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Survival Of The Unfittest: Japan Or The UK?

Tyler Durden's picture




 

The spread differential between Japan sovereign CDS and UK sovereign CDS (both denominated in USD) is near its widest on record (Japan 55bps wider than UK). Furthermore, Japan's CDS trades notably wider (101bps in 5Y) than its bond's yields (which are the domestically held and subdued by local savings unlike the USD-denominated CDS market) while UK CDS trades 24bps inside its Gilts 5Y yield - quite a difference. Flows have surged into both the Japanese and British markets as AAA safe havens 'were' in demand (until the all-clear appears to have been signaled recently?). The critical point here is that these two nations have devastatingly unsustainable debt/GDP ratios (which show no sign of deleveraging - unlike the US - ignoring unfunded liabilities) with both at just about 500% in total debt/GDP,  and yet in general UK trades far better than Japan. McKinsey's 'Debt and Deleveraging' note today points to significant increases in leverage for Japan, Spain, and France (and UK in the middle ground of rises in leverage for now). Of course none of this matters as clearly this debt will never be paid back and/or interest coverage will approach 100% of GDP (and perhaps that is the 100bps premium in CDS for JPY devaluation probability?).

 

 

compared to sovereign CDS...

 

and the CDS to bond spread differentials across the major currency users...

 

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Fri, 01/20/2012 - 16:06 | 2082105 redpill
redpill's picture

The Japanese are better at pretending everything is OK.  They'll have all four limbs hacked off, bleeding everywhere, and they'll still insist Black Knight-style that everything is fine.  Therefore, like a cartoon character who refuses to look down after running off a cliff, they'll maintain their suspension of disbelief longer than the Brits.  Perhaps if for no other reason than the Brits will have folks like Nigel Farage reminding them of reality in loud and effective ways.

 

Fri, 01/20/2012 - 16:19 | 2082165 johnu1978
johnu1978's picture

Remember what the Japanese did to the English at Singapore which is why the Japs will win!

-John
http://www.youtube.com/watch?v=gZcONxLklc4

Fri, 01/20/2012 - 16:21 | 2082171 NewThor
NewThor's picture

Can we get Japan and the UK in a cage match?

 

Fri, 01/20/2012 - 16:38 | 2082242 blu
blu's picture

In some dark recess of the dark pools, they are already slugging it out with monetary war hammers.

Fri, 01/20/2012 - 16:54 | 2082311 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

^+40,000 for the warhammer reference.

 

Sat, 01/21/2012 - 00:20 | 2083354 jeff montanye
jeff montanye's picture

speaking of wars, who really won ww2, japan or the brits?

Fri, 01/20/2012 - 20:10 | 2082866 css1971
css1971's picture

In Britain, "keeping up appearances" and "muddling through" are national sports.

Interestingly both are island nations with high population densities. Less opportunity to get away from the results of your actions.

 

Fri, 01/20/2012 - 20:43 | 2082931 Jack Burton
Jack Burton's picture

The main difference between the two is the UK accepts a very high immigration rate, both legal and illegal, and is hell bent on a vast multi cultural experiment. Japan on the other hand accepts few immigrants and has no intention of dumping it's racial character or cultural traditions.

So which nation fares the best will be a test of these two very different approaches to 21st century national life.

Fri, 01/20/2012 - 22:07 | 2083137 smore
smore's picture

Excellent point.  A complicating factor in the multiculture/monoculture matchup will be the Japanese predilection for robots though, which has every chance of being a gamechanger if we can get through the next 20 years without nuclear armageddon.

http://www.futureforall.org/robotics/robotics.htm

The Brits might lead in RobotTraders, but, um, is that a good thing???

Fri, 01/20/2012 - 22:19 | 2083190 philipat
philipat's picture

 Wow, it's great to hear that everything is fine in the US. I had assumed that it is only the US that has unfunded liabilities which, if added in, make it the worst of the lot. Better not let Congress get hold of this piece.

Fri, 01/20/2012 - 22:47 | 2083238 Buck Johnson
Buck Johnson's picture

But the UK is better at ignoring. You see the reason why the UK is still doing "better" is because they are the center of all the financial manipulation that has been going on in the Western banking system for decades. They will by hook or crook do anything they have to keep going and let someone else take the blame before they go under.

Fri, 01/20/2012 - 16:05 | 2082114 falak pema
falak pema's picture

the financial empire meets the electronic and car empire...both on the edge of a failed paradigm. 

Sign of the current  times. But not sign of the future. That's my take.

Fri, 01/20/2012 - 16:21 | 2082173 LawsofPhysics
LawsofPhysics's picture

precisely, and no CDS on sovereign debt will ever be triggered.  Same as it ever was.

