You are on page 1of 8

Protecting Yourself From Japanese Insanity

Published on Zero Hedge (
Home > Blogs > Asia Confidential's blog > Protecting Yourself From Japanese Insanity

Protecting Yourself From Japanese Insanity
By Asia Confidential Created 04/06/2013 - 16:33


Submitted by Asia Confidential [1] on 04/06/2013 16:33 -0400 Bank of Japan [2] Ben Bernanke [3] Ben Bernanke [4] Bond [5] Central Banks [6] Fail [7] Federal Reserve [8] Great Depression [9] Gross Domestic Product [10] Japan [11] Marc Faber [12] Monetary Base [13] Money Velocity [14] Precious Metals [15] Real estate [16] Reality [17] Recession [18] recovery [19] REITs [20] Unemployment [21] Volatility [22] Yen

I'd hate to say it but this time really is different. Never before has there been coordinated global money printing of the scale of today. Ever. Japan intends to double its money in circulation in just two years. This is incredible stuff. But it only mimics the U.S. Federal Reserve which has tripled the amount of dollars in circulation since 2008. Most stock brokers and mainstream media will tell you that this money printing is what's needed to stimulate economies and whether it succeeds or not, the outcome will be relatively benign. Don't believe them. It's highly likely that this is not a normal economic cycle and the consequences will be more extreme: success will mean all the printed money filters through to economies resulting in double digit inflation or failure will bring serious deflation. In other words, the most probable outcomes aren't pretty and you need to prepare your investment portfolios as such. Today I'll suggest some ways that you might be able to do this. Sayonara to Japan First to Japan. You've got to love mainstream media, investors and stockbrokers. The Japanese central bank's plans to end deflation have been widely greeted as having surpassed expectations. They're described as "bold", "inventive" and just what Japan needs after sitting on its hands for 20 years. Nowhere have I seen words such as "stupid", "insane" or "half-witted". Because anyone with a brain can tell you that Japan's plans will have terrible consequences, whether they succeed or not. First, let's look at what Japan intends to do: It will double current stimulus to 7.5 trillion yen (US$81 billion) per month. This means buying the equivalent of 70% of the total long-term government bonds in markets. It will buy Japanese government bonds with maturities of up to 40 years, seeking to

1 of 8

4/6/2013 8:43 PM

And to reiterate a point that I've made previously. the BoJ will increase purchases of exchange traded funds (ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) by 30 billion yen per year. has way too much debt and economies haven't been restructured to make them competitive again. Whether right or wrong. The bond market will revolt well before it reaches that point though.8% for the interest on government debt to equal government revenues (currently.zerohedge. I'm on the record suggesting that I don't think the BoJ plans to lift inflation will work. To put this into some context. those that assume the Japanese government bond market can never blow up as domestic Japanese own 91% of the market are looking through the rear-view mirror.' own US$85 billion program. More specifically.S. And the West is falling into the same trap as Japan by trying to inflated its way of over-indebtedness. Japan's stimulus of US$81 billion a month compares to the U. But Japan's economy is much smaller than the U. Ageing Japanese need to fund their retirements and won't be able to support the government bond market as they've done in the push the average duration of Bank of Japan (BoJ) bondholdings to seven years. You can be certain of more desperate measures from western central banks as they try to stave off a Japanese-style deflationary slump. from the current three years. it seems inevitable that the yen will significantly depreciate from here.Protecting Yourself From Japanese Insanity http://www. interest rates will rise at some point and they just need to reach 2. as I've done it previously here [24]. It makes Bernanke look like a patsy. 2 of 8 4/6/2013 8:43 PM . Others will follow suit Japan is likely to prove a prelude of what's to come in much of the developed world.S. Bondholders aren't going to sit there earning less than 0. Now I'm not going to detail the reasons why the BoJ package will be a disaster for Japan. by far the highest of any country. Suffice to say. like Japan. Foreign investor holdings of government bonds is 9% and rising. to say the least. The debt is also 20x government revenues. If Japan fails in its bid to increase inflation. And that the bond market will crack at some point. Japan's stimulus will be twice as large as America's. if Japan succeeds with its 2% inflation target. It will increase purchases of financial instruments linked to the stock and property markets to lift the prices in those sectors and encourage other investors to buy them. you'll see government debt balloon. They're going to be want better returns for the risks that they're taking on. though putting a date on that is very difficult given extreme government intervention in the market.6% on Japanese government bonds while debt increases and the yen tanks. The West. interest of government debt takes up 25% of government revenue). The BoJ put a timeline of two years on its prior promise to achieve 2% inflation. Adjusted for GDP.. Japan's current government debt to GDP is 245%. here [25] and here [26]. Investing in this type of environment will be tricky.

