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Protecting Yourself From Japanese Insanity
I'd hate to say it but this time really is different. Never before has there been coordinated global money printing of the scale of today. Ever. Japan intends to double its money in circulation in just two years. This is incredible stuff. But it only mimics the U.S. Federal Reserve which has tripled the amount of dollars in circulation since 2008.
Most stock brokers and mainstream media will tell you that this money printing is what's needed to stimulate economies and whether it succeeds or not, the outcome will be relatively benign. Don't believe them. It's highly likely that this is not a normal economic cycle and the consequences will be more extreme: success will mean all the printed money filters through to economies resulting in double digit inflation or failure will bring serious deflation. In other words, the most probable outcomes aren't pretty and you need to prepare your investment portfolios as such. Today I'll suggest some ways that you might be able to do this.
Sayonara to Japan
First to Japan. You've got to love mainstream media, investors and stockbrokers. The Japanese central bank's plans to end deflation have been widely greeted as having surpassed expectations. They're described as "bold", "inventive" and just what Japan needs after sitting on its hands for 20 years. Nowhere have I seen words such as "stupid", "insane" or "half-witted". Because anyone with a brain can tell you that Japan's plans will have terrible consequences, whether they succeed or not.
First, let's look at what Japan intends to do:
- It will double current stimulus to 7.5 trillion yen (US$81 billion) per month. This means buying the equivalent of 70% of the total long-term government bonds in markets.
- It will buy Japanese government bonds with maturities of up to 40 years, seeking to push the average duration of Bank of Japan (BoJ) bondholdings to seven years, from the current three years.
- It will increase purchases of financial instruments linked to the stock and property markets to lift the prices in those sectors and encourage other investors to buy them. More specifically, the BoJ will increase purchases of exchange traded funds (ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) by 30 billion yen per year.
- The BoJ put a timeline of two years on its prior promise to achieve 2% inflation.
To put this into some context, Japan's stimulus of US$81 billion a month compares to the U.S.' own US$85 billion program. But Japan's economy is much smaller than the U.S.. Adjusted for GDP, Japan's stimulus will be twice as large as America's. It makes Bernanke look like a patsy.
Now I'm not going to detail the reasons why the BoJ package will be a disaster for Japan, as I've done it previously here, here and here. Suffice to say, if Japan succeeds with its 2% inflation target, interest rates will rise at some point and they just need to reach 2.8% for the interest on government debt to equal government revenues (currently, interest of government debt takes up 25% of government revenue). The bond market will revolt well before it reaches that point though.
If Japan fails in its bid to increase inflation, you'll see government debt balloon. Japan's current government debt to GDP is 245%, by far the highest of any country. The debt is also 20x government revenues. Bondholders aren't going to sit there earning less than 0.6% on Japanese government bonds while debt increases and the yen tanks.
And to reiterate a point that I've made previously, those that assume the Japanese government bond market can never blow up as domestic Japanese own 91% of the market are looking through the rear-view mirror. Ageing Japanese need to fund their retirements and won't be able to support the government bond market as they've done in the past. Foreign investor holdings of government bonds is 9% and rising. They're going to be want better returns for the risks that they're taking on.
I'm on the record suggesting that I don't think the BoJ plans to lift inflation will work. Whether right or wrong, it seems inevitable that the yen will significantly depreciate from here. And that the bond market will crack at some point, though putting a date on that is very difficult given extreme government intervention in the market.
Others will follow suit
Japan is likely to prove a prelude of what's to come in much of the developed world. The West, like Japan, has way too much debt and economies haven't been restructured to make them competitive again. And the West is falling into the same trap as Japan by trying to inflated its way of over-indebtedness. You can be certain of more desperate measures from western central banks as they try to stave off a Japanese-style deflationary slump. Investing in this type of environment will be tricky, to say the least.
Take the U.S. for example. Many of the country's cheerleaders suggest that the economy is recovering, led by the housing sector. What they don't tell you is that GDP growth of 2.2% in 2012 is still way below the 3.2% average since World War Two. Nor do they emphasise the still very high unemployment rate, above 11% if you include people that have dropped out of the workforce since 2008. More importantly, all the evidence suggests deflationary forces - principally households intent on paying down debt - are beating the Federal Reserve's (Fed) best efforts to lift inflation.
