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JAPAN - 3 Arrows of ABE-nomics Not Working
Despite claims to the contrary in the mass media, Japan’s economy is continuing to suffer mightily under the leadership of Prime Minister Abe Shinzo. Abe is from a famous family and he’s a convincing talker, so he was able to bamboozle people into believing that he could make Japan prosper with his three arrows. These metaphorical arrows stand for “monetary stimulus,” “fiscal stimulus,” and “structural reform.”
When Abe was elected using his “three arrows” symbolism to attract votes, I thought the Japanese people were beginning to believe in magic. Perhaps they were gullible or a little lazy in thinking or thought they would receive “free stuff” from Abe. No matter, Abe became Prime Minister in December 2012 and shot off his arrows.
With his “monetary stimulus” arrow, Abe arm-twisted the central bank into doubling the money supply in just a few months time. I could just imagine Abe rubbing his palms together and fiendishly muttering “We’re going to be rich, rich, RICH!” All that the central bank had to do was type a few numbers into their computers to make this happen. Naturally, the newly created money was distributed to politically powerful banks.
How did all of this money creation affect the common people? Despite claims that Japan has less than 2 percent inflation, I can assure you that the prices of many goods, especially imported goods like energy, have increased dramatically since the monetary stimulus arrow was fired. Wages, on the other hand, have remained depressed. With higher expenses to pay, Japanese people can’t afford other goods they would like to buy and businesses can’t afford to raise wages, hire, or expand. Only Abe’s bankster friends have profited from this scheme by speculating in the stock market with the counterfeited money that had been credited to their accounts with the central bank computer.
Japanese people are mostly smart enough to realize that typing numbers into a computer can’t make an economy strong, yet they just haven’t figured out that Abe’s monetary stimulus is nothing but a sneaky counterfeiting scheme.
At the same time as the monetary stimulus arrow doubled the money supply, Abe and his gang used their fiscal stimulus arrow to enormously increase spending on government works projects. Unlike capitalists who at least try to invest productive enterprises, the government allocates money based on pull and other political considerations. Wasting money on things like a new sewer system in Kiev, replacing the perfectly good Olympic stadium with an expensive new Olympic stadium, and handing out plum contracts for highways to nowhere will never generate a profit. Government investment is more like consumption, often creating a 100-percent loss.
These money-losing projects weigh heavily on the people. After all, they will have to pay for this waste in the form of higher taxes and higher debt service. Even if by some miracle the fiscal spending created a profit, the money wouldn’t be distributed to the taxpayer. Heads you lose, tails you lose.
Most Japanese people are smart enough to realize that investing in things that lose money can’t make an economy strong, yet they just haven’t figured out that Abe’s fiscal stimulus is nothing but a sneaky scheme to enrich his well-connected friends. After nearly twenty-five years and fifteen rounds of fiscal stimulus spending, you’d have to be totally bamboozled to still be a believer in this failed Keynesian claptrap.
To pay for his “fiscal stimulus” arrow Abe decided to raise taxes and take the money he needed by force. He raised car taxes and income taxes and he raised sales taxes by 60 percent, but he also announced plans to raise sales taxes by 100 percent. He is considering increasing taxes on married people and poor people. With each tax increase and threat of further tax increases, the economy has weakened further.
And what of Abe’s third arrow, “structural reform”? No one knows what this political slogan actually means. It sounds like some modern day form of Soviet era Glasnost, but there’s been no significant deregulation or loosening of government controls that have long stifled the Japanese economy. We do know that Abe has spent a great deal of effort making enemies with the neighbors. Effectively, Abe’s aggressiveness in foreign affairs is the real third arrow.
Abe has severely damaged relations between the peaceful and industrious Japanese people and their business trading partners in the neighboring countries of China, Russia, and South Korea.Business deals such as the effort to build a gas pipeline between Japan and Russia have been scrapped. Profitable trading in South Korea and especially China has been crushed by Abe’s undiplomatic actions. Via his confrontation with China and sanctioning of Russia, Abe has recklessly followed the dictates of the warmongering US government, all to the detriment of the Japanese people.
Abe’s arrows have been praised in the media by the economically ignorant, the politically motivated, and those who believe prosperity is parceled out by some all powerful shaman.However, the arrows, seen in the harsh light of reality, turn out to be counterfeiting schemes, “investing” in money losing ventures, taking money from the productive, and squabbling with the neighbors. These counterproductive political actions won’t ever result in a stronger economy and have instead left the Japanese people with a crushing debt and tax burden. Don’t get taken in by the hogwash you read in mainstream media propaganda pieces.
Abe’s policies are complete and utter failures.
