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Japan Still Leads The Way Towards Our ENDGAME
Successful investors live by a golden rule: what the mainstream financial media talks about is not important. They focus on what they don't hear instead. So forget about Yellen for a second. Let go of Draghi, oil, the South African rand and Syria. That's all in the now. But investing is about the future.
We are convinced there is one proverbial elephant in the room in particular that will shape our future. And that elephant is Japan. The 'widowmaker' trade has been claiming financial lives for multiple decades now. That is, short JGBs, or Japanese Government Bonds, was so obvious a trade that it never worked. The 10-year yield currently trades at 0.3%, which is close to the all-time low. We're still waiting for the shoe to drop.
Will it ever drop? We believe it will. 'Drop' might not be the appropriate word. The accumulation of imbalances might trigger a cascade of events that will shake the world at its core. Let's investigate some data.
Japan's debt-to-GDP ratio has hit a unprecedented 230%. You probably knew that. But it doesn't keep you awake at night. We are genetically wired to focus on acute danger. If a tiger approaches us, we focus. But if stands still and doesn't move for years, we turn around in search for other dangers. Wise investors remind themselves constantly of the tiger though. They never let their guard down.
What about the pace at which debt-to-GDP is ramping up? The budget deficit tells us all we need to know.
For six years in a row already, Japan scored around minus 8%. And given the flattish GDP, these annual percentages head straight to the public debt pile. Japan's long term potential real GDP-growth rate is simply close to zero, given the demographics. The latest quarterly print was a minus 0.3%. This makes the debt grow even faster.
The GDP leads us to the approach that governments used time and again in history to reduce debt loads: nominal GDP-targeting. Also known as inflation-targeting, financial repression, money printing, and monetary stimulus. The Bank of Japan (BoJ) is working hard in that respect. It already owns over 30% of the total JGB market. In a few years, Japan Macro Advisors (JMA) projects the BoJ might be holding over 60% of the total market given its current policies.
What does that look like from a total balance sheet-perspective? With the BoJ also buying all kinds of non-JGB assets, the other central banks' balance sheets just pale in comparison. We are witnessing a truly historic experiment.
It doesn't take an Einstein to figure out that this is totally unsustainable. The BoJ-policies will have consequences. The most likely scenario is that inflation slowly develops at first. Commodity prices could turn. The yen could take another beating. And then suddenly, inflation accelerates.
Now, there has always been a lack of 'demand' for stuff in Japan. It has always been lucrative to hold cash. Yens were safe. Every year, you could buy more stuff. But as inflation develops, the growing flock of elderly will realize their government benefits are just paper promises. When the price of everything rises, as already happened in the Japanse stock market, they will realize their savings are losing value. Money will then become the hot potato. The velocity of money will rise. Suddenly, 'demand' will appear. Inflation accelerates.
Hyperinflation is a possibility. It is not yet well-understood how this develops. There are multiple theories on the process. But historically, nearly all hyperinflations have been caused by government budget deficits financed by money creation. And that condition for sure is present in Japan.
Once the bond market realizes what is happening, the game is over. The JGB market will crash. The 'widowmaker' will make millionaires of the ones still hanging on. There will be a fiscal crisis. Panic develops. A banking crisis ensues, as yen denominated asset prices and the yen itself both crash.
Japan leads the way
The most scary prospect is that Japan is our leading indicator. Remember what we heard after the financial crisis. The US was not Japan. Europe was not Japan. There was not going to be deflation here. We were smarter. We learned Japan's lessons. Well, as we're heading into 2016 you would be hard-pressed to find anyone who would deny that the US, and especially Europe, both struggle with anemic growth and deflation. Despite all the extraordinary efforts of the Fed and ECB.
Japan does lead our way. One morning, Japan's experiment will reach its logical conclusion. The sun will rise in the East and the world will be a different place. That morning might arrive sooner than you think.
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Who's the greenie environmentalist that thinks electric cars and wind turbines are the answer to everything? Taken a dip in some of Al Gores punch bowl?
You're an idiot. Look up the ICCC (not IPCC) on youtube. Do some research. Stop peddling that total bullshit.
Wind turbines take 18 yrs to pay back their usefulness in investment, and cost more "carbon" in concrete and steel than they save.
Fucktard.
And windmills last less than 10 yrs before they have a catastrophic failure.
Jack Buster:
“Who's the greenie environmentalist that thinks electric cars and wind turbines are the answer to everything? Taken a dip in some of Al Gores punch bowl?
