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Is It Finally Japan's Turn?

Tyler Durden's picture




 

Japan is starting to heat up a little in terms of risk and we hope that Noda is watching carefully. While the strengthening trend in USDJPY and JGBs has been a long one, the last few days are starting to worry some traders and most notably, Bloomberg points out that not only are FX options the most USD bullish-biased (JPY-bearish) in seven years, swaptions have screamed to their highest in over seven months at 54bps. The growing concern that the European crisis will spread to Japan is evident in recent underperformance but these option bets support the view that the JPY strength and trade surplus arguments are much less support than they have been recently.

Swaption spreads are their highest in seven months - traders are paying more now to lock in cost of future JPY funds on the expectation of rising rates...

and at the same time, the difference in prices for puts and calls in the FX option market are the most bearishly biased in over seven years. The so-called risk-reversal is positive for the first time since 2004. The combination of the bet on JPY weakness and rates rising at the same time as ratings, fiscal sustainability, and trade surpluses come into question is rather notably concerning.

Charts: Bloomberg

Some notable sections from the Bloomberg report 'Swaption Surge Signals Euro Contagion in Yen Debt: Japan Credit' include:

Options traders are the most bearish on Japanese bonds in seven months, signaling concern that Europe’s debt crisis may spread to a market that’s been insulated by currency gains and a trade surplus.

 

The risk-reversal rate for one-month options on the dollar versus the yen advanced above zero for the first time in seven years, as more traders wanted the right to buy the greenback if it starts to rise.

 

...

 

There’s speculation that a bad gain in bond yields and yen weakness will happen simultaneously,” said Yunosuke Ikeda, head of Japan foreign-exchange research at Nomura Securities Co., the nation’s biggest brokerage. “Overseas investors may be thinking a bond slump should spread to Japan especially after it occurred in Germany.

 

...

Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said on Nov. 24 that Japan’s finances are “getting worse and worse.” S&P rates Japan at AA- with a negative outlook, compared with Germany’s AAA grade.

 

It “may be right in saying that we’re closer to a downgrade,” he said in an interview. “But the deterioration has been gradual so far.”

 

Also...

 

The International Monetary Fund said in a report on Nov. 23 that concerns about Japan’s fiscal sustainability may result in a “sudden spike” in bond yields.

 

...

 

 

The yen has outperformed all of its 16 major counterparts this year. The currency tends to strengthen during periods of financial stress because Japan’s export-reliant economy doesn’t need foreign capital to balance its current account.

 

The nation, which had the world’s second-largest current-account surplus last year after China, will see a 28 percent decrease its surplus through 2016, according to estimates from the IMF.

 

“There’s a possibility that bond yields will surge because of the worsening of Japan’s finances,” Hiramatsu, whose Tokyo-based company manages about $58 billion, said yesterday. “That day is coming closer, but not this year or next year.”

 

Following S&P's recent 'downgrade' chatter, the IMF's decidely negative perspective on fiscal sustainability, and the market action of the last week or so, it seems perhaps Noda was right to keep watching. Perhaps the sad inevitability of the real endgame of Richard Koo's balance sheet-recessionary view of Keynesianism is closer than many believe.

 

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Mon, 11/28/2011 - 19:46 | 1923368 Seasmoke
Seasmoke's picture

nuclear explosions they can handle, this is much more dangerous

Mon, 11/28/2011 - 20:05 | 1923428 CPL
CPL's picture

nuclear explosions they can ignore and lie about, this is much more dangerous.

 

- fixed

Mon, 11/28/2011 - 21:57 | 1923762 dlmaniac
dlmaniac's picture

Japanese style of Mark to Myth accounting: Fukushiwa not a nuclear event.

Sun, 01/22/2012 - 03:11 | 2085970 Non Passaran
Non Passaran's picture

Gee, you can't even spell the name. Why should anyone trust you?

Tue, 11/29/2011 - 02:27 | 1924349 Camtender
Camtender's picture

Kyle Bass called Japan as the next short not too long ago.

Mon, 11/28/2011 - 19:53 | 1923379 Captain Kink
Captain Kink's picture

"Japan is a bug looking for a windshield."

-Endgame


Mon, 11/28/2011 - 20:27 | 1923500 Mike2756
Mike2756's picture

Will it play out the same as the baht back in '97?

Mon, 11/28/2011 - 19:51 | 1923383 apberusdisvet
apberusdisvet's picture

The true facts about Japan is that they are contemplating the relocation of Tokyo; perhaps millions may die within 20 years from unexplained cancers, and the top half of the main island will be unihabitable. The world's 3rd largest economy is going down fast.

Mon, 11/28/2011 - 19:55 | 1923397 Dapper Dan
Dapper Dan's picture

1

Some here will think this hyperbole, but not I, the gift that keeps giving.

Radiation.

 

Mon, 11/28/2011 - 20:32 | 1923514 CPL
CPL's picture

With a 24000 year long half life on plutonium...it will be remembered longer than the ruins of Tokyo will be around.

 

Mon, 11/28/2011 - 19:56 | 1923402 Börjesson
Börjesson's picture

Yes, of course. You read it on the internet somewhere, so it must be true.

Mon, 11/28/2011 - 20:00 | 1923417 Carlyle Groupie
Carlyle Groupie's picture

I heard it on The Hedge bitchez!

Mon, 11/28/2011 - 20:44 | 1923462 Dapper Dan
Dapper Dan's picture

 Borg, you read this on the internet, is this true?

On another note:

Fukushima Daiichi plant chief hospitalized

TOKYO, Nov. 28, Kyodo

Tokyo Electric Power Co. said Monday that the head of its troubled Fukushima Daiichi nuclear power plant has been hospitalized and will be relieved of his post for medical treatment, effective Thursday. 

The utility declined to provide details regarding 56-year-old Masao Yoshida's illness and his accumulated radiation exposure, citing privacy, only saying that doctors have not indicated a link to radiation. His illness was detected during a recent checkup, TEPCO said.

http://english.kyodonews.jp/news/2011/11/128559.html

URGENT: Japan's unemployment rate rises to 4.5% in Oct.

TOKYO, Nov. 29, Kyodo

OECD: Japan Economic Recovery Moderating Due To Strong Yen, Global Slowdown

Moderating = falling of a cliff

At the same time, it said the gross government debt load will likely rise to 230% of GDP in 2013, even if planned tax increases and spending caps are fulfilled. It said this would push Japan's public finances, already the worst among the OECD nations, further into uncharted territory.

