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« Gold Prices Update 10 December 2011 | Main | The Key Relationship between US Real Rates and Gold Prices »
Wednesday
Dec082010

Collection Call

By David Galland, Managing Director, The Casey Report

Hello, is this Japan I’m speaking to?

Yes. (tentative). May I ask who’s calling?

It’s the ACME collection agency. We’re calling today because of your outstanding obligations.

Is there a problem?

We’re hoping not, but your creditors are beginning to worry you won’t be able to keep up with your debt service.

Oh. Why the sudden concern?

It was an item in a recent RMB Currency Trader. And I quote:

The Land of the Rising Sun has the dubious distinction of sporting the highest debt-to-GDP ratio of any industrialized nation in the world. Now greater than 200%, Japan’s relative debt load is bigger than that of Greece, Spain, Portugal or the US. Japan needs to borrow over 50% of GDP this year just to stay afloat, according to the International Monetary Fund (IMF), and its financing needs are expected to reach almost 60% of GDP next year. (See graph below.) Its strength has been somewhat befuddling, especially considering this growing burden of debt.

Why has the Japanese currency been so strong? Because despite all of the yen’s problems, Japan runs a trade surplus. Traders view that surplus as a source of funding which can be used to pay down Japan’s skyrocketing debt, making the yen seem like a “flight-to-quality” currency despite appearances. However, Japan’s strong currency is beginning to affect Japan’s ability to export. Competition from China and rising Asian powers such as Vietnam is also beginning to take its toll. Japanese industrial output fell 1.9% in September after dropping 1% in August



Care to comment, Japan? Japan? Are you there? Hello? Hello?

Casey 1 8 Dec 2010.JPG

David again. As you can see from the chart, even though Japan has managed to stay off the radar of the mainstream financial media, the country’s economy is in a real mess. And, for the record, the U.S. is in no great shakes, either, not when you consider the neighborhood it’s in, in the above chart.

As we have discussed at length in The Casey Report, while the eurozone is back in the soup just now, Japan could very well be the next black swan to lay an egg on the global economy.

Heretofore, Japan has been able to avoid the worst consequences of its many debts and obligations – but that may soon change. In addition to the exports referenced above, the country’s high internal savings rates have provided crucial support for the Japanese government’s energetic issuance of debt at low rates. But as you can see in the chart below from our own Bud Conrad, those internal savings – like exports – are now in decline.
 
Casey 2 8 Dec 2010.JPG
 

The upshot of this is that the Japanese government will increasingly have to turn to external buyers to finance its many obligations. That, in turn, will require competing with sovereign debt offering better yields.

Japan’s extreme borrowing needs over the next couple of years are, at this point, locked in – which almost certainly means that Japanese interest rates will rise – potentially by a lot – relative to the near zero yields now on offer.

Yet it should be obvious from the IMF data that Japan simply can’t afford to have the cost of servicing its massive debt rise even a little, let alone a lot. Which is another way of saying that something has to break, and soon.

Another way to view the situation is by looking at the trend for yields being offered by Japan’s largest competitor for new borrowings, the U.S. As you can see in chart here – which ran in today’s edition of Things That Make You Go Hmmm – yields are clearly moving up.
 

 Casey 3 8 Dec 2010.JPG

It all begins to get a bit circular when you consider that Japan’s aggressive financing needs make it likely the country will have to dial back its participation in future auctions of U.S. Treasuries. It would not surprise me if they followed China’s lead in reducing the U.S. paper now held in reserve. That, in turn, could lead to even higher U.S. rates, and even higher rates for Japan. Or it could lead to more monetization of U.S. Treasury debt by the Fed, which in turn leads to Mr. Market demanding higher yields to compensate for the rising potential of inflation.

This Gordian Knot of the interconnected global financial system makes it essential for investors to not only monitor your own house for signs of fire, but to watch your neighbor’s as well. In the case of Japan, smoke is starting to leak out from under the door.

----

To figure out the correct moves for your investment portfolio, it is not enough to focus on the domestic economy. In today’s interlinked global economy, the troubles of one country can spread like wildfire to others. Every month, The Casey Report analyzes big-picture trends to glean the best profit opportunities for subscribers. Try it for 3 full months, with money-back guarantee.

.......................................................................................................

Over in the options trading pit www.skoptionstrading.com had a number of stops triggered yesterday, but walked away with an average gain of 32.7%, so we now have 59 winners and out of 61 trades.



sk chart 19 Nov 2010.JPG



The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



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Reader Comments (4)

Hello, this is Japan calling you back. Sorry we had to put the phone down on you, but there was so much laughter going on here, I couldn't hear you, or hold onto the phone to respond.

