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China: Caution May Be Warranted | Japan: Real Troubles
- Albert Edwards
- Australia
- Bank Failures
- Bond
- Capital Markets
- CDS
- China
- Credit Default Swaps
- default
- Demographics
- Equity Markets
- France
- Germany
- Gross Domestic Product
- Hatoyama
- Hong Kong
- Iceland
- International Monetary Fund
- Japan
- Latvia
- Nomura
- Norway
- Quantitative Easing
- Rating Agencies
- RBC Capital Markets
- Real Interest Rates
- Recession
- recovery
- Savings Rate
- Simon Johnson
As I have repeatedly noted, China has been blowing a bubble with easy credit. MarketWatch's Craig Stephen warns investors to be wary of a potential correction, at least in some sectors:
Policy
tightening could soon become the dominant market theme, meaning it's
time for a rethink. After recent rate hikes in Australia and Norway,
tightening is back on the agenda in many countries, including China.
And with the U.S. just clocking up 3.5% annualized GDP growth for the
third quarter, dollar bears will have something to think about.
Nomura says its time to get a little more defensive in the face of what
they call a "cappuccino recovery" - one-third espresso, one-third milk
and one-third froth.
They argue investors face a
dilemma on how to discriminate between genuine and sustainable areas of
economic growth and the sharp rise in asset prices, often aided by
excess liquidity.
The Nomura analysts advise switching out of high beta regional exchanges, which was a recent call.
This change is worth paying attention to, as Nomura's strategists were
among the first to link quantitative easing to raising the risk profile
of investors and lifting equity markets early this year.
Exchanges and brokerages have been some of the big winners of
resuscitated financial markets, while in China, banks and insurers have
been a great play on the huge money-supply expansion. Last Friday we
saw China's new GEM market launched, with all stocks more than doubling
in intraday trading -- will this be a new high-water mark?
Another area where asset prices may have peaked is property...
Runaway
prices are not foremost on officials' minds, rather the possibility of
a reversal. According to a story in the South China Morning Post
quoting an unnamed official, there are no plans to introduce
substantial measures to control the surge in the property market.
Instead, it said, the government is more worried about a sharp fall in
property prices.
Perhaps investors should take note. In Hong
Kong, the government effectively controls the price of land. Moreover,
property and banking stocks make up more than half of the Hang Seng
Index.
If loose money conditions that have been so
good to financial and property assets do reverse, Nomura suggests a
good place to be positioned is in the under-performing telecom sector,
which looks attractive on a yield basis...
Another area that
offers similar attributes to those of telecoms and is likely to see
continued strong growth is the China Internet sector. A new report from
Macquarie on China Internet leader Tencent orecasts growth will remain
robust. One statistic that caught my eye was that its QQ
instant-messaging services now caters to 448 million active accounts.
Tencent is expanding its range of services to this massive user base
and is consolidating its first-mover advantage.
In case you haven't been keeping up with Japan, Ambrose-Evans Pritchard does a great job of summing up that nation's dire financial circumstances:
Japan is drifting helplessly towards a dramatic fiscal crisis...
The
rocketing cost of insuring against the bankruptcy of the Japanese state
is telling us that the model has smashed into the buffers. Credit
default swaps (CDS) on five-year Japanese debt have risen from 35 to 63
basis points since early September. Japan has suddenly decoupled from
Germany (21), France (22), the US (22), and even Britain (47)..."Markets
are worried that Japan is going to hit a brick wall: the sums are
gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.Simon
Johnson, former chief economist of the International Monetary Fund
(IMF), told the US Congress last week that the debt path was out of
control and raised "a real risk that Japan could end up in a major
default"...
"Can these benign conditions be expected to continue
in the face of even-larger increases in public debt? Going forward, the
markets capacity to absorb debt is likely to diminish as population
ageing reduces saving," said the IMF.
The savings rate has
crashed from 15pc in 1990 to near 2pc today, half America's rate.