Uncharted terrotory = holy fuck we have never,ever seen this shit, ever!  fucken A!

Tue, 11/29/2011 - 06:30 | 1924581 Overflow-admin
Overflow-admin's picture

About fukushima, follow ex-skf and enenews instead of MSM headlines.

Fukushima Worker Tweets: TEPCO told hospitalized chief to step down — “Yoshida is expected to talk about the truth when he finally becomes free”

 

Thanks for your translation "Moderating" and "uncharted territory". My crisis of laughing recovery also moderating... ROFL

Mon, 11/28/2011 - 22:47 | 1923870 Freddie
Freddie's picture

4 shitty old GE (junk) reactors hit by a tsnami and a major earthquake with shoddy maintenance done by the Yakuza.  GE as in General Electric corrupt shitty Oba the muslim's GE.

The Japanese are pleasant people and I would not wish this on anyone but the Yakuza is all throughout their businesses and soceity.   The Russians/Ukrainians at least sacrificed hundreds of men to try to entomb Chernobyl as fast as possible.  This "clean up/fix" is like slow motion.    We do not know what is going on but we know we are being lied too.  The damn old USSR was a hell of a lot more forthcoming.

Also what is the exclusion zone at Chernobyl?  70 mile radius at least?  And it may melt though the floor there at the dead plant that is not so dead.    

Mon, 11/28/2011 - 23:24 | 1923947 NoControl
NoControl's picture

Radiation = Cancer?

surely you're joking!!!!   

Mon, 11/28/2011 - 20:09 | 1923443 Zgangsta
Zgangsta's picture

Not only is that not true, there is so little radiation in Tokyo that the governor is actively looking to import more of it from the disaster zones, and bury it within the city.

http://mdn.mainichi.jp/perspectives/editorial/news/20111105p2a00m0na0010...

 

 

Mon, 11/28/2011 - 20:12 | 1923455 Non Passaran
Non Passaran's picture

Haha what a bunch of crap.
The likelihood of getting a cancer from Fukushima is close to nil.

Mon, 11/28/2011 - 20:22 | 1923491 Dapper Dan
Dapper Dan's picture

Define likelihood.

I would agree that you can't get cancer from Fukushima, but you could get it from the enormous amount of radiation emanating from there.

But I read this on the internet so it must not be true.

Sun, 01/22/2012 - 03:17 | 2085976 Non Passaran
Non Passaran's picture

Read measurement reports done by university scientists right after the incident.
Or bet against my claim by investing against my thesis. You don't have to argue with me, beat me on markets - everyone is welcome!

Tue, 11/29/2011 - 11:57 | 1925671 Au Shucks
Au Shucks's picture

What the Hedge are you talking about?  On what basis do you make such an extraordinary claim?  Are you suggesting that the Japan double (or triple) meltdown, far bigger than Chernobyl which caused hundreds of surrounding miles of countryside to be inhabitable, is somehow contained better?  You do realize it is still in meltdown, right?  You do realize that there has been plutonium found tens of miles away, right?  You do know there was a hydrogen explosion, at least one, which spread contaminants much further than they were spread by the Chernobyl "accident"?

So, obviously I am the one missing the truth here because you put the chances at nil.  Please enlighten me so I can stop speaking out of ignorance.

(although there is sarcasm in my closing request, I do not put it beyond reason that I am misinformed... I do doubt however that you have first hand knowledge of what is or isn't happening there.  I hope you can prove me wrong, not opinion me to death)

Mon, 11/28/2011 - 20:20 | 1923484 Vlad Tepid
Vlad Tepid's picture

You mean the backup governmental center/trade center to go up at the old Itami area?  That's not the relocation of Tokyo.

"perhaps millions may...."?  You sure about that?

The top half of the main island?  What about the bottom half of the top island?  I can cast aspersions on your wild claims as fast as you can pull them out of your ass.

Sun, 01/22/2012 - 03:13 | 2085972 Non Passaran
Non Passaran's picture

So you've put all your savings in a short Japan investment?
Or you're just talking out of your ass?
I think it's the latter.

Mon, 11/28/2011 - 19:52 | 1923390 phungus_mungus
phungus_mungus's picture

growing concern that the European crisis will spread to Japan?

 

Is this something like the growing concern that you are going to die one day?

Mon, 11/28/2011 - 20:20 | 1923478 Manthong
Manthong's picture

No problema. The US will take care of it.

Here, I already got the headline ready for them:

OBAMA SAYS U.S. `READY TO DO OUR PART' TO RESOLVE JAPAN CRISIS.

OBAMA SAYS SOLVING JAPAN CRISIS OF `HUGE IMPORTANCE' TO U.S.

http://www.zerohedge.com/news/uncle-sam-wants-you-bail-out-europe

(strikethrough doesn't work in comment field)

Mon, 11/28/2011 - 20:03 | 1923393 DormRoom
DormRoom's picture

Japan is headed into a demographic death spiral, unless she opens up immigration.  Its aging population is  reaching a tipping point where there's isn't enough domestic net savings to buy Japan bonds, since the elderly will start drawing down savings at a greater rate, so she will increasingly have to go to the foreign market.  And at a debt:gdp @ 220% who will buy the bonds?  Who will buy the bonds if the the US/Europe continue monetizing, pushing upwards pressure on the Yen, leading to an export collapse, and deep recession?

 

And if the EZ collapses, the Yen will go higher, and lead to a  deep recession.  It's not looking so good for Japan over the next 2-10 years.

 

I wonder if the Fed/ECB consider the effects of their monetizing programs on Japan.  They've left her with a binary policy option.. monetize, or die. And monetizing, only kicks the can down the road a lil while before the null point is reached.

 

Mon, 11/28/2011 - 20:08 | 1923441 CTG_Sweden
CTG_Sweden's picture

 

DormRoom:

"Japan is headed into a demographic death spiral, unless she opens up immigration.  Its aging population is  reaching a tipping point where there's isn't enough domestic net savings to buy Japan bonds, since the elderly will start drawing down savings at a greater rate, so she will increasingly have to go to the foreign market.  And at a debt:gdp @ 220% who will buy the bonds?"

