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Thoughts from the Frontline

All Japan, All the Time

May 18, 2013

The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause and consequences, and silence by their authority the interested clamors and sophistry of speculating, shaving, and banking institutions. Till then we must be content to return, quo ad hoc, to the savage state, to recur to barter in the exchange of our property, for want of a stable, common measure of value, that now in use being less fixed than the beads and wampum of the Indian, and to deliver up our citizens, their property and their labor, passive victims to the swindling tricks of bankers and mountebankers.

–Thomas Jefferson, in a letter to John Adams, 21 March  1819

I am definitely bullish. The budget deficit is shrinking massively. Guys who are short, they better have a shovel to get out of the grave.

–David Tepper, Appaloosa Management LP, CNBC, 14 May 2013

Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk.

–Bill Gross, PIMCO, 14 May 2013

We can rightly declare victory on the housing front and (reduce) our purchases, with the aim of eliminating them entirely as the year wears on. I believe the efficacy of continued purchases is questionable.

–Richard Fisher, president of the Dallas Federal Reserve Bank, National Association for Business Economics, 16 May 2013

It will take further gains to convince me that the "substantial improvement" test for ending our asset purchases has been met…. We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year.

–John Williams, president of the Federal Reserve Bank of San Francisco, Reuters, 16 May 2013

The balance of risks of prolonged very low interest rates and unconventional policies is shifting. The costs are growing in relation to the benefits.

–BIS, Reuters, FT Alphaville, 16 May 2013

Jefferson was lamenting the woeful state of the dollar 200 years ago because the country was beset by fiscal problems, not because someone in the government wanted to ruin the value of the currency. Today, however, we find ourselves in a situation where it is the national policy of multiple countries, including the United States, to reduce the value of their currencies. My friend Mohamed El-Erian chided me on stage at our recent conference not to say “currency wars” but to use the more polite term “currency tensions.” But no matter what you call it, there are clearly governments whose intent is to pursue a mercantilist trade policy to the detriment of their trade partners by manipulating the value of their currencies.

I predicted in Endgame that the latter half of this decade would see the most serious currency wars since the end of WWII. The opening shots have been fired. This will not be just a continuation of the currency skirmishes we have seen in recent decades. No, the real artillery is being brought to the front. And as in any war, it is best not to have your valuable personal possessions anywhere near the field of conflict. But which way to run? Who are the good guys to run to? Are there any good guys at all? Maybe the better question to ask is, who will win? Will there be any winners? Do you really want to look like Rocky Balboa after his first winning fight?

This week we again focus on Japan. Their stock market has been on a tear, and their economy grew 3.5% last quarter. Is Abenomics really the answer to all their problems? Is it just a matter of turning the monetary dial a little higher and voila, there is growth? Why doesn’t everyone try that? And what would happen if they did?

But first, since we are talking about Japan, let me remind readers about a very special webinar with one of my personal-favorite money managers, Kyle Bass of Hayman Capital Management, LP, based here in Dallas. On May 29, I will be calling in from Brussels to team up with Jon Sundt of Altegris Investments to talk with Kyle about his thoughts on all things economic, but in particular his latest views on what is happening in Japan. He will have just returned from Asia and will be full of new facts and ideas (as he always is). Kyle has always positioned his fund to take advantage of what he sees as potential risks in global markets (the subprime crisis, Europe, etc.), and now he has really laser-honed in on Japan. Given that I think (as I will make the case today) that Japan is now the center of monetary experimentation (and potential fiscal earthquakes), we must pay close attention.

If you are a qualified purchaser or a licensed investment adviser qualified to make private placement recommendations, please join my partners at Altegris for this webinar event on Wednesday, May 29, at 12:00 noon EDT/9 a.m. PDT. If you are not yet a Mauldin Circle member, be sure to register here for this lively and candid discussion. Upon qualification by my partners at Altegris, you will receive an email invitation. Existing Mauldin Circle members will automatically receive an invitation. I apologize for limiting this discussion to qualified purchasers and investment advisers, but we must follow the rules and regulations. I look forward to having you at this exclusive event. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

And now let’s focus on Japan.

All Japan, All the Time

Japan grew at a 3.5% annual pace last quarter, the fastest pace in a very long time. Of course, government officials see this development as vindication of their new policies and will no doubt decide that even more of the same will be needed in the future.

Retail sales in Japan are soaring as a “wealth shock” electrifies the economy. The Nikkei index has risen 70%…

Discuss This


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May 20, 2013, 6:49 a.m.

An additional risk for current Japanese growth plans comes from the inflation pressures you noted for those living on fixed incomes. Not only is it bad for the individuals, but as they try to compensate for their increasing costs, they will have to pull more of their savings deposits from banks and the Japanese Postal System. They in turn will have to sell more of their Japan Gov. Bond holdings.

Current estimates indicate the gov of Japan can borrow down their accumulated current accounts surplus and fund their deficits into 2015 without having to significantly tap foreign markets or have the central bank print money to cover their debts. If inflation causes the “very large and growing” group of fixed income individuals to accelerate their withdrawals, the 2015 estimate may be optimistic.

If the political struggle to enact the other needed reforms is as protracted as previous attempts indicate it will be, Japan may be overtaken by events while their “defensive moat” is still in debate.

Brian McMorris

May 18, 2013, 8:51 a.m.

on my way right now to Japan, John.  I will let you know what I find.  As an employee of Panasonic, I have a stake in this very high stakes poker game