just as unprecedented, will confine its damage largely to the central bank’s balance sheet.
Lapthorne starts off by reminding readers that since equity markets peaked in June 2014, UK and Eurozone equities are down by 27% and 20% respectively in US dollar terms based on MSCI indices. In sharp contrast the US is up almost 10% and Japan has risen 6%. He then points out that “the resilience of US and Japanese equity markets will be, in part, down to QE and other central bank policies influencing the equity market. Some see this as a success; we, on the other hand, are worried about its consequences.“
The reason why the SocGen strategist is worried, is because while the mechanisms by which BOJ and Fed money printing find their way into the equity market appear similar, in reality “they are not”, and thus the end game to QE may have very different outcomes.
In the US, easy central bank policy leads to greater corporate bond issuance and leverage, which in turn result in companies buying back their own equity – and to that extent QE is now residing on individual company balance sheets. In contrast, in Japan the BOJ simply buys Japanese equities directly. This difference is important. In a market downturn, equity market losses will lead to the BOJ having to mark to market its equity holdings at a lower price. In the US, lower equity markets will lead to balance sheet disruption with the inevitable job losses and cuts in capital spending. In a low growth world debt is dangerous; in a deflationary world, debt is toxic. Japanese companies through years of experience probably understand this and have deleveraged as a result, US corporates, perhaps foolishly, have done the exact opposite.
The chart below shows the divergence Lapthorne is focused on: deleveraging in Japan vs record high corporate leverage in the US.
And while we certainly agree with Lapthorne that shoudl QE come to a premature end, or any end for that matter, US corporations will be forced to massively delever, mostly through chapter 11 and other forced reorg which wipe out years of equity tranche build up thanks to buybacks and dividends, an alternative explanation is that the central bank elite will merely force Japanese companies to onboard much more debt and keep the party going for a few more years, effectively transfering leverage from the US corporate sector to Japan’s. Which brings us to a bigger point: if for some reason, the leverage game is halted, either on the public or private balance sheet, it’s truly game over – and one has to include China in this analysis – as the trillions in global debt created over the past 7 years is the only reason why capital markets trade where they are, and perversely, is also the reason why global economic growth continues to deteriorate. Ironically, a reset of the unprecedented debt overhang is precisely what will be needed to reboot economic growth once again, something we have said since 2009, however for that to happen much of the global equity tranche will have to be wiped out. And the last thing the 1%, also known as corporate shareholders will agree to, is that.
Which is why we expect central bankers to come up with a few more tricks up their sleeves before the endgame envisioned by Lapthrone is finally unleashed.
The post SocGen Presents The “Toxic” Difference Between QE In The US And Japan appeared first on crude-oil.top.