2 - Japan Debt Deflation Spiral
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - JUNE 29h- JULY 5th, 2014
Macroeconomist Gordon Long says, “We’re not really running a capitalist system. We are running a credit system. Instead of using savings, we are using credit. Credit, the way we are doing it now, is really a form of counterfeiting. If you look at the $72 trillion shadow banking system that we have operating right now, that is generating this credit . . . it collapsed in 2008 . . . and now it’s on a hairy edge. It’s not mortgages and housing this time. It’s student loans through Sallie Mae. These students don’t have any hope of paying this back. We are talking north of $1.1 to $1.2 trillion. It’s car loans this time because of subprime. That’s the way to look at car loans, they are sub-prime. . . . And you got these highly leveraged real estate investment trusts also operating through the shadow banking system. These problems are blatantly evident, and I don’t think the powers that be have any control over them.”
On the next financial crisis, Mr. Long contends, “I think 2008 was an early warning signal of the magnitude of the problem. We didn’t fix it. We did extend and pretend. Dodd-Frank did not solve the underlying issues. The global swaps market went from $600 trillion to $700 trillion last year, alone. We’ve watched the shadow banking system push through $72 trillion. So, we didn’t stop it. We just, in fact, inflamed it even worse, and we got into even riskier kinds of assets. Is it imminent? No, I think we are talking 2015. I think we have a little bit of a deflation scare before we get into the hyperinflation. Don’t underestimate the central bankers and the politicians’ ability to kick the can down the road. They still got some more bullets here.”
Will the crisis in Iraq get out of control? Gordon Long says, “I happen to think that it probably will because we are not resolving the basic problems. But the big core issue here is the petrodollar. It’s not about oil and it’s not about gas. It’s about what it is bought and paid for in, and that is U.S. dollars. There is no one that trades any one of those products in anything other than U.S. dollars . . . right now, as of today. . . . As long as the trading continues in U.S. dollars, all those dollars will stay out there and not come back to the United States. When it comes back to the United States, you will have hyperinflation. These conflicts need to be seen in the context of they are really going to force groups to trade in other than the U.S dollar. That’s the problem because they are going to come back. They are going to say I have a U.S. dollar, and I am going to make a claim on it. That’s what is going to drive the hyperinflation. That’s what is going to drive the currency crisis. This is about trading in the U.S. dollar. . . . We are looking at spring 2015 to Q three. There is trouble there.”
On government debt and suspicious bond buying in places like Belgium, Gordon Long says the government has to keep finding was to sell Treasury bonds to finance the huge U.S. debt. Long explains, “They not only have to sustain the buying, but they actually, right now, need a shock to the system, what I will call a bond scare, so money will move out of an over-inflated equity market. . . . And they need that to drive down the interest rates, push up the bond prices and get that financing charge much lower.” Long goes on to say, “The real game that is going on here is a complex game, but it’s pretty simple, what they are trying to do and that is they are trying to finance the government’s debt.”
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ANALYTICS - Long Term Return Trends
'Tangible Ideas' via Sean Corrigan of Diapason Commodities via ZH
So where does this leave us, in financial markets, at the mid-point of the year, other than with asset prices through the roof?
As can be gathered from the faux lamentations issuing forth from those central banking Uriah Heeps who sit wringing their hands at the dangers inherent in a ‘search for yield’ which they themselves have driven, sovereign bonds are currently at their lowest yields, longest durations, and hence most adverse risk:return settings of the past half-century.
In turn, this has led to a similar compression of credit spreads to the point that junk yields are trading sub-5% nominal, sub-3% deflated for the first time in history, levels at which they spread to US treasuries has also gone blow the 250bps area which marked the eve of the last three major credit events in 1994, 1997, and 2007. Needless to say, they are also historically cheap to stock earnings yields, actually trading below them.
Stock multiples are also among the most favourable vis-à-vis corporate yields in three decades, while dividend yields – though themselves in only the 5th percentile of the last six decades’ range – are atypically well in excess of both the Fed funds rate and the 3-month T-bill rate - again for the first time in over half a century. This, as we shall shortly see, is perhaps the single most compelling reason why stock markets seem to have an inexhaustible supply of bidders.
What is good for junk is also becoming true for emerging market bonds, even if the broader indices, such as the EMBI is still some 60bps above the post-2007 lows of 220bps. Similarly, though Bono and BTP spreads have seen some profit-taking since hitting four-year lows early in June, crashed to their lows, they still trade at or through UST equivalents at the lowest nominal yields in history. For all the rumblings about debt traps, after-CPI yields in Italy, at around 2.5%, are smack on the midmean of the whole EMU era and thus substantially reduced from the 6.5% average which was laid down in the last decade of the lira’s life.