The velocity of money is one of the best indicators that deflation is getting the better of the Fed. Since the financial crisis, the Fed has flooded the economy with printed money, trebling the so-called monetary base. That base consists of highly liquid money, such as coins, paper money and commercial bank reserves with the central banks.
Under normal circumstances, increasing the monetary base to this extent would be highly inflationary. But the problem is that this money is not making its way into the economy or changing hands (money velocity). That's why money velocity in the U.S. has dropped to a more than 60-year low.
Rising money velocity indicates that the same quantity of money is being used for several transactions. It's turning over, signalling a robust economy. Declining velocity, on the other hand, indicates money isn't changing hands and that the economy is anything but healthy.
What declining velocity of money suggests is that banks are sitting on excess money because households aren't willing to borrow as they're busy paying down debt. Meanwhile businesses, which are less indebted, aren't confident enough in the economy to borrow money and invest it.
If you're thinking that Japanese businesses and households may have exhibited similar behaviour over the past 20 years, you'd be right. That's why Japan also has money velocity reaching multi-decade lows.
Declining money velocity is one of several signs that the Fed is failing in its battle to produce inflation in order to revive the U.S. economy and reduce the country's debt.
The larger point is that as long as this remains the case, Bernanke will continue with stimulus. And if stimulus continues to fail, he (or whichever like-minded academic takes over from him) will get more desperate and use unconventional methods like Japan is now (such as buying stocks directly, for instance).
How do investors position themselves?
The question then becomes: how do you allocate your assets given this atypical economic environment? In investing, no bet is a sure thing. But what you can do is look at the facts, the probable outcomes and invest where the odds are in your favour.
So let's take a look at the probable outcomes. I see four possibilities:
1) Mild inflation and a global economic recovery. This is the outcome that stock markets are currently betting on. If it happens, stock would be the place to park your money, while bonds, precious metals and cash wouldn't be.
2) Inflation does lift off but central banks tighten policy early, resulting in economic contraction, and likely recession. Stocks would initially benefit then suffer. Bonds would initially perform poorly, then outperform. Precious metals would rise with inflation, then probably fall as contraction takes place. This outcome appears unlikely though as central banks will be loath to switch off stimulus early. Ben Bernanke is obsessed with the Great Depression, when stimulus was stopped too soon before recovery could happen, in his view.
3) A global economic recovery happens but inflation gets out of hand as all the printed money flows through to economies and central banks seem powerless to stop it. In this instance, stocks, bonds and cash would get punished. Precious metals would benefit most.
4) A more serious deflationary depression happens. Stimulus fails and debt compounds until the weight of it kills economies. Under this scenario, long-term bonds would outperform, though low current yields make substantial outperformance unlikely. Cash could outperform if you're in the right currencies. Precious metals may also outperform if confidence in currencies dissipates. You wouldn't want to own stocks if a deflationary depression occurs.
As you may have gathered, I think the most probable outcomes are 3) and 4) with 4) being the most likely. Precious metals should outperform under both scenarios 3) and 4) and therefore overweighting this asset class makes sense. Holding some cash also makes some sense, though it could suffer under serious inflation. Long-term government bonds may be worth holding, though currently at almost all-time low yields, upside appears very limited. Meanwhile, you'd want to stay almost entirely out of stocks if scenarios 3) and 4) turn into reality.
Channelling Harry Browne
How you invest your money will obviously depend on your own circumstances, including which country that you're located in. Some of you may feel uncomfortable holding large quantities of precious metals or staying out of stock altogether. This is understandable.
If that's the case, I'd guide you towards a safe, easy-to-follow investment portfolio that's likely to perform under any of the probable outcomes mentioned above. The portfolio was first advocated by the late Harry Browne.
Browne was an American investment newsletter writer who wrote numerous books and found fame after writing the 1970 bestseller, How You Can Profit From The Coming Devaluation. That book accurately forecast the 1970s slump and the need to be substantially overweight precious metals, particularly silver. He went on to run as a Libertarian Party candidate for the U.S. Presidency in 1996 and 2000.
