Our “Trade of the Decade” called for selling Japanese bonds and buying Japanese stocks. The bonds go down when the liquor runs out…and then, when Japan can no longer close its budget gaps by borrowing, it will print money. First, the bonds will crash. Then, the stocks will soar. Has it done well? Not exactly. But the decade has just become. And it looks more promising than ever.
Lord Keynes may not have had the Japanese bond market in mind. But almost an entire generation of JGB investors is living proof that “the market can stay irrational longer than you can stay solvent.” For nearly 20 years, they thought rising supplies of Japanese bonds must lead to falling prices. As the quantity increased the quality had to decline. It was irrational to think anything else. And yet, Mr. Market not only remained irrational, he seemed to enjoy it. He was like a drunk with a half-finished bottle in his hand. Everyone knew he would have to sober up some day. But as long as there was still liquor left, why bother? Japan borrowed more and more…and speculators went broke waiting for bonds to go down.
Here on the back page we yield to no man in our appreciation of the irrational. It is practically boundless, as near as we can tell. Nevertheless, sooner or later the booze runs out.
What makes this interesting to readers everywhere is that Japan is a trendsetter. The Japanese stock market headed down 10 years before the NASDAQ cracked in the US in January of 2000. Japan’s economy was ahead of the pack too; it went into a long correction 17 years before America’s subprime lending crisis. Its central bankers and finance ministers have a long lead too. Every rabbit, currently being pulled out of Ben Bernanke’s hat, was hopping around in Tokyo many years ago.
For example, the Japanese have been “zero bound” for 15 years. In an effort to restart the economy, the Bank of Japan went to ZIRP (a zero interest rate policy) in 1995. They’ve been within 50 basis points of zero ever since. So too did Japan’s huge central government deficits begin a decade ahead of those in the US. But the rope that was thrown out as a lifeline has become a noose. Japan can’t go back to normal policies; it can’t afford it.
Among all the world’s nations none now has more debt per GDP than Japan. For every dollar of output, Japan has $2 of central government debt. The figures are much more striking, and meaningful, when you compare debt to the cash-flow that services it. The central government owes about 1,000 trillion yen. It collects less than 50 trillion in revenues each year. In other words, every dollar of tax receipts must support about $20 in debt. If it had to carry its debt at just 5% interest it would take up 100% of government revenues. And its debt is still increasing; the Bank for International Settlement says it will grow to 3 times GDP over the next 10 years.
Pondering these numbers, JGB speculators must have thought they had found a gold mine. Japanese bonds HAD to go down, they said to themselves. What they discovered was that a government can stay insolvent longer than they could stay rational. And now, practically every financial official, householder and investor on the home island is foaming at the mouth. Having avoided sanity for so long, they think they can do so forever.
The descent into insolvency was directed by the Bank of Japan and enabled by bond buyers themselves. It did not bother them that Japan was the most broke nation in the world. Or that the Japanese were dying out, with negative population growth and more people retiring than entering the workforce. Or that the primary sources of funding for Japanese deficits were drying up. Corporate profits are pinched between the forefinger of a strong yen and the thumb of higher energy prices. The savings rate for people over 60 has fallen to zero. And as a percentage of GDP, national savings, net of both public and private borrowing, has fallen from plus 11% in 1991 to minus 5% today.
Lenders must be as stupid or as mad as borrowers. Even today, they give their money to the government for 10 years, at a yield of only 1.2%. But so far, they have been right. The inflation rate in Japan is negative by about 2%, giving them a real yield of 3.5%. And compared to other investors in Japan, bond-buyers are geniuses. Japanese stocks are down 75% since 1990. Real estate is down about 70%.
He should get out more. Take a trip to Japan. He would see where $1.5 trillion deficits, ZIRP, and QE lead – to more deficits, more ZIRP, and QE squared. He would see the madness in investors’ eyes…and palsied hands of his central banker cronies. They couldn’t stop. Neither can he. Not without higher unemployment and falling prices – the very things he fears more than the fires of Hell. Once an economy drinks deeply, it cannot stop until the bottle is empty.
