Investors vs. Policymakers: Who's suffering the most from Confirmation Bias?

There's a term in psychology that refers to a person's mindset when his/her ability to perceive a situation without bias is hindered by the insistence of their beliefs being accurate in every detail to such an extent they jeopardize possessing full clarity by ignoring information that refutes their view and paying attention only to that which supports it.

If you haven't heard of it before, it's called confirmation bias, a well documented human tendency that has significant relevance within financial markets, specifically towards those responsible for taking decisions based on opinions of an investment.

However I'm not here to talk about the decisions made by investors which might be overcome by this bias but rather those in prominent policymaking positions who dictate the direction of an economy as a whole and hold an influential role in deciding what balance works best.

One would think it's safe to assume that these figures have the necessary requirements to equip them with clear thought on growing variance on either side of the economic spectrum and in effect be bring about consistency to the pathway of growth instead of extremity.

BoJ doubles down on easy monetary policy https://t.co/vshzMQnKYs

— Financial Times (@FT) September 21, 2016

But this thought is becoming evermore irrelevant when we come to realise that the power once enjoyed by these economic mechanics are losing their influential grip of reality by overlooking data which suggests their actions do more to distort than anything else but instead choose to merrily continue along a path destined to produce failure.

The Bank of Japan announcement pertaining to the scrapping of monetary base targets and replacing it with "yield curve control" reiterates the point being made that central banks around the globe and more importantly those in the developed world aren't willing to admit defeat in the lack of substance of generating a full economic recovery from the toolbox of available policies.

Merely changing tactic won't change the skepticism being built up around the abilities of these policymakers to effectively take hold of the situation and steer proceedings in the right direction.

Interference in the stock market by Japanese government shows wary signs

Much of this year's economic debate has centred around global central banks and more so those operating in advanced economies who have taken to exhausting the limits of its policies to new extremes in introducing bold yet questionable moves in shifting interest rates below zero for the first time in recorded history in an effort to curb a decline in economic activity.

Besides this, another crucial function of monetary policy is the asset sales and purchases that take place as part of the process of decreasing or increasing the money supply respectively. However over the years since the Financial Crisis central banks have announced numerous rounds of purchases all of which has created a shortage of appropriate instruments to use when stimulating.

The Bank of Japan has faced this dilemma for some time and has resulted in it now owning over half of the listed Japanese Equity ETFs. Not only is this worrisome but the continuation of this policy measure provides doubt concerning the true valuation of equities considering the artificial demand stemming from these purchases.  

Furthermore Japanese equities aren't only finding favour from the BOJ but also the Government Pension Investment Fund of Japan, the world's largest pension fund. The fund shifted it's strategy almost two years ago by opting to focus it's accumulation into equities whilst squeezing out bonds, a decision that was largely influenced by Shinzo Abe's government who saw the frightening outflows from Japanese equity markets.    

Bank of Japan and Government Pension Investment Fund own largest shares in 474 of ~1970 cos. listed on Tokyo Stock Exchange: Nikkei

— zerohedge (@zerohedge) August 28, 2016

However the fund made headlines for all the wrong reasons recently when it reported a loss of $52 billion for the quarter ended June saying it had been affected by the aftershocks of Brexit but more importantly the strengthening of the Yen, a factor that's been troubling government's for some time, leaving many wondering if the government's efforts to prevent a fresh crisis had failed in its entirety.

Combine the two organisations stakes together and they register as the largest stockholder in approximately 25% of all companies listed on the Tokyo Stock Exchange.

There can only be one conclusion when confronted with the facts, Japanese citizens don't share the same confidence in the country or its economy as its government does. If they did the government wouldn't find the necessity to hold such a significant stake to hide the truth...

Consider for a moment the scale with which an unwinding of such investment would demand from interested buyers.

Perhaps an economy that doesn't suffer from a lack of structural reform that subsequently weighs down efforts by government to turnaround the situation yet falters the economy at every site of a recovery.    

Japan's economy proving policymakers wrong

It wasn't long before the Japanese economy proved contrast to policymakers belief  that exceptional stimulus measures coupled with an experimental and untested use of interest rates below zero are necessary means to break out of decades long stagnation and deflation with the latest printed figures indicating the nation's economic activity only grew 0.2%  in the second quarter of 2016, a paltry increase that's bound to pressure the government to deliver expectedly.