Japan's $1.5 trillion state pension fund (the world's biggest) has
become a net seller of government bonds this year, as it must to meet
pay-out obligations. The demographic crunch has hit. The workforce been
contracting since 2005.
Japan Post Bank is balking at further
additions to its $1.7 trillion holdings of state debt. The pillars of
the government debt market are crumbling. Little wonder that the
Ministry of Finance has begun advertising bonds in Tokyo taxis,
featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.
No one knows exactly when a country tips into a debt compound trap. But
Japan must be close, even allowing for the fact that liabilities of the
state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.
"The debt situation is irrecoverable," said Carl Weinberg from High
Frequency Economics. "I don't see any orderly way out of this. They
will not be able to fund their deficit. There will be a fiscal
shutdown, a pension haircut, and bank failures that will rock the
world. It is criminally negligent that rating agencies are not blowing
the whistle on this."
Mr Hatoyama inherited a country that
was already hurtling into sovereign "Chapter 11". The Great Recession
has eaten up 27pc in tax revenues. Industrial output is down 19pc, even
after the summer rebound; exports are down 31pc; the economy is 10pc
smaller today in "nominal" terms than a year ago – and nominal is what
matters for debt.
Tokyo's price index fell 2.4pc in October,
the deepest deflation in modern Japanese history. Real interest rates
have risen 300 basis points in a year. It reads like a page from Irving
Fisher's 1933 paper, Debt Deflation Causes of Great Depressions...
"This
is incredibly dangerous," said Russell Jones from the RBC Capital
Markets."The rate of deflation is shocking. The debt dynamics are
horrible and there is the risk of a downward spiral."
We're not talking about Iceland or Latvia here. Japan is the world's second biggest economy. If Japan tanked, it would dramatically affect the world economy.
For more on Japan's lousy age demographics, see this.
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How did the Japanese post office manage to make $1.7T in order to buy all those bonds? The USPS has probably not made $1.7T over the course of its entire existence, in fact, it has probably cost more than this sum.
Japan has been holding tremendous debt and 0% interest rates for a long time, right? The same thing we are doing now?
Countries and Areas Ranked by Population: 2035
Rank Country or AreaPopulation
1 India1,519,490,869
2 China1,460,962,250
3 United States389,531,156
4376,969,791
5 Indonesia297,584,616
6 Brazil247,358,953
7 Pakistan244,390,505
8 Nigeria225,864,453
9 Bangladesh213,761,102
10 Ethiopia187,580,799
Source: U.S. Census Bureau, International Data Base
oops! the census lost a piece of data
63bp seems cheap considering Carl Weinberg says there is no way out.
They should merge with China. If not, China should do a hostile takeover.
The savings rate decline is surprising until one considers that retired folks trying to live off interest have a tough go of it when rates are as low as Japan's. Even folks with a $20 million Nest Egg have to draw against principle to live modestly (same with retired US folks now).
It's a terrible combination to have a rapidly aging population, excess federal debt that rolls soon, tumbling savings, a horribly underfunded pension system, deflation, and a moribund economy.
Having the debt ownership mostly domestic is no great advantage when savings are tumbling. It also takes away the nuclear option of repudiating foreigners' claims that the US retains.
hmm so is this article saying that the japanese domestic debt market is tapped out? therefore japan must borrow elsewhere. therefore interest rates must go up, killing the carry trade, forcing US T's up as well... this would indeed be cataclysmic.
BUT
the author forgets the obvious solution. BOJ makes like the FED and buys japanese government bonds. magic! problem solved!
You are forgetting that one of America's last great exports is holier-than-thou fiscal policy directives.
Just because America is doing it doesn't mean Japan should be allowed to! /end sarcasm
They have been doing this already for years.
As you can see: http://www.boj.or.jp/en/theme/research/stat/boj/mei/index.htm
They have been doing this already for years.
As you can see: http://www.boj.or.jp/en/theme/research/stat/boj/mei/index.htm
the japanese may owe the debt to themselves now - but they won't be able to roll it over to themselves.
conversely, the US owes everyone else and seems to be in the process of rolling over (what it can) to itself.
