Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
EU REMAIN Population Forecasts - England 4.1 million Explosion, London Migration Crisis - 28th May 16
A Guide to the Trump-Sanders Debate - 28th May 16
Gold And Silver – At Significant Support. New “Story” Developing - 28th May 16
The Next Systemic Lehman Event - New Scheiss Dollar & Gold Trade Standard - 27th May 16
Energy and Debt Crisis Point to Much Higher Silver, Metals Prices - 27th May 16
Gold Junior Stocks Q1 2016 Fundamentals - 27th May 16
These Crisis Markets Are Primed to Deliver Big Gains, Platinum Never Cheaper! - 27th May 16
Operation Black Vote BrExit Warning for the Wrong EU Referendum - 27th May 16
UK Immigration Crisis Hits New Extreme, Catastrophic ONS Migration Stats Ahead of EU Referendum - 27th May 16
Many of the World’s Best Investors Made Their Fortunes This Way…And You Can Too - 27th May 16
The Ugly Truth About Stock Market Manipulation and Gold Prices - 27th May 16
Gold Price Looking Vulnerable While Gold Stocks Correct - 27th May 16
The 5 Fatal Flaws of Trading - 27th May 16
The Next Big Crash Of The U.S. Economy Is Coming, Here’s Why - 27th May 16
A New Golden Bull or Has the Market Gone Too Far Too Fast? - 27th May 16
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16
Will Venezuela Be Forced to Embrace the US Dollar? - 21st May 16
Danish Central Bank Stumbles with Its Currency Peg to the Euro - 21st May 16
SPX Downtrend Underway - 21st May 16
George Osborne Warns of More Affordable UK Housing Market if BrExit Happens - 21st May 16
Gold And Silver 11th Hour: Globalists 10 v People 0 - 21st May 16
David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - 21st May 16
Gold Stocks Following Bull Analogs - 20th May 16
The Gold Chart That Has Central Banks Extremely Worried - 20th May 16
Silver Miners’ Q1’ 2016 Fundamentals - 20th May 16
Stock Market Rally At the End of the Road? - 20th May 16
British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - 20th May 16
NASDAQ 100, FTSE, and British Pound - When Rare Market Data Screams, Listen  - 20th May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

End of the Debt Supercycle and a Coming Massive Devaluation of the Yen ...

Economics / Global Debt Crisis 2012 Dec 20, 2012 - 04:56 AM GMT

By: Mike_Shedlock

Economics

... Most Difficult Time to Invest; The Belief Bubble

Late last month, Kyle Bass, managing partner of Hayman Capital, shared his thoughts in a video at the University of Virginia Darden School of Business Investing Conference with Professor Ken Eades.

It is a fantastic interview that echoes many of the things I have been saying about Japan for quite some time.


Interview Snips

Ken Eades kicks off the interview welcoming Kyle Bass mentioning that over the past few years his investment thesis has been then same. Eades then asks Bass to recap and review. what follows is Bass' reply.

Thematically, the bottom line is the total credit market debt-to-GDP globally is 350 percent. It's 200 trillion dollars' worth of debt against global GDP of roughly 62 trillion.

It's of our belief you are going to continue to see lower global growth, and you're going to see certain countries hit the proverbial end-point or wall where they have to restructure their debt. We've been particularly dogmatic with our view there.

Investing around that particular idea is very difficult. As Dick Mayo [Chairman, Mayo Capital and Founding Partner of GMO] said today, it's actually the most difficult time in the world to invest in his lifetime, and I would echo his comments. Investing in the environment that I am describing to you is the single hardest thing to do as far as investing is concerned over the last few decades.

So this is a debt super-cycle that is coming to an end at various end-points for different countries. We think you are going to continue to see yield compression in the developed world. We think the US and Europe could actually see negative nominal rates over the next 12 months which is something that as an academic is very hard to understand, as a participant really hard to understand. But it seems we are seeing enough rhetoric and research done on the subject that it's actually a real possibility. Maybe it's only a 20% possibility but the fact that it's even on the white board is something that's worthy of paying attention to.

A lot has happened in Japan in the last 12 months. In fact, in the last 2 months we believe Japan has crossed that proverbial Rubicon. We think that you've seen 20 years of conjecture regarding Japan's eventual demise. And now we see a point where, in the last couple months what you see is a continued deterioration in their balance of trade. It's actually running at about negative $100 billion or close to 10 trillion Yen. And we think given this resurgence of Chinese nationalism over the Senkaku crisis [disputed islands], you're going to see that move another 1.5 to 2 percent or another $100 billion. Put that in perspective. What that means is we could see full current account negativity in Japan in October. That's something nobody is ready for.

Think about it. You have a secular decline in the population, you have a balance of trade that is literally being rewritten and falling off a cliff, and their GDP is now tracking negative 3.5 or 4 percent.

So what has to happen in Japan. Now their backs are against the wall. They have a full crisis, and they absolutely have to change the manner in which they deal with their currency. And so we think over the last couple of months they have crossed the final Rubicon that turns the whole situation around and weakens the Yen from a currency perspective. Then you are going to start to see, we think, in the next 12-18 months a move in their rates.

Basically Japan is entering its final checkmate phase of the game.

[Ken Eades asked when will the October numbers come out]. ... That data gets released mid-December. I'm not focused on one particular data set. It's naive of me to think that I can call the end of the 70-year debt super-cycle with any kind of precision whatsoever.

