Why Tomorrow Is the Most Important Day in the Markets

If you haven't been paying attention, you could be forgiven for not understanding just how important tomorrow is for the markets.

Tomorrow is day two of two-day meetings being held by the Bank of Japan's monetary committee and the Federal Reserve's Federal Open Market Committee (FOMC).

Right now, it's not what central bankers with god complexes say that matters - even though, yes, they move markets with what they say and even what they don't say.

It's what they've done and what's going to happen - no matter what they say - that matters now.

Forget the gobbledygook, cryptic blathering spewing down from Mt. Olympus.

Here's what going to happen tomorrow - and beyond...

Three Things You Need to Know About Central Banks

Before we dive in, there are three facts you probably don't know - but you absolutely need to know - about central banks.

Number one: All central banks, in all their iterations, whether they're a branch of government, quasi-independent institutions, or private corporations whose shareholders are big banks and elitist bankers, which is exactly what America's Federal Reserve System is, are all in bed with their governments.

Watch Out: A Huge Bond Bomb Is Set to Explode - Here's What You Need to Know

They couldn't exist otherwise. They're given the power to manipulate interest rates, mostly through "open market operations," where they go into financial markets (without any capital to speak of) and buy and sell trillions of dollars' worth of government bills, notes, and bonds to move interest rates up and down, for two reasons:

  1. They can buy all the government-issued debt they're asked to buy so governments can run unlimited deficits without immediately adversely impacting interest rates;
  2. They can be blamed by politicians if there's no economic growth or high inflation due to too much government borrowing, relieving politicians of the blame for high unemployment or high interest rates.big bank

Number two: All central banks, after glad-handing their political masters, serve their country's big banks, providing liquidity when needed and bailing them out, if they can, at least up to the point that governments have to step in with bailout money they get from central banks. Central banks are big bank, backstopping, bailout machines.

Number three: There is no need for any central bank, anywhere. They only exist to be manipulated by governments, to bail out "too big to fail" (TBTF) banks, and to enrich bankster oligarchs, their capitalist cronies, and political officers all feeding at the same dirty trough.

With that established, I want to take a close look at the Bank of Japan. In terms of modern-day manipulations, BOJ has been at it the longest.

Believe It or Not, the BOJ Is Worse Than the Fed

After the BOJ's excessive easy money policies inflated Japanese real estate, which was used as collateral in the 1980s for margin loans to buy stocks, which rose exponentially and were themselves used as collateral with banks for mortgages to buy skyrocketing properties, all ended in the horrific crashing of Japan's stock markets in 1990 and real estate markets in 1991, the BOJ stepped in. And it never left.

Thirty-five years later, the BOJ's still manipulating rates, still pushing on a string, still trying to underpin stocks and real estate, still trying to turn deflationary realities into some kind of magical 2% inflationary panacea. It's not working.

The BOJ's pursuit of inflation by artificially manipulating interest rates lower, into negative territory as of this past January, by buying 38% of all Japanese government-issued debt in the world, by buying corporate debt, and by buying stocks, hasn't worked.

It's not that the BOJ can't see that their low-interest-rate policies haven't worked.  It's not that the BOJ can't see that Japan's exporting juggernaut has been slam-dunked by rising emerging markets exporters, especially China. It's not that the BOJ can't see that productivity declines and demographic realities are working against Japan's economy.

The BOJ sees all that. None of it matters to them because it's just doing what it does, what central bankers with god complexes and their cheerleading state governments want them to do, step into the void and manipulate rates and financial markets.

Why? Because regardless of what's working for the economy, or the population, there are financial asset renters, bankers, and politicians who benefit by the manipulation.

The same story holds true for the run-up in real estate prices in the United States and the stock market crash. The Federal Reserve's low-interest-rate policies inflated bubbles that popped.

Just like in Japan, big banks were saved by a central bank and have all gotten bigger.

The haves have gotten wealthier and the middle class and lower socio-economic classes have tragically fallen backwards down a very slippery slope.

Savers have been punished. Retirees and pensioners have been devastated. And the capital they'd amassed, which fed bank lending and capital formation throughout free markets, has been replaced by central bank, master-of-the-universe funny money.

Here's why tomorrow is so important...

Why Tomorrow Is Huge for Markets

Tomorrow, the BOJ's going to say they're going to do more.

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

They're probably going to say they'll take rates further into negative territory if they have to. They'll buy more government bonds, more corporate bonds, and more equities if they have to. They'll buy foreign government bonds to lower those rates to manipulate the yen down to spur export growth if they have to. And to help beleaguered savers and pensioners, they'll even let longer-term rates rise and buy even more shorter-term debt to "steepen the yield curve" if they have to.

And the Fed?

It's unlikely they'll raise rates tomorrow. Partly because they don't want to let the world think Donald Trump, who called them out for being political (which of course they are), is going to goad them into raising rates before the presidential election (which, by the way, happened in October 1979 and cost Jimmy Carter the election).

Don't Miss: Turbocharge your investing returns with our top 5 money-making investment reports. Get them now - they're absolutely free. Click here...

They'll probably say they're data dependent and since things have slipped a little, they're on hold until December.

But the fact remains that the Fed could raise rates tomorrow. And that could disrupt markets that aren't expecting a raise. The BOJ could say tomorrow that to help pensioners, they're going to let long-term rates rise. And that could disrupt markets even more than the Fed raising rates.

Or they both might take those unexpected courses and really double-whammy disrupt markets.

But it doesn't matter. The disruption is coming. It's either coming tomorrow or between now and the end of the first quarter of 2017. But it is coming.

It's impossible to keep manipulating rates and blowing smoke into financial markets when there's no earnings growth, when earnings have been declining for five quarters in a row, when there's no meaningful economic growth anywhere.

Central bankers are not gods. Free markets are the closest thing we have to capitalist heaven, and they eventually will break free from the massive manipulation, from the extraordinary decades-old manipulations.

Because that's what happens when markets are manipulated too high for too long.

Starting today, get ready for bond market and stock market volatility.

We're betting interest rates are going to rise, and we're betting stock market volatility is going to explode over at my subscription newsletters.

We're shorting the bond market by buying inverse ETFs that go up when bond prices decline (and rates rise), and we're buying call options on the VIX.

Follow us - before the storm hits.

This Is the Best "Retirement Stock" of 2016... And the good news is, it's trading for "pennies." But it won't be for long... its revenue is set to surge 4,709%. Learn the details of this $5 stock today while it's still "on sale." Read more...

Follow Money Morning on Facebook and Twitter.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

Read full bio