Later in his career, Browne advocated what he called a bulletproof portfolio, which could perform under any economic environment. This portfolio turned into the Permanent Portfolio, a mutual fund that's now listed in the U.S..
Browne's original idea, outlined in his book Fail-Safe Investing, was that a safe, easy-to-follow investment portfolio should consist of 25% in long-term government bonds, 25% in cash (money market funds), 25% in stocks (growth style mutual funds) and 25% in gold.
His thesis was that each of these assets would outperform during one or more economic environments, whether it be prosperity, serious inflation, recession or depression. And this outperformance would outweigh the underperformance of some of the other assets during particular periods. For instance, gold's outperformance during the 1970s inflationary period more than offset the underperformance of stocks, bonds and cash.
Browne surmised that such a portfolio would deliver good long-term returns with limited volatility. He's been proven right as the Permanent Portfolio has done just that, outperforming the vast majority of mutual funds in the U.S. with very few down years. Note that the listed fund has deviated somewhat from Browne's original proposed allocation, though not by a lot.
Now I'm not advocating that you necessarily go out and invest directly in the Permanent Portfolio fund as it depends on your particular needs and circumstances. However I am suggesting that Browne's ideas may be worth considering as a potential guide to navigating the uncertain economic environment ahead.
Interestingly, investment guru Marc Faber has proposed a remarkably similar investment portfolio to that of Harry Browne, the only difference being that instead of owning long-term government bonds, he suggests real estate instead (he thinks inflation is on the way and is a well-known bear on long-term U.S. government bonds).
This post was originally published at Asia Confidential: http:asiaconf.com
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The smartest way to use the new money they are going to print is probably to invest at least some of that money in domestically produced energy. That would improve their balance of payments which becomes increasingly important if the yen depreciates as a result of money printing.
You're assuming that the goal of Abe/Kuroda is some kind of maximal utility for the benefit of the Japanese people. That's so old and irrelevant! Governments now only exist to serve the interests of their masters, the banks and corporations who receive the lion's share of newly printed money being created for them.
It's Robin Hood in reverse now. Take from the middle class to give to the rich.
Explanation:
Depreciating yen --> imported oil more expensive --> impaired balance of payments --> more domestically produced energy improves balance of payments.
Bullsheet!
Recovery summer 5, or is it 4 is right around the corner........
Would the O'Bowel Movement (AND "the ladies" on The View) lie to us?
I think the difference in the 30's Japanese government printing is that the money actually made it to the people. What is happening in the privately owned central bank system is so corrupt, that whatever is not used to pay vig (interest) is being actively skimmed by the financial infrastructure and not making it into the economy. The results will be fast either way, money floods into the private sector as banks buy up stuff or loss of confidence and everything is vaporized in the markets. Its hard to visualize a soft landing when alot of big ships are steaming full print ahead at each other.
there is a rumor, that the NY feds public address system plays this tune every friday at 4pm: " I think I am turning japanese I really think so!" Ben hums along a wide smile with major eye tics....
nice visual. i lol'd.
Why can't they buy the bonds and then cancel them? Why do they need to keep them on the books? The problem is the debt. If the U.S. and Japanese central banks really want to get things restarted then they have to have a bond burning party once they buy them all up. If the CB's are are the only ones left to bid on them and buy them then the bonds are no longer economically viable in the markets. Buy 'em and cancel 'em. Time for a huge reset
In the limit when bond prices are at infinity and BoJ is the only buyer standing?
'Analysis by algorithm' (or so-called analysis):
Relatively benign should be replace with 'relatively irrelevant'.
Central bank don't print money they do not expand the money supply, they have nothing to do with velocity which in and of itself is irrelevant to anything.
Central banks are pawnshops: they make loans against collateral. To take on a loan as collateral while extending a loan in the same amount does not create anything new. There is no increase in the money supply. There are no increases in the numbers of transactions. The process flattens the yield curve, nothing else.
The only way for the central bank to increase the money supply is for it to make unsecured loans, loans in excess of collateral.
- The commercial banks of Japan have made trillions (yen) unsecured loans, these banks are uniformly insolvent. The only reason there hasn't been a gigantic crisis so far is because Japan has enjoyed a more or less permanent trade surplus. This surplus is now gone: enter the crisis!