Protecting Yourself From Japanese Insanity http://www.S.2% in 2012 is still way below the 3. Many of the country's cheerleaders suggest that the economy is recovering. More Take the U. What they don't tell you is that GDP growth of 2. But the problem is that this money is not making its way into the economy or changing hands (money velocity). The velocity of money is one of the best indicators that deflation is getting the better of the Fed. trebling the so-called monetary base. That base consists of highly liquid money. all the evidence suggests deflationary forces . led by the housing sector. Nor do they emphasise the still very high unemployment rate. above 11% if you include people that have dropped out of the workforce since 2008. for example. [27] Under normal circumstances. such as coins.S. increasing the monetary base to this extent would be highly inflationary. paper money and commercial bank reserves with the central banks.2% average since World War Two.principally households intent on paying down debt are beating the Federal Reserve's (Fed) best efforts to lift inflation.zerohedge. 3 of 8 4/6/2013 8:43 PM . the Fed has flooded the economy with printed money. That's why money velocity in the U. has dropped to a more than 60-year low. Since the financial crisis.

indicates money isn't changing hands and that the economy is anything but healthy.zerohedge. That's why Japan also has money velocity reaching multi-decade lows. [29] 4 of 8 4/6/2013 8:43 PM .Protecting Yourself From Japanese Insanity http://www. signalling a robust economy. It's turning over. on the other hand. What declining velocity of money suggests is that banks are sitting on excess money because households aren't willing to borrow as they're busy paying down debt. Meanwhile [28] Rising money velocity indicates that the same quantity of money is being used for several transactions. which are less indebted. you'd be right. 쀀" If you're thinking that Japanese businesses and households may have exhibited similar behaviour over the past 20 years. Declining velocity. aren't confident enough in the economy to borrow money and invest it.

Precious metals would benefit most. Bernanke will continue with stimulus. though low current yields make substantial outperformance unlikely. If it happens. Under this scenario. Ben Bernanke is obsessed with the Great Depression. Meanwhile. Bonds would initially perform poorly. then probably fall as contraction takes place. This outcome appears unlikely though as central banks will be loath to switch off stimulus Declining money velocity is one of several signs that the Fed is failing in its battle to produce inflation in order to revive the U. As you may have gathered. Long-term government bonds may be worth holding.Protecting Yourself From Japanese Insanity http://www. Cash could outperform if you're in the right currencies. Precious metals should outperform under both scenarios 3) and 4) and therefore overweighting this asset class makes sense. Precious metals would rise with inflation. stocks. This is the outcome that stock markets are currently betting on. though currently at almost all-time low yields.S. I see four possibilities: 1) Mild inflation and a global economic recovery. But what you can do is look at the facts. for instance). Precious metals may also outperform if confidence in currencies dissipates. you'd want to stay almost entirely out of stocks if 5 of 8 4/6/2013 8:43 PM . And if stimulus continues to fail. while bonds. though it could suffer under serious inflation. You wouldn't want to own stocks if a deflationary depression occurs. stock would be the place to park your money. Stocks would initially benefit then suffer. the probable outcomes and invest where the odds are in your favour. 4) A more serious deflationary depression happens. no bet is a sure thing. The larger point is that as long as this remains the case. then outperform. upside appears very limited. resulting in economic contraction. when stimulus was stopped too soon before recovery could happen. long-term bonds would outperform. How do investors position themselves? The question then becomes: how do you allocate your assets given this atypical economic environment? In investing. Stimulus fails and debt compounds until the weight of it kills economies. In this instance. and likely recession. bonds and cash would get punished. in his view. 3) A global economic recovery happens but inflation gets out of hand as all the printed money flows through to economies and central banks seem powerless to stop it. he (or whichever like-minded academic takes over from him) will get more desperate and use unconventional methods like Japan is now (such as buying stocks directly. 2) Inflation does lift off but central banks tighten policy early. economy and reduce the country's debt. I think the most probable outcomes are 3) and 4) with 4) being the most likely. So let's take a look at the probable outcomes.zerohedge. Holding some cash also makes some sense. precious metals and cash wouldn't be.

