Abenomics: The Biggest Ponzi Scheme in History?

By George Leong

All of you know how I feel about the Japanese stock market and the economy in general.

Yes, I was wrong in the past when I suggested traders and investors stay away from the Japanese stock market. The benchmark Nikkei 225 has been the top performer this year; in fact, at one point on May 23, the stock index was up a hefty—though undeserved—70% or so.

Yet despite all of the hoopla regarding how Japanese Prime Minister Shinzo Abe has become a rock star in Japan’s equivalent of Wall Street due to the country’s massive stimulus regime referred to as “Abenomics,” I still remain unconvinced about the Japanese stock market.

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Just like the Federal Reserve here with Ben Bernanke, Abenomics is all about driving the economy by flooding the monetary system with easy and, essentially, free money. (Can you say “Ponzi scheme”?) And when money is free, it is expected that consumers and corporations will spend it. But the problem, just like the one we’re experiencing here in America, is that the flow of money down the pipeline will create an artificial Japanese economy that will stay stuck in a recession—despite the growth.

As I mentioned previously in these pages, the flowing of easy money is dangerous because spenders become addicted to the near-zero interest rates.

Just recall the use of the term “monetary cocaine” by Richard Fisher, president of the Dallas Federal Reserve Bank, in reference to the Fed’s stimulus. (Source: “Fed’s Fisher: We Cannot Live in Fear of ‘Monetary Cocaine,’” Reuters, June 5, 2013.)

The failure of the Bank of Japan to offer up new stimulus at last week’s monetary meeting and the subsequent selling in the Nikkei stock market were red flags that we need to watch.

It’s no different from here; just like the U.S., Japan is currently being driven by the easy money—and traders want more of it. Hold back the easy money, and you’ll see the stock market fall.

In the Global Economic Prospects report produced by the World Bank, Japan’s gross domestic product (GDP) growth projection was raised to 1.4% from the previous 0.8%. According to the World Bank, “In Japan, a dynamic relaxation of macroeconomic policy has sparked an uptick in activity, at least over the short-term.” (Source: “Japan growth estimate gets World Bank boost,” The Japan Times News, June 13, 2013.)

The upward revision is encouraging for Japan, but it doesn’t justify the associated rise in the Japanese stock market. Not even close.

Moreover, last year’s launch of Abenomics will add to the already woeful debt levels in Japan, and, just like the massive debt buildup in America, this will not be good.

The Nikkei 225 has retrenched 22% from its high on May 23, and I don’t think a bottom has even been reached yet. I said it before and I will repeat it now: I would stay out of the Japanese stock market.

And just like the United States, Japan will find out very soon that its stock market will be dependent on the flow of easy money to continue its uptick. This is a risky proposition, especially as the global interest rates begin to ratchet higher. And just like America, the Bank of Japan is running a massive Ponzi scheme that could—very simply—collapse.

This article Abenomics: The Biggest Ponzi Scheme in History? was originally published at Investment Contrarians