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Guest Post: The Narrow Road to the Deep North: Fixed Income Skew and Signatures of Japanification
The Narrow Road to the Deep North: Fixed Income Skew and Signatures of Japanification (pdf)
Submitted by JM
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not finished but already like it
Japanification is too soft a word. We are heading for something much worse.
Since all fiat currencies are subject to manipulation via the press, what can we put our hat on. If all trades are now based on what a particular currency cross does, how can a reasonable person invest ex FX? This is why gold and silver will accelerate over time. Who can anticipate the winner of the race to the bottom?
Gold is great as a currency hedge. But I think you are falling for the long-standing Aristotelian myth of the immovable force.
No asset is fixed in time. They all float against each other. When monetary policy is a disaster and there are no other opportunities to invest, gold does very well. It is quick to root out central banking folly. In other times, it doesn't work as well.
It is our job to walk on a crust of barely cooled lava and avoid falling in the fire.
Mr.Krugman Goes To Tokyo...LOL.
Where's James Stewart when you need him.
In retrospect, no better for Tokyo than when Curtis Lemay visited.
About the same "impact" I would say.
I've often wondered about the real impact of socialism and academia sponsored group think on a society. The futures lost, the unknown potential by trying to direct billions of events per minute via a central authority.
Didn't mean to hijack the thread...it's a great bit of research in my opinion.
Amen to your middle paragraph. Those who wax poetic about the wonders of those of their same taste and economic castes running the lives of all the rest of us implicitly denigrate the lives of all the rest of us. Like some sort of solipsists, they can't imagine that people have joy and sophistication and accomplishment without them. We're the physical objects that Bishop Berkeley contends do not exist without their minds. It's such a coarse view of the world and somewhat infantile, really.
Agreed.
Another ponderable.
How is it that if they are so intellectually superior, they are constantly screwing things up? My working theory is if there is constant turmoil the "huddled masses" will always be looking for the fix through leadership...which is always promised but never delivered on.
Also a good way to keep our hands at each others throats instead of where they properly belong...figuratively speaking of course ;-)
OMG. Just read it before you type.
Where you come off saying I approve of anything?
This is nothing more or less than a description. No approval here.
Or Mr Geithner goes to China...
DavidC
Hey dick, I mean David. How do you get China out of anything I said?
Maybe you are carrying delusions of profundity like your pals up top...
Sorry jm, why dick? My pals up top? You've lost me there.
My reply referred to nmewn's post (Mr.Krugman Goes To Tokyo), not yours, and Timothy Geithner's trip to China where he got laughed down by Chinese students.
OK, maybe a bit lateral (and I am a vertical thinker myself!).
DavidC
I said dick because invoking Tim Geithner's name in comparison to anything even remotely connected to me is being a dick.
silly round eyes
Japan is just beginning to get their 'world of hurt' on. They have irreversible effects of an aging population not being replaced by younger workers. In fact, many of the younger people left in Japan are finding ways to live frugal lives, hardly fitting the youthful stereotype of spending most of their income.
Think they could just make it with an influx of expats sick of their respective countries? Maybe not, here's the combo-killer:
Sure, it isn't as recent of a report - but have their birthrates upticked miraculously? Something says they haven't - their economy is still stagnating.
I don't disagree with you about the demographic problems. Seems to go along with the supposition that massive adjustment in debt and capacity reduction is needed. It is unclear that this necessarily implies utter collapse. Maybe it is just a vicious bear market.
The "lost decade (and a half)" had its bright spots. Some GDP prints were positive, with recovery all over them. The economy recovered enough for the BOJ to exit ZIRP, QE, and FX interventions for a time.
While it is difficult to speak of valuations, the Nikkei 225 is converging to book value. I can't help but think it is a market that would even please Ben Graham.
It's like patching a hole in a tire with no tread left. Sure it will run but...
Nice analogy.
...thus it is impossible for their debt to ever be paid (granted at the moment it is mostly domestically held...but that may change). If the new new economic 'norm' for the US continues we will also have a demographics issue. Since the recession started, the birth rate in the US dropped dramatically. A 10 yr cycle of this would cause a massive future problem for the US.
How do you increase a population indefinitely? It's not demographics, but productivity, how much human labor is really needed these days?
Got rice?
I keep saying: Japan is the BEST case scenario, not the most likely. US situation was very different going into the depression, and remains different. You just can't compare a surplus national economy with massive export manufacturing to a deficit, import-dependent one just for openers. For as big as the Japan bubble was, ours dwarfs it because we've run massive twin deficits for over forty years, paid for exclusively with paper from the money tree.
Japan lost decade economists: in their dreams it's all just about "fixing balance sheets", household and otherwise. However the structural problems run much much deeper. It's not just that we're "paying for our debt sins" and then everything will be alright. We can't earn our way out of debt when we've outsourced so much of our industry. Even when "experts" counter by saying that US manufacturing is on the rise, what they fail to tell you is they're counting offshore production under a US name. We'll have more trouble exporting inflation now that China's appetite for US dollars and debt has reached terminal velocity.