Fri, 01/20/2012 - 17:54 | 2082509 Belarusian Bull
Belarusian Bull's picture

Could you please explain the lowest chart, as i get, it represents the difference between yields on CDS and respective Bonds.

Is it so?

Thanks in advance.

Fri, 01/20/2012 - 19:04 | 2082707 Flakmeister
Flakmeister's picture

Only fitting in that they never should have existed in the first place...

Fri, 01/20/2012 - 16:40 | 2082247 GeneMarchbanks
GeneMarchbanks's picture

#10 is shocking in my humble opinion.

Fri, 01/20/2012 - 17:57 | 2082518 Belarusian Bull
Belarusian Bull's picture

It's probably people searching for local Cash 4 Gold  dealers.

Fri, 01/20/2012 - 17:44 | 2082473 roadhazard
roadhazard's picture

I hope it's coffee curing daibetes... I'm not going to look.

Sat, 01/21/2012 - 01:53 | 2083513 StychoKiller
StychoKiller's picture

A couple of the numerous chemical compounds found in coffee have been found to help with insulin uptake.  (de-caff only, I'm afraid :>( )

 

Fri, 01/20/2012 - 16:09 | 2082123 RobotTrader
RobotTrader's picture

Here's the Shocker:

The Treasury market is 5x bigger than the stock market

We have seen weeks upon weeks of steady equity fund outflows.

We have seen huge panic buying in Fixed Income the last 4 months, which has totally swamped the selling from Asian banks.

Yet both stocks and Treasuries have skied huge the last 3 years amidst the worst economy in a generation and wild-eyed government spending and a hockey-sticked Fed balance sheet.

What happens when all that bond money starts flowing back into stocks?

What happens when 30 some odd weeks of mutual fund outflows start turning into inflows?

Dow 15,000?

Dow 20,000?

Just sayin'....

Fri, 01/20/2012 - 16:11 | 2082132 oddjob
oddjob's picture

Stick to bad mouthing mining stocks, you were almost getting good at it.

Fri, 01/20/2012 - 16:18 | 2082162 Robot Trader's ...
Robot Trader's brother's picture

Ignore him.  He was dropped on his head when a baby.

Fri, 01/20/2012 - 18:00 | 2082528 Zero Govt
Zero Govt's picture

"Just Sayin" Robbo or have you put your money (what's left of it!) where your mouth is?

Just askin!

Fri, 01/20/2012 - 16:13 | 2082141 redpill
redpill's picture

The real question is WHY would they turn into inflows?  What has fundamentally changed that spooked the equity dollars out of the marketplace to begin with?  

Fri, 01/20/2012 - 16:17 | 2082157 GeneMarchbanks
GeneMarchbanks's picture

10-year, oil & silver are all fundamental today.

Fri, 01/20/2012 - 16:38 | 2082238 Greenspan Shrugged
Greenspan Shrugged's picture

Fear and lack of confidence in the currency would do it.  You here this stupid QE3 shit everyday.  The Bernank uses fear to his advantage, helping him keep his little balancing act going.  Pretty soon the American economy is going to look like that Carnival cruise ship off the coast of Italy. 

Sat, 01/21/2012 - 07:37 | 2083810 daily bread
daily bread's picture

And who is the cost guard meister that tells the captain of the ship to get back on board?

Fri, 01/20/2012 - 16:15 | 2082148 somethingisrotten
somethingisrotten's picture

Oh no, not the "money on the sidelines" argument!!!!!!!!!!!!

Don't you a-holes ever realize that safe haven buyers of bonds never buy your momo stocks, the only stocks they buy are utilities whose divs are close to bond yields.

Fri, 01/20/2012 - 16:15 | 2082151 Gubbmint Cheese
Gubbmint Cheese's picture

what happens if record profit margins start to regress back to the mean?

what happens when aggregate demand doesn't materialize?

what happens when the global economy slows down?

 

Fri, 01/20/2012 - 16:34 | 2082224 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The flood of money over the past few years from the gubbimints ended around the middle of last year. The lakes are getting dry and no rain is forcasted for months ahead. Reverse to mean it will be.

Fri, 01/20/2012 - 16:36 | 2082233 blu
blu's picture

No. There will be a miracle!

Fri, 01/20/2012 - 16:27 | 2082198 LongSoupLine
LongSoupLine's picture

 

 

robo,

I often say to people I know, "You're entitled to your opinion."

However, in your case, you are not.  Why?  Because yours is not an "opinion", but rather a calculated, purposeful and biased attempt to harvest funds from good people through use of deceptive and arrogant dis-mis-and selective information.