Lord Keynes may not have had the Japanese bond market in mind. But almost an entire generation of JGB investors is living proof that “the market can stay irrational longer than you can stay solvent.” For nearly 20 years, they thought rising supplies of Japanese bonds must lead to falling prices. As the quantity increased the quality had to decline. It was irrational to think anything else. And yet, Mr. Market not only remained irrational, he seemed to enjoy it. He was like a drunk with a half-finished bottle in his hand. Everyone knew he would have to sober up some day. But as long as there was still liquor left, why bother? Japan borrowed more and more…and speculators went broke waiting for bonds to go down.
Here on the back page we yield to no man in our appreciation of the irrational. It is practically boundless, as near as we can tell. Nevertheless, sooner or later the booze runs out.
What makes this interesting to readers everywhere is that Japan is a trendsetter. The Japanese stock market headed down 10 years before the NASDAQ cracked in the US in January of 2000. Japan’s economy was ahead of the pack too; it went into a long correction 17 years before America’s subprime lending crisis. Its central bankers and finance ministers have a long lead too. Every rabbit, currently being pulled out of Ben Bernanke’s hat, was hopping around in Tokyo many years ago.
For example, the Japanese have been “zero bound” for 15 years. In an effort to restart the economy, the Bank of Japan went to ZIRP (a zero interest rate policy) in 1995. They’ve been within 50 basis points of zero ever since. So too did Japan’s huge central government deficits begin a decade ahead of those in the US. But the rope that was thrown out as a lifeline has become a noose. Japan can’t go back to normal policies; it can’t afford it.
Among all the world’s nations none now has more debt per GDP than Japan. For every dollar of output, Japan has $2 of central government debt. The figures are much more striking, and meaningful, when you compare debt to the cash-flow that services it. The central government owes about 1,000 trillion yen. It collects less than 50 trillion in revenues each year. In other words, every dollar of tax receipts must support about $20 in debt. If it had to carry its debt at just 5% interest it would take up 100% of government revenues. And its debt is still increasing; the Bank for International Settlement says it will grow to 3 times GDP over the next 10 years.
Pondering these numbers, JGB speculators must have thought they had found a gold mine. Japanese bonds HAD to go down, they said to themselves. What they discovered was that a government can stay insolvent longer than they could stay rational. And now, practically every financial official, householder and investor on the home island is foaming at the mouth. Having avoided sanity for so long, they think they can do so forever.
The descent into insolvency was directed by the Bank of Japan and enabled by bond buyers themselves. It did not bother them that Japan was the most broke nation in the world. Or that the Japanese were dying out, with negative population growth and more people retiring than entering the workforce. Or that the primary sources of funding for Japanese deficits were drying up. Corporate profits are pinched between the forefinger of a strong yen and the thumb of higher energy prices. The savings rate for people over 60 has fallen to zero. And as a percentage of GDP, national savings, net of both public and private borrowing, has fallen from plus 11% in 1991 to minus 5% today.
Lenders must be as stupid or as mad as borrowers. Even today, they give their money to the government for 10 years, at a yield of only 1.2%. But so far, they have been right. The inflation rate in Japan is negative by about 2%, giving them a real yield of 3.5%. And compared to other investors in Japan, bond-buyers are geniuses. Japanese stocks are down 75% since 1990. Real estate is down about 70%.
He should get out more. Take a trip to Japan. He would see where $1.5 trillion deficits, ZIRP, and QE lead – to more deficits, more ZIRP, and QE squared. He would see the madness in investors’ eyes…and palsied hands of his central banker cronies. They couldn’t stop. Neither can he. Not without higher unemployment and falling prices – the very things he fears more than the fires of Hell. Once an economy drinks deeply, it cannot stop until the bottle is empty.
