Posts Tagged ‘japan’

Time was when people thought a bubble was something kids blew, and you put into a bath.

Time was when the South Sea Bubble and Tulip Bubble were things that only historians seemed to know about. “This time,” to coin a phrase, “it is different.” Bubbles are now things that not only all investors know about, but non-investors do too.

Joseph Kennedy sold his stock after a shoe shine boy asked his advice on what stocks to buy. “I smell bubble,” thought Joe, or words to that effect, and the Kennedy family fortune was made. But what happens when a shoe shine boy asks you if there is a bubble in the making? It feels a little like that now. Whenever anything rises, the popular press cries bubble, unless it is UK house prices of course, because the lesson of bubbles doesn’t seem to have infiltrated the psychology of baby boomers as far as UK house prices are concerned.

It is, of course, tempting to say that equity prices are so high because of QE: that once it is reversed equities will crash like a child’s bubble wand thrown to the ground in a fit of temper. Yesterday, 23 May, equities saw sharp falls after minutes from the Fed hinted that QE may be coming to an end.  See Fed at sixes and sevens.

Then again, look at valuations, and things don’t look too serious. See: Are the stock markets set to crash? 

The fear however – and this is where bubble comes in – is that corporate earnings themselves are not sustainable. It is a puzzle how company profits and the economy have been moving out of alignment. In the long run either the economy will adjust upwards to reflect corporate strength, or profits will fall to reflect economic weakness.

If we see the latter of these scenarios then equities probably will crash, and we will be able to look back on the last year or so and say that the period saw the formation of a bubble. And we might add that it was so obvious that it’s a puzzle why people couldn’t see it at the time.

The next possible bubble relates to bonds. QE has pushed up the price of bonds with interest rates being so low that they are even negative in Germany for some government bonds. It seems inevitable they will fall in price, and fall sharply too. Indeed in Japan, government bonds have been falling in price of late, despite QE. That really is a source of concern.

A few days ago it was told here how the ITEM Club reckons inflation may rise in the West as Chinese wages increase. This may be just the catalyst to lead to bond prices crashing. See: Will rising inflation spoil the market’s party?

Another danger area relates to emerging market debt. This is a big topic and will be discussed in more depth at a later date. Here are some headlines for you to consider. Between 2002 and today, outstanding credit in China rose from around 110 per cent of GDP to around 180 per cent. Over the same time frame outstanding debt In Brazil rose from around 30 to roughly 80 per cent of GDP. The average cost to households of servicing their debt to their income is around 22 per cent in Brazil against 10 per cent in the US.

Emerging market debt is a problem. It often works out like that after a period of rapid growth, but bear in mind that in South East Asia, things may be different this time. You may recall that during the 1990s the region boomed, took on too much debt, and crashed in 1997. This time around however, much of the boom has been funded internally for domestic savings. “Local investors hold 88 per cent of domestic government notes in the Philippines, 85 per cent in Thailand and 73 per cent in Malaysia,” stated this article from Bloomberg. See: Record Bond Sales Showing Lessons of 1997 Learned: Asean Credit

A bigger fear relates to demographics. In Europe, both East and West, the US, Japan and indeed China, aging is a problem. For Japan it is hard to see how government debt more than approximately 230 per cent of GDP will be affordable when the working population starts to shrink. But this has already happened. Maybe this is why Japanese government bonds have been falling even as the central bank kicks off more QE. Japanese households are not saving like they used to either; in fact, the Japanese savings ratio is much lower than that of the UK. This may be a symptom of the fact that the Japanese baby boomer generation has already retired, and is drawing down savings to fund day to day living.

In China, the country will shortly pass what’s called the Lewis Turning Point and will run out of workers to migrate from the country to cities. Its policy of one child per family is taking its toll too. But even when the government reverses this policy, getting the birth rate up may prove quite difficult – not least because of the high proportion of younger males to females in the population. By 2030 China is expected to have a shortage of around 140 million workers, according to the IMF.

That leaves one more bubble to warn you of, and this relates to US student loans. See: Student Debt and the Crushing of the American Dream 

© Investment & Business News 2013

In Japan the Nikkei 225 had risen from 8,515 back in October to 15,627 earlier this week. Yesterday the index lost 7.5 per cent, falling back to 14,483.

In the US, the Dow rose from 12,542 last November, to 15,387 earlier this week.

In the UK the FTSE 100 rose from 5,605 last November to 6,840 earlier this week, yesterday it lost 2 per cent.

So this begs the question: why?

News that the Fed may be set to bring its policy of QE to an end later this year did not help, see Fed at sixes and sevens.