 

My comments:

Would Japan had been better off with more oversupply of labour and more unemployment? I think that you (like many others) want to fool people that the US does not have problem with oversupply of labour. The lack of current and future oversupply of labour is probably one of the strengths of the Japanese economy.

However, the Japanese government should probably have increased taxes on consumption in the past (which would have reduced the demand for labour even more) in order to reduce or eliminate the budget deficits rather than borrowing from the population. Instead of investing in government bonds, people should have been encouraged to invest in stock, probably in stock linked to growth markets in Asia. Decreased taxes on dividends would probably have decreased government revenues very little but the Japanese people would probably have benefited a lot from that.

Mon, 11/28/2011 - 20:28 | 1923502 Vlad Tepid
Vlad Tepid's picture

Great response Sweden.  You put it better than I could have.

I tend to lose focus and see red when people bring up this demographic argument.  The relative scarcity of labor due to strict immigration will be one of the saving graces of Japan if it can withstand making the Faustian bargin to open the gates and irrigate the parched pyramid scheme of social welfare. 

Unlike the US and much of the "West," Japan will likely maintain it's cultural identity over the coming decades because there are no "others" to challenge the status quo.  This will also mean increased stability and strength of decision making (one would hope) in dealing with the coming crisis.  Ask the Austro-Hungarians, Soviets, and Ottomans what happens to multi-ethnic nations in tough times.  Heck even check out Rwanda or Zimbabwe.

Mon, 11/28/2011 - 21:07 | 1923630 Bicycle Repairman
Bicycle Repairman's picture

Japan actually has a national identity and culture, and it is more important that mere economics.  I envy them that.

Tue, 11/29/2011 - 00:00 | 1924014 sydneybound
sydneybound's picture

Your scarcity of labour does not answer the issues of having a group of savers looking to unload their bonds into a vacuum, with yields increasing accordingly.

 

I went over the FY10 Japanese budget actuals, and with 50% of their expenses covered by new debt issuance (45T yen), and 50% of their tax revenue going to debt servicing (10T yen to interest and 10T yen to rolling of debt), small increases in yields will hurt that country.

 

I do not see a world where non-Japanese investors will take up their bonds at current rates.  For the Japanese, 1% on bonds is better than losing money in a deflationary environment, but I cannot fathom anyone else ok with this.

 

Any thoughts?

Tue, 11/29/2011 - 01:19 | 1924185 Ragnar24
Ragnar24's picture

You're right. The other posters don't seem too concerned with pesky facts. 

That somehow "scarcity of labor" is an advantage for a country with such a massive amount in liabilities is laughable.  And it's also naive to think that somehow an inverted population pyramid -- which implies that Japan's older people own Japanese bonds in their retirement -- will NOT lead to much higher rates or debt monetization down the road (when those currently at the top of the top-heavy pyramid are DEAD).

Japan's screwed. And it's not because of an aging population -- it's because those old assholes piled up the debt for a future generation to worry about.

Tue, 11/29/2011 - 04:50 | 1924503 Vlad Tepid
Vlad Tepid's picture

I have not been over the actuarial details so I will defer to you guys but it is critical to understand that the liabilities Japan owes are all to itself. I have no illusions that Japan will default and much pain will come, but it will fall on the aged before the future generations have to worry about paying it...they are the ones who will default/revolt rather than be forced into the international economic maelstrom that is coming with a 200% debt to GDP ratio.  The Japanese havemore than enough reserves to protect themselves from their debt held outside the country.

For me, the only question is whether Japan will jettison it's US debt before the Fed prints it into worthlessness.  I know they are concerned about this.  I don't know if you remember or followed this but about 2 or 3 years ago, the Italian police caught two undercover Japanese Finance Ministry agents trying to sneak into Switzerland with billions in paper Treasuries from back when the US actually issued paper - the 50s and 60s.  Japan's been trying to get rid of this stuff on the sly without starting apanic as I'm sure other countries are as well.  (BTW, the paper and the agents disappeared from an Italian immigration cell leaving the Italians fuming - they had rights to a percentage of the seizure.)

Because of Japan's demographic age curve and peculiar financials, they went through their Lost Decade 2 decades before everyone else. They will, I believe, hit their "gaman dekinai" - "I can't take it any more" moment before everyone else too.  While they notionally respect their elders, they will - and the elders in question if I read the culture right - will not take the country down with them.  The Japanese geezers don't cling to their Social Secutiry the way Europeans and North Americansseem to. It is sacrosanct but not sacred.  Japan always seems to hit the fire hard but then come out stronger.  Not to get mystical, but this will be one of those time...however, the hurt will get worse first.

Tue, 11/29/2011 - 00:05 | 1924023 Uchtdorf
Uchtdorf's picture

But one must not forget that Japan had its own long era of internal struggles called Sengoku Jidai. The first use of "gaijin" was towards other natives of those islands who were found not speaking the right dialect.

Tue, 11/29/2011 - 00:10 | 1924031 Uchtdorf
Uchtdorf's picture

No girlfriend? No worries. Well, other than there won't be enough Japanese workers to support all those folks who live into their 90s there.

61% have no immediate prospects for marriage.

http://mdn.mainichi.jp/mdnnews/news/20111126p2g00m0dm012000c.html

 

Mon, 11/28/2011 - 20:42 | 1923545 kaiserhoff
kaiserhoff's picture

Good points, Svede.  The US has an oversupply of ghetto and government, but it's been so long since we had free markets, I don't think anyone knows whether we have an oversupply of labor.

Mon, 11/28/2011 - 22:55 | 1923891 Freddie
Freddie's picture

Swedes and other nordic countries, except Finland, have let others in thanks to the left.  See muslim Malmo.  The nutty shooter in Norway said that once peaceful Oslo is filled with violent Muslims.  The nordics are not dumb enough to elect them to run/ruin their country yet like the red white  and blue.

I have walked the streets of cities in both countries pre islamics and they were very safe.

As far as the Japanese.  Their efforts to protect their culture are admirable but they have to reproduce.  People can talk labor this and that but when more are dying then being born it is a death spiral.  Eventually people like China start getting ideas.   Putin is trying to reverse the demographic death spiral to keep China from taking over Russia in a few decades.  

Mon, 11/28/2011 - 20:59 | 1923603 Ragnar24
Ragnar24's picture

Not sure how you jumped to that conclusion (that Dormroom thinks US does not have a greater supply of labor than demand for it). 

