Tuesday, July 22, 2014

How Long Until the Japanese Yen Collapes? Months, Years, or Another Decade?

The collapse of yen is inevitable. No government can fund half of their spending with debt forever. The Japanese government debt burden is so enormous that the Bank of Japan must hold down the cost of  borrowing by funding the debt via being the primary buyer of Japanese government bonds (aka money printing). With Japan's aging population leading to increased demands for government spending, there is no way out for the Bank of Japan's (BOJ) program of buying up government debt. The debt issuance is so enormous, and the bonds are such a risky investment that it is totally unrealistic to think that market would soak up all the debt issuance without the BOJ's buying. Thus, this massive debt buying/money printing by the BOJ can not be halted. This massive debt buying/money printing will eventually lead to the debasement of the yen and a run on Japan's currency.

The eventual collapse of Japan's economy has been widely predicted for years. I came across a 2001 article on Japan's Runaway Debt Train. And even back in 2011, shorting Japanese bonds was referred to as "the widow maker" because it had been such a disastrous trade for so long. However, at this point, with the interest rate on the benchmark Japanese government 10 year bond at just 0.5%, further declines are getting close to being mathmatically impossible.

However, the "widow maker" trade is to short Japanese bonds. It's my opinion that the smarter trade in the near term may be to short the yen, as bond buying by the BOJ may hold down interest rates on government debt at artificially low levels until well after the decline in the value of the yen is well underway. Given the goal of the government bond buying by the BOJ is to increase inflation while holding interest rates low, in the near term going with the flow and assuming the BOJ will have some success at both goals, shorting the yen may be a quicker route to profits.

Eventually, shorting the yen is going to be spectacularly successful. The critical question, and one that is frustratingly challenging to answer is, "when will the yen collapse?". It seems almost impossible to believe that the crash of the yen will not occur within this decade. Yet on the other hand, there is little to indicate that the crash of the yen is only months away either.

Here is why the yen is destined to collapse sometime in the near future. Both Japan's total government debt and the annual deficit are insane and unsustainable.

Japan Government Revenue and Expenditures

Revenues (2013) - $460 billion
Expenditures (2013) -  $945 trillion
(source - WSJ)

The gap between revenues and expenditures is enormous - $485 billion

Projected Interest Expense (2014)  - $224 billion

Funding half of government spending via debt/money printing is not sustainable, particularly given that the Japan's government debt has now passed a quadrillion yen. According to Japan's budget forecast, revenue from bond sales will pay for 43% of the 2014 budget, down from 46% in 2014. This  is the official number and is likely highly optimistic - my guess is that final 2014 numbers will equal or exceed last year's 46% (the official numbers for deficit percentages do not match up with the WSJ revenue and expenditures totals shown above in part due to off budget items, thus the government figures understate the depth of the problem).

And the BOJ is not printing money solely to buy up newly issued government bonds. The BOJ has pledged to increase the money supply by 60-70 trillion yen ($589-687 billion) in 2014, an even larger amount than the deficit.

Interest payments of $224 billion essentially eat up half of all revenue, and that is with the BOJ holding down interest rates on Japan government debt under 1%. Without BOJ's bond buying, higher interest rates would result. Simply a small rise in interest rates would lead to an enormous budget busting cost of debt financing

Putting further pressure on the yen will be Japan's total debt of $12.7 trillion (which expressed as percent of GDP is 242.3%, and $99,725 per person according to Bloomberg). To date, Japan deficit financing has not led to a crash of the yen. But the huge deficits have led to Japan's government being even more indebted than even the PIGS (Portugal, Italy, Greece, and Spain) as a percent of GDP. No nation in history has been able to sustain money printing for a prolonged period without eventually causing a crash, and the Japanese economy is not so exceptional that it will be able to escape this trend.

