TOTAL FINANCIALIZATION - Versus Enterprise Value

Total Debt + Equity = USA Bubble #1 03-03-13 McKinsey via ZH

Most of the time, when economists or Wall Streeters present a continuum of who's worst (or best) in the world, they show just a part of the whole: whether it is total sovereign (public) bonds, total corporate bonds, securitized or non-securitized bank loans, or in some cases, equities, as a percentage of the host nation's economic output, or GDP. The reality is that all these are merely a part of the greater whole, and showing one independent of the others tells at best a small part of the story. For the full picture one always needs to show how all these add up combined to get what in corporate finance is known as "enterprise value", and what in economics McKinsey has dubbed "financial depth" or the value of the world's financial assets relative to GDP. It is here that it is clearest and most visible just how extensive the "bubblification" of the US capital markets - both debt and equity - has been, even despite the relative drop in consolidated "financial depth" in the past five years.

In short: think US is the biggest financial bubble in the world? You are right.

And for those who say there is still a long way to go before the global bubble - the consolidated global bubble, including equity and debt, is reflated back to 2007 levels, guess again - we are now at a new all time high of "financial depth."

Finally, while everyone is bombarded every single day with news that the global stock market is back to "all time highs", what virtually nobody knows is that when expressed as a percentage of global GDP, which in turn is driven entirely by new debt creation mostly by central banks, global equities as a % of global GDP are now 40% lower than their previous high achieved back in 2007!

Those who are familiar with the simplest concept in all of finance - Enterprise Value - will understand why in an environment of imploding free cash flow such as the current one, this is bad to quite bad.

JAPAN - Yen Devaluation

Guide To Trading USDJPY 03-03-13 Zero Hedge

Having trouble deciding whether to join the herd? Unsure if Abe and Kuroda can unilaterally take on the world's central banks? Worried that surging inflation in energy and food costs in Japan will force the BoJ's inflationary resolve to crack? The following flow-chart from HSBC provides an at-a-glance decision-tree for whether JPY weakens to over 120 or strengthens back to 80...

Click to Enlarge

(h/t @JEliasof)

JAPAN - New Bank of Japan Policy - 2% Inflation in 2 Years

BOJ nominee Kuroda sets out aggressive policy ideas 03-04-13 Reuters

Haruhiko Kuroda - BOJ Nominee

NO MONEY INCREASE LIMITS

The Japan government's nominee to be the next central bank governor outlined more forceful policy prescriptions on Monday to finally defeat deflation, saying he

"would not set any limits on the amount of cash the Bank of Japan pumps into the economy"

INFLATION OF 2% IN 2 YEARS

Underlining expectations he would be an aggressive governor, Haruhiko Kuroda told lawmakers the BOJ's current policies were not powerful enough to boost inflation to 2 percent, a target he said the central bank should strive to achieve in two years.

Kuroda suggested the most natural way to ramp up the central bank's stimulus for the economy would be through

1. Huge purchases of longer-dated government bonds.
2. The BOJ should also consider kicking off its open-ended asset purchases early, rather than waiting until the scheduled start date of 2014.

"It would be natural for the BOJ to buy longer-dated government bonds in huge amounts," Kuroda said in a confirmation hearing in the lower house of parliament. "But the central bank also needs to scrutinize market developments at the time, as well as the potential drawbacks."

Prime Minister Shinzo Abe nominated Kuroda, president of the Asian Development Bank, to be the new governor in a push for bolder central bank efforts to end nearly two decades of debilitating deflation and revive the fortunes of an economy stuck in its fourth recession since 2000. His nomination is expected to be approved by parliament because opposition parties, whose support would be needed in the upper house, have indicated they would back him.

The prospect of BOJ buying longer-dated bonds prompted a market rally, led by the longer end. Yields on 20-year bonds dropped to a seven-month low of 1.550 percent. Yields on 5-year debt hit a record low of 0.110 percent.

Japan's former top currency diplomat, Kuroda, 68, would replace incumbent Masaaki Shirakawa, 63, who is due to leave office on March 19 along with his two deputy governors.

PRIOR POLICY

Under Shirakawa, the BOJ has agreed to

1. buy assets or make loans totaling 101 trillion yen by the end of this year, part of which includes buying government bonds with a maturity of up to three years.
2. It said in January it would switch to open-ended asset buying from 2014 to achieve the 2 percent inflation target.

ABE'S RESULTS

Abe's demands for bolder action has already

1. pushed the yen to a three-year low and
2. the stock market to a four-year high as investors anticipated much looser policies.
3. Sentiment in the government bond market reached a seven month high, a Thomson Reuters poll showed on Monday.

"Market expectations are high and it will be hard for the BOJ to do something to surpass such expectations," said Koichi Haji, chief economist at NLI Research Institute.

"You cannot deny the possibility that the central bank will ease before the scheduled first monetary policy meeting in early April to provide surprise."

If Kuroda's nomination is approved, his first regularly scheduled policy review would be on April 3-4.

Abe has also nominated academic Kikuo Iwata, who supports unconventional monetary policy, and BOJ official Hiroshi Nakaso, who has hands-on knowledge of the central bank's inner workings, as deputy governors.

Kuroda said that like other central banks, the BOJ should also focus on reducing long-term rates and risk premiums with the aim of increasing consumption and investment. The BOJ should not focus solely on the amount of money circulating through the economy, he said. "Simply expanding monetary base won't be too effective," he told lawmakers.

He acknowledged international concerns over Japan's monetary policy and worries a sliding yen could spark competitive currency devaluations.

"There's evidence that currencies tend to fall for countries that ease monetary policy on a large scale ... But the BOJ's policy is not targeting currencies,"

"The important thing is to ensure price stability and achieve the 2 percent price stability goal, although it could affect currencies in that process." Kuroda said currency levels should be determined by markets, but intervention was possible if markets greatly deviate from fundamentals.

It would be difficult for the BOJ to buy huge amounts of foreign currency bonds on its own, Kuroda said. The nominations must be approved by both houses of parliament to take effect. Abe's ruling camp controls the lower house but lacks a majority in the upper house, so needs the support of opposition parties to confirm the nomination.