News that the latest flash composite PMI measuring Chinese services and manufacturing has fallen below the critical 50 no-change mark for the first time since last October, did not help much either.

See: China stumbles, Eurozone limps

But then again, maybe the real catalyst for yesterday falls is that after a period when shares have risen sharply these things happen. What goes up eventually comes down.

So yes, yesterday the FTSE 100 lost 2 per cent but, no its falls were not even enough to reverse the overall gains seen this week.

Yes the Nikkei 225 lost 7.5 per cent, but its closing price yesterday was still up on its level seen just 10 days ago.

And the Dow did not actually fall that much at all yesterday – down by just 0.08 per cent on Thursday.

Here are a couple of observations and then a warning.

Observation number one: the all-time high of 6930 set for the FTSE 100 in December 1999 remains elusive. Back in 2007, the index went close, moving within 200 points before crashing. This week the index went within 90 points before yesterday’s mini crash. Will the index fail to pass that level yet again in this cycle, before a sense of realism descends on the markets, or was yesterday’s fall just a blip on the steady march to new ground?

Observation number two relates to the news out of Japan, which is less rosy. The markets have gone Shinzo Abe mad. Abeonomics has done for markets what LSD did for hippies during the ‘60s, yet the feeling that the markets have gone too far, are a tad too euphoric, won’t go away.

What they call the cyclically adjusted pe – or the CAPE – which is to say stock market valuations as a proportion of average earnings over the previous ten years, was 28 for the Nikkei 225 before yesterday’s falls. To put that in context, last autumn the CAPE for the Nikkei 225 was just 18. For the US S&P 500, the CAPE is currently around 24. The US average CAPE since 1900 has been 15. The average for the Nikkei 225 since 1985 was 40.

But the US CAPE from 1900 probably understates reality, because earnings growth during the 20th century was rapid. The average CAPE for Japan probably overstates reality, because it was distorted by the exceptional bull run of the 1980s and 1990s.

Earlier this week, Capital Economics forecast that the Nikkei 225 would lose 15 per cent over the remainder of this year. Yesterday it lost half this amount in just one day.

Of more concern is that the yields on Japanese government bonds have been rising of late, and that is despite all the new QE we keep hearing about.

And that brings us to the warning.

There are bubbles in the making: in fact four distinct bubbles come to mind.

 © Investment & Business News 2013

Let’s hope you are sitting down because this may come as a shock. It turns out that a lot of Brits are not saving enough.

According to Prudential: “One in seven (14 per cent) people planning to retire this year will depend on the State Pension as they have no other pension.”

The Prudential analysis also reveals that nearly one in five (18 per cent) of those planning to retire this year will be below the poverty line. The Joseph Rowntree Foundation estimates that to be above the poverty line a single pensioner in the UK needs an income of at least £8,254 a year, yet 18 per cent of those retiring in 2013 expect to retire on less than this.

The findings also highlight a significant gender divide, with 21 per cent of women expected to retire below the poverty line in 2013 compared with 14 per cent of men. In addition, women are nearly three times more likely than men to have no other pension – 23 per cent of women retiring in 2013 will retire without a private pension, compared with just 8 per cent of men.

The truth is that the retirement of the baby boomers, something we are only just beginning to experience, will provide the single biggest challenge to the UK economy over the next few decades. Indeed the US and much of Europe face a similar challenge.

You could say that what is happening in the UK now happened in Japan 20 years ago.

What is the answer?

From a micro point of view it is for us all to save more. But if we all save more, the result may be recession and falling wages, which in turn may make it harder to save.

From a macro point of view we need investment into innovation, infrastructure and just in trying to create a more dynamic and stronger economy. Or we need more immigrants, which is not an idea that is likely to prove very popular.

© Investment & Business News 2013

Last year I did a list of each country’s national debt divided by population to see what the next generation might either pay interest on or pay back.

Examples in $1000 per head:

UK 26.5

Ireland 35

Germany 28

France 31

Spain 17.5

Italy 38

Japan 83

USA 29

Canada 37

Norway 39

Australia 11.5

So what you might say? As a percentage of GDP it’s not so much … well that’s got naff all to do with it too unless there is a current a/c surplus … if you cut someone’s hair it adds to GDP but it hardly pays the £26,500 you owe on top of the £10,000 on your credit card.

Obviously, in the UK, with the old folks about to fund the out of work young folks as well as the civil servants, NHS etc (biggest GDP earners presumably and therefore the biggest ‘so what’ in this whole sad tale) this black hole is here to stay for a long time.