When it comes to equities themselves, it might appear that, just looking at P/E ratings – added to a little eternal optimism regarding the prospect fro the growth in the denominator, whether as a result of buybacks or earnings growth – the market has not yet gone beyond the bounds of sanity.
What we can say, however, is that the fraction of profits rung from each dollar of sales has become greatly elevated – running at just under 10% for manufacturing companies, for example, which is twice the 5% typical of the last four decades of the 20th century. This has allowed earnings to grow enough to keep the buy-side happy, even though revenue growth has become very lacklustre of late, to the point that it is barely positive in deflated terms, often a harbinger of a more widespread economic malaise.
Fundamentally, if profits are growing as a share of sales, we must be deducting less from those receipts. As a share of EBIT, both the tax take and the interest pay-out have fallen substantially over the cycle. Whereas, in the mid-1990s, interest was eating up half of pre-tax operating income and taxes were taking a third of the remainder, currently the former reduction has fallen to around 30% and the latter to a highly depressed 20%. Note, however, that in 2013, the ROIC was a creditable 5.4% nominal, 3.3% real, while the realized cost of capital (using dividends and tax-adjusted interest paid) was 3.3% nominal, 1.2% real. This, you will note, nevertheless left the residual ‘economic’ profit rate at 2.1% nominal or precisely zero after taking account of the intervening general rise in prices.
The point here is that this is a finite, if long-lived, process: the tax rate cannot continue to fall without limit while interest costs are already at historic lows (so much so, in fact that corporates, as we have noted are hardly shy about increasing their susceptibility to any future adverse changes in them). Whenever the day arrives, there will necessarily come a point when earning cannot grow faster than revenues and if, when that occurs, revenue growth itself remains enfeebled, earnings, too, must begin to disappoint.
Something of the sort may perhaps be found a parsing of the latest Duke/CFO Magazine survey of US business executives. This 405-strong sample found that the outlook for both revenues and earnings had darkened appreciably in the pact six months. Last autumn, sales were seen to be about to quicken to a 6.8% rate of increase taking earnings up to a 14.3% rate of climb. Now, revenue growth is forecast to reach only 5.7% yoy, with the earnings outlook slashed to 4.1%. That latter is the worst such outcome of their prognostications since the third quarter of 2009 and stands in stark contrast to sellside expectations, as reported by S&P, for a 25% gain.
As if that were not enough, the price to book of equities is also rising alarmingly, especially price to tangible, replacement cost book, a measure which has only been higher in the run up to the Tech bubble peak. So, to sum up, little account has been taken of the fact that a couple of the main factors which have allowed margins to expand so greatly are presumably fast approaching their expiry date; the price to forward earnings being bandied about only seems reasonable on a Street guesstimate which is no less than six times that offered by corporate insiders; price to cash flow is in the topmost six percent of the distribution; the liquidation value of the average company would leave creditors well under water, while net debt as a proportion of either cash flow or net worth is approaching previous highs.
That all hardly makes for a compelling investment case, even without wondering about the herding effects currently at work in the market.
Which only leaves us with commodities – bastard children of the last few years’ bull market, still greatly despised, outside of the energy sector, at least. In truth, in the year so far theirreturns have been anything but lacklustre. As of writing in the last week of June, the basket has returned a healthy 7.7%, led by Ags on 12.5% and lagged by industrial metals on just 1.3%. With such a score, they have so far outpointed US bonds (3.4%), Junk (5.6%), US Small Cap (2.7%), EM equities (5.5%), World ex-US stocks (6.1%), and the US itself (7.2%). Only EM bonds – plus-8.5% - have done any better among the major asset classes.
* * *
What this long preamble is aimed at doing is alerting the reader to the possibility that while the trend line chugs on upward with the bond market at ~6% nominal, any divergence of other asset class returns too far from this line may well sow the seeds of their own dampening and subsequent phase reversal. Here we would ask you to squint at the accompanying, start date-normalized plot of returns to see if you, too, can make out what appears to be atantalizing, seven-year waxing and waning of equity returns away from and back to the trend, alternating Blue Sky bull markets like the one we have been in for much of the past five years with more short-lived, Icarus-like descents of the order of 50% where they converge not just with bonds, but commodities, too.
If past is indeed sometimes prologue, this simple chart might be hinting that a rally similar in arithmetical range and time-span – if not in percentage gain – to the Tech bubble itself is becoming dangerously overripe and that, if so, the most propitious time to effect an exit is not when the fat lady interrupts her warbling of the anthem to shriek, 'Fire!' at the audience instead.