You're an idiot. Look up the ICCC (not IPCC) on youtube. Do some research. Stop peddling that total bullshit.
Wind turbines take 18 yrs to pay back their usefulness in investment, and cost more "carbon" in concrete and steel than they save.
Fucktard.
And windmills last less than 10 yrs before they have a catastrophic failure.”
My comments:
I'm not touting the electric grid/wind turbine solution for environmentalist reasons (even though that may also be a good argument in Japan because of the risks associated with nuclear power and earthquakes).
It takes about 15 years from the decision to build a nuclear power plant until it is ready to produce electricity while the lead time for a wind power farm can be cut to 1.5 years. And Japan would need the electricity as fast as possible. Coal is probably a better option for base load power since the lead time would be shorter than for nuclear power.
As regards the cost for electricity, wind power is nowadays not more expensive than nuclear power. The problem with wind power is the need for base load power. And you need nuclear power, coal, oil or natural gas for base load power. And that is something the environmentalists tend to forget.
Like in the old days - a brook and a water mill made of wood works for a long time, bitches. It will be back to the roots, eventually.
PS. And the donkey carrying the produce to the market.
PSS. HAHAHAHA, a true shyte storm is straight ahead...
Who's the greenie environmentalist that thinks electric cars and wind turbines are the answer to everything? Taken a dip in some of Al Gores punch bowl?
You're an idiot. Look up the ICCC (not IPCC) on youtube. Do some research. Stop peddling that total bullshit.
Wind turbines take 18 yrs to pay back their usefulness in investment, and cost more "carbon" in concrete and steel than they save.
Fucktard.
I think Japan is headed for hyperinflation and I think I really understand how hyperinflation works:
http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html
First they add "Zeros", one by one, and then boom, they are all scratched out in one blow.
"But investing is about the future."
But do you really have a future when lyin' and stealin' is so handsomely rewarded. Pretty soon there's no real capital to steal.
Old quotes:
"Changes in the value of your currency is nothing but a "gigantic robbery."
"Behind every great fortune is a great crime."
Just as private individuals can live for decades with high debt, Japan can do the same.
all quite amusing.
i live in central Tokyo, have for many years. i am planning on retirement with continued base in Tokyo after 23 years running my own smallish tech shop. now my views on Japan, fwiw.
Demographics rules everything as young energy, initiative, curiosity, revolt, desire, etc. determines so much. Japan is the leader in demographic reversal, largest cadre of over 65 and smallest of under 16 y.o. in the world. Normally this would be a disaster. But what is not normal? Much depends upon resource dependencies, climate change (central Tokyo summer in the heat island sucks), geopolitial power plays (think PRC breaking out of containment), tech (robotics).
Money and finance: the great delusion known as current policy is unsustainable by definition, but who will head for the emergency exit screaming FIRE first when the prisoners' dilemna defines the delusion? that game hinges on co-operation and consensus, a factor where the homogeneous Japanese system excels. (Van Wolferen's book is still valid) Back when he bubble popped, those of us arguing for a hard landing were defeated by the advocates of the convoy system. That remains the world wide practice, crony salvation at the expense of the mass.
Social life: the notes regarding the basis for and the size of pensions is correct. entitlements for the able bodied are nil to minimal, the social darwinist defeated class take to the streets as in today's protest in Shibuya (Angry single men stage anti-Christmas rally in Tokyo). Demographics becomes salvation as we elders move to the sidelines, plenty of jobs become available for those who want them, robotics ensures continuity anyway, and those who are entrepreneurial pursue their dreams, as I did.
Black Swans: one can only hedge, more quakes, more radiological contamination, war, and so I have with currency spread rather than other paper assets. My assumption is that if there is a breakdown moment, liquidity is the absolute king at the window. But that is a bet, like every other, though conservative and risk avoidant.
Sorry to ramble on.
"All quite amusing"?
I've never considered Ponzi schemes amusing. Why do you?
Ponzi schemes are ALWAYS avoidable, not inevitable. They are TRAGIC, not amusing.
Most everything is a ponzi scheme.
the comments are amusing. but I question whether the label Ponzi applies here. Perhaps I am too strict in my definition, so can you advise why you thnk Japan is a Ponzi case study?
If he needs to explain that to you at this point, you need to just roll over and go back to sleep.
It is only a matter of time! It is to late to reverse the weak yen policy, Japan has gone over the edge into the abyss. It is clear that the prospects for Japan are lousy. The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency.
This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world. They are past the point where they can return to a "free and fair market" interest rate marketing their bonds to the world and still be able to pay the debt service.
