The central bank is trying to cheapen the currency after a decade-long resources boom
Despite the recent market correction threatening the four-year bull market, investors should be partying like it's 2006.
Easy-money programs from the world's central banks and a recovering global economy could push stocks and other assets higher. So why is the comparison to 2006 relevant?
September 2006 was two years before the collapse of Lehman Brothers and a 28% drop in the markets in the span of less than a month. And two years is about the amount of time we may have until the next great market crash.
So what will be the proverbial straw that breaks the market's back? Europe? China? Market contagion from a collapse in commodities prices?
None of the above. While the rest of the market worries about those issues, there is a bigger threat that could pull down world markets and change the way we measure safety investments.
The next great collapse is unlikely to come from any of these problems. It is more likely to come from a country that has been a haven for investors for more than 30 years and accounts for nearly 10% of world growth.
A look at this country's debt situation, especially relative to the United States, is truly amazing.
This country is paying 21% of government revenue on interest payments to support a 236% debt-to-GDP ratio. With annual spending twice as high as its revenue, the government is running a deficit of 5 billion a year and adding to its .2 trillion debt. This is all before the monetary stimulus programs announced recently by its central bank.
If you thought the United States government was a financial basket case, Japan is exponentially worse. A collapse in the yen and the stock market is all but certain — the only question is when.
The recent easy money program by the Bank of Japan gives us a good idea of the timetable.
The announcement by the Bank of Japan to buy 7.5 trillion yen (about billion) in bonds per month and double the monetary base during the next two years is exponentially higher than anything the country has tried in the past two decades. If you think U.S. Federal Reserve Chairman Ben Bernanke and the Fed's billion monthly purchases is extreme, consider that Japan's economy is a third the size of the United States' and that its growth has stalled in the past decade.
So the bank wants to increase inflation to 2% from its current negative rate of 1% deflation. If they are even partially successful, interest rates on the government bonds could jump. If inflation increases to 1% and the rate on the 10-year bond increased to just 1.5%, the government would need to pay out 65% of revenues just to service the interest.
Kyle Bass of Hayman Advisors recently told Barron's that a debt crisis that will rival Argentina's 2001 collapse is "the most obvious scenario of my adult life. The question is when."
The U.S. stock market is up more than 50% since November with the currency depreciating 25% since government officials started pushing their monetary plans. Just like 2006, everyone is talking about the money to be made in the Japanese stock market.
Japan Monetary Base
(trillions of yen)
After two years, the assets held by the Bank of Japan may be as much as 60% of GDP, compared with just 25% for the Federal Reserve. The bank won't be able to sell these assets without driving up rates, and the government will no longer be able to fund its massive deficits with the skyrocketing interest burden.
Why should investors care about a country that represents less than 10% of global growth? To put Japan's importance in perspective, Greece's economy is less than one-twentieth of Japan's — and brought the market to its knees last year.
Like the 10-year Treasury note, Japan's government bond has been used by the market to evaluate risk for more than 30 years. A collapse in this market could send shock waves across markets worldwide.
Why do I think the scenario could play out over two years?
The Bank of Japan's monetary program will involve buying most of the government's bond issuance for the next two years, which should help keep rates down. As the program winds down, the bond issues are unlikely to attract many buyers, sending rates higher. The government won't be able to pay the high interest burden, and the Bank of Japan will not be able to sell its bonds to fight inflation.
The analogy to 2006 almost certainly will not play out along the same two-year timetable, however. The Bank of Japan's monetary program covers two years. The stock market is fairly reliable as a six-month predictor of the economy, so investors could start running for the exits in as little as a year and a half.
Of course, anyone jumping out of the market in 2006 would have missed out on the remainder of the bull market. The trick is to ride the market further — while gradually rotating into safer names and assets.
The iShares MSCI Japan Index (NYSE: EWJ) is up 30% since its November 2012 low, but it has underperformed the S&P 500 by 74% since its launch in 1996, with a 31% loss in that time. The fund is extremely expensive at 21.5 times trailing earnings and may have a tough time adding to gains.
U.S. automakers like General Motors (NYSE: GM) and Ford (NYSE: F) have more to lose than most other domestic companies. The yen could collapse along with the financial system, which could make Japanese exports cheap compared with those of international competitors.
While Japanese automakers like Toyota (NYSE: TM) have factories set up internationally, the country still exports about 1.5 million cars a year to the United States. As the yen weakens, these companies may shift more production back to the mainland, driving the cost of Japanese vehicles down further.
The CurrencyShares Japanese Yen Trust (NYSE: FXY), down almost 20% since November, could eventually implode as a debt crisis ruins the currency's status as a safe haven and massive depreciation follows. Investors may be able to use the fund as a hedge against market losses in their portfolio if a collapse does happen.
Risks to Consider: As the great economist John Maynard Keynes said, "Markets can stay irrational longer than you can stay solvent" — so shorting the Japanese market may not be recommended as the bubble inflates. Japan is still the third-largest global economic power, and it could stave off the inevitable for a couple of years.
Action to Take –> I firmly believe this event could send the world into a recession. Japanese stocks and the yen could be the hardest-hit, and shorting them may provide a good hedge against drops in other markets. Take your profits on Japanese equities and keep the situation on your radar.
– Joseph Hogue
The cost to insure Argentina’s debt rose to its highest levels since March 2009 as investors worried the country could be weeks away from default if a U.S. court rejects its plan to pay holdout creditors.