- If the central bank takes on commercial banks' loans as collateral it becomes insolvent without fixing the commercial banks.
- If the central bank makes unsecured loans it becomes insolvent for the same reason as commercial banks.
- If there are no solvent banks in Japan there is nothing to guarantee bank liabilities/deposits besides the Japanese treasury, no lender of last resort.
- If the BoJ makes unsecured loans it becomes another, very large insolvent commercial banks => entire Japanese banking system is insolvent => there is no lender of last resort => there will be/already is a run out of the Japanese banking system. Some of the 'run' may be into Japanese stocks, some will be out of yen into another currency.
The easy credit policy is likely to fail because the effect of the policy on Japan's fuel import prices. There really is no independent monetary policy anywhere in the world b/c of the relationship between money, fuel and drivers.
'Money Printing' is a term of the art of peak oil denial. Your problem is at the end of your driveway not in your wallet.
Question is when the big crash comes, assuming it does, does gold go with it like everytime in the past which I suspect it most likely will. Next problem is if things spiral out of control quick would you even be able to get gold? That could be a problem.
Bingo! Can you get gold? Nyet! As the SHTF, it will be impossilbe. It's NOW or NEVER. BTW, it has dried up in all my local coin stores and the spread continues to go UP. So what does that tell you? The weak hands are smart and NOT weak. Buy and hold 'cause the small amount of folks holding now know exackerly what is coming to a theatre near them...
Take a Yen margin loan, buy equities in other currencies.
"Whether right or wrong, it seems inevitable that the yen will significantly depreciate from here. And that the bond market will crack at some point, though putting a date on that is very difficult given extreme government intervention in the market."
Seems like a poorly thought comment. How will the bond market crack? The BOJ, the FED, other CBs have clearly shown their hand. They are going to monetize government debt up to 100% if need be. Bond vigilantes are irrelevant. Interest rates will not rise anytime soon.
Dec 4th 1941, top story is that there is no immediate threat to the motherland. She is doing her nails w/ a budweiser in her hand and singing sweet lullaby's. Everyone go back to sleep, there is nothing to see here.
In the 70s and 80s Japan could not do anything wrong. In the following two decades, they could not do anything right. Now Japan is stuck with an overvalued currency and a huge government debt incurred mostly because Japan cannot raise taxes. Flooding the market with money in a deflationary environment is a stealth way to actually raise taxes. If it ends up reducing the purchasing power of the average Japanese, we would have "inflation" without inflation. Foreign products will become expensive once again. Oil too insuring that Japan becomes even more efficient. Not necessarily a bad strategy. But will the rest of the world let the country have it its way? Very unlikely to my opinion.
Not sure what you guys are seeing on the right hand side banner ad, but mine says "you can get up to 400:1 leverage in FX" (by IBFX)
Harry Browne is for pussies, short the fucking yen!!! (STFY!!!)
Nice article but dated. Velocity of BitCoin is increasing instead of fiat. The ballyhooed bubble of the last week has dissipated quite nicely as profits were taken in an orderly fashion. BitCoin has gradually drifted back to $145 this evening. And remeber a BitCoin is simply a unit of measure much as a trillion dollars is a unit of measure.A Satoshi is like a penny and since there are 100m satoshis in a Bitcoin a Bitcoin should roughly be compared with 1 million dollars before long.
Hypothetically speaking...how does Japanese Insanity relate to deja vu ?
What's normal about these levels of debt? Nothing.
I read something earlier today about some genius in Japan who did this kind of money printing and easing in the early 1930's - and then Military Officers shot him dead because he cut pay for the military. And then...WWII with Japan and Hyperinflationary Germany leading the charge.
So...what about this scenario do people not get?
Buy silver and ammo while you can. Food would be good to stock up on also.
Who are the two who junked Zorba over this?
Paul K. and Ben B. ?
The section "How do Investors position themselves?" with the four possibilities seems to be a reasonable guide. I would appreciate anyone's opinion on how to invest in the current global financial situation. Percentage invested in stocks, bonds, cash and PMs.
I suggest that you keep 75% of assets in physical gold in your own home, 25% in cash and 100% in stocks against -100% in borrowed fiat money. There's no way there will be 'peaceful slow deflation', it's either bubble or crash, most probably both.