The moment the Japaneses stock market fails to rise enough to offset inflation and the people of Japan realize that even a weaker yen will not help we will see a tsunami of money fleeing Japan. This will constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/05/japan-sliding-towards-abyss.html
Is Bloomberg trying to hide the coming collapse? Hugo Salinas Price thinks so.\
http://www.plata.com.mx/Mplata/articulos/articlesFilt.asp?fiidarticulo=279
The bank of Rothschild = The bank of Japan = Comply or we will nuke you 'again'!
What more is there to know?
The agenda rolls on unabated......
http://beforeitsnews.com/conspiracy-theories/2015/12/as-events-spiral-ou...
something for nothing, the human inherit weakness, fostered by corrupt politicans/banksters seeking control and wealth of the masses. we are beyond a chance of reversal of policy and house cleaning. preparation will be useless, because of the unpredictability and random nature of disaters. we must do the demise to an epic reset of humanity. enjoy each day to it's fullist because darkness looms on the horizon. the locust storm of followers will swarm humanity and snuff out life of a majority, all predictable by math and cycles of life. so few have even a clue....
Buy shiny lead, speed up the process of losing your money and enriching the gold peddlers.
Despite predictions of the opposite, life in Japan is still of high quality. It is clean and safe, people go to work, ghetto thugs are not shooting each other day and night, the Japanese police do not execute 1000 of their citizens evey year. All these charts and numbers and graphs are just superstitous beliefs compared to the culture the Japanese people have.
Things change, and especially fast when the bill comes due. All this "prosperity" is financed, it is all debt, to be paid for by children that in Japan's case aren't even being born.
When Japan defaults and it will default, your little idyllic lifestyle will change rapidly. You will be forced to pay either through asset strippage like Greece, or if you resist you will have to fight and lose a war. Recall in living memory Japan had two cities vaporized - things change.
fuck japan an aberation of reality, soon to be no different than the slums of chicago or brazil. get a fucking clue you miopic idiot...
Krugman advises "More More More, you arent doing enough"...
We have the benefit of watching an ill guided economic policy, yet we fall in line and follow. Japan is 8 years ahead of us...and yet we follow..like lemmings off the cliff. Theories with no practicality or reality.
At some point, if the Government buys up all the Bonds and also Stocks, as needed to prop the market, the Government ends up owning the factors of production. Sort of like Communism, as the end game. Maybe Japan should throw open its doors to immigration of young workers from, say, the Philippines, which has a huge unemployed population... that would help address the demographic problem.
Going to cure one Ponzi scheme with another Ponzi scheme. Oh, you're brilliant.
Demographics is not the problem. No one is ever going to convince you of that but I'm tired of idiots trying to convince others that a population ponzi is the cure.
It is at moments like this that I recall Cheney's cryptic words: "Deficits don't matter."
With some confusion I wonder what did he know that I do not? Could he be right in some diabolical Cheney sort of way? Do they not matter until they do matter?
And, why did he say that?
Cheney's statement about deficits is often quoted, rarely understood. He was speaking to his party leaders, not to citizens. He was telling Republican leadership to stop running on a policy of "reducing the deficit" or "eliminating the deficit" because Reagan's re-election, after creating what was then the largest series of annual deficits since WW2, proved that "deficits don't matter" if the objective is electoral success.
Democrats and their liberal media supporters seized on Cheney's words to defend all subsequent deficits and neuter opposition to government welfare programs. Again, they cared only about the political effects of deficits, not the economic ones. If the objective is a free citizenry that does not leave its children enslaved to bankers, deficits obvioiusly DO matter.
WTF?!!!! You're going to quote a professional politician as if he had something profound to say? FU!!!!!!! You're disgusting.
Hayaku! Hayaku!
My theory is that when the Yen detonates the Japanese will turn to the USD to fill the need of a paper currency. The Japanese will have to sell tangible goods to get a hold of dollars and to a lesser extent Euros. Those who have been buying PM's will have to sell gold and silver, others will simply sell their jewelry and art and silverware and stock holdings, and this will generate demand for USD while increasing the supply for PM's and stocks thus driving down the prices of PM's and stocks.
This will be the USA's last chance to pursue a sound money policy and probably do a little defaulting of their own. It will be fun watching the public demanding we get off the path we're on after watching Japan blow up.
SO the slow but ELE known as Fukushima doenst count?
of coz it counts...
elites have thoroughly assessed all probable outcomes,
and Japan has been put on the altar since that day, much earlier than 311.
