This is a useful analogy to understand what the Fed, the BoJ, the BoE, the ECB, and just about every other major central bank on the planet is engaged in right now with their various easing and lending programs.
In his 1995 book, The Prestige (later made into a Hollywood film), Christopher Priest has one of his characters describe a magic act this way:
“Every great magic trick consists of three parts or acts. The first part is called 'The Pledge'. The magician shows you something ordinary: a deck of cards, a bird or a man. He shows you this object. Perhaps he asks you to inspect it to see if it is indeed real, unaltered, normal. But of course... it probably isn't. The second act is called 'The Turn'.
The magician takes the ordinary something and makes it do something extraordinary. Now you're looking for the secret... but you won't find it, because of course you're not really looking. You don't really want to know. You want to be fooled. But you wouldn't clap yet. Because making something disappear isn't enough; you have to bring it back. That's why every magic trick has a third act, the hardest part, the part we call 'The Prestige'.”
This is a useful analogy to understand what the Fed, the BoJ, the BoE, the ECB, and just about every other major central bank on the planet is engaged in right now with their various easing and lending programs. What we've witnessed since the Lehman collapse has been 'The Pledge.' Simple, ordinary bailouts, emergency lending facilities, and quantitative easing programs. In other words, the establishment of the act by showing us the objects we're dealing with. But once the audience has become used to the pledge and the markets have priced in the stimulus, it's time for the magic to commence. Enter the turn.
This week the Bank of Japan shocked no one by keeping their economic assessment unchanged and declining to increase the rate of money printing in their monetary stimulus program. Upon seeing this, USD/JPY, S&P, and the Nikkei (all locked in the same dead cat death bounce spiral) all took a brief dip before shooting through the roof.
So what happened? The audience looked again and noticed the turn, that's what happened. Turns out the BoJ surprised everyone by doubling the ceiling on their bank lending facility from 3.5 trillion yen to 7 trillion yen. At first glance, it makes no sense. It makes no difference to the Japanese economy. It's not like there are prohibitive interest rates keeping a debt-hungry public from taking out a loan. It's not like there are businesses in Japan that are clambering for loans at the moment anyway, and the raising of the BoJ's lending ceiling isn't going to change consumer sentiment. It literally effects nothing. But there's something so compelling about the move that markets just have to react, so they did. This is exactly what the turn looks like. The audience is buying into the act.
Of course, the magic of the turn will wear off without fail. The only question is how many days (or hours) this euphoria will last, and what the talking heads will blame it on when it all goes south again. The cold weather? The price of tea in China? A butterfly flapping its wings in Taipei? Whatever it is, they will focus endlessly on that explanation until the next event arrives.
This does raise the question of what the prestige is going to look like in this particular magic act, though. Unfortunately for the audience, this might be less of a magic act than a con. And in that case, the prestige is going to involve making their pensions, retirement savings and paper “wealth” disappear.
They don't call them the wizards of Wall Street for nothing.