Having written about the topic of Japan on numerous occasions my opinion has yet to change regarding the type of policies employed by both monetary and fiscal authorities who have failed to drive the economic progression towards a better outcome.

In recent weeks we heard a bold but skeptical plan hatched by Japanese prime minister Shinzo Abe to expand his government's budget in an effort to support the economy, a frequent past time that's featured more distinctly as evidence clearly points to policy failure having promised to save Japan from economic implosion.

Japan's economy stalls in April-June, casts doubts on Abe's policies https://t.co/AIGc6FpAlG

— Jennifer Ablan (@jennablan) August 15, 2016

His partner in crime Haruhiko Kuroda hasn't had luck either in convincing buyers in the Japanese Yen of the overstated strength they've poured into the currency in the last year. The devastating impact this is having on the country's export clearly shows up with relenting desire to derail future prospects.

However no confidence can be found when the actions of the Bank of Japan imitate that of its counterparts and vice versa with a "follow the leader" mentality attached closely with every desperate measure taken by developed world economies in a bid to save themselves. Actions which are spurring on fresh currency wars amongst each other.

If the scale of stimulus were to be increased to a larger amount than what we're witnessing currently we are certain of financial catastrophe that would overshadow the haunted past and when considering the extent to which policymakers are willing to extend monetary programs, the ease of which to reach this state is not out of grasp.

Once again it cannot be stressed enough that world leaders need to come to the realisation that the global economy doesn't require infinite amounts of money supply to move the dial but a closer look into the shifting dynamics that are having a greater effect on the economic cogs that motion the mechanisms of growth

Japan's delay of a sales tax hike merely spells doom

In an expected move Japanese Prime Minister Shinzo Abe delayed the implementation of a sales tax hike following the failure of the once prospective Abenomics that's seen Japanese debt balloon outwards placing its citizens with grim prospects of the future. The move will bring short term gain to an economy that's been battling deflationary pressures together with contractionary expectations related to the health of economic activity in the country.

Abe didn't deviate much from what he had said last week when Japan hosted the other 6 remaining members who make up the economic council of G7(otherwise known as Group of 7). He reiterated the risk the global economy faces due to the slowdown in activity in emerging market nations saying China had influenced most of the current downtrend being experienced adding that the adverse effects felt by most nations around the world had taken the wind out of the sails of a planned economic recovery that had been underway for some time.

As much as these economic conventions help guide investors on the course of direction the world economy is headed in, very often they're used to test alliances with the case of Japan's ties to China standing on shaky ground having centuries old rivalry with its Asian neighbour.

Trying to point out China's failings while ignoring their own dilemma of an increasing debt horde is quite rich when coming from the likes of Japan.

S&P says #Japan sales tax hike delay makes 'some sense' (as debt to GDP has grown to 240%). https://t.co/fdwLDUssIQ pic.twitter.com/2ScgLFnVv5

— Holger Zschaepitz (@Schuldensuehner) June 1, 2016

Credit rating agencies have already started circling with a handful of critics painting a woeful picture of the outlook of the Japanese economy if it doesn't properly arrest its debt problems that sits at the highest levels to GDP amongst all countries in the world. Furthermore the situation only becomes bleaker when you weigh up the poor take up of prime minister Abe's stimulant fiscal measures that produced the tiniest amount of excitement at the beginnings of its undertakings that subsequently fell by the wayside in recent years.

Refusal to concede defeat, Abe's lack of sensibility has prompted Bank of Japan Governor Haruhiko Kuroda to rush in and "save the day" as some might term it, when in fact the policies churned out from the monetary body is in direct conflict with the goals of the economy and its people.

The market never lies and none can be truer when observing the abnormal strength of the Yen versus the US Dollar leaving many theorist scratching around for answer after the BOJ dropped interest rates below zero and announcing more stimulus measures to an already extended program.

Supranational monetary organisation the International Monetary Fund have recently warned developed nations that the limits of monetary stimulus are wearing thin and stressed the need for governments to begin "structural reforms" of their economies if they want to avoid riding into economic catastrophe further down the line.