The real trap is found in Japan's aging population. With zero or negative returns on their retirement investments, people have to burn up their capital on a monthly basis rather than let their money pay them to live.
This means that the traditional "biuy and put it away" model is dead. Driving the yen down means that even more capital assets have to be burnt every month in order to maintain a reasonably decent lifestyle. This acceleration of redemptions in an economy with falling numbers of new savers buying JGBs means that there is no alternative to print-based redemptions. This of course further accelerates the decay rate and caps the amount of time available to turn things around. Tick, tick, tick.
Another genius promoting the population Ponzi.
Demographics is not the problem, its financial mismanagement. If interest rates weren't reduced to zero, then savers could live off the savings they acquired during their working life.
But thanks to government trying to be the cure all for every recession, they have a nasty habit of always trying to bring demand forward to even out the cycles of the economy.
If we ever get past this cultural and commercial dogma that our job is to consume so that the economy always grows, then we'll be halfway towards curing government economic ponzies.
tarabel:
“The real trap is found in Japan's aging population. With zero or negative returns on their retirement investments [- - -]”
My comments:
No the real trap is NOT Japan´s ageing population (but zero or negative return on their retirement investments is a problem). Their labour force participation rate is not impressive. They don´t need more labour. The unemployment would increase and the employment to population ratio would decrease.
So an increased supply of labour wouldn´t solve anything. Sony would not be more competitive compared to Samsung because of more labour supply. Japanese shipyards would not become more competitive compared to the Hyundai shipyard.
What Japan needs is more tax revenues which don´t harm demand in the private sector and replacing imports with domestically produced goods and commodities. The only simple solution I can think of is to replace cars that run on imported oil with electric vehicles that can run on domestically produced electricity.
Building wind turbines and improving the electric grid can generate jobs and tax revenues almost instantly. This is a better idea luring people to consume their savings or to build bridges to nowhere like they have done in the past. If the taxation system discriminates enough against vehicles that run on gasoline and diesel, most consumers will choose electric vehicles. Since Japanese vehicles are scrapped or exported when they are about 10 years old it will take less time to replace vehicles that run on gasoline/diesel in Japan than in other countries.
The taxation of production and consumption of domestically produced electricity will mean increased tax revenues. A significant chunk of Japanese imports will be transformed into tax revenues by doing this.
Even if Japan would need base load power sources such as coal or nuclear power in addition to wind power in order to compensate for the fact that the wind is not blowing all the time it is quite obvious that Japan would be able to replace most of it´s imported energy intended for passenger cars with domestically produced energy. It seems as if the base power source needs to be about 35 to 40 % of the total output.
It also seems as if existing wind turbines in Japan can withstand the earth quakes.
The superior power efficiency of electric motors also means that even at the current oil price, electric vehicles are less expensive to operate than vehicles that run on fossil fuels, provided that the cost of producing the vehicle is the same (this is primarily an economies of scale problem). The savings generated by the power efficiency gap can easily be transformed into extra tax revenues by increased taxes on consumption of electricity. The cost for the consumer would remain the same but the total tax revenues would increase.
(Another factor that people should keep in mind is that the Japanese public sector has smaller pension obligations than many other countries in Western Europe and North America. The Japanese get very small pensions from the national pension system and save for themselves instead. They save money in their bank accounts and the banks buy government bonds for these deposits. That is an important reason why Japan has a larger public debt than countries in Western Europe and North America. Also keep in mind that the Japanese national pensions are based on the amount of money previously contributed by the individuals, and not on future tax revenues.)
Good points all but Japan's population is declining on an absolute basis, hence domestic demand will not rise. At the same time these budget deficits continue, increasing the absolute amount of debt. Immovable object, meet irrisistible force.
At some point, the inexorable increase in debt requiring ever-increasing debt service from declining government revenues will reach a tipping point, AKA catastrophic failure.
I'm not smart enough to know the timing of this event or even the mechanics of what will happen next but this looks "baked in" with linear precision.
These are my words but the underlying thoughts are from the brilliant Kyle Bass' Japan thesis
Mike in GA
“Good points all but Japan's population is declining on an absolute basis, hence domestic demand will not rise. At the same time these budget deficits continue, increasing the absolute amount of debt. Immovable object, meet irrisistible force. [- - -]"
My comments:
But if the number of jobs also shrink you don´t solve anything by increasing the population or by slowing the decrease. Like I said, Sony does not become more competitive compared to Samsung just because you increase the population.
