Yesterday we presented what the balance sheet of the developed [5], or better known as insolvent, world- recall there was over $21 trillion [6]in excess debt as of 3 years ago, looks like, and the curious to some observation that trillions in liabilities also double up as assets, in what is easily the world's most confounding (to central bankers at least) global circle jerk. After all, one can not inflate liabilities, without also destroying the assets these double count as at the same time. Yet while informative, that chart did not tell us anything we did not already know. However, the next chart we will present today will show a different aspect of the developed world, namely by indicating how the households of the three "richest" economies - Japan, the US and the Euro Area, have invested their money in various financial assets. And while this is merely the asset side of the ledger it shows how distinctly different the approach to capital allocation has been for countries in different stages of growth or ungrowth. What is most notable is the distinct distribution of capital in shares and equities within the three regions: it also shows why a sustained downtick in the US stock market is the deathknell of the modern economic experiment. What is also curious is that the investment of Japanese households into Insurance and Pension reserves, which in turn are then funneled into JGBs, is no larger than the US or European equivalent: it means that the true funding cost of the welfare state is roughly a third of all modern financial assets.
What is different about Japan, unlike the US, is that whereas in the US pension and insurance reserves are recycled into 401(k), in Japan these go to prop up the bond market. In essence, the weakest link for Japan is the bond market, while for US it is stocks. Unfortunately, since the US is now well on its way to becoming Japan, and retail has given up on stocks (just today we had yet another consecutive outflow [7]from domestic equity stock funds, soaring markets be damned) we expect increasingly more capital to be reallocated from equities and into currency and deposits, as the fear of deflation pushes more and more to keep cash well-invested in the First Bank of Mattress City. And as the rotation out of stocks and into other financial assets accelerates, prepare to see what true Japanification means for yet another increasingly aging society.
The assets of the developed world's households:
[8]
And the offsetting financial liabilities - nothing but another circular pyramid scheme.
[9]
Source: BOJ