To get away from the obvious side of the story let’s have a look at the other side of the loans – the £26,500 each and every one of us had borrowed on their behalf… someone is the lender and so they will either ask for it back one day or extend the loan forever and the borrowers (you) will pay the interest. As the banks already went bust then presumably the debt is met by bond issuance from each government … “wow government – must be safe” bonds of course.

So who owns the bonds? i.e who is hoping to get paid back?  As it’s not countries per se nor banks so much, it must be the pension funds and the pension funds have your money in trust for when you retire. So the money they are going to give to you one day is indirectly the money you already owe ? And in order to realise that money, the pension funds have to redeem the bonds so the government has to find the money to give the pension providers to give to you….. enough of that … the real truth is that the government bought votes by indirectly spending your pension fund over the past few decades. The government borrowed from the very people it was robbing at the time. Many pension plans will have to go pear-shaped… whose will be first?  Do you doubt this? In that case just tell me who is going to produce your £26,500?

Any thoughts out there?

Patrick O’Connormist is this week’s guest contributor to The Money Spy blog


Be under no doubt, record low interest rates and quantitative easing are the main reasons why equities are riding high at the moment. There is this view that central banks control interest rates; that they can determine flows of money. So why panic about rising rates spoiling the party? Central banks will only do this once the economy is back on its feet. It is just that there are reasons to think this analysis is wrong.

It is remarkable how, in this post financial crisis era, central banks still seem to operate under a kind of halo. The media and organisations such as the IMF still suggest that these central bankers are like mini gods, moving the pieces of the economy around. They are like Zeus in one of those old Hollywood movies, in which the gods of Olympus (played by the likes of Lawrence Olivier), controlled the movements of mortal man in much the same way a croupier moves chips across a roulette board.

Maybe the truth is that central banks have about as much power as Zeus does in the real world, which is to say that the sense of the central bank’s omnipotence is based on a myth.

So did central banks create the financial crisis of 2008 by letting interest rates fall too low, or were their actions largely irrelevant? Maybe the real reason why inflation fell during the 1990s and noughties was that the Internet helped to promote price competition and globalisation – in particular the rise of China – meant cheaper manufactured goods.

At the same times, ageing in Japan, China’s policy of protecting the yuan, and rising corporate profits led to a global savings glut, meaning there was lots of money sloshing around the system, pushing down interest rates. Alan Greenspan himself alluded to it when he was chairman of the Fed and he talked about long-term interest rates set by the markets being lower than short-term rates set by central banks.

But supposing things went into reverse. The Ernst and Young ITEM Club recently forecast that inflation will rise later this decade as wages increase in China, which will lead to rises in the price of manufactured goods. It also forecast that UK bank rates will be increased to 1 per cent in 2015 and to 2 per cent in 2016. On the back of rising interest rates, it forecast that mortgage interest payments will jump 15 per cent in 2015 and by a massive 23.4 per cent in 2016.

But is it possible that it is underestimating the changes that may occur?

Zeus is a myth. We now know that bankers’ hubris gets punished, and maybe central bankers have an Achilles heel. And that heel is that actually, there are forces at work – underlying forces – that are far more important than what members of monetary policy committees say and do.

Alan Greenspan once said it is the job of central bankers to take away the punch bowl as the party gets started. Maybe changes across the global economy will do this anyway, no matter how much gin and vodka central bankers pour into the QE punchbowl.

© Investment & Business News 2013

According to data from the ONS, the number of people aged 65 or over in employment has risen from 890,000 in the first quarter of 2012 to just under a million in Q1 of this year.

According to a survey from NS&I, just under a third of Britain’s adults (31 per cent) do not know how they will finance their needs in later life, including such eventualities as long-term illness, nursing home or care fees and care of others, including partners, parents and siblings.

On the subject of retiring over 65, Nigel Green – who is the chief executive of the large IFA the deVere Group – said: “Naturally, it’s hugely positive if the over 65s who are working past the traditional retirement age are doing so because they choose to, but it’s totally different if they’re being forced to carry on working as they can’t afford to retire.” He said: “I suspect the majority are working because they have to.” He continued: “The ONS findings show once again that as a nation we’re simply not saving enough. There needs to be a radical shift in the savings culture.”

The NS&I research shows that “over a quarter of Britons (27 per cent) who have yet to consider financial planning in later life admit they do not want to think about such events. 23 per cent say they simply have not had time to think about their later life financial needs, and just under a fifth (19 per cent) prefer to take a short-term view of their finances and use the money they have for the present.

A further 12 per cent don’t consider that this situation will affect them in the near future and believe they will have plenty of time to consider such planning going forward, while 7 per cent of Britons do not consider later life financial planning as important.”

So what does that tell us?

Clearly we have to save more and we will, as the baby boomers wake up to their pension crisis in the making.