What I'm telling you is when you look at all the inputs, look at their balance of trade, look at their full current account, look at the fact they have had 10 finance ministers in six years. You have the BOJ [Bank of Japan] independence somewhat usurped or revoked in the last few weeks when there is a press release put on the BOJ's website, a joint press release from the MOF [Minster of Finance], the BOJ, and the government, that analogous to Bernanke, Geithner, and Hillary Clinton issuing a joint press release saying we're going to end deflation.

This is how it begins to happen. You start to revoke the independence of the central bank and let the politicians run monetary policy, well this is how it falls apart.

So you have Shinzo Abe coming in, the elections in Japan will be around December 16, and Abe we think is a shoo-in, and he is saying they are going to do everything possible to get to 3 percent inflation. He doesn't even know what he wishes for. Because if he gets there, he detonates his debt-bomb.

[Ken Eades asked, next year is it possible you will be going long?] It's possible. Again, I don't want to be naive to say that it's going to happen in the next 12 months. All of the ingredients are there to have this viscous cocktail fall apart. I think that it could probably take a little longer. But to the extent that we see a bond crisis in the Yen that has a massive devaluation? Yes.

Current Account Update

Updated current account and trade balances were posted on December 9. Japan's current account balance surprised to the upside, but do not expect it to last.

Nasdaq reports Japan Current Account Stronger Than Expected.

  • Japan posts current account surplus of Y376.9 billion

  • Figure is higher-than-forecast but still down 29.4% from last year

  • Separate revised GDP figures show no change in overall contraction of 0.9% for third quarter

  • Second-quarter GDP revised to show small contraction

TOKYO--Japan's current account surplus fell in October from a year earlier, as the nation's trade deficit continued to expand, while separate revised gross domestic product figures showed that the economy may have already entered a recession.

The finance ministry said on Monday that the current account surplus narrowed to Y376.9 billion in October before seasonal adjustment. That was slightly larger than the Y218 billion surplus expected by economists surveyed by Dow Jones Newswires and the Nikkei.

"Speaking generally, exports have been the weakest link in recent data, and the direction exports take will be key for economic recovery," said Jun Kawakami, market analyst at Mizuho Securities.

Balance of Trade and Current Account

Please consider the trend in Japan's Balance of Trade

Japan recorded a trade deficit of 548.90 Billion JPY in October of 2012. Historically, from 1979 until 2012, Japan Balance of Trade averaged 635.3 Billion JPY reaching an all-time high of 1608.7 Billion JPY in September of 2007 and a record low of -1476.9 Billion JPY in January of 2012.

Balance of Trade Since 2009

Japan Balance of Trade

Starting in 2011, Japan's balance of trade has been consistently negative.

Please consider the trend in Japan's current account.

Japan recorded a Current Account surplus of 376.90 Billion JPY in October of 2012. Current Account in Japan is reported by the Ministry of Finance Japan. Historically, from 1985 until 2012, Japan Current Account averaged 1106.53 Billion JPY reaching an all time high of 3287.90 Billion JPY in March of 2007 and a record low of -437.30 Billion JPY in January of 2012. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).

Current Account Since 2009

Japan Current Account

The trend in Japan's current account has been in serious decline starting 2011.

Japan will be in serious trouble as soon as its current account stays negative. That has not happened yet, but it will. As soon as it does, Japan's debt-bomb goes off.

For more on the Yen please consider Spotlight on Japan: Return of 'Abenomics', More Militarism, Tougher China Line; Outlook for Yen and Nikkei

For more on the conflict with China regarding disputed islands, please see China Skips IMF Meeting In Japan; Taiwan Claims Islands Too; What's the Dispute Really About?

Most Difficult Time to Invest

I wish to conclude with the statement by Kyle Bass "As Dick Mayo [Chairman, Mayo Capital and Founding Partner of GMO] said today, it's actually the most difficult time in the world to invest in his lifetime."

I endorse that statement 100%. Moreover, I would like to add that many now find investment decisions relatively easy. They look at monetary easing by the Fed, by the ECB, by China, etc., as a perpetual green light.

Clearly Kyle Bass does not see it that way, nor do I, nor does John Hussman. Indeed, I believe the only ones who find investment decisions easy are those who do not understand the risks.

Belief Bubble

As I have pointed out on many occasions, if the Fed could have prevented a collapse in 2008, it would have.

If Japan's central bank had an easy cure for deflation, it would have found it long ago. Instead Japan has a massive amount of debt, with nowhere to hide.

If the ECB had an easy solution to the crisis in Greece, Spain, and Italy, there would not be endless meetings followed by endless bickering.

Yet, for whatever reason, there is a bubble in the belief that central banks are in control.

Problem is Debt, With No Easy Cure

The problem is debt. As Bass pointed out "the total credit market debt-to-GDP globally is 350 percent. It's 200 trillion dollars' worth of debt against global GDP of roughly 62 trillion."

The 70-year debt super-cycle is coming to an end. It could have happened last year, or the year before, but it didn't. It may or may not happen in 2013.

Those fully loaded in equities are either ignorant of these facts or they do not care. Those of us who are aware, but also aware the end cannot be precisely timed are the ones who look overly cautious. We are the ones who think "this is a difficult time to invest".

Prudent to be Patient

I am comfortable in my position that better times are ahead for those willing to be patient, even if I cannot precisely say when that will be. In the meantime, I am willing to sit with a position in gold, cash, and various hedges until better opportunities present themselves.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2012 Mike Shedlock, All Rights Reserved.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Shedlock Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife