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

Is Kuroda trying desperately to stall the onset of "Helicopter Money"?

Although much anticipation had been built into today's announcement from Bank of Japan governor Haruhiko Kuroda to deliver an extra boost of stimulus it wasn't to be. Needless to say Kuroda spun a new surprise on the market by stating the central bank is placing the current stimulus program under review with research into the impacts it's having on the Japanese economy.

The announcement might have not thrown the right punches but it does indicate the BOJ is contemplating the use of "helicopter money" which so many expect to be the next policy to be introduced.

Just last week Kuroda had told a journalist in a radio interview that the possibilities and need for "helicopter money" was not necessary and couldn't provide Japan's economy with the requirements to meet its economic goals.

However the markets reaction to his statements told a different story following previous statements made by Kuroda where he had shared the bank's opinion and sentiment concerning the implementation of policy measures skewed largely to the side of pessimism to the markets view whilst abrupting changing his tone not long afterwards by implementing what the market had expected while wreaking havoc in financial markets.

It's this kind of action that leaves market participants with little space to verify the authenticity of central bankers integrity to communicate honestly regarding matters of the economy whether they be prosperous or grave. The crucialness of this is only being seen now with the consistent to and fro motion of indecision as well as the indulgent back pedalling from policymakers when making an endeavouring effort to step away from supporting their economies that have become somewhat comparable to a mischievous child ignoring his parents instructions.

A lack of boundaries during childhood can lead to a problematic outlook later on in life which is certainly what many feel is inevitably happening amongst the developed world's economies with little confidence to say the least. The problem is once you've fallen back on a decision there's little stopping you from doing whatever it is you shouldn't be which is why the notion of "helicopter money" is no a last resort but a necessary evil that merely shifts the extremism of global monetary policy just that much further away from rationality.

"...the BOJ is running into operational challenges as the Kuroda era of massive stimulus wears on". https://t.co/t2zHU1bk5k via @business

— David Kudla (@David_Kudla) July 29, 2016

Are the markets as "resilient" as Draghi says?

ECB's president Mario Draghi struck a soft tone when talking about the impacts of Brexit yesterday saying the central bank was of the view that financial markets had acted "resilient" in the face of incredible headwinds created by it but conceded the bank could only tell of the real damage at its next meeting to be held in September. Draghi reiterated that he was ready and able to use all the instruments available to him to ward off disruptions created by the event.

The irony of this comes in the article I posted yesterday surrounding comments made by Bank of Japan governor Haruhiko Kuroda where he explicitly told a radio interviewer that the probabilities of floating the concept of "helicopter money" weren't possible and needed to revive Japan's sagging economy.

Inasmuch as I'm of the belief that measures such as these merely make a small problem even bigger, there's no hiding from the fact it's created the situation we deal with at the moment.

ECB in wait-and-see mode after Brexit vote, says Mario Draghi https://t.co/r3ZpvLhmpe

— Telegraph Business (@telebusiness) July 22, 2016

Markets didn't rally after Brexit because they thought the prospects of a separation between the United Kingdom and the European Union would bring about a stronger outcome, they did so based on the expectation of central banks natural inclination towards reverting to stimulus measures when the sad state of the global economy peeks through the cracks of policymakers rhetoric.

If this be the case then Draghi's comments regarding the "resilient" spirit of financial markets after Brexit cannot be taken at face value but in the context with the action that's driving valuation higher than they should be, the very policy he advocates as a measure to unshackle deflation that's arrested economic growth in the region but with little evidence to prove effectiveness.

A frighten trend of monetary policymakers following in the footstep of their bureacratic government counterparts of choosing to ignore the problem long enough to think it'll disappear only to be shaken awake when crisis hits is a reminder that those in charge don't necessarily possess the right solutions to the problem.

Kuroda's comments emphasizes the markets addiction to QE

As much as I oppose the thought of more deviant ways to stimulate the world economy with "free"money, the coyness of Bank of Japan governor Haruhiko Kuroda in a recent radio interview with BBC 4 is quite comical to say the least. This after the market perceived the central bank to evoke the use of Helicopter Money in an effort to purge the Japanese economy of deflation.

The market drew even more inference in its arrival when former US Federal Reserve Chairman Ben Bernanke made a visited to Japan a week and a half ago in a meeting with Japanese economic policymakers over possible ways of reviving its economy with alternative tools. Bernanke is a strong proponent of helicopter money so the link between the two inevitably matched up and got market participants racing to splash out on speculative assumptions.

We've seen a resurgence of buyers on the market following the British referendum which many had thought would devastate financial market stability yet has left many baffled when staring at new all time highs being registered in US markets as well as the buoyancy of global indices to erase all losses incurred two days after the results of Brexit.  

Bank of #Japan's Kuroda rules out 'helicopter money' https://t.co/qRusUlrvKw

— Pedro da Costa (@pdacosta) July 21, 2016

A close affinity by market participants to the use of quantitative easing methods to abate consequential risks leaning on the global economy have become so intertwined that any inkling of its continuation sends markets into a overdrive to get its hands on the most freely available assets with returns attached to it.

Sooner or later this hocus pocus will end but policymakers aren't committed to put an end to the extreme out of fear of collapsing an already fragile system built up artificially over the past eight years. When the realisation sinks in that the world doesn't require to be flooded out with hordes of money piles but instead a restructured approach to dealing with evolutionary economic problems, the damage done will be insurmountable and a need to start from the bottom up begun.

Driving market valuations upwards with money that has no cost suspends the decision making action that evolves out of borrowing money. It also has the quality of distorting the picture or outlook of the world economy due to its overpowering nature to secure returns instead of finding alternative asset classes to be placed in. Any asset that yields return is being flooded with "free" money to the detriment of the global financial system, a fate we'll only see when it finally gives up the falseness of the situation.  

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.