This is what makes you a shithead troll amongst trolls, and a complete joke here on ZH where your sick objectives are as visible as neon on a clear Vegas night.

So, kick back, relax, and have a nice hot cup of STFU.

Fri, 01/20/2012 - 16:55 | 2082314 GoodMorningMr.V...
GoodMorningMr.VanRumpoy...'s picture

hehehe. Who is this joker?

Fri, 01/20/2012 - 17:18 | 2082386 Big Ben
Big Ben's picture

What happens when all that bond money starts flowing back into stocks?

The thing is that just because money flows into an investment, doesn't necessarily mean that it will flow out again. People can put trillions into long term bonds, bidding them to the moon. And if interest rates then start to rise, most of that money could just vanish overnight. One day the bond was worth $10000, blink your eyes, and suddenly the same bond is only worth $5000. The $5000 is no longer available for purchasing stocks or anything else. It is just gone. Suddenly everyone owning long term bonds is broke, so they cut back their spending causing a monster recession that kills stocks.

So my answer is that if people start to lose their appetite for bonds, interest rates rise, bond prices drop, trillions in bond value disappears overnight, and all hell breaks loose.

People owning long term bonds are living on the slopes of Vesuvius. It is a very good life as long as it lasts. But it cannot go on forever.

Fri, 01/20/2012 - 18:59 | 2082692 blu
blu's picture

Nice analysis. That right there cleared up a bunch of blind spots in my thinking up to now.

Fri, 01/20/2012 - 19:53 | 2082831 css1971
css1971's picture

You just going to hold your now 50% and dropping bonds? Or sell them and go elsewhere?

Fri, 01/20/2012 - 18:11 | 2082537 RSDallas
RSDallas's picture

Robot,

Yet both stocks and Treasuries have skied huge the last 3 years amidst the worst economy in a generation and wild-eyed government spending and a hockey-sticked Fed balance sheet.

This is the part of this, so called rally, that is puzzling to me, but what do I know I have had 3 great years in Real Estate.  Just saying.  

Oh, and one more thing for all of you who continue to junk Robot.  You have to hand it to him, he has been consistent with his message from day one of this mess and absolutely right in regards to the direction of the stock market.  Unlike some of you doom and gloomers.  By the way, the sky is falling.........

Fri, 01/20/2012 - 19:49 | 2082821 css1971
css1971's picture

However... The commodity market is a tiny fraction of the size of the stock market. Even spill over will cause chaos.

Worldwide:

  • Bonds ~82 trillion USD
  • Stocks ~36 trillion
  • Commodities ~380billion

Where do you go when you can't trust Treasuries.

Do you go to companies, or to real stuff companies need?

Having said that... Japan, 20 years+

 

Fri, 01/20/2012 - 16:14 | 2082145 NEOSERF
NEOSERF's picture

Based on current debt growth rates (and likely GDP declines), when will interest payments be at 80% and 100% of GDP?  Seems like the market finds one way after another to ignore increasing debt but these two metrics will be impossible to ignore

Fri, 01/20/2012 - 16:17 | 2082158 youngandhealthy
youngandhealthy's picture

Downgrade UK now! It is insane that UK can keep its AAA because of Cameron when their financials suck. Cameron is OK but UKs financials are realy bad, Bad, BAd, BAD....

Fri, 01/20/2012 - 16:38 | 2082245 css1971
css1971's picture

This is really just The City taking over the world, restoring The Empire. The Pound Sterling will be the next reserve currency. World domination.

 

Long live the Queen!

http://www.youtube.com/watch?v=ZyVXFpD4k_s

 

Fri, 01/20/2012 - 22:26 | 2083200 smore
smore's picture

The NWO is headquartered in the City.  Frankly, I wouldn't bet against them.  They'll kill us all before they go down.

"As a kid, says Icke, I always wondered how a few islands which you can hardly see on the globe could have an Empire that spanned the world. Now the reason is obvious. It was not the Great British Empire at all. It was the empire of the Babylonian Brotherhood."

http://www.bibliotecapleyades.net/biggestsecret/esp_biggest_secret_5.htm

Sat, 01/21/2012 - 15:59 | 2084736 Non Passaran
Non Passaran's picture

LOL

Fri, 01/20/2012 - 16:19 | 2082163 fonzannoon
fonzannoon's picture

Fukin VIX

Fri, 01/20/2012 - 16:21 | 2082175 indianajohns04
indianajohns04's picture

Thought tvix was cheap last week......no I'm just getting burnttttt.