25% in cash (money market funds). a mutual fund that's now listed in the U.S. For instance.Protecting Yourself From Japanese Insanity http://www. How You Can Profit From The Coming Devaluation. was that a scenarios 3) and 4) turn into reality. The portfolio was first advocated by the late Harry Browne [30]. Presidency in 1996 and 2000.. with very few down years.S. 25% in stocks (growth style mutual funds) and 25% in gold. This portfolio turned into the Permanent Portfolio [31]. Browne was an American investment newsletter writer who wrote numerous books and found fame after writing the 1970 bestseller. the only difference being that instead of owning long-term government bonds. Note that the listed fund has deviated somewhat from Browne's original proposed allocation. though not by a lot. He's been proven right as the Permanent Portfolio has done just that. His thesis was that each of these assets would outperform during one or more economic environments. serious inflation. which could perform under any economic environment. including which country that you're located in. Channelling Harry Browne How you invest your money will obviously depend on your own circumstances. Some of you may feel uncomfortable holding large quantities of precious metals or staying out of stock altogether. outlined in his book Fail-Safe Investing. easy-tofollow investment portfolio should consist of 25% in long-term government bonds. gold's outperformance during the 1970s inflationary period more than offset the underperformance of stocks. That book accurately forecast the 1970s slump and the need to be substantially overweight precious metals. This is understandable. particularly silver. Browne advocated what he called a bulletproof portfolio. investment guru Marc Faber has proposed a remarkably similar investment portfolio to that of Harry Browne. If that's the case.S. Interestingly. government bonds). Browne surmised that such a portfolio would deliver good long-term returns with limited volatility. easy-to-follow investment portfolio that's likely to perform under any of the probable outcomes mentioned above. Browne's original idea.S. outperforming the vast majority of mutual funds in the U. And this outperformance would outweigh the underperformance of some of the other assets during particular periods. He went on to run as a Libertarian Party candidate for the U. However I am suggesting that Browne's ideas may be worth considering as a potential guide to navigating the uncertain economic environment ahead. I'd guide you towards a safe. he suggests real estate instead (he thinks inflation is on the way and is a well-known bear on long-term U. This post was originally published at Asia Confidential: http:asiaconf. recession or depression. whether it be prosperity. Now I'm not advocating that you necessarily go out and invest directly in the Permanent Portfolio fund as it depends on your particular needs and [32] 6 of 8 4/6/2013 8:43 PM . bonds and cash. Later in his career. [6] Links: [1] http://www.zerohedge.advertisements The Next Industry to Crumble [17] [15] http://www.zerohedge.2 trillion Cable TV [19] [2] http://www.Protecting Yourself From Japanese Insanity http://www.zerohedge.Three cash cows are ready to overthrow the $ [21] [4] [11] [9] [24] [13] [33] Like Tweet 0 0 Send [34] .com/taxonomy_vtn/term/9586 [10] [18] [7] [5] [16] [22] [20] [12] [14] 7 of 8 4/6/2013 8:43 PM [8] [3] http://www. This savvy investment could make you rich! Similar Articles You Might Enjoy: Bank of Japan Ben Bernanke Ben Bernanke Bond Central Banks Fail Federal Reserve Great Depression Gross Domestic Product Japan Marc Faber Monetary Base Money Velocity Precious Metals Real estate Reality Recession recovery REITs Unemployment Volatility Yen Source URL: [23] http://www.

png [30] http://www.zerohedge.xml [34] [31] 8 of 8 4/6/2013 8:43 PM .com [33] [26] [25] http://asiaconf.png [28] http://asiaconf.png [29] Yourself From Japanese Insanity [32] [27] http://asiaconf.