He/she is arguing that JAPAN has a DEBT/UNFUNDED LIABILITY problem that only massive growth in the population of workers could possibly support (as with any good Ponzi scheme) because its people are old as shit, retiring, and collecting their entitlements.  Also, an extraordinary jump in the demand for Japanese goods/services would also help.

Either way, the massive amount of debt can't be magically lifted off the shoulders of the diminishing population of young Japanese workers -- Japan will have to hyperinflate or increase tax revenues (without raising tax rates that would cripple the incentive to earn an income).

Mon, 11/28/2011 - 21:16 | 1923643 SDRII
SDRII's picture

Agree the money supply growth has to keep up with population growth arguments die with contraction. Take not eof the hard push to open the Japan Ag markets by the US. Noda agreed but with minority support within his own party - then again he backed into the job. In a related note see article on French judge throwing out the GMO (Monsanto) suit (and the US Ambassador comments via trade war with France over GMO per the info op Wiki). By the way didn;t some Japanese national get arrested with a backpack full of bonds? Same formula, again and again and again. Who will break the cycle?

http://www.dailymail.co.uk/news/article-1343889/WikiLeaks-George-Bush-ur...

http://www.google.com/hostednews/afp/article/ALeqM5jqAqK0uhvkwkOaUAn8PdP...

http://www.naharnet.com/stories/en/20056-japan-says-to-join-pacific-free...

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayy1QKcwcGN0

 

Mon, 11/28/2011 - 21:24 | 1923678 SDRII
SDRII's picture

Noda just sent putin a letter....

http://mdn.mainichi.jp/mdnnews/news/20111128p2g00m0dm006000c.html

Contents of the letter are not known, but Koichiro Watanabe, a lawmaker of Noda's Democratic Party of Japan, told reporters that the letter reflects the Japanese premier's strong willingness to strengthen exchanges between the two nations.

Mon, 11/28/2011 - 23:07 | 1923917 Jack Burton
Jack Burton's picture

Agree! I am sick of the "we must have population growth to have a viable economy crap".  The Black Death swept Europe and killed millions, when the death ended, the lack of labor and oversupply of good farm land was the cause of great rises in people's wages, ability to own land and a general boom time for average people. But the elites were unhappy as they found good serfs and slaves hard to come by. Why? Too many well off farmers and well paid artisans.

It is complete crap the idea that a society and economy can not prosper in a declining population. Japan would be a complete economic success story if half as many people were living on Japan's resources in a 100 years time.

 

Tue, 11/29/2011 - 00:02 | 1924018 sydneybound
sydneybound's picture

cough. except for that little pesky problem called debt.

Mon, 11/28/2011 - 23:16 | 1923934 chindit13
chindit13's picture

I see your point, but I am not sure the positives outweigh the negatives.  The plus side of a demographic pyramid is the ability to fund the savings and retirement Ponzi (corporate pension, Kampo, Yucho).  The negative side, or rather the problems of the  inverted demographic pyramid, is trying to make up for the astonishing level of underfunding or, in the case of Kampo and Yucho, the non-existence of a substantial portion of these schemes owing to bizarre accounting and the mid-1990s "PKO" of the equity market.  As the Bell Curve shifts, we'll see, as retirees attempt to draw down the nominal funds in their Yucho account.

A national identity might have some benefits, but when even Japanese don't want to be Japanese, it has a few drawbacks.  Look at the percentage of Japanese women of marrying age who are neither married nor interested in being mothers of the next Yamato generation.  I have seen figures that upwards of 40% of 20-35 year old Japanese women are unmarried non-mothers.  The fertility rate is the second lowest in the OECD (Italy is No 1), but Japan might take the lead this year.  We've reached Peak Japanese at a time when somebody needs to fund the deficit and pay into the pension scheme.  That someone is going to have to be foreigners, since combined savings (now negative on a yearly basis) and corporate profits no longer cover Japanese Government expenses.  Maybe foreigners will "diversify" into those not so attractive current JGB yields, but it is far from a certainty.

I wonder---regarding your argument of a declining labor base as being a plus---if the same argument can be made of the US manufacturing base in a world of peak oil and economic (demand) slowdown, plus overcapacity?  Did the US actually export one of its problems to China?  Does the writedown of plant and capacity the US has already achieved lay the groundwork for creating brand spanking new cutting edge and energy efficient plant and equipment if or when a new economic growth cycle begins, while China will be stuck paying for low cap-util dinosaurs?

Tue, 11/29/2011 - 07:19 | 1924613 Vengeance
Vengeance's picture

 

 

Funny that I read this article on ZH after I sent this to my clients today (and then I read an article a little while ago on Reuters carrying a brief piece on Japan):

"I was just saying yesterday that I wonder when traders will start targeting Japan due to their estimated 492% overall total debt to GDP (source: Mckinsey) putting  them just behind the UK who comes in first at 495% (owing in some part to its large and growing financial sector).

Exacerbating Japan’s debt woes are the deteriorating population demographics (over half its population are over 45) and unlike many other G7 nations Japan has a poor immigration policy in part due to their inherent xenophobic nature (trust me I lived there for half a decade and know this first hand). With an aging population the major fallout has been declining tax revenues over the last 15 or so years even as expenditures on social security items like pensions & health care have doubled over the same period. Not to mention savings being dipped into by retirees to fund living expenses which means a lower saving rate that has been on the decline for a few years now.

Some argue Japan has lots of room to raise taxes, and I would concur that this is true being that they have one of the lowest tax revenues as a percentage of GDP (17%) in the OECD countries and that their ratio of tax burden to national income at 22% (12.3 percent for national tax and 9.7 percent for local tax) is also among the lowest, but the issue is that it’s the old people who vote in Japan and they are not on board with any tax hikes in any way shape or form. So we can probably take this off the table in the short to medium term as from the time I spent over there, politicians will not make any tough choices at odds with being reelected (sounds like most countries really). But I do think that this is potentially why JGBs trade at such low interest rates, the room to hike tax rates if the situation becomes dire enough.

Another reason for JGB stability is often touted as the massive household assets (300% of GDP) compared to public debt. This reason seems to be the most popular explanation as to why so many believe that Japan is different - its strong and very high household assets. In addition, the make-up of Japan’s debt is quite different from many other countries in that most of its debt is held domestically (around 94%) and therefore unlikely to face the squeeze that many European countries are and have been seeing as markets have frozen them out or demanded higher rates due to their perceived riskiness.