Fri, 01/20/2012 - 16:32 | 2082216 candyman
candyman's picture

GDMF VIX, thought I'd clean that up a bit.

Fri, 01/20/2012 - 16:21 | 2082170 ghostfaceinvestah
ghostfaceinvestah's picture

no problem, they can both monetize their debt if necessary

Fri, 01/20/2012 - 16:33 | 2082220 blu
blu's picture

Okay so that was both funny and terrifying at the same time.

Fri, 01/20/2012 - 16:24 | 2082185 kevinearick
kevinearick's picture

The Traveling Salesman:   Empire Tax Collection

“tax collection depended very much on powerful individuals who acted as tax farmers. They were given a fixed amount to raise and what private profits they made were, if they were within reason, ignored by the Crown. Indeed, in the outbreak of every great revolt…tax collectors played a vital role!”

Under Socialism, as it is practiced, all participants are tax collectors, creating artificial demand and supply, to be paid for by OPC, each with a convenient scapegoat in the others, until the misdirection becomes so cumbersome that they trap themselves in their own recursion, prisoners dilemma, the only possible result of which is tyranny, as all seek to avoid responsibility for their own inability to adapt, having run out of time, because their behavior is embedded in the DNA of irrational markets, with no more room to grow the ponzi.

If you don’t want gum on your shoe, stop throwing gum out into the street, instead of hiring cops to imprison other offenders, subjecting yourself to the police State. Corporate is a revolving door, which always runs out of sheep. Politicians agree to fleece each other’s voters; that’s what they do.

Fri, 01/20/2012 - 16:28 | 2082187 Bam_Man
Bam_Man's picture

Both their bond markets will look fine - right up until the moment they implode. And the same goes for US Treasuries and German Bunds.

A lot of people will wake up one morning to find that a huge portion of their "paper wealth" has gone POOF!

This is how "price discovery" works in today's "markets".

Fri, 01/20/2012 - 16:33 | 2082212 blu
blu's picture

 interest coverage will approach 100% of GDP

So these guys are so dead right? And they know this right? Everyone knows this.

If the UK and Japan are the dead walking crying dry tears of zombie dust, why is the world not in some sort of massive blackhole collapse-a-thon? Are unicorns shitting skittles really all that and a bag of ships? They can hold this whole thing together with just their skittle shits?

Marc Faber is right; There. Is. No. Future.

Dammit.

Fri, 01/20/2012 - 16:33 | 2082219 fonzannoon
fonzannoon's picture

Do mining stocks only go down?

Fri, 01/20/2012 - 16:34 | 2082226 blu
blu's picture

Mining Stocks: A bunch of guys digging in the dirt.

Down would seem to be the general rule.

Fri, 01/20/2012 - 16:38 | 2082240 fonzannoon
fonzannoon's picture

It's funny that I thought I would be better off in SLW than that paper SLV....

Fri, 01/20/2012 - 16:37 | 2082236 jm
jm's picture

don't think that CDS means as much in Japan.  Bond futures seem the preferred hedge.

Fri, 01/20/2012 - 16:44 | 2082257 scatterbrains
scatterbrains's picture

TrimTabs just put out another vid discussing the 750billion rise in taxes starting jan 2013.. or a few weeks after the new president is seated. TrimTabs then goes on to admit the fed will have to just keep on printing.

Fri, 01/20/2012 - 17:07 | 2082347 PORTA PORTA
PORTA PORTA's picture

It all depends under what jurisdiction are the Bonds they have issued !!!

We must find also the CDS issued on their debd and the owners and issuers of those....

Go have a look on the Sep 2002 G10 Working Group... on "COntractual Clauses" !!

Enjoy

http://www.scribd.com/doc/78739178/G10-Working-Group-on-Contractual-Clau...

For example, what if us, Hellas, we demand PSI under German Law !! xaxaxa excelent exercise..!

 

PP

 

 

 

 

Fri, 01/20/2012 - 17:28 | 2082419 a1sinclair@aol.com
a1sinclair@aol.com's picture