The yen did decline by 20% in value in from October 2012 to May 2013, from 87 yen to the dollar to 103 yen to the dollar. But it has since stabilized and is back to 101.5 yen to the dollar. When the yen does finally crash, as is absolutely inevitable, the future decline will dwarf last year's 20% drop . And it seems likely that the crash of the yen may not be too far off.

       click chart for current Yahoo Finance report

The fact that the Yen has not collapsed is in part due to the claim that Japan is moving toward a budget surplus in 2020. That claim seems about as likely as peace in the Mideast, the fountain of youth, or turning lead into gold.

The Information on this blog is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS BLOG WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. 

Saturday, May 3, 2014

The Propaganda Battle Over The Fatal Odessa Trade Union Building Fire

Russia is using the fatal fire in the Odessa Trade Union Building in a matter right out of the Joseph Goebbels playbook. The Russian claim "Odessa slaughter: How vicious mob burned anti-government activists alive" is a terrific way to get a population stirred up to support an invasion.

On the other side of the coin, the Ukrainian authorities are claiming "pro-Russians accidentally set fatal Odessa fire with Molotov cocktails"

This is one of those cases where perception matters far more than reality. The flames are being fanned for more violence to come. The truth of how the fire was really set is not a very important issue in this propaganda battle. 

Odessa could be a flash point for an escalation of the conflict. Ukrainian authorities are unlikely to allow their remaining Black Sea port to fall into the hands of the separatists following the loss of Sevastopol in Crimea. Yet with a majority Russian speaking population in Odessa, the potential for strong separatist opposition is almost certain

Is Russia setting the scene for another invasion of Ukraine?. Time will tell, but more violence in Odessa is a highly likely outcome. And violence in Odessa could be the excuse that Russia utilizes to expand their occupation of Ukrainian territory. They are already using the media to get their populace ready to support an invasion.

Wednesday, March 5, 2014

Cutting Through The Global Warming Debate: It's the Rising Sea Level, Stupid!

Every day brings a new report on some obscure impact of climate change by 2050. Today's headline is almost comical, "Chipotle Warns It Might Stop Serving Guacamole If Climate Change Gets Worse". Along the same lines, a typical example of a news story about the impact of global warming is the claim that "climate change may cause major lizard extinctions by 2050". The cacophony of claims about all the catastrophic events that may occur by 2050 become little more than white noise to climate change deniers and skeptics. 

Here is the climate change impact that most resonates with climate change skeptics. "The sea level is rising by 1/10" per year". It may be that the sea level rise of 1/10 inch per year is such a slow trend and is so lacking in shock value that it is not much of a headline generator. However, it's easy to understand and fairly linear. It's also one of the most worrisome aspects of the millions of metric tons of greenhouse emissions gases being emitted annually.

Here is another tactic to take with global warming skeptics. Make a wager that 2015 will be the warmest in recorded history. If James Hansen is correct, you have a good chance of winning the wager, and it refutes the denialism that has been fomented due to the decade long pause in the increase in global surface temperatures

And for those living in areas of the U.S. that have suffered through a brutally cold winter, suggest they visit this site that shows the global temperature departure from average. The maps on this site visually show that while some geographies are unusually cold, they are more than compensated by areas that are unusually warm.

Global warming deniers may try to refute the fact that the seas are rising. Of course, many of the same folks will tell you that dinosaur fossils were put here to test our faith. However, I'll take the word of NASA scientists that confirm that the sea level is rising. If the folks at NASA are good enough at math that they can put a man on the moon, I trust their capability to measure the rising sea level

Read More

Tuesday, March 4, 2014

Is The Impact of Japan's April 1 Consumption Tax Increase Being Underestimated?

The general consensus seems to be that the upcoming consumption tax increase in Japan has been so thoroughly analyzed that its impact is baked into future projections. My crystal ball in regard to the impact of the 3% increase in the consumption tax from 5% to 8% is rather cloudy. But it seems like the impact could be more severe than most analysts seem to expect. The sales tax increase could set off an ugly downward cycle.

Here are a couple of other events that led to the type if forward shifting of demand that the upcoming tax increase is producing

Japan - The April 1, 1997 2% increase in the consumption tax from the then 3% to 5% led to a huge increase in sales of big ticket items in the run-up to the hike in rates. However, it was followed by a year and and half recession.
Global - The boom and bust in purchases of high tech capital goods due to Y2K compliance led to a recession in 2000 that hit virtually every developed economy.