But if a large chunk of the UK populace starts to save more won’t that lead to recession? This is what happened in Japan 20 years ago, and we all know what happened next.

© Investment & Business News 2013


Here is your starter for ten points. Who was Chancellor of the Exchequer when the UK re-entered the gold standard? Bzzzz. Yes, that’s right, it was Winston Churchill.

Now for your next question, who was chancellor in the 1930s, and adopted economic policies not dissimilar from those being applied in Japan today, and with very impressive results? Not sure? Well, it was Neville Chamberlain.

It is quite ironic. Churchill was a brilliant war time leader, but he was a disaster as a finance minister. In the case of Chamberlain, it was the other way round. So what did Chamberlain do and what are the parallels with today?

Back then the UK was in what Nobel Laureate Paul Krugman calls liquidity trap conditions. Interest rates were about as low as they could go, but still the economic performance was awful.

Chamberlain, let’s call it Chamberonomics, went for zero – or near zero – interest rates, a weaker currency and a targeted price level entailing some inflation. Economist Lars EO Svensson calls it The Foolproof Method

The point to remember here is that if the economy is seeing deflation – as it did in the UK during the early 1930s, as it has been in Japan over the last two decades, and as may well in the Eurozone over the remainder of this decade – it becomes very difficult to reduce government debt to GDP.

Think about it, if prices are falling, the economy can be expanding even if GDP measured in pounds shillings and pence is contracting. So if the nominal value of GDP is falling, in order to reduce debt to GDP, it is necessary to make even more severe cuts, or impose even higher tax rises.

So by trying to create some inflation, Chamberlain was able to create the conditions for economic recovery. And at least to an extent this policy worked, with GDP expanding by an average of 4 per cent between 1933 and 1936.

And all this pretty much describes the policies being adopted by Shinzo Abe, Japan’s new (ish) – and by the way he has held the position before – Prime Minister.

They call Abe’s approach Abeonomics, but maybe they should call it Chamberonomics. And by the way, the success enjoyed by the UK during the mid-1930s was also helped by a house building boom – something George Osborne says he is trying to create with his Help to Buy scheme – although whether he is in effect trying to bribe the electorate with an artificial boom in house prices is a moot point.

© Investment & Business News 2013


It is the great dread. Right now, inflationary pressures are weak in the Eurozone, and deflation is seriously looking like it is back on the agenda. But suppose, just suppose, that from out of nowhere inflation starts to rise, and central banks find that, in order to keep it in check, not only must the rate of interest rise, but the real rate of interest – that is to say relative to inflation – must rise too. It won’t happen, you might say. Why should inflation rear its ugly head at times like these? Well, don’t go so fast.

There are deeper forces at work, and there are reasons to think that in the next few years inflation may return. This is why.

During the boom years central bankers must have had sore vertebrae. They must have because economists, and finance ministers around the world kept slapping it. To let you into a secret, it seems that to an extent central bankers also slapped their own backs – albeit in a subtle way. Mervyn King gave Alan Greenspan’s spine a good tingling; Greenspan let his hand fall upon Mervyn’s spinal column.

The IMF was at it too, slapping away. Why such so much friendly smacking? It all boils down to NICE: that is to say non-inflationary, continuously expansionary. During the noughties, and indeed the late 1990s, economies in the developed world (with the exception of Japan) enjoyed the best of both worlds: strong growth, but modest inflation. Central banks were held up as the reason. Even Gordon Brown received some praise for giving the Bank of England independence, and giving it free rein to do what was right.

These days, central bankers’ savvy is not quite so appreciated, but even so, only a few months ago, they were being cited as the main reason why inflation across the world is so low.

But here is an alternative view for you. Maybe there was another cause of such low inflation. Perhaps there were even two main causes: globalisation and technology. The Internet created unprecedented price competition, while technology helped more efficient production, which led to lower costs. And the rise of emerging markets led to far cheaper manufactured goods, which were imported by the West from factories in Asia.

The part played by commodities in all this confused the picture. The rise of China may have meant cheaper manufactured goods, but also led to a rise in demand for oil, metal and then food. So we had downward inflation pressure on manufactured goods, and upward pressure on commodities. This confused the picture, and may have fooled central bankers, leading them to make mistakes.

But are the forces putting downward pressure on prices still in action? Maybe the Internet effect in creating price pressure via the magic competition was a one-off.

Now take globalisation. Earlier this week, LGIM economist James Carrick suggested that many of the forces that helped globalisation push down on prices are moving into reverse.

He said: “LGIM research shows that [the] increase in global import penetration effectively reached a plateau in 2006, largely due to changes in the Chinese economy. This has grown massively since joining the WTO, but it is also maturing quickly. Greater use of technology and more sophisticated production capabilities mean that China is getting richer and its workers are paid more.

