When Will Central Banks Learn?
It’s Like a Rerun of a Bad Movie…Dear Boom & Bust Subscriber, • Japan’s “lost decades” are old news. Everyone and his dog has heard how its stock market benchmark, the Nikkei, peaked in 1989… then plummeted 75% over the next 20 years. In 2010, Japan humiliatingly lost its position as the world’s second largest economy to supercharged China. It’s been a long and hard fall for Japan. But why should you care now? Because the country is about to fall further. • Japan just posted its first trade deficit since 1980. That means the country now imports more than it exports. This is a seismic shift in momentum. The country that once relied on money within its borders – from the savings of corporations, workers and pension funds – to buy Japanese government debt must now start asking foreign investors for money. And Japan needs a fortune. Its debt-to-GDP ratio is now more than 230%! That’s far more debt than what the likes of Greece, Spain, Portugal, or any other developed nation currently considered “at risk” owes. Yet the country continues to “function.”
• This is possible because Japan has protected the wealth and status of certain groups, while shifting economic burdens onto the backs of other segments of the population. In particular, it created a pool of “temp” workers that has steadily overwhelmed the Japanese work environment. These temp workers get neither health benefits nor pensions. They are not guaranteed work from one day to the next. And they receive much less pay. In fact, roughly 90% of Japan’s temp workers make less than $20,000 compared with 10% of the full time, “regular” workers who earn as little. Look…• This is where it gets more interesting. Most temp workers in Japan are younger than 34. This means the older Japanese workers are maintaining their grip on the more permanent, full-time positions. As a result, the youth of Japan find themselves unable to grow their personal lives, get married or have children. The long run implications of this will be catastrophic. The youth of Japan has no money to spend. So the Japanese middle class is shrinking at breakneck speeds. • Not surprisingly, the money that the Japanese government has relied on for so long is vanishing along with the middle class. As the tide turns, Japan will have to seek outside investors to buy its debt. • It’ll be a tough sell, especially as the yen continues to weaken thanks to Japanese quantitative easing. As the yen declines, Japanese bondholders lose money. Soon, they’ll demand interest rates above the current 1% to 2% level. This will make Japan’s debt burden more unsustainable. In short, the Japanese economy faces a shock in the months and years ahead. Watch for the yen to drop back to 100 yen to the dollar. As wood cutters yell before their giant redwood is about to topple… “Timmmmberrrrr.”• While you watch a once great nation collapse, take note of the parallels between what’s going on in Japan and what’s going on locally… • Since 1989, Japan has suffered deflation in 1995, every year from 1999 through 2003 and again in 2005, 2009 and 2011. In response, the Japanese government stimulated the economy by encouraging the Bank of Japan to print trillions of yen. They used this money to buy trillions worth of Japanese government bonds. As a result, Japan’s 10-year bonds have been around 1% for decades. • Now reread those last few lines and substitute “America” when you see the word “Japan” and “the Fed” when you see “Bank of Japan.” In spite of everything Japan has done in an attempt to stave off the inevitable winter shakeout, it has not worked. Nor will this approach work in the U.S. It’s like a rerun of a bad movie…• This brings us to a question from subscriber John W. He emailed the following: “Hey guys, I’m right on board with you. I saw Harry on Bloomberg just recently where he backed away from 2012 as the bust year. The logic why was sound and you guys did project an uptrend in the 4th and 1st quarters (which came true). Hard to predict the impact of the Fed when they keep spiking the bowl. Question: Why haven’t I seen any reference to the 2013/2014 adjusted timetable in the newsletter? It seems like in the newsletter and emails you’re still projecting a bust in 2012. If your forecasts have justifiably changed recently, I’d love to know how it specifically affects you latest timing projections and positions. I’m sitting mostly in cash waiting for the fire sale and thinking I might need to get more proactive if we have another 12-18 months. Did I miss a communication?” Rodney answers: We know this is a question for many of you, so recently we sent you an email that explains our views on Dow 13,000. You can read that here if you missed it. In the meantime, here’s what we see happening ahead… Given the coordinated central bank easing, our forecasts for a significant market crash have been pushed back to mid-2013. The story we’ve just told about Japan proves there is always a day of reckoning. Sometimes it takes a couple of years to come… something a couple of decades. But it always comes. We’d be better off, in the United States, if we didn’t follow Japan’s example. We should allow the deleveraging process to happen instead of fighting it tooth and nail with stimulus. Of course, that’ll never happen. So we adjust our forecasts and investment recommendations accordingly.Rest assured that all our research still points to the same conclusion… only a few months further down the road than we originally anticipated. In your April issue of Boom & Bust, we’ll give you details of what portfolio changes to make to take advantage of the election year “fever” and the additional quantitative easing we see ahead. Watch out for this in your inbox soon. We’re working to build a balanced portfolio. This shift in our time frame is in fact one of the reasons we split the portfolio into “Booms” and “Busts.” These will ensure we’re positioned to the short side for when the crash comes, but also profit while the Fed “spikes the punch bowl,” as you say.• The question really should be: when will central banks learn that there is no way to stimulate out of the demographic-lead winter season? As we see from the example Japan is setting, they only learn when they have no more bullets left to fire Until next week,
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