Japan's economy is already under huge duress due to an aging population. With 24% of the population age 65 or older, no other country in the world has so many senior citizens to support. Japan still has a labor force participation rate of 59% (versus 63% in the U.S.), but it bound to decline over time.

Japan government spending, deficits, and debt make one dizzy just pondering the numbers, as pointed out by Wolf Richter. The Japanese government's Ponzi game of borrowing half of spending and creating demand for the borrowing via money printing will ultimately lead to a collapse. The $70 billion a month of "quantitative easing" by the Bank of Japan to soak up demand for Japanese government debt is ultimately a recipe for a Weimar Republic like collapse.

The Japanese economy is headed for a calamity at some point in the future due to the massively excessive debt and deficit. Will the April 1 consumption be the straw that breaks the camel's back? Probably not. However, don't be surprised if the boom bust impact of the April 1 consumption tax increase is worse than most analysts are projecting. It seems reasonably likely that Japan is in for a nasty recession during the balance of 2014.

Friday, February 28, 2014

Will The Tea Party Recognize That The Only Real Climate Change Debate Is Whether It Is Catastrophic?

The weird weather this winter has focused a good deal of attention on the debate over whether global warming is the cause of the cold, snowy winter across much of the U.S. Frankly, even as someone that is firmly in the "warmist" camp, I suspect that the weird weather may just be due to the variability of weather.

However, in the many stories about the debate over global warming appearing in the mainstream media, the articles on the subject have been filled with quotes from the small group of global warming scientists that are skeptical that catastrophic global warming is occurring due to greenhouse gas emissions. Of note, there is only a tiny group of climate scientists that deny global warming is occurring. The only real questions even among the climate scientist that are global warming skeptics are: 1) is it really catastrophic; and/or 2) is it really caused by greenhouse gas emissions. Here is a typical quote from a couple of the most frequently quoted climate change skeptics, University of Alabama in Huntsville atmospheric science professors Richard McNider and John Christy
For instance, in 1994 we published an article in the journal Nature showing that the actual global temperature trend was "one-quarter of the magnitude of climate model results." The disparity between the predicted temperature increases and real-world evidence has only grown in the past 20 years.
Given how badly the climate change models have overstated expected changes in global surface temperature, their skepticism about "catastrophic" global change does not seem unreasonable. However, McNider and Christy do not deny that global warming is occurring, that the oceans are rising by 1/10th inch per year, or arctic sea ice is declining to the point that ocean shippers can now use the Northwest  Passage during the summer.

Confusing the issue, publications such as Forbes are guilty of publishing out and out misinformation. Any article that exaggerates the decade long pause in global surface temperture warming to 17 years should instantly be recognized as being invalid. Cherry-picking 1998 as the starting point for measuring the start of the pause in the rise of global surface temperature is a favorite and invalid tactic of the climate change deniers. 1998 was a statistical outlier, an unusually hot year caused by El Nino, and using that year as a starting date demonstrates statistical illiteracy. What makes the publication by Forbes of this misinformation seem a bit bizarre is that fact that in 2012, they published an article explaining why cherry picking 1998 was invalid. Another example showing how using 1998 as the start of the "pause" is not scientificly valid is provided by SkepticalScience.

The Tea Party Platform does not address the issue of global warming, despite the large number of its members that fall into the "denier" camp. However, the philosophy of the Tea Party puts it in direct conflict with the global warming "alarmists" who are demanding government intervention to reduce greenhouse gas emissions.