Japan is on life support.  The largest buyers of their debt are now sellers.  Japan Post Holdings holds almost 3 trillion dollars of JGB's and GPIF, the retirement fund, holds over $1 Trillion of JGB's.  Japan Post is the largest financial institution in the world and has 75% of assets in JGB's and now wants to diversify.  The retirement fund is liquidating $80+ billion per year to pay out benefits.  Just read that the banks across Japan have 25% of assets in JGB's and the IMF is coming over this summer to do an interest rate risk analysis if rates were to move 1% (double) what would be the impact to the capital of the banks?  Are the banks going to move to 30%, no.  The insurance companies are big holders and the people are getting old and dying.  The savings rate is at 2% and headed negative (also demographics).  The trade surplus has turned to deficit.  The budget for this year was to have more JGB issuance than government revenue (about 50% of spending to be borrowed), then the earthquake hit.  I project that the end total may approach two thirds of total spending will be borrowed for the current fiscal year.  It is specifically the fact that the Japanese hold all the debt that is now their biggest problem.  There are no new large buyers to replace the above and to sell bonds outside of Japan would require rates at 4% or more.  The Japanese people have trusted their financial institutions and the government and the trust has been violated.  The money is gone and the government is not fiscally responsible.  This party is about to end.  John Mauldin called Japan, "A bug looking for a windshield" and Kyle Bass, "A giant ponzi scheme that is running out of time".

Sat, 01/21/2012 - 16:15 | 2084773 Non Passaran
Non Passaran's picture

This has been "true" for like 10 years now.

One day you'll be right. 

Fri, 01/20/2012 - 17:56 | 2082516 Zero Govt
Zero Govt's picture


"Survival Of The Unfittest: Japan Or The UK?"

This is not a race, this is a destination

Fri, 01/20/2012 - 18:30 | 2082622 doggings
doggings's picture

looks like Kyle Bass has got another payday hoving into view 

Fri, 01/20/2012 - 18:40 | 2082638 non_anon
non_anon's picture

get ready to tumble!

Fri, 01/20/2012 - 19:03 | 2082704 bankofvol
bankofvol's picture

if S&P wants to be famous for igniting the world worst crisis ever, it just has to downgrade Japan, this will have domino effects, as a slight rise in yield for JAPAN 200% Debt to GDP model will bring Japan to its knees and to immediate bankruptcy. Japan is the "fragile" country (using Nassim Taleb definition of "fragile") by excellence.

Fri, 01/20/2012 - 19:18 | 2082741 bank guy in Brussels
bank guy in Brussels's picture

Japan has been downgraded plenty over these last two decades.

At various phases Japan has had credit ratings lower than the African country of Botswana, as Richard Koo points out.

But it hasn't mattered for these 22 years so far after the 1989 crash, the Japanese sell nearly all their debt to themselves.

Their view is, they don't need no stinkin' rating agencies. The Japanese could care less.

If Japan 'defaults' it is rather a within-the-family affair.

Richard Koo may be right, in suggesting that really every country should sell its debt to its own people, or not sell it at all.

Fri, 01/20/2012 - 23:18 | 2083272 a1sinclair@aol.com
a1sinclair@aol.com's picture

Japan's government is in the business of destroying wealth and they are very good at it.  The stock market peaked in 1989 at 39,000 and is around 8,500 today.  Well they did collect the meager dividends.  Real estate is down about 70% from 1990 and now the people are going to lose their social security/retirement and a third to half of their bank deposits.  This is just an ongoing process but the trust of the people is waning. Keep in mind that China is modeled after Japan--I don't think they have a magic model.

Fri, 01/20/2012 - 19:52 | 2082829 Big Ben
Big Ben's picture

The rating agencies still have some clout, but people are paying less and less attention to them these days.

And it isn't even clear what the rating really means. When you loan to a country there are two risks:

1. Default risk where the country doesn't pay the money back.

2. Inflation risk where the country pays the money back in inflated dollars with less purchasing power.

The ratings agencies have traditionally concentrated on risk #1. But for a country that can print its own currency (like Japan or the US) the major risk is #2. If a country can print as much currency as it wants, why would it ever miss a payment.

So if the ratings agency is concentrating only on risk #1, then the Japan and the US should have very high ratings even though their debt situation is unsustainable.

On the other hand, if the ratings agency were to include both risks in the rating, then it should also downgrade corporate bonds if it looks like their country is going to inflate.

Really there should be two ratings for bonds: a default rating to for default risk and an inflation rating for inflation risk.

This idea that you can rate a bond with just one number is a quaint holdover from the days when currencies were backed by gold.

Fri, 01/20/2012 - 23:22 | 2083278 a1sinclair@aol.com
a1sinclair@aol.com's picture

It is hard to understand why the rating agencies have given them a pass.  If you and I tried to manage our way out of their mess without worrying about politics; we still could not do it.

Sat, 01/21/2012 - 10:24 | 2083953 GMadScientist
GMadScientist's picture

Japan would recover more quickly after default (mostly because of the concentration of internally held debt, but also because they are an extremely resourceful people and have exports).

Britain would end in flames were they to seriously implement the austerity required of their current finances.

The Japanese are less culturally biased to lose their shit in the face of economic collapse.

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