LOS ANGELES (MarketWatch) — Moody’s Investors Service late Wednesday cut its assessment of the highest rating it can assign to a domestic debt issuer in Cyprus to Caa2, saying the move stems from increased risk the financially troubled country will exit as a member of the euro zone. Moody’s said any rating actions taken as a result of the new country ceiling will be released during the coming week. Also, Cyprus’s Caa3 government bond rating and negative outlook are unchanged as they don’t lie in the scope of the announcement, it said. An exit from the euro by Cyprus “would result in large losses to investors due to the redenomination of government debt and private debt securities issued under Cypriot law,” said Moody’s in a statement. “It would also lead to further severe disruption to the country’s banking system and additional acute dislocations in the real economy.”
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.
Italians are leading the country to the ungovernability, and after a neck-to-neck battle to take control over the lower house between the center-left Bersani’s party and Mr. Grillo’s five star movement, with the first claiming a marginal victory, the big problem now lies in the advance from the center-right Berlusconi’s group and Mr- Grillo in the Senate, where there is no majority by any party. According to the FT’s, Italian Senate vote projections are as follow: “Centre-right 127 -
ECB's Asmussen: French problems not forex but inside the country
ECB's Asmussen: French problems not forex but inside the country. Reuters February 11, 2013, 4:01 am. UK-ECB-ASMUSSEN-FRANCE:ECB s Asmussen: French problems not forex. Reuters © Enlarge photo. BERLIN (Reuters) – European Central Bank …
ECB's Asmussen : French problems lie within, not in forex
Via Simon Black of Sovereign Man blog,
You know you’re no longer living in a free country when the government tells you what you can and cannot put in your body. Or when an unelected board of bureaucrats and corporate insiders can confiscate the assets of hardworking small business owners.
Yet these have become par for the course in the Land of the Free.
The latest bout involves a family-owned raw milk operation in Missouri that was decimated last week by the heavy hand of government, courtesy of the State Milk Board.
Of course, this isn’t even an actual government agency, but rather one of more than 200 such committees in Missouri which wield tsarist authority over their domains.
State Milk Board members include both state bureaucrats and corporate leaders from the milk industry. How convenient that a few big producers are given unelected, absolute authority to torpedo a raw milk competitor…
And so, last Friday, farm inspectors arrived to confiscate 18 tons of cheese that Morningland Dairy had produced from raw milk. They were met by a small crowd which had gathered to show support for the family… and to denounce these agents of government for carrying out an immoral act on innocent people.
It was all captured on video, including the police response.
You have to respect what these people were doing. They stood to face their enemies and peacefully demonstrate against abuse of power. They even tried to convince government agents to stop participating in the wholesale destruction of liberty.
It’s a noble thing indeed. But the uncomfortable reality is that their efforts were wasted.
The police, the bureaucrats… they are not the enemy. They are merely pawns of an entire system gone critically bad. In truth, there is no actual enemy. The enemy is an idea – a faceless government that is not embodied in a single individual or group.
Trying to ‘fight’ this enemy, this idea, is as futile as a government ‘declaring war’ on drugs or poverty. These are not enemy combatants. They’re nouns. Concepts.
As such, trying to ‘take back’ the country is a noble yet unfortunately misguided expenditure of precious resources. One would be more successful trying to train a potted plant how to juggle rather than trying to change the system.
As humans we have natural instincts to defend ourselves. Rationally, though, the best move we have is to simply refuse to play the game. That means leaving.
Our most solemn obligations are to our families, ourselves, and our chosen loved ones. Not to a society that no longer shares our values. Not to a passport. Not to a politician. Not to a piece of dirt.
Just as our forefathers did, when the walls of the social contract start closing in, you go find a new piece of dirt. Or at least have a plan for it; the time to consider your escape options isn’t while you’re packing your bags.
Ecuador could be a possibility. It’s pleasant here. The economy is growing. It has plenty of modern conveniences. It’s easy to become a resident– in some cases you can even use the funds in your IRA to qualify.
Plus it’s cost-effective. You can still live reasonably well for under ,000/month. And real estate can be extraordinarily cheap. I’ve just seen a spacious 2,000 square foot home on 10 acres for about 0,000 dollars; they’re effectively selling the home at construction cost and throwing in the land for free.
Now, I’m not trying to convince you to move to Ecuador. But rather point out that as the steady march into tyranny continues, the best solution may be to stop playing the game altogether. You won’t be worse off for at least reviewing your options and having a plan.
British Prime Minister David Cameron wants nothing to do with a United States of Europe, an idea that’s gaining currency as the countries that use the euro struggle to fix their debt crisis.A day after …
Good Morning , – EURUSD fell to a 2 month low overnight at 1.2672 . – Stocks: Nikkei -0.18 %, Hang Seng -0.78 %, Shanghai Composite -1.33 %, Dow Jones + S+P500 flat – Greece’s international lenders agreed on Monday to give the country two more years to make the cuts demanded of it but the euro zone and IMF clashed over a longer-term target date to shrink the country’s debt pile. Euro zone finance ministers gathered in Brussels did not disburse more aid to the debt-ridden country and by
This article is going to examine the home-style country restaurant Cracker Barrel (CBRL) through the lens of FAST Graphs™ – fundamentals analyzer software tool, which shows us a picture of a company that is currently in value. The prudent growth and dividend investor may want to do their own due diligence into this fine company for possible addition to their own portfolio.