Yet this can only last so long as public debt is slowly catching up with household assets. Eventually, Japan's mounting levels of gov’t debt, namely public debt (IMF 2010 est. 225% - note that the UK is est. 76.7%) will top household assets and I think that the perception that this will happen is more important than the actual fact.

Also, people have argued that the use of Gross Debt is misleading, and that does have some merit. But the point is that you owe what you owe, and netting it out assumes that whoever owes you money is going/willing/able to pay when it comes due. That is why I prefer the gross number over net numbers. But for full disclosure, Japan’s net debt of 130% (subtracting from the gross the $3.3 trln in ‘assets’) is roughly in line with Greece’s; the point is that many believe debt/gdp ratios over 90% have strongly negative implications on growth.

I think that investors (mainly Japanese) are suffering from Ostrich Syndrome where they stick their heads in the ground and believe all is fine and dandy despite reality, and the wake up call for them is likely to be when Japan starts running a negative current account balance for more the two consecutive quarters, and/or household assets are eclipsed by government debt, and/or inflationary pressures start mounting, but at this point all are seemingly not imminent...

Nevertheless, investors will eventually realize JGBs are no safer than Spanish or Italian bonds (not a truly accurate comparison, but you get my point) and then we’ll see domestic demand weaken (bid-to-covers being the leading indicator here) as the domestic buyers of JGBs are not quiescent any longer. I believe this will and is slowly starting to happen and will be the key point to the turning of fortunes in the JGB market.

These domestic investors will, especially with a strong yen, begin to look more earnestly overseas for higher yielding returns and the reason I believe they haven’t done so in droves yet is that Japanese tend to be more inward looking, more likely to invest domestically than in the perceived risky global market place, and to some degree, I think they feel obligated to support their gov’t and thereby neighbours by investing in JGBs. Perhaps it’s also that they feel there is no other place to invest, which might tie into the perception of risk… That said, the party doesn’t last forever and Japan will eventually have to tap into the global debt market and sell more debt externally and when this happens, I expect yields to rise for a number of reasons.

Investors are realizing that there is no such thing as ‘risk free’ debt, they are doing more due diligence when it comes to which gov’ts they are willing to lend to, and to me, one of the more important reasons is that inflation has to be taken into account when investing in debt instruments. If an investor faces a higher inflation rate (food and energy prices will keep climbing and every country will face these pressures), then debt they will invest in (other things being held constant) will have to offer a higher return being: (domestic) inflation rate + opportunity cost + risk adjusted return.

Circling back to higher yields, we start getting into a negative feedback loop that as yields move higher so too does the cost of servicing the debt. It is costing Japan something around 50% or so of its tax revenues to service its debt and with uber low interest rates if yields rose from current ~1.00% to 2-3% the interest expense would start to become a huge burden. Higher than 3% - 3.5% and likely the interest expense starts accounting for more than revenues. So as that interest expense becomes an ever increasing percentage of gov’t outlays, then the market demands higher yields to compensate for the increasing riskiness of that debt.

We’ve seen this happen already, and Japan is no different. They’ve just been lucky enough to have the right mix of ingredients for the last twenty years, but I believe the recipe is changing right under their noses.

Turning to flows, real money has been selling yen but at the same time investors have been net buyers of JGBs but it does appear that all the things mentioned above are slowly coming to the attention of larger macro investors. So is Japan the next country (with France a prime candidate also) in the cross hairs? Well it’s certainly to early to say that traders are locked and loaded gunning for Japan, but I’d be keeping my eye on demand (like at this Thursday’s 10-yr auction) for JGBs because if we start seeing foreign demand weaken, then likely domestic demand will catch on and start nosing around as to why and we could be witnessing the start of Japan entering the sovereign debt crisis.

So far yields on 10-yr JGB (Japanese Government Bonds) have poked above Sept 2nd’s high and are flirting with support turned resistance from the May/July consolidation area before yields broke lower. A weak auction on Thursday could see yields heading back to 1.18% area in short order with the next target being the 1.34% area. The last time Japanese yields on the 10-yr were above 2% was in 2006 so that 2% area is going to be a harbinger of things to come if we see yields close above there.

Point is that although Japan has some severe fiscal/debt issues, the time hasn't yet come to bet the farm against them. It will though. We'll keep you posted"

 

Mon, 11/28/2011 - 20:24 | 1923493 chump666
chump666's picture

The EU has collapsed it's now a zombie.  The EUR has like maybe half a yr of life in it...then it is gone.  The big worry, huge, if the Fed prints.  I don't think the ECB will.  It will be the FED, they will do something different with their printing presses.  Whether they flood, trillion +, USD's into the global economy. Swap lines from hell.  That seems more likely.  If Japan goes you can 100% guarantee that the US taxpayer will bailout Japan via the IMF, but if the FED  go utterly more insane and devalue the USD...Japan will crumble and China will step to the play.   Japan goes into a crisis and the YEN peaks, exports are destroyed.  Can't see China sitting back and saying, 'lets allow Japan to economically sink'

Not looking good at all

Mon, 11/28/2011 - 19:55 | 1923394 saturno_v
saturno_v's picture

Someone can please explain to me the technical breaking points of a Central Bank (in this case Japan), buying all the public debt necessary in the market to keep a lid on rising interest rates which would crush the sovereign ability to pay?? How long they could do this and what eventually snap?? The currency?? Triggered by commercial partners (public or private) at some point refusing to do business in that currency (loss of faith = hyperinflation)?? We all know that Keynesians believe that CB can print as much as they want as long as there is no growth (no money velocity = no inflation)....however hyperinflation is very different from inflation...loss of confidence can appear suddenly....

Mon, 11/28/2011 - 21:09 | 1923598 disabledvet
disabledvet's picture

given that the current head of Bank of Japan is considered quite the neophyte there is a concern that the process of weakening the yen in an orderly fashion may not be carried out successfully. We know for a fact that when Switzerland tried it they lost billions of francs and only recently finally "hammered that thing." In Japan they have already failed to weaken the yen...now the fear is you could get "too much a big bang the other way" thus leading to a "chaotic situation." Sending a letter asking for advice to the banks on how to "do this" which the BOJ has done is...quite frankly...terrifying.

Mon, 11/28/2011 - 19:56 | 1923401 Yen Cross
Yen Cross's picture

 Yes the institutional players are selling JGB's. Yes Toyota needs a 91 usd/yen break even. I just can't get past KAMPO and the savings rate S/T. Trading yen on the crosses is risky business. All the risk currencies are one mushroom away from implosion, unless you trade some small sovereign. I won't mention names.  I'll lightly trade the crosses into January.

  My level of risk in the yen is is several hundred pips away. Confirmation, confirmation, confirmation! Light liquidity in December is just chasing a quota.

Mon, 11/28/2011 - 19:57 | 1923409 SHEEPFUKKER
SHEEPFUKKER's picture

Godzilla 

Mon, 11/28/2011 - 19:58 | 1923412 Carlyle Groupie
Carlyle Groupie's picture

Who here is going to run out and short JGB's? Remember what Kyle said?

Mon, 11/28/2011 - 20:53 | 1923577 Schmuck Raker
Schmuck Raker's picture
I'm tempted. Here's a new product: Powershares Db Inverse Japanese (JGBS)
Mon, 11/28/2011 - 21:40 | 1923721 Mike2756
Mike2756's picture

They will be forced to monetize debt, i'm going with the currency.

Mon, 11/28/2011 - 20:04 | 1923421 chump666
chump666's picture

A good bear signal, is when the YEN surges even when it is a 'risk on' trade.  When Asia starts to turn bearish prior to EZ/US. That has happened  in the last few mths.  Market starts to go risk averse in Asia before other markets.  It does seem like Japan leads this risk off trade.  More so when there is HKD's and Yuan selling and Yen buying, which is volatility selling and buying outta Asia.  On Japan and rates?  They are stuck.  I think Japan is doomed.

Mon, 11/28/2011 - 20:11 | 1923452 Matt1973
Matt1973's picture

Short Yen as Japan has by far the worst debt load situation

Mon, 11/28/2011 - 20:13 | 1923459 Divine Wind
Divine Wind's picture

The Japanese certainly have a host of challenges before themselves.

With the destruction caused by the earthquake and tsunami in March, they are already reeling.

Add to this the ongoing nuclear disaster at Fukushima, and the recent new revelations about just how bad two explosions and 3 core melts have been.

Apparently ALL of Japan was blanketed with radioactive Cesium, not to mention more than 200 other radioactive isotopes.

http://ajw.asahi.com/article/0311disaster/fukushima/AJ201111260001

And apparently one of the most contaminated areas is in Tokyo!

http://jen.jiji.com/jc/eng?g=eco&k=2011112800918

This has seriously impacted all of the crops, including rice.

What a lousy situation.

 

 

 

Mon, 11/28/2011 - 20:20 | 1923480 Carlyle Groupie
Carlyle Groupie's picture

Beware of what you eat in the USA. Hillary has lifted trade restrictions with Japan on radioactive foods.

Japan is exporting all contaminated foods and imported good food from Chile and Brazil.

http://www.examiner.com/human-rights-in-national/radiating-americans-wit...

Mon, 11/28/2011 - 20:59 | 1923601 Rodent Freikorps
Rodent Freikorps's picture

Isn't that a pic of a Chinese clay soldier?

Hard to believe the Japanese ever created anyone that butt ugly.

Mon, 11/28/2011 - 21:11 | 1923642 sabra1
sabra1's picture

the US has janet napolitano! and her son alan greenspan! barney frank is once removed from janet's butt! seriously, who calls their kid newt?

Mon, 11/28/2011 - 22:09 | 1923782 Divine Wind
Divine Wind's picture

It is one of the terracotta sculptures from a Chinese city call Xian (Shee Ahn).

Nope, not Japanese.

Mon, 11/28/2011 - 22:50 | 1923878 Yen Cross
Yen Cross's picture

 Wecome back. Safe and Whole I prejume? 

   Take some time.  Eurocratic style. /Singapore sling>>>

Mon, 11/28/2011 - 20:17 | 1923473 Zgangsta
Zgangsta's picture
Nuclear insurance group won't renew Fukushima plant's liability insurance

http://mdn.mainichi.jp/mdnnews/news/20111128p2a00m0na020000c.html

I can't believe that this wasn't already a given...

Mon, 11/28/2011 - 20:18 | 1923475 mynhair
mynhair's picture

Nippon ha no problems.

They have 'savings',

and no Berskank.

Mon, 11/28/2011 - 20:24 | 1923483 mynhair
mynhair's picture

Calling TCT!  Calling TCT!

Are you actually doing Fx tonite?

I'm going to bed, have fun.

Got nuthin and interested in nuthin.

Mon, 11/28/2011 - 20:21 | 1923487 M.B. Drapier
M.B. Drapier's picture

And this is what happens when the central bank tries to hold a hard line against monetar ... oh, wait.

Mon, 11/28/2011 - 20:22 | 1923490 kito
kito's picture

man it would be great to import a quality prius at chinese labor prices!!!!!!!!!!!!!!

Mon, 11/28/2011 - 20:27 | 1923501 Yen Cross
Yen Cross's picture

  Will it require a " HAZMAT" team, to tow it from a crash site?

Mon, 11/28/2011 - 20:36 | 1923527 Brian
Brian's picture

I wrote this in Sept. 2010.  It seems like we are getting near step 8 of my 12 steps...  (note, QE lite and QE2 are now added to with imminent QE3)...

The 12 Simple Steps to Financial Meltdown:

 

1) Japan buys dollars with Yen to prevent Yen from strengthening any further.

 

2) Japanese exporters, who are flush with dollars that they haven’t been willing to exchange at recent lows (because they would have suffered big losses), convert some dollars into Yen by buying Yen (selling dollars to BOJ, basically)

 

3) BOJ stops buying Yen to test the market, and Yen strengthens because of exporter buying until the Yen reaches the “line in the sand,” where BOJ intervenes and again starts buying.

 

4) Cycle repeats several times until it becomes clear that BOJ is going to be forced to supply Yen permanently.  This permanent supply would be at a floor price, which will create a known and very tight range for the Yen/Dollar trade.

 

5) All the while, BOJ is buying up US Treasuries, which they will need in a few steps…

 

6) At the same time, newly minted Yen are winding up in the hands of export companies (in exchange for their imported dollars), and thereby steadily and rapidly increasing the supply of Yen in the domestic Japanese economy (by way of the exporter’s domestic expenses like labor and leases).