If the people you add to the labour market can´t feed themselves by working they will feed themselves either by government subsidies or by committing crimes. None of these options bring in more taxes for the Japanese public sector (or reduce public spending) but rather the opposite. Another alternative is that you bring in people from, let´s say, the Philippines that actually get work but replace Japanese, domestic labour so that they have to live on welfare or steal to survive. The Japanese government will not get a smaller budget deficit this way either, but rather the opposite.
The absolute amount of debt for a peasant does not shrink just because he brings in more people on the farm that have to live off the same number of acres. He is probably better off without additional people on the farm. Japan is not 19th century America where the GDP automatically increased when you brought in people that settled on the prairie and almost instantly could increase production by growing corn on land where no production of anything previously took place. Sony won´t increase its market share just because the population grows. Sony won´t lose less market share just because the population shrinks more slowly.
Yes, the demographic spin is a tired cliche. You do not position for long term growth that is dependent on productivity that in turn depends on technology in a global economy with masses of young untalented people. Conversely, they are liabilities to the systems particularly with no focus by govt to admit real talents vs accommodation of welfare seekers. If Japan gets lucky and surf through the market headwinds, it will emerge with even less old people (liablilities) and fewer young people. Why are japanese not comfortable with paynig the price in not chasing an artificial debt induced GDP for an intact culture ?
Correct that spinners miss the point that the pension system is not based on defined benefits that have to be carried by the next gen.
The population is irrelevant in this equation.
The finances of government are independent of the size of the population. Unfortunately its human nature that MORE government or MORE of anything is always to be considered "better".
Just like the halfwits that think if we pump MORE money into education it equates to churning out better students. It does not, because government is involved and government is NOT efficient. It is NEVER efficient because it is always irresponsible. Governments answer to anything is to always spend MORE. That's the brainwashing and conditioning people have received over the decades.
I have no idea what Kyle Bass' "brilliant" thesis was but if your comments were any indication, it sounds like he's a moron selling a straw man solution.
Wrong. A government's debt is a pledge of future tax revenues. True, there is a 'greater fool' element in the case of bankrupt states like Japan (and the US and the EU and...), but as the taxable population of the tax farm withers away (here, most dramatically, the productive segment), the result is inevitable. It won't be pretty.
It's all about the demographics (electric cars won't help---electric unicorns, on the other hand...).
Tejano:
“Wrong. A government's debt is a pledge of future tax revenues. True, there is a 'greater fool' element in the case of bankrupt states like Japan (and the US and the EU and...), but as the taxable population of the tax farm withers away (here, most dramatically, the productive segment), the result is inevitable. It won't be pretty.
It's all about the demographics (electric cars won't help---electric unicorns, on the other hand...).”
My comments:
The solution to bring in millions of people from the Philippines seems to be the “unicorn” solution to me. I have explained why above. It will only make matters worse.
Improving the electric grid and discriminate against vehicles that run on (imported) gasoline/diesel is one part of the solution. But they probably also got to raise taxes more than they have done so far. They should probably have done that 20 years ago. They probably also got to cut spending. They should probably cut defense spending and use that money for improving the electric grid instead. Perhaps they should also sell the Senkaku Islands to China and use the money for improving the electric grid.
Not sure why people assume inflation is 0 when having their "money pay them to live."
Savers have always been screwed. Do you think a bank has ever paid a better interest rate than annual inflation?
Example: Back in 1980 even a passbook savings account paid 10.5%. But inflation was 14%. So maybe you got $110,000 or so per year on your $1m passbook savings balance. But the value of the "untouched" principal was losing 14% pr annum or $140,000! And you had to pay capital gains tax on the 110k "income"!!
Argualby, today's arrangement is better at least from this standpoint.
IIRC, you could live pretty well on the $60K you would have had after taxes back in 1980, then leave something for your kids. Old people now have to burn through the seed corn so there's nothing to pass on. A million dollars today will pay you, what, $5K in interest. And the Fed wonders why the savings rate is sticky.
when it happens it will be too late, like a flood. most will be caught up in the torrent flow of asset losses. from the demise of fiat will be asset classes of value tied to life sustaining non-durables, like water and food and a way to protect it from about 7 billion desparados, the minions that will not be able to sustain the unsustainable. it will be the epic reset. and i don't know when, but within 10 years imo...
Ritual suicide. What else is new?
The only reason to care about Japan's inevitable collapse is the $Trillion in UST they are going to be forced to redeem.
No, that's NOT the only reason to care. Their demise provides valuable clues, not that any other government would be willing to learn from those clues. However, private investors can and some how develop strategies to help survive our collapse.
You are right. Japan can be useful as a bad example.