On one hand, fighting against greenhouse gas reducing legislation seems to be in the wheelhouse of the Tea Party's philosophy. However, on the other hand, if Tea Party members use a claim that "global warming is a hoax" to support opposition to greenhouse gas reducing legislation, then they will be guilty of being flat earther's, willfully ignoring science. If "global warming is a hoax" claims become ingrained within the Tea party platform, it will cost the group an enormous amount of credibility, particularly if James Hansen's claim that 2015 will be the hottest year in recorded history comes to pass

Monday, February 24, 2014

2015 Will Be The Hottest Year In Recorded History - The Prediction That Will Be Hard to Refute

The climate change debate is muddled due to the decade long pause in warming of the earth's surface temperature. Most climate models wildly overstated the warming that would occur during the most recent decade. The long pause in the warming of the earth's surface temperature has played a big role in climate researchers' utter failure to convince U.S. voters that "climate change can now be considered another weapon of mass destruction" (a much disputed line from a John Kerry speech). Further, much of the debate between climate change skeptics and "warmists" has been  challenging to interpret or evaluate.

However, a number of climate researchers have made a prediction that should be easy for everyone to interpret, and that is that the next El Nino will lead to the hottest year in recorded history. According to climate researcher James Hanson, "It appears that there is substantial likelihood of an El Niño beginning in 2014, and as a result a probable record global temperature in 2014 or 2015". Dr. Michael Mann has indicated that "perhaps that will put to rest once and for all the silly notion, promoted by climate change contrarians, that climate change has ‘stopped’.”

As shown in the chart below, years in which El Nino conditions are present tend to be hotter than La Nina years. And Dr. Michael Ventrice suggests "We are seeing increasing evidence of an upcoming change in the Pacific Ocean base state that favors the development of a moderate-to-strong El Niño event this Spring/Summer

It would be nice to think that the results of the "hottest year in recorded history" prediction will provide some resolution in the debate about whether global warning and climate change are occurring. The outcome of this prediction should certainly provide a bit clarity in regard to the global warming debate. Maybe there will be some change in the makeup of the Global Warming's Six Americas as defined in an analysis provided by the Yale School of Environmental Studies
  • The Alarmed - 16%
  • The Concerned - 27%
  • The Cautious - 23%
  • The Disengaged - 5%
  • The Doubtful - 12%
  • The Dismissive - 15%

Little action will be taken on a global basis to reduce emissions of greenhouse gases until there is consensus on the importance of doing so. The outcome of the prediction that 2015 will be the hottest in recorded history maybe be a milestone event in the resolution of the debate on global warming and climate change.

Friday, February 21, 2014

Is U.S. Winter Weather Weirdness Due to Climate Change or Is It Just Winter?

The weather this winter in the U.S. has been really weird. It has led some to speculate, including myself, that the declining arctic sea ice or other climate change impacts may be playing a a role. However, given that a group of leading climate researchers have recently come out with an opinion in regard to climate change that "we consider it unlikely that those consequences will include more frigid winters", it is challenging make a case that climate change is causing the winter weather weirdness.

It is of particular note that most of the articles suggesting winter weirdness may be in part due to declining arctic sea ice reference the research of Rutgers climate scientist Jennifer Francis. However, even Francis doubts that declining arctic sea ice is causing the weird winter weather. She stated
"The media certainly had a field day with the “attack of the polar vortex” in early January, and in their hyping of the story, some misquoted me (and others) by saying that climate change caused the unusual cold spell. Of course this sort of event has happened before, and this one wasn’t unprecedented. I also agree that greenhouse-gas induced warming will reduce, not increase, the likelihood of breaking cold temperature records — the data already show this."
Casting further doubt on the the influence of arctic sea ice on the winter weather is that fact that the massive decline in arctic sea ice is mostly just a summer occurrence. As stated by Cornell climate scientist Charles H. Green,
“The lag between decreases in sea ice extent during late summer and changes in the mid-latitude atmospheric circulation during other seasons (when the recent loss of sea ice is much smaller) needs to be reconciled with theory.”
It is ironic that the current weather impacts a large segment of the populations' opinion about climate change and that this bout of weather weirdness is being taken by some as evidence that climate change might not be a hoax. So, opinions of some about climate change are being influenced by weather that is probably just due to it being winter.

Related Article
Weather Weirdness and Arctic Sea Ice