It was your silly concerns, like so many Westerners today, especially brainwashed Americans, who fail to see how this world is run, and why.

As Kipling said (Yes we do read your Western literature) 'East is East, and West is West, and never the twain shall meet'.

I think perhaps he meant 'our minds see things differently' and find it difficult to 'meet'.

You know we Asians like to explain things in analogies, sometimes they may seem a little cryptic, or mystic, to Western ears, so will try to make this one as clear as possible in the form of questions, and relate it to a game with which you are familiar.

When the chess pieces move around the board, do they move individually by themselves, or is there a hand that moves them all? Does the chess piece, pawn or even King, get to think and act for itself, or does the mind that controls the hand that moves the piece do the thinking that controls it?

If the piece could think and make its own move, do you think
it may move (act) in the way it is made to?

Are you with me so far?

Now does Japan which just lost a war and is still 'occupied' have true independence? You thinks so? You mean you think all those thousands of military on say Okinawa would still be there if we could get them to leave?

The Japanese industry, decimated, along with many cities, during the war. in a nation almost bankrupt, how did it rise so quickly? Who financed it? Who provided the markets to make it possible, against the American people's own interests - but most of all WHY?

Who is always in control, the debtor, or the creditor?

If you asked yourselves more questions, instead of listening and accepting all you are told, perhaps you would not need to ask such silly questions to others. This only shows up ignorance.

And it was your ignorance that caused us to laugh so. With such an advance in information technology, and the claim of Americans to have 'free thinking minds', how else could you self claim to be 'the land of the free'.

But thanks for your call, it tells us so much about you. and explodes so many of the myths you encourage. It is too late for us, but our Chinese neighbours have watched, and learned, so much, we envy them. And, mind how you go, they are so much bigger than we are - much more difficult for even the creditors to push around. They could hit back with a mighty punch.

Sayonara

December 10, 2010 | Unregistered CommenterRay Newton

Hello, Hi David, this is Japan calling you back. Sorry we had to put the phone down on you, but there was so much laughter going on here, I couldn't hear you, or hold onto the phone to respond.

It was your silly concerns, like so many Westerners today, especially brainwashed Americans, who fail to see how this world is run, and why.

As Kipling said (Yes we do read your Western literature) 'East is East, and West is West, and never the twain shall meet'.

I think perhaps he meant 'our minds see things differently' and find it difficult to 'meet'.

You know we Asians like to explain things in analogies, sometimes they may seem a little cryptic, or mystic, to Western ears, so will try to make this one as clear as possible in the form of questions, and relate it to a game with which you are familiar.

When the chess pieces move around the board, do they move individually by themselves, or is there a hand that moves them all? Does the chess piece, pawn or even King, get to think and act for itself, or does the mind that controls the hand do the thinking that controls it?

If the piece could think and make its own move, do you think
it may move (act) in the way it is made to?

Are you with me so far?

Now does Japan which just lost a war and is still 'occupied' have true independence? You thinks so? You mean you think all those thousands of military on say Okinawa would still be there if we could get them to leave?

The Japanese industry, decimated, along with many cities, during the war. in a nation almost bankrupt, how did it rise so quickly? Who financed it? Who provided the markets to make it possible, against the American people's own interests - but most of all WHY?

Who is always in control, the debtor, or the creditor?

If you asked yourselves more questions, instead of listening and accepting all you are told, perhaps you would not need to ask such silly questions to others. This only shows up ignorance.

And it was your ignorance that caused us to laugh so. With such an advance in information technology, and the claim of Americans to have 'free thinking minds', how else could you self claim to be 'the land of the free'.

But thanks for your call, it tells us so much about you. and explodes so many of the myths you encourage. It is too late for us, but our Chinese neighbours have watched, and learned, so much, we envy them.

And, mind how you go, they are so much bigger than we are - much more difficult for even the creditors to push around. And they could pack a mighty punch if provoked to defend.

Sayonara

December 10, 2010 | Unregistered CommenterRay Newton

Er sorry about the double post, but it appeared the first one did not 'connect'. I 'refreshed' the page many times but it did not show.

If you provided the feature for us to 'edit' and delete our post, at least for a short time after posting, we could avoid such situations. Other sites can do it.

December 10, 2010 | Unregistered CommenterRay Newton

Ray,

Ounce you have sent in a comment, leave it a while to allow Feedburner the time to pick it up and run with it, I can delete one of them if you so wish.

December 11, 2010 | Unregistered CommenterGold Prices

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