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OK, I Get It. Things Are Coming Unglued

As long as major stock indices around the world keep soaring (forget for a moment the carnage in smaller stocks), and as long as bonds trade at near all-time highs, and as long as the yield of dubious government debt is close to zero or below zero so that borrowing has become a profit center for governments and a loss center for investors, as long as we live in this wondrous world, who cares about the global economy?

This is a resounding theme. Super-ugly data about Japan’s economy piles up, and people say, “Yeah but look, the Nikkei surges.” And this discussion is over.

It doesn’t matter that the Nikkei surges as the Bank of Japan is buying every JGB that isn’t nailed down. It’s buying them from banks, pension funds, and individual investors to pile them up on its balance sheet where they can be selectively defaulted on without sparking social chaos. Everyone seems to have accepted the alternative to social chaos, namely a gradual loss of “wealth.”

So banks, pension funds, and other investors are selling their JGBs to the Bank of Japan and are looking at stocks as a place to stash their proceeds. This buying is unrelated to what companies in the Nikkei are doing. It’s an effort to get rid of increasingly toxic JGBs. And hedge funds anticipate that pension funds and other investors are shifting into stocks, and they front-run them, and the Nikkei surges….

But off to the side, in Cairns, Australia, the finance honchos of the G-20 are meeting this weekend. And they’re already jabbering. They’re lamenting just how badly the global economy is faltering. But it was overshadowed by the iPhone 6 razzmatazz and the IPO hoopla of Alibaba, whose shares give investors ownership in a mailbox company in the Cayman Islands that has a contract with some Chinese outfit, and nothing more. But hey, the purpose of owning a stake in a mailbox company is to make a buck and get out. An equation that might work for a while in this era of endless liquidity.

There they were, the finance honchos of the G-20, fretting about the global economy. US Treasury Secretary Jack Lew knew exactly what was wrong with it. First he patted himself and the Fed on the back for the crackerjack performance of the US economy under his leadership that “continues to be a source of strength in the global economy.”

In reality, after diving in the first quarter and recovering in the second, the US economy is flying along at barely above stall speed and is in no position to pull along anything.

Alas, the overall global economy “continues to underperform,” he told reporters. “This is particularly true in the Euro Area and Japan, while a number of emerging market economies” – including China, the big one – “are also slowing.”

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