VIX reflects the lack of fear and is correctly doing so. The chart below shows daily closing prices for VIX and the S&P 500 from the beginning of 2014 through the end of the first quarter in 2014 and is a good illustration of why I believe VIX is properly reflecting the lack of fear.
Note the four places on the chart above where I have highlighted spikes in VIX over the past 15 months. The S&P will have hit a small rough patch and VIX moves up based on concerns that the market drop may turn into a protracted correction or bear market move. Now note what happens after these spikes in VIX, the S&P 500 resumes a move to the upside and VIX returns to lower levels. This pattern continues to repeat itself investors and traders become less fearful of the next drop. The last real volatility event in the US occurred back in August 2011 which seems be quickly becoming a distant memory for many traders.
Part of the argument about VIX not reflecting fear is that there are more alternatives to hedge against a drop in the equity market. This is an argument that I have a tough time with when I consider exactly what VIX represents. VIX is the implied volatility of options based on the S&P 500 or SPX Index options. Average daily volume for SPX option trading in 2013 was about 823,000 contracts which was a 17% increase over 2012 average daily volume. So far in 2014 average daily volume for SPX options is running at about 870,000 contracts. Many listed markets in the US have been experiencing negative or flat volume growth. If there are new hedging alternatives that are impacting the level of VIX this would mean that SPX volume should be shrinking, not growing.
VIX is doing what it has done for over 20 years – it is properly reflecting the lack of concern in the market when the S&P has a day like yesterday. The market has become accustomed to small corrections followed by a new high in the S&P 500 and VIX is quantifying that complacency through being a relatively low levels. When we get the next real volatility event that should quiet the critics that say VIX has undergone some sort of change – fear will return and with it higher levels for VIX.
"The Japan Trade is in trouble," warns BofA's Macneil Curry (and rightly so after this week's utter collapse in Japanese data and Abe's soaring disapproval rating). Over the course of the past week both USDJPY and the Nikkei have broken key technical levels which point to furthersubstantial downside in the weeks ahead.
BofAML's Macneil Curry explains...
Specifically, $/¥ has closed below its 200d average (now 101.71) for the first time since Nov'12, while the Nikkei has closed below 5wk trendline support (now 15,276). In both cases these breaks of support point to new 2014 lows before greater signs of stabilization. However, we must make clear that, despite our negative medium term outlooks, both of these markets remain in long term bull trends. We will look for these long term bull trends to re-emerge around the beginning of Q4, but for now we are BEARISH.
Chart of the week: $/¥ is breaking down
Since early Feb, $/¥ has been caught in a well-defined contracting range. NOW, the closing break of the 200d (101.71) says that the range trade is giving way for a bear trend. The downside is seen to at least 99.21, potentially 97.40
The Nikkei is rolling over
Similar to $/¥, the Nikkei outlook is turning negative. The break of 5wk trendline support (now 15,276) says that further weakness is coming. Minimum downside targets are seen to the multi-month range lows at 13,995, but weakness is more likely to extend to the confluence of support between 13,194/13,107.
Jeremy Grantham — once a bedpan salesman from Doncaster, England, now co-founder of one of the world’s largest asset management funds GMO — is noted for his astute predictions of stock market bubbles and recoveries. His investment philosophy is heavy on statistics and a conviction that asset prices and profit margins mean revert to the long run.
In January 2007, he wrote: “The stock market is overpriced. Everything is overpriced” and in March 2009, he wrote his newsletter titled: “Reinvesting when Terrified.” The timing was perfect because on March 9, 2009, the S&P 500 closed at 676, the lowest since September 1996.
Grantham’s first quarter 2014 letter was titled “Looking for Bubbles Part one.” The chart of aggregate profit margins on U.S. corporations shows they have risen from 7 percent in the fourth quarter 2008 to 12.7 percent in the last quarter of 2013 and have abruptly declined to 11.6 percent recently.
Grantham’s newsletter admittedly exhibits some rare indecision on one hand stating “The bull market may come to an end any time,” pointing to China slowdown and a Russia miscalculation, while also stating it will end badly after it reaches a level in excess of 2,250 or more.
In his defense, the credit, rates and equity markets are also throwing up mixed signals. A chart of the Credit Suisse Fear Barometer compared with the VIX , five year swap spreads and the CDX IG index show stark disagreement.
Grantham pointed to geopolitical risk as an achilles heel of the market. Country risk will be brought into sharper relief Monday with Argentina facing the possibility of another default
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
THE CONTENT OF ALL MATERIALS: SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.
THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he encourages you confirm the facts on your own before making important investment commitments.
Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.
Please note that Mr. Long may already have invested or may from time to time invest in securities that are discussed or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.
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