Miser,
Harry Browne advocated a regular rebalancing of these four assets to keep the even-weight at 25% each constant. If you would add real estate to these four and switch the PM to commodities, you would have the Ivy Portfolio five asset strategy. Ivy Portfolio looks at 20% per asset with international and USA stocks being 40% of the total. RE, commodities and bonds fill in the other 60%
MarketWatch has a string of stories on Lazy Portfolios and PlanIQ on SeekingAlpha also follow adaptations of Browne's ideas on permanent portfolios. The do-it-yourself concept lets you skip expensive fund management fees.
All of these portfolios seek diversification across asset classes that ongoing global currency debasement tends to mute. Today gold and strong currencies are an excellent additional asset class to add to all these variations. Because Browne's original four-asset portfolio is the most basic, it may be the most successful as today's complexity needs simplicity to counter all the confusion.
The Ivy Portfolio recommends that you sell each asset and go to cash when the asset drops below its 10 month EMA or 12 month SMA. There is excellent merit to that tactic so you keep what you make. Marty Zweig said you should sell whenever a whole-market unweighted index (ValueLine) drops more than 4% below its peak price. Buy back in when it is 4% above the market low...
That will keep you alive. You should take possesion of gold and silver for at least 10% of your net worth. You need that to be diversified out of the local national currency which is a new wrinkle in all these market and risk balanced portfolio approaches. You bet everyone on Cyprus wishes they had more gold on hand right now.
Good luck!
I remember selling some of my (overpriced) land to the Japanese in the 1980s when they were crawling all over the USA buying everything in sight thinking prices would never drop....until they did and they got blistered for decades as it turns out.
Reminds me of the present buying spree by the Chinese now on the West Coast. Maybe 'this time is different.'
Then again, maybe not.
This also sounds a bit like that All Weather Portfolio strategy which was discussed on this blog a while back. Maybe just as good; as good as anyone can expect to do. That’s the problem. The sad fact is it’s not good enough to produce a positive real return for the average investor. Thanks to the practices and strategies of central money planners, most people can only hope to lose as little as possible purchasing power on their investments. Nothing demonstrates failure of central banks better than that.
If QE is such a great thing why did Japan wait 20+ years.
In the 1980's I was told by Japanese that their business plans encompassed 100+ years planning. Really?
Japanese where warned about Tsunami water level that occurred 400+ years ago. They don't remember their own history.
QE = desperation
Tiny men and their feeble attempts to control the tide. They dream of creating but to create the must by definition produce something from nothing which they cannot. Like the scientist who wagered God that he could make a man from the dust of the earth to which God replied, "fine, then get your own dirt". Japan, like all nation states are dead men walking.
Bernanke's only hope is that the billionaires will buy bigger and bigger yachts to boost the economy. Clearly to achieve this he needs to give more to the rich.
actually it was the last Bush that flew the moneycopter and dropped checks into alot of mailboxes... when will the FED get fed up with the corporation sitting money and just fly and sent out direct moneybombs to everyone?
who needs to make a job market anymore?? solyndra, etc, who cares, just print and give to the masses.. monthly. sending out $600 checks... nah call them 'economy vouchers' where they are just like food stamps but they buy anything besides food
Yea, and try and do it before the end of the world so you can actually spend some of that money, rather than gazing at your net worth on paper with stars in your eyes.
Having already paved their entire coast, this time Japan plans to clad Mount Fuji in Tungsten siding.
Wait... didn't they do that in some anime?
Maybe melt down some of Central Bank gold for that titanium.
Is this a joke? Protect yourself? It's a no- Brainer. BTFD @ 95 and some change.
The only no brainer is the joker who buys the dips all the way down to 400.
BTFD B4 SHTF!
As much as Asia Confidential (James Gruber) claims to be clever and contrarian ... not likely for someone whose bio describes him as « a regular guest on CNBC », ha!
Gruber writes about Japan: « ... Nowhere have I seen words such as "stupid", "insane" or "half-witted" ... »
But his above article actually follows the ZH group-think gang meme, and is wrong in ways that are silly at points.