“If the benefits of shifting basic assembly work to China are decreasing, companies will keep production closer to home, an effect we are seeing already with Mexico no longer losing market share in the US. This ultimately means firms can’t keep cutting costs by using cheaper suppliers and therefore will result in higher inflation.”

Mr Carrick reckons there are already signs of this change in the nature of globalisation putting upward pressure on inflation. Well maybe, but to be frank it is early days. We are talking about a trend that may take several years before it becomes obvious.

But would a rise in inflation be a bad thing? After all, inflation is a good way to reduce the real value of debt.

It depends. If we get wage inflation too, then household debt will suddenly look more manageable, and nominal government tax receipts will rise, making government debt look less frightening.

But…suppose wages don’t rise. Suppose prices rise, making us all worse off, interest rates rise making those with debts even worse off, but wages rise more slowly. That would be a nasty set of circumstances.

One thing seems likely. If inflation does start to pick up substantially later this decade, bond prices will suddenly look way too expensive, and we may well see their values crash.

Central banks may have less say over inflation than they are given credit for and QE may be less inflationary than it is assumed. But QE has forced up asset prices, and if external factors then cause a crash, the fall-out would be very unpleasant. If all this happened, maybe, as a punishment, we would need to give central bankers a good flogging.

© Investment & Business News 2013

“We are all Keynesians now,” or so said Milton Friedman in 1965. Later, President Nixon said: “I am now a Keynesian in economics”, and popular misconception has thrown up the view that it was Nixon who made the comment about us all being Keynesian.

Political leaders in South America could say it now, too. Leaders across the continent would sound eminently consistent if they too said: “We are all Keynesians now.” It is just that they aren’t and neither was Nixon, and neither was Friedman. Keynes advocated a certain set of policies under certain conditions: namely when monetary policy no longer worked no matter how low interest rates were, and when people still weren’t spending. He called the use of monetary policy in such times pushing on string.

Others call it liquidity trap conditions.

Right now in South America, monetary policy is not pushing on string, and there is no liquidity trap. Ditto the US economy in the 1960s. The policies that were adopted in the 1960s and to a lesser extent in South America today may be called Keynesian by some, but it is doubtful that Keynes would have called them that.

Keynes would have called for the remedies he famously advocated only when interest rates had fallen so low, that they cannot fall any lower. That is to say, about now in the US, the UK, Europe and Japan, but not in South America.

If you are running late and stuck in traffic, hitting the gas won’t help. But if you are running late, and the motorway is empty, and devoid of speed cameras, then upping your speed will help you to complete the journey quicker. Critics of Keynes who said his ideas didn’t work in the 1960s and thus won’t work now, are like someone who concludes, after a day spent in heavy traffic, that there is never any advantage in driving over 30 miles per hour.

© Investment & Business News 2013

The recent falls in the price of gold have been a puzzle; contradictory forces are at work.

The main trigger for recent falls has been talk that Cyprus is set to sell gold holdings. Yet the rationale behind Cyprus’s move is that it is virtually bust, and usually when countries go nearly bust, gold rises in price. A number of media reports has suggested that even money in our banks accounts is no longer safe, and that governments across the world are effectively insolvent. These are usually seen as reasons to buy gold.

Maybe the truth is that markets don’t believe all those predictions of doom. QE is usually associated with gold rising in price, but if markets think Japan’s QE will lift its economy, then that may be a reason to sell gold.

This article is really worth a read: 12 Rules of Goldbuggery  It’s a touch ironic. The bottom line, if you want the précis, is that gold bugs, as they call out-and-out fans of buying gold, are not totally rational . If gold falls in price they say it is because of market manipulation. Indeed they say if the markets were left to themselves gold would only ever rise. And they add that it is inevitable that the world will return to the gold standard.

Here is a thought about all this so-called goldbuggery. If the world did return to the gold standard, the global economy would soon afterwards descend into depression from which it would not exit until the gold standard was ditched. It is not true that inflation does not occur when the gold standard is in place. And it makes no sense to limit the money supply to the stock of gold, which is totally unrelated to innovation and economic potential. A return to the gold standard would kill innovation, crush change, and protect the status quo, making it easier for the rich to stay rich and harder for the poor to gain wealth.

Finally, Warren Buffet had something good to say about gold. “What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” or so said the wise man of investing last year. He added: “During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while.”

He also once said: “If you put your money into gold or other non-income- producing assets that are dependent on what someone else values that in the future, you’re in speculation…You’re not into investing.”

©2013 Investment and Business News.

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