Japan was able to coordinate fiscal and monetary policy and keep the people relatively happy. Japan has a much more centrally planned economy than the US. So does China. One of the themes of the next several years will be "can the US economy compete with centrally planned economies".
Is the path going to be a slow decline like Japan or a complete collapse like the Soviet Union?
I dunno for sure. I'll be the first to say I could be wrong about the precise nature of things. All one can do is think it through and get LOLed if I am wrong.
In a nutshell, I think that the key is the US government becoming fiscally responsible before a complete collapse.
Has China's appetite for USD and debt at terminal velocity? I sure hope so. The US government has no constraints on borrowing yet. When bonds buyers become less willing to lend to us at anything other than a rate reflective of reality, it will be painful but necessary corrective.
Re: Japan and the United States... initially the debt composition was different. The US has massive government debt and consumer debt (this includes mortgages). Japan's debt problem was concentrated in the corporate and banking system. My how that has changed.
Also, it is hard for me to compare debt levels accurately, because US gov't debt is hard to get a handle on. Many entitlements are literally just smoke and mirrors and can vanish in a poof in time.
Not sure I agree about the central planning stuff. Japan's labor market is much more free than it was in the past.
US banks have been more aggressive in writing off bad debt.
The global economy needs to be rescaled to the consumer realities of the world. This will take time and be unpleasant.
Hopefully more informed people can weigh in.
The only thing preventing the US from competing with Japan et. all IS the central planning. Firms can't plan production outlays when the interest rate may rise before their plans come to fruition, throwing all of their ROI calculations off, so they tread water. This means stagnant or dropping outputs, employment, and no further investment in capital beyond what is absolutely necessary to maintain their cash burn rate such that they can hunker down for the remainder of the depression. They run machines down rather than refurbishing or upgrading, they run down inventories and spend their cash reserves only as necessary while cutting hours worked at the same time QE is forcing up their input costs.
ZIRP is government decreed capital consumption. Japan got off lucky with global growth tailwinds during their recession, but now the entire planet is slowly eroding its productive capital base in its governments' effort to preserve an inverted pyramid of debt who's integrity is itself dependent on expanding production. The world economy is devouring itself.
Nobody seems to get it.
The cause of the long Japanese depression. THE CARRY TRADE.
Japanese banks didn't lend into their own economy. The risk free carry trade was to borrow cheap and buy US Treasuries.
The same thing now. The banksters can borrow from the fed at free money and get a return on....US Treasury bonds. The money never reaches main street.
You have to put a road block in front of the carry trade.
It won't happen for about 20 reasons !
The carry trade you describe develops when the financial system is on life support via ZIRP and friends.
ZIRP and friends develop because the economy goes into debt reduction mode. I'm inclined to think it is in the demographics. If true, then time and altered lifestyles are the only fix.
Relatively speaking, nobody wants credit and even ultra-low rates are little inducement to borrowers. Except government and int'l hotspots.
I do agree about the free money part. The Japanese foreign exchange swap market has seen a lot of negative interest rates when foreign banks raised yen in exchange for dollars.
ZIRP perpetuates things. The right course is to allow collapse to happen rather like flushing out the toilet. Once ZIRP is in place a carry trade usually (always?) develops which does not benefit the real economy. ZIRP is intended to stimulate the economy but does not work because of the carry trade.
The carry trade is a rotten side effect of ZIRP. ZIRP and QE don't fix the problems. They keep the financial system on life support.
If collapse spreads beyond a bunch of insolvent banks into full political instability, then I'm not in favor of that course of action.
The carry trade could stimulate the real economy, but only if recipients (somewhere down the line) make investments, which support real GDP growth, which yank the originating economy out of its h*llhole. That's a lot of if's, though, and absolutely won't work if there's no scope for real investment anywhere -- the state we're currently in.
Thanks for the article JM. The 10-y yield histogram comparisons are enlightening.
Tyler, do you have some good info on how to invest in a Japanese style economy?
Because I don't think many of us ever traded on the Japanese stockmarket. I don't even have acces to that market with their trading system.
I know their real estate funds suck, so what kind of funds do they invest into?
Domo-kun, the same basic rules apply as the American market.
Having traded in both markets for almost 10 years, I can confidently say that if you can invest in an American style economy, you can in an Japanese style economy and vice versa.
If you are good at real estate funds, go ahead and invest. I have been pretty successful investing in Japanese real estate stocks and REITs over the years.
Find out what you are good at, and keep doing it.
And one last advice:don't invest in the stock market using funds.
Since the overall economy is going down, you don't wan't to make "overall investments" using funds. Investing in companies with strong B/S, high cost efficiency, market share in growing markets(regionally and demographically) and meeting customer demands is more important than ever.
So, we are not that much different from the Japanese at all.
More proof? Here it is from the article:
I don't disagree in the least... you even quote me to "prove" the point. I am wondering if you have another point.
The majority of any theory is useless crap. That why the article is has data. Make your own conclusions.
I did, pretty much based on what was presented, I quote myself: