The quintet of ‘Benny and the Jets’ – Bernanke (US Federal Reserve), Carney (Bank of England), Draghi (European Central Bank), Xiaochuan (Peoples Bank of China) and Kuroda (Bank of Japan) – are secretly a cover band for Doris Day.
Their one and only (repetitive) rendition is this chorus:
I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high,
Nearly reach the sky,
Then like my dreams,
They fade and die.
Fortune’s always hiding,
I’ve looked everywhere,
I’m forever blowing bubbles,
Pretty bubbles in the air.
Benny and the Jets have belted out this song for four years. The market keeps cheering, so they keep singing.
The smart money is questioning when will these one hit wonders topple from the charts?
Which bubble (and there are many) is going to ‘fly the highest’ and ‘fade and die’ the fastest?
The Japanese love karaoke, so perhaps Kuroda is singing the loudest from the central bankers’ song sheet.
From the quintet, Kuroda is the one blowing the most air into his bubble.
The Land of the Rising (Rising, Rising) Debt
Kyle Bass from Hayman Capital made a fortune from shorting the US sub-prime mortgage market and Greek bonds. I’m a big fan of Bass. He has a real grasp of numbers and forensic analysis.
In his opinion Japan is living on borrowed time (and lots of printed money). Based on his analysis, he’s betting Kuroda will be singing a much sadder song in the not too distant future.
Bass shared his views on Japan in a recent address he gave to The University of Chicago Booth School of Business. Here are some of the key notes from his speech:
- On all historical measurements Japan is well into the ‘zone of insolvency‘.
- Emerging market economies historically implode when public debt levels exceed 5 times central tax revenue.
- Japan’s debt level of over one quadrillion (a billion billion) yen represents around 25 times central tax revenue.
- Tax revenues are approximately 43 Trillion Yen, of which 10 Trillion Yen (23%) Japan uses to pay the interest only on the debt – this is with interest rates around a measly 0.6%.
- Japan collects 43 trillion Yen in taxes but spends 102 billion Yen. Japan spends double the amount they collect in taxes, which just adds to the debt pile. The pile of dry tinder just keeps getting bigger.
- In the past 5 years there have been 10 Japanese Finance Ministers – this cabinet post is a real hot potato. Of the ten, one minister committed suicide and one checked into hospital after ratifying a budget.
- Large Japanese corporations are actively engaged in acquiring/merging businesses outside of Japan. Bass believes they are moving money out of Japan as a hedge against massive currency devaluation.
- Demographics – Due to its closed border policy, Japan’s population is shrinking in number. The population is also ageing. Approximately 30% of the population is aged over 60, compared to 8% in the rest of the developed world. More retirees mean less taxes and more welfare – not a combination that will correct a massive budget deficit.
- Until 2012 Japan had been able to finance its government debt from the savings of its citizens. Those savers are now retirees and are selling their government bonds to fund their retirements. The base of the Ponzi scheme is shrinking.
This is why the newly elected Prime Minister Shinzo Abe and the recently appointed head of the Bank of Japan, Haruhiko Kuroda, have signaled a ‘print and be damned’ approach to their problems.
- When the bond market loses confidence in Japan, Bass thinks Japanese interest rates will go into the teens. To appreciate the enormity of this implication – currently 23% of tax revenues go to pay interest on government debt at an interest rate of 0.6% – if Bass is right, interest rates will rise nearly 20 times current levels.
To put some numbers on this – interest payments would skyrocket from 10 trillion yen to 200 trillion yen, which they would need to pay from tax revenues of 43 trillion yen. That’s simply not possible. If something cannot continue then it won’t.
Highly respected US economic and investment author, John Mauldin, described Japan as ‘a bug in search of a windshield.’
In his recent weekly newsletter, Thoughts from the Frontline, Mauldin stated, ‘Let me repeat what I wrote months ago, that the largest single position in my personal portfolio, since January 1, is short Japan.‘
Kyle Bass thinks there are numerous pins waiting to burst the Japanese bubble – you only need one:
‘We believe that Japan is teetering on the precipice of financial collapse, and any number of data points or events in the coming weeks and months could be the proverbial tipping point.
‘It could be as significant as a negative structural current account, a revocation of BoJ policy independence, or even political and economic conflict with regional neighbors or perhaps something as innocuous as ratings actions or Basel III regulations that force financial institutions to reduce their hugely concentrated exposure to JGBs.
‘What we do know is that when it does break loose, 20 years of suppressed, spring-loaded interest rate volatility on the back of the largest peacetime accumulation of sovereign debt will afford no time to readjust portfolios to get out of the way.‘
When the Japanese bubble bursts, the cacophony of all the other bubbles popping will drown out even the loudest shrills from Benny and the Jets.
A Thought Bubble
The first three lines of the first verse of the central bankers’ theme song sums up their thinking:
I’m dreaming dreams,
I’m scheming schemes,
I’m building castles high.
Be careful. These dreamers and schemers will blow your castle sky-high if you believe their spin.
When the bubbles burst perhaps they can learn the lines to:
‘Pop go the weasel(s).’
Contributing Editor, Money Morning
From the Archives…
24-05-2013 – Kris Sayce
Why the Only Thing That Matters in the Markets is Japan
23-05-2013 – Murray Dawes
When Soros Buys Gold Stocks, You Better Take Note…
22-05-2013 – Dr Alex Cowie
Look for Small-Cap Resource Stocks with Plenty of Cash
21-05-2013 – Dr Alex Cowie
Why Bank Stocks have Outperformed Resource Stocks…
20-05-2013 – Kris Sayce