But again the powers that be continue to steer their economies in the opposing direction of rationality with Japan being a basket case leading the forefront of technological advancement in an economy yet failing to take into account the impact such changes bring onto the decision making process of its citizens.

Looking at reasons for why conventional economic policies aren't working isn't enough and should instead be viewed as a need to push past old beliefs by exploring the possibilities of exceeding the bounds of theories that have laid around for decades and renew the study of economics as it was intended in the formative years of Adam Smith.

Is the ECB running scared after today's comments?

Questions still remain whether the decision made by the European Central Bank was the right choice in adding extra stimulus to its already extensive arsenal in the hopes of bumping up inflation above the all important 2% mark which so far has failed to win over critics. Apart from having to contest with both internal and external shocks that play a massive role in influencing the inflation rate, the ECB has now found itself drawn into a new debate over the usage negative interest rates.

The message that came out of the ECB this morning is a reactive one where the central bank is trying to revive the hope that a stock market rally might pursue if they talk it up enough. This is hardly the case as new uncertainty arises from the profit prospects of the banking industry following another interest cut that takes things deeper into negative territory prompting banking executives to re-think their strategies going forward.

After Mario Draghi's announcement last month I commented in my blog that markets have become fearful of the ability of central banks to steer the global economy in the right direction. We heard grim projections of the state of the European economy that increased fears rather than abate them leading to market participant to reassess their views on the current market environment.

Norm would suggest that markets should've come alive after such an expansive stimulus program yet it didn't and instead fell flat on the ground leading many to believe that perhaps monetary policy has reach an exhaustive end.

ECB stresses it's ready to do "whatever is needed" to return inflation to target https://t.co/ixShYT2hkL pic.twitter.com/HqMmFQH06h

— Bloomberg (@business) April 7, 2016

If wanting evidence that would backup the belief you'd only need to look over the Asian continent to Japan and witness the unforgiving onslaught traders and investors have brought onto the stock market fearing the once hopeful policies proposed by Prime Minister Shinzo Abe amusingly known as Abenomics maybe setting up a dramatic tragedy to end the tale.

With government debt ballooning out of proportion and credit rating agencies closing in on investment grades by warning that the levels we're seeing currently aren't sustainable, now would be a good time to exhibit the good that may have come out of such measures after almost 4 years of progress. But the Japanese economy has nothing to show for it besides piles of debt and an overheating stock market spurred on by the Bank of Japan.

Foreign investors have taken exception to the shifting ground below their feet and decidedly made a spectacular dash for the exit sign as things get worse. There's an old saying that goes "The proof of the pudding is in the eating" and unfortunately Abe hasn't delivered on his promises. Adding further to the woes is the BOJ's action of supporting equity markets and placing a blur of valuations making the risk of a collapse so much closer.

It's clear that monetary policymakers are running out of options at an alarming rate which would explain the uncertainty that's lying around global markets at the moment. The more they struggle to find endless solutions to perpetual problems the clearer it becomes that the time for governments to get to grips with the reality on the ground and focus on the restructuring of their respective economies is coming soon.

 My only distress is how much disorder has been created by taking the extreme this far?

"Buy my Abenomics"? Hedge fund says nope https://t.co/ixihLhwVdz via @ynakamura56 #JPY pic.twitter.com/RJy9kSctOu

— Sarah McDonald (@mcdonaldsarahj) April 7, 2016

Travelling Technicals with Global Indices: Nikkei 225

Among the world's top stock markets as measured by market capitalisation is the Tokyo Stock Exchange with 2292 listings, it certainly lives up to its hierarchical standing with plentiful multinational corporations having all started in Japan and expanded outwards, conquering new business landscapes and winning over global consumers with products that has seen them become some of the most trusted, reliable and technological brands of our time.

It's not difficult to understand why the Nikkei 225 has formed part of a common index following throughout the world. If one thinks of just a select few companies that can be found in their day to day lives that reside in the index you sense that they are the appropriate gauge for world economic outlook;

• Toyota
• Nissan
• Sony 
• Fujitsu
• Panasonic 
• Komatsu 
• Yamaha 

It's evident to see how Japanese products have influenced the way the global consumer utilises their purchases and in saying that has set the benchmark in terms of standard of quality that should be expected.

