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Stage 1 Comes to an End!
A Matter of National Security
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It's Either RICO Act or Control Fraud
Shifting Risk to the Innocent
Uncle Sam, You Sly Devil!
Is the US Facing a Cash Crunch?
Gaming the US Tax Payer
Manufacturing a Minsky Melt-Up
Hitting the Maturity Wall
An Accounting Driven
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TIPPING POINTS

Process of Abstraction

Research Process

1- Sovereign Debt Crisis
2- EU Banking Crisis
3 - Risk Reversal
4- State & Local Government
5 - Food Price Pressures
6 - Rising Inflation Pressures &Interest Pressures
7 - Social Unrest
8 - Chronic Unemployment
9 - China Bubble
 
10 - Geo-Political Event
11 - Residential Real Estate - Phase II
12 - Commercial Real Estate
13 - Public Policy Miscues
14 - Oil Price Pressures
15- Bond Bubble
16 - Pension - Entitlement Crisis
17 - Central & Eastern Europe
18 - US Banking Crisis II
 
19 -Credit Contraction II
20 - Japan Debt Deflation Spiral
21- Finance & Insurance Balance Sheet Write-Offs
22 - US Stock Market Valuations
23- Government Backstop Insurance
 
24 - Shrinking Revenue Growth Rate
25 -Global Output Gap
26 - US Dollar Weakness
27 - US Reserve Currency
28 - Public Sentiment & Confidence
29 - Slowing Retail & Consumer Sales
30 - North & South Korea
31 - US Fiscal, Trade and Account ImBalances
32 - Corporate Bankruptcies
33 - Terrorist Event
34 - Financial Crisis Programs Expiration
35 - Iran Nuclear Threat
36 - Natural Physical Disaster
37 - Pandemic / Epidemic

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THE COLLAPSE - The Lost Decade

- Over the last twenty years, asset prices are down by 65% for the Nikkei stock index, 50% for residential real estate, and 70% for commercial real estate.

- Public debt rose from virtually nothing to 225% of gross domestic product (GDP),

- Central government debt approaching one quadrillion (one thousand trillion) Yen and central government revenues are approx ¥48 trillion. Their ratio of central government debt to revenue is a fatal 20X. (1000Y supported by 48Y ~ 20:1)

INTEREST RATE INCREASE EXPOSURE

- According to J. Kyle Bass' Hayman Capital, every 100 basis point change in the weighted-average cost of capital (interest rates) is roughly equal to 25% of Japan's central government's tax revenue. (12Y)

- A 200 basis point move higher over time in Japan's interest rates will increase their interest expense by more than ¥20 trillion.

1% = 12Y

2% = 20Y

- Over the last year Greece with a 1/3 less and Ireland with less than 1/2 the debt to GDP ratio of Japan, imploded when foreigners refused to invest.

- If Japan had to borrow at France's rates (a AAA-rated member of the U.N. Security Council), the interest burden alone would bankrupt the island nation.

ABILITY TO SELF FINANCE

- Japan has avoided this deficit financing end-game, because the nation has been able to finance 95% of its debt at home. Lower family formation has caused the household savings rate for the thrifty Japanese to fall from 5% at the end of the 1990's to just above 2% currently.

- Millions of Japanese savers are about to start spending their savings on essentials, since they have lost their jobs and businesses due to the damage

- Japan has maintained a 41% corporate tax rate; the highest in the world, 10% above the US and Europe and triple the fast growing Asian economies of Taiwan and Singapore. This has made Japan an unattractive location for private investment.

PARADOX

- Has maintained current-account surplus and has been sending more than 3% of its GDP abroad, providing more than $175 billion of funds this year for other countries to borrow.

- A combination of high corporate saving and low levels of residential and non-residential fixed investment due to poor investment opportunities in Japan.

INSURANCE

- Earthquake insurance in Japan is very expensive and only 10% of homeowners buy coverage. Therefore, the Japanese government will be on the hook for several hundred billion in infrastructure and reconstruction costs.

RECENT SITUATION

- Standard & Poor's credit rating service had just downgraded Japan's sovereign debt to AA- in mid-January.

- The huge increase in the costs for welfare and unemployment payments, the economic disruption, the scale of the devastation, the lack of insurance and the minimum five years to rebuild the country may take Japan's credit rating down to "junk bond" levels. ==> DOWNGRADE AHEAD

The debt crisis tsunami has been building for twenty years and may be much more devastating to the future of Japan.

 

Equity markets across the country have gotten hit pretty hard since February 18th (when the S&P 500 made its bull market high). Below we highlight the performance of major equity indices for 79 countries since 2/18 as well as year to date. The average year to date stock market performance of the 79 countries listed has now turned negative (-2.20%). The average performance of the countries since 2/18 is -4.38%. As shown, Japan is down the most since 2/18 with a decline of 16.13%. Germany and France rank 2nd and 3rd worst with declines of 12.29% and 11.08% respectively. In the table we have outlined the G7 countries and shaded the four BRIC (Brazil, Russia, India, China) countries in light blue. Earlier in the year, the BRICs were significantly underperforming while the G7 developed nations were outperforming. Since 2/18, however, the opposite has been the case. All of the G7 countries are down at least 4% since then, while 3 of the 4 BRIC countries are actually up!