 

7) And meanwhile, US Treasuries are being purchased, giving the Greenback support in the face of QE lite and real QE2.

 

8) As Yen supply within the Japanese economy spikes, prices rise and inflation sets in, even in the face of a now artificially stable Yen price in the “public” markets.

 

9) Inflation accelerates to hyperinflation, as hundreds of Trillions of Yen relentlessly bombard the domestic economy, until the BOJ is forced to stop supplying Yen.  This will likely happen when Yen demand starts to cross the BOJ established price range anyway, and it will already be far, far too late to avoid the inevitable…

 

10) The Yen value will crash as everyone becomes a seller.  The BOJ will have only one choice: to use their huge stockpile of US Treasuries they just purchased as a way of soaking up the vast excess of Yen that they have created, and they will start dumping them to get the dollars to buy back Yen and provide price support – something “unimaginable” today.

 

11) Forced liquidation of Treasuries by BOJ in conjunction with QE2 will create a dam-burst of Treasuries flooding the market.  The price will plummet and interest rates will skyrocket.  Every major Treasury holder from China to Pimco; to the states’ pension funds to every wallstreet bank, will see this Treasury crash and sell, Sell, SELL!!!  Dollars will be everywhere.

 

12) Result: Yen collapse, Dollar Collapse, Bond Market Collapse, Massive Interest Rate Spike, and Hyperinflation.

 

The end

 

Mon, 11/28/2011 - 21:53 | 1923757 Carlyle Groupie
Carlyle Groupie's picture

Add predictive dates and you will hailed a genius. Otherwise everyone will say: pzzzit, that guy thinks he's reggie, all flash no cash.

Mon, 11/28/2011 - 22:54 | 1923793 Yen Cross
Yen Cross's picture

 Blahhh Blahhh.  Trade you're( A), " MIND" .

 

   As in you are the trader! RETARD!

Mon, 11/28/2011 - 20:45 | 1923550 Georgesblog
Georgesblog's picture

Japan never really recovered from the '90s. It was Japan that showed the United States how to do near-zero interest. This is one of the other shoes, hanging in the air.

http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/

Mon, 11/28/2011 - 20:46 | 1923556 asteroids
asteroids's picture

Too much debt, too much credit, not enough cash. You either forgive debt/reduce credit or print cash.  If you forgive the banks pay, if youj print the peasants pay. Pick your poison.

Mon, 11/28/2011 - 20:50 | 1923567 williambanzai7
williambanzai7's picture

But they are the leading market for adult disposable diapers....

Mon, 11/28/2011 - 21:04 | 1923617 Schmuck Raker
Schmuck Raker's picture

And, adult disposable diaper porn...eeeewwwwww.

Mon, 11/28/2011 - 21:09 | 1923635 spanish inquisition
spanish inquisition's picture

Hmm... Could help our balance of trade if they are interested in adult baby furniture. http://www.babyapparels.com/index.html

Mon, 11/28/2011 - 20:53 | 1923583 Eireann go Brach
Eireann go Brach's picture

Who flung dung?

Mon, 11/28/2011 - 20:54 | 1923585 gjp
gjp's picture

when will it be America's turn?  The biggest trade deficit for decades, now one of the biggest fiscal deficits, the biggest and most corrupt financial sector.  Oh, but they are experts at printing money here.  Move along, nothing to see, look at everyone else's problems!

Mon, 11/28/2011 - 21:03 | 1923615 slewie the pi-rat
slewie the pi-rat's picture

what will japan do w/ all those yen that it won't be using to devalue against the U$D, like it had to do a month ago?

use them to buy more printing presses!

Mon, 11/28/2011 - 22:56 | 1923894 Yen Cross
Yen Cross's picture

 Supplant the PIIG's!

Mon, 11/28/2011 - 21:05 | 1923620 Catflappo
Catflappo's picture

“That day is coming closer, but not this year or next year.”

 

This assumes a pretty inefficient market.....    if the market thinks the day is coming closer then it will start to price it in (increasingly) now.     Now, whether or not the market is remotely efficient is another discussion.....

Mon, 11/28/2011 - 21:59 | 1923766 Wixard
Wixard's picture

I think at this point the market is confused and none of that matters anymore. 

Mon, 11/28/2011 - 21:07 | 1923628 defencev
defencev's picture

Japan has huge US currency reserves. I do not see Japan going down untill it exausts these reserves or US crushes (whichever comes first).

Tue, 11/29/2011 - 01:00 | 1923660 non_anon
non_anon's picture

Confucious say "left hand not know right hand in circle jerk

Mon, 11/28/2011 - 21:21 | 1923671 thx111
thx111's picture

It is time for Japan to dump all the US treasuries they own.

Mon, 11/28/2011 - 21:23 | 1923677 kevinearick
kevinearick's picture

From Bloomberg, without comment:

“London Banks Seen Rigging Rates Losing Credibility With Markets”

“China Wary of Choking on Dollar Driving Hong Kong Dim Sum Bonds”

Mon, 11/28/2011 - 22:07 | 1923778 BigInJapan
BigInJapan's picture

I've been preparing for this over the past two years.
I am in liquidation mode because now, for the first time ever, the fear is beginning to creep in.
A stranger in a strange land...

Mon, 11/28/2011 - 23:15 | 1923931 chump666
chump666's picture

Yeah it's getting worst by the week.  Thing is with Japan, they will need to find oil somewhere, Uranium, gold, iron ore something to offset the devaluation of their WHOLE economy.  Kinda tragic.  But Japan is done.

Europe is done, Japan, China (doesn't invent anything except for new War-planes and Subs) are done.  But America plays it's cards right, shuts down the FED, shrinks the government...could be a great nation

Mon, 11/28/2011 - 22:17 | 1923797 Yen Cross
Yen Cross's picture

 Slewie please anex me>

Mon, 11/28/2011 - 22:32 | 1923832 slewie the pi-rat
slewie the pi-rat's picture

consider yerself anxwered, Y/C

Mon, 11/28/2011 - 22:18 | 1923798 booboo
booboo's picture

nippon bonds suc dong ben wrong too long we die soon

translation: we all japanese now round eye bitchez

Mon, 11/28/2011 - 22:20 | 1923801 Yen Cross
Yen Cross's picture

 Time to get long, duck suck dong?