But as much as the Japanese businesses have successfully captured profits from their export endeavours, the pathway with which the Japanese economy is along has been troubled for the past two decades with a risk of continuing to deteriorate if long term solutions aren't found to pressing issues. One particular dilemma facing the Japanese is a crisis of having a shrinking population or put more plainly a situation where there are more old people than young people.

As a result the Japanese government is finding it extremely hard to tap into revenue sources that would produce sufficient taxation to fund an increasingly demanding fiscal budget that requires more priority on the health of the elderly and as such needs to tackle restructuring their economic activity that would be prosperous over the long term. Thus far that goal looks too distant for many to begin being hopeful of the future yet with every passing year the need to deliver is growing ever constant.

This is just one of the many problems facing the Asian nation but makes a worthy case study for other developed economies to pay attention too. We've seen parallel policy implementation when it comes to a monetary easing between the Bank of Japan and the European Central Bank which is seemingly causing the world to ponder what trajectory both these nations are on.

However because the generous helping of monetary easing has made the need to find suitable returns ever greater the Nikkei 225 index has seen a dollop of resilience coming through that's assisted the index to challenge long term resistance with potential to go higher.

Let's get down to the charts:

Quarterly

The chart we looking at has a considerable length of time spanning as far back as 1987 which would date the preceding rally before the asset price burst that has held financial markets back in Japan for over two decades. The highs made during the late 80's early 90s have never been registered again since the huge declines that sent it into a secular downtrend. 

That downtrend was completed in 2005 with an initial break out producing a good rally but falling short of the resistance level needed to see a resurgence of buyers joining the trend upwards. It seems as if the trouble started around the same time as the Financial Crisis and sent prices back down to the lows of 2003/04. But surprisingly prices were able to hold support steady without plunging further which would have reaffirmed the continuation of the downtrend. 

Prices remained subdued after the shock of the Financial Crisis which is something I found unfamiliar compared to other major indices that registered fresh lows then made a courageous effort to reach for the highs last seen at the peak. In this case there seemed to lack directional movement which would suggest a disconnect between this index and other major indices. 

In came Abenomics together with the BOJ on a crusade to rid Japan of the evils of deflation by putting together a string of stimulus measures that helped get the index moving once more in sight of the overhead resistance that had yet to be broken. 

However it must be mentioned again that another disconnect became known and that happened between the Japanese GDP growth rate and the Nikkei 225. Where the GDP growth delivered far below par performance, the Nikkei continued its flight to the top which begs the question, who's buying into the Japanese recovery story? 

It turns out that the amount of bonds available for the BOJ to buy isn't sufficient enough so Governor Haruhiko Kuroda found it necessary to buy Japanese equity ETFs that has caused the BOJ to own roughly 50% of all equity ETFs listed on Japan's stock market. 

Back to the aspects of the chart and we see that the resistance around 18 000 has been broken but subsequently fallen back below that level which shifts the risk into the hands of the buyers. If we assess the overall price action that has taken shape over the last 15 years it resembles that of a double bottom formation suggesting that we could've found a solid bottom. With the price having broken upwards activating this pattern with big potential. 

But with the price hovering below 18 000 it does leave traders a little skittish over the prospects of going higher. A general rule of thumb would be to say if the price were to close below 14 000 (roughly half the measured move) it would nullify the pattern. We saw a dramatic drop in the first quarter of this year but a strong bounce shows that buyers have strong interest at those levels.     

Weekly

The uptrend we spoke about earlier on is seen clearly on the weekly chart with a distinct topping pattern having formed, the Cup and Handle with a break to the downside. The progress of the move indicates that we've reached a level that hasn't satisfied the full target of the move which means there could be further downside before we see any resolve of the price.

Two scenarios could enact themselves in reaching the final target price that lies just below 14 000, a level we established to be critical in previous paragraphs. Either the price falls to reach the target and bounces strongly back to shield it from anymore technical damage or the price falls below 14 000 and becomes stuck underneath nullifying the quarterly Double Bottom pattern which would be a real nuisance had you been following it for the past 15 years!!!

Current market conditions don't bode well for a bullish case in this situation so it should be accepted that the bias lies to the downside however if the BOJ were to up its stimulus measure we could see a strong rally pursue but this is becoming unlikely with the markets sentiment around the use of such measures being frowned upon.