Like the claim above (made for years against Japan) that « ... The bond market will revolt ... »
No it won't. As Jim Sinclair explains about massive QE:
« You cannot predict higher interest rates if you also predict QE to infinity. QE is the non economic purchase of government and other debt securities. Therefore as long as QE expands to meet the size of bond offering, the bond market will stay bullish and interest rates will not rise significantly. »
- Jim Sinclair, JS Mineset
---
Japan may quite surprise the ZeroHedge crowd and make their programme work, actually
And we should give Japan credit for the courage of their brave gamble
There are reasonable - quite reasonable - arguments that Japan's current policies may well succeed, as similar policies succeeded in the early 1930s
The large-scale new Japanese QE is of a very qualitatively different kind than the Bernanke version, which only channels trillions to Wall Street ... the Japanese are, by contrast, trying to lift all the boats in the harbour, and they could well do it. Much as since their 1990 crash the Japanese have always been concerned that workers stay employed and have some pocket money ... no brutal Western-type 'austerity' ravaging the vulnerable.
And besides, Japan's programme is a roll of the dice in a situation where the Japanese have little to lose by trying
The reasons why Abenomics might work, and why Japan should absolutely continue to try to do what it is doing, are nicely covered by Ambrose Evans-Pritchard in his recent articles:
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100023922/ab...
http://www.telegraph.co.uk/finance/economics/9972754/Japanese-bank-gover...
You apparently don't understand that infinitely high supply equates to infinitely low value. As interest rates approach zero, bond prices appproach infinity.
No it won't. As Jim Sinclair explains about massive QE:
« You cannot predict higher interest rates if you also predict QE to infinity. QE is the non economic purchase of government and other debt securities. Therefore as long as QE expands to meet the size of bond offering, the bond market will stay bullish and interest rates will not rise significantly. »
- Jim Sinclair, JS Mineset
It might work? What are you - fucking retarded?
Money printing does NOT cure insolvency. I repeat - because you are fucking retarded - Money Printing does NOT cure insolvency.
Try this - Google Kyle Bass japan and watch somed videos
While what Sinclair's says is theoretically correct, in practice it is just plain wrong. The Japanese Bond Market is approx 11 trillion (US$) strong. While the Central Bank can buy up all new bond issues, what happens when the owners of the old issues panic and sell? (as we recently saw). The market tanks, and suddenly everybody wants to dump their JGBs. While theoretically the Central Bank could put a bid on all these old issues by printing more trillions, what do we end up with? Hyperinflation. Why would the owners of the old issues panic and sell? They eventually realize that their currency is being devauled by the excessive QE that Japan has just begun.
Perhaps the holders of JGB's will "eventually realize" that their currency is being devalued pretty soon since that is the prime objective of Abe's Keynesionomics.
Sorry @bgiB but you're not offering anything new on this. So OK AEP wrote a cheerleading piece. Just because he pounds the table and insists that QE eliminates debt doesn't make it true.
Personally I think this "experiment" will show "good results" for long enough to give people pause.
Nine months from now Abe will look like a hero.
Question: what will he look like in 27 months?
I will write my essay on what I got wrong when a country can exit QE and survive. Not until.
I will sell my gold when real rates go positive without tanking the economy, and not until.
If the future devolves into a statist "euthenasia of the rentier", a Diocletian prison world where the central authorities "fund" every industry and fill every pocket with "credits" - credits that expire, and so must be "spent" promptly - then I will not take back one word of my condemnation.
Even if it "works".
Because a well-fed and amply amused slave is still a slave.
"And we should give Japan credit for the courage of their brave gamble"
I'm not sure that Japan is acting on its own behalf or in its best interest. Japan in my opinion gets their orders from the US which are still an occupying force. The US gets their orders from who knows exactly whom? Let us agree that they get their orders from powerful interest groups that have little to do with sovereign nationality.
That begs the question what exatly are these powerful interests after? My guess is power. Absolute power. Power over life and death of the likes of people like you and me certainly and power over people like Obama and Abe likewise.
Who knows what tools they use and will use to continue furthering their interests? The US military where necessary and every other venue certainly you and I can think of and others we can't.
Just because they're out to get you doesn't mean you're not paranoid.
Can only borrow long once. Japan is blow wad this time.