What a big, chaotic, sprawling place. How does it work? São Paulo is huge... stretching out in all directions. It has some of the world's richest people - with two Ferrari dealerships and countless private helicopters - and some of the world's poorest people, too.
The rich live in guarded communities. The poor live in 'favelas' - or slums. And the girls from Ipanema are not here in the streets of São Paulo... or at least, they're not wearing bikinis.
That's about all we know about São Paulo. We just got here and have been in meetings all day.
So, let's go back to the markets and the post-'all you can eat' QE boom.
Wait... where's the boom? The Dow fell. The price of gold dropped. Shouldn't both be headed for the sky...the moon...the stars?
It looks like the rocket launch has been postponed. Or, maybe the market was in orbit already... it had already priced in the Fed's latest bamboozle. Which makes you wonder: what can the Fed do now? Talk. And print. Talk. And print. There's nothing else left.
And where does all this talking and printing lead?
Well, no one knows for sure. It should lead to inflation... and maybe hyperinflation. But that's what we thought in 1979. And then, Paul Volcker came into the Fed and the talking changed and the printing stopped.
But don't expect that outcome this time. Mr Romney is doing his level best to help Mr Obama get re-elected. And Mr Obama will keep Mr Bernanke at his post - talking and printing.
And then what?
Well, do you recall our 'trade of the decade'? We announced it in 2010. 'Sell Japanese bonds; buy Japanese stocks,' we said. People have been laughing at it ever since. Because both sides of that trade have gone against us.
But wait. It's only 2012. And this is the "trade of the decade", not for next year. So, give us a break. Cut us some slack. And we have a feeling that it could still go our way.
Japan slipped into its present funk back in 1990. 22 years later and it still hasn't gotten out.
... It has been running deficits and printing money for the last two decades... trying to stimulate its way to recovery. It practically invented QE... and it hasn't worked for Japan any better than for the US or Europe.
... Now, it has the second biggest pile of debt in the world - after the UK.
... And its population is falling... which makes it impossible to imagine Japan growing its way out of its debt problem.
America's troubles began in 2000 - ten years after Japan. But a big burst of monetary and fiscal stimulus set off a bubble... which made it look like the country was booming. It wasn't. It was just using its last gasp of credit to waste resources...
The bubble popped in 2007... jobs were lost... housing collapsed... and the feds have been trying to stimulate a recovery ever since - just like Japan.
And now, just like Nippon - the population of native-born Americans is falling... while the country still runs $1trn deficits.
And now, guess what... after a 22-year slump, Japan seems headed for a crisis. The end of the print-borrow-spend spree may be at hand. Here's Reuters:
'Japanese Finance Minister Jun Azumi warned on Friday that the government could run out of money by the end of November even with spending delays adopted under a contingency plan to cope with the opposition's blocking of a deficit-bond bill, which is needed to proceed with many of the government's expenditures.'The spectre has emerged of a Japanese version of a 'fiscal cliff' of economically damaging spending cuts, as the deficit-bond bill's delay raises concerns among investors about the potential impact on the economy and financial markets, although financial markets have so far shown little reaction."
And here's the Atlantic:
'Who could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt, and its banking system?...'Think about Japan...'
Colleague Justice Litle comments:
'The fate of Japan is a mystery wrapped in a riddle, as Churchill might put it, because the country has teetered on the brink of disaster for so long. The trouble is not the "if," but the "when"... Japan could break loose from its moorings tomorrow, or go on looking precarious, like a boulder perched atop a steep hill, for years to come.'Many traders have bet against Japanese Government Bonds (JGBs) in size, based on compelling macro evidence of the sort laid out in the Atlantic piece. Indeed, the short JGB Japan thesis has fueled so much frustration and Wall Street career derailment, it has come to be known as "the widow maker trade".
'Still though, Japan seems likely to go at some point. Gravity can be defied for a long time, just as markets can remain irrational longer than bears can remain solvent... but a long time is not forever.'
Isn't 22 years already a 'long time'?
for The Daily Reckoning Australia