Whose Financial System Will Lose the Race?

11/05/2014 12:01 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak takes an in-depth look at three key global financial markets and shares his analysis on which one looks the most likely to survive in these turbulent times.

The old joke about how fast do you have to be to run away from a bear really is kind of a central image to keep in mind for explaining the global financial markets. Of course, the answer to that riddle is, well, you only have to be faster than the slowest guy in your group to run away from a bear. In the case of central banks and the world financial markets, you don't have to be a rocket scientist bank, you don't have to be a perfect central bank, you just have to be better than the other guy.

One of the things that the Fed has got going for it right now is the other guys, principally the Bank of Japan and the European Central Bank, are both looking like, well, if they were running away from a bear, and this is the fuzzy kind of bear, we're not talking about a stock market bear, if they were running from a bear, one of those guys would wind up as lunch very, very soon.

In Japan, you've got a faltering Abenomics scenario that the whole idea was they were going to get inflation back over 2%, they were going to get growth close to 2%, end the deflationary spiral and the slow growth period in Japan. The problem, of course, is that it doesn't seem to be working. The Japanese government of Shinzo Abe did what a lot of Japanese governments have done. They stimulated the economy and, before it was really roaring, they put in a tax increase that took money out of the economy so growth has faltered. It doesn't look like the Japanese economy is going to hit the 1% growth target this year, inflation doesn't look like it's going to break 1% now, and you've also got a huge political scandal in Japan, which involves, let's see, you've got more than one going on at this time. One of them involves a cabinet minister who apparently took campaign contributions from a foreign owned company, which is illegal in Japan, and you've also got another minister, not the same guy or woman, in one case, not the same person whose staffers apparently ran up a fairly big bill at a Tokyo bondage club. That seems to be a little outside the payout even in Japan so you've got this huge scandal, you've got faltering growth, you've got faltering inflation, so the whole thing seems to be a muddle plus you've got a decision this fall, this winter, on whether they're going to implement the second half of the tax increase. They argued so strongly in favor of the first half of the national sales tax increase saying it's essential for Japanese fiscal stability, it would be very hard not to do the second half but, clearly, in terms of the fundamentals of the Japanese economy, it doesn't work so that's the situation in Japan. As you can see, that's not a very high hurdle to jump.

In Europe, the ECB, European Central Bank, has decided that it's going to start a fed style quantitative easing program but they've got a problem, which is that the assets that the German Central Bank, the Bundesbank, is willing to let the ECB buy without raising a huge political fuss are covered debt as well as certain kinds of corporate bonds. The ECB says that it wants to a $1 trillion to its balance sheet. Those markets are not deep enough so they can't really buy $1 trillion worth of stuff. It leads that, at some point, to have to go after sovereign debt, national debt, and the Germans and their Finish allies and I think the Dutch are really, really opposed to that so you've got a half cooked, once again, stimulus plan that doesn't look like it's going to go very far and, again, contrast to the fed, which was able to put in its quantitative easing program despite all the criticism and it got a lot, now has been able to exit. Again, the fed looks really good, looks like it knew what it was doing if you compare it to these other central banks who don't, and that's one of the reasons why the US stock market remains the best bet in a not so great global economic picture.

Related Articles on GLOBAL