Mon, 11/28/2011 - 23:03 | 1923912 Yen Cross
Yen Cross's picture

 I just revesrsed usd/jpy @ 7848  

Mon, 11/28/2011 - 23:25 | 1923952 OurCynic
OurCynic's picture

Japanese debt levels are monstrously high, but when people bring up the unsustainibilty of this situation

the standard mainstream response is that it's okay because the debt is held by the Japanese people for

the most part.

 

IMO that is missing the point, the point is that rising rates will be forced on the Japanese at some point

(ratings downgrade?) and when that happens the envitable result is default. 

Kyle bass makes this point a hundred percent better than I could.

 

Debt that cannot be repaid will NOT be Repaid. End of story.

 

One thing to note though, over the last year, most of the new government issuance has been forced

onto the already zombie Japanese banks. I believe that the next domino after a few Euro bank failures

could be the these Japanese banks. They cannot stand scrutiny of their balance sheets.

 

I have shorted NMR SMFG and MFG on this expectation.

We'll see how that goes.

Mon, 11/28/2011 - 23:38 | 1923980 HD
HD's picture

Granted - this is out of place, but it was cute, so I thought I'd post it for the hell of it:

 http://www.myconfinedspace.com/wp-content/uploads/tdomf/371630/tumblr_ll...

Tue, 11/29/2011 - 03:14 | 1924422 Jimmy Carter wa...
Jimmy Carter was right's picture

20 years of stagnation has changed Japan from a wasteful nation to a resourceful nation.  And believe you me they can get even more resourceful.  Problem is what happens when unemployment hits 30% in a megalopolis?

 OurCynic and Brian make excellent points.  A lot of domestic debt will be written off.  And this may trigger the treasury dump, the mother of all dumps, the last biggest stinkiest dump any of us will ever ever see. 

Personally I think the J-gov will be forced to fork over large pieces of prime real estate to the Japanese Banks holding the domestic debt.  How else can they pay? Taxes may well skyrocket, but collecting them will be another story.  There is no county sheriff system in place to start evicting people en-masse. Won't happen. and the recent anti-yakuza laws may well be that the J-government actually sees the writing on the wall, this unlike Fukushima is something they think they can handle . 

Tue, 11/29/2011 - 05:30 | 1924542 lolmao500
lolmao500's picture

Japan runs a 15% GDP deficit and spends twice what it brings in...

Japan numbers :

Budget of 113 trillion yen

45 trillion yen income + deficit of 68 trillion yen.

GDP of 428.73 trillion yen.

That means a 15.86% of GDP in deficit...  + a debt of 200% of GDP and rising fast.

And you add to that an aging population.

And the whole Fukushima disaster.

And the xenophobia of Japan...

And it's pretty clear that anyone who invest in Japan as a safe investment is fucking insane.

Tue, 11/29/2011 - 05:48 | 1924553 lolmao500
lolmao500's picture

Here's how to save Japan from it's debt. 95% of the Japanese debt is held by the Japanese people... well then, just don't pay the debt.

Say it's ``for the good of the nation`` and the Japs will take it up the ass for their motherland and not say a word about it.

Japs are culturally incapable of being angry at their own government.

Tue, 11/29/2011 - 07:04 | 1924598 goodge
goodge's picture

You guys have to concur this article is written at least badly!

Which swaption are you talking about? there is justa  chart without any specification. Swaptions are not by default bearish bets, can be either. I understand most of the article has been taken from bbg, which is usually written by incompetent journalists.

The Japan blowout story resurfaces every now and then. I am the first one to think the situation is unsustainable in Japan as it is (since the first day I steeped in Japan), but they have the means to sort it out. They have one of the lowest VATs in the world, just raising that (with minimal impact on sales) will recover a lot. They have tons of savings, an ageing population, a culture which doesn't make you enquire much about the government and so on so on.

Yes will depreciate, I would not bet my life on Japan defaulting though! Defaulting to who by the way? Debt is mostly owned domestically, the 200% figure is gross by the way, the net debt is half that

Tue, 11/29/2011 - 08:24 | 1924689 chindit13
chindit13's picture

I'm not really sure about what you mean by savings.  Do you mean Kampo and Yucho?  Regarding those two schemes, do you mean the actual value of the assets held by Kampo and Yucho, or what each individual policyholder thinks he has in the two?  Do you mean savings deposits at the banks?  Since these deposits are not sitting there as cash, what is the market value of the assets against which the deposits sit?  A lot of those hundred year mortgages are held by people who might not survive the notes' tenure, and the underlying property is worth somewhere between 5% and 25% of what the note says.  Will these mortgages be extinguished when the unlucky homeowner expires?

All schemes operate, and have always operated, by relying on the simple fact that either populations always grow or a majority will not all need their "savings" at the same time.  Japan is going to test both.  Peak Japanese was reached years ago, and the average age of the declining population is increasing plus many are reaching the state where they no longer save and cannot save because of Perpetual ZIRPu.  The age thing also means many, even a majority,  will be withdrawing savings as the years pass...from banks, from pensions, from Yucho and from Kampo.

Japan was fine when its yearly savings and yearly corporate profits exceeded the government's borrowing needs.  That is no longer the case.  Japan can no longer just "fund itself domestically".  Thus there are only four possibilities:

1)  Spend less/tax more

2)  Find willing foreign buyers of JGBs

3)  Print

4)  Default

The interest rate bomb is also ticking, i.e., the amount of revenue required to fund interest payments alone, which would be hurt even if spending stabilized in the balanced state, if the rate curve shifts upward while bonds mature.

Wed, 12/07/2011 - 05:10 | 1954101 octafinance
octafinance's picture

 

Japan will face a gigantic debt crisis very soon. I'm personally buying OTM yen puts as I do expect that BOJ will finally start monetizing the debt and will risk a collapse of the yen.

http://octafinance.com/2011/11/japans-debt-crisis-comes-after-europe-buy...

In this analysis I answer the following important questions:

1. Why Japan’s crisis will shake the world in few years?

2. Why for many years hedge fund managers betting against Japan lost money and why they were wrong?

3. How can I profit from what is coming? Why position now?

4. Why Japan’s debt and economy are not safe? Most people think Japan is save because: 

-  Japan is net creditor and have huge reserves.

- Japan has trade surplus so it gets more money than spends from outside.

- Japanese government bonds are locally hold so it’s not a target for sudden yield spikes or attacks from foreign bond holders.

 

Do NOT follow this link or you will be banned from the site!