People say we'll have a lost decade like Japan.
Nonsense!
It'll be 2 decades.
BB
Did you see my decade? I couldve sworn I left it here
Ha! Japan is working through it's lost 2nd right now.
This may be true about China but why the FUCK do all the keynesians point a finger at China about bubble blowing when they are in the process of creating an even bigger one themselves with stimulus and 0% interest rates ?/
"We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy."
I don't know if Pritchard knows much about economics but he has little insight into human nature. The ONLY way to cut borrowing is to tighten monetary policy. People do not willingly embrace austerity - it must be forced upon us, and I include central bankers, governments etc ("the protectors of our money") in "us".
The most important factor for the Japanese market and the profitability of its companies is the Yen. If they can manage the Yen to weaken considerably from here, they'll survive this OK. Otherwise, issues likely loom.
time123
admin: http://invetrics.com
If the Yen weakens'considerably' then the better quality Japanese goods will take a large market slice from the Chinese, (& others). Emerging price war.
The Chinese are in deep doodoo already with massive malinvestment in Condo-cities. They couldn't handle a price war. Game over.
regards
Kinda takes your breath away, doesn't it? Guess who will be next?
I question the credibility of anyone who is a permabear or permabull and Pritchard is perma-apocalyptic. Yes, Japan faces serious challenges but their economy is not going to tank overnight. I'd rather be in Japan's shoes than the US's. Japanese have a tremendous capacity to endure (gaman) whereas the US is in la-la land, unwilling to face up to its glaring problems.
AEP's piece looks more like an effort to take the focus away from another bankrupcy candidate - Britain itself.
At least the Japanese government owes the debt to its citizens.
Exactly...as I stated in the comments section.
Japan owes debt to itself....the US owes debt to Japan and China.
What we are seeing is Japan pretending to die to save itself...
A great Aikidoist maneuver.
Exactly!!!!
Can Japan save the yen by becoming China's "export bi#ch" just as it was the USA's for two decades? After all, China has the demographics to become the largest economy in the world. Or is the pace of deterioration of Japan's fiscal position too fast to be contained?
China has really poor demographics...Population control is state policy, hard not to have your citizens age when you kill off the young.
Yes, and population control has been made into a dirty work in the USA by church and now State too. We do a good job of killing off our young, look at Iraq and now the new (old) mess to the far east. I suppose it helps to keep food prices down without hurting tax revenues and church receipts.
IMHO, the Japanese don't believe that the Rapture is going to bail them out next year or the year after. They are thinking long-term. Long-term, fewer people per acre of rice land and per fish in the sea is the formula to sustain wealth. Close on the heels of the Information Age comes the Sustainability Age, and the nations which fight it will be the next Africas.
Amen, Anon. It drives me crazy when people claim that high birth rate countries like India are somehow in a better position to grow economically. In the future world of peak oil, peak food, peak resources in general, having more and more mouths to feed will not put a country in a position of strength.
China will overtake Japan shortly as the #2 economy if it hasn't already. The U.S. within a decade.
But what would it mean specifically to the global economy if Japan dives even more than it has over the last ten years?
With demographics as they are, wouldn't their typical anti-immigration policy reverse creating jobs for several hundred thousand over the next few years?
As in the U.S. when retirees start to quicken, doesn't this bode well for those who will replace them? Not all of their jobs are going to die with their exit from the workforce.
It would bode well for those who replace them, if...
-They didn't then have a smaller number of workers paying for more retirees.
-Anti-immigration was just a policy, not an attitude. (Can't turn those around as quickly). Large-scale immigration isn't going to happen without a societal change in norms (xenophobia is big there).
Have to change the name of the G8 to the BK8
I guess I better start being more nice to the me generation. I thought it was odd that Africa was not a part of any graph. Are they going quietly into the night?
Surely 'me generation' = the Baby Boomers right?