"Macro" Musings

[yadayada]

The more I study the macro situation in the world today, the more I worry. I always thought it was strange that Michael burry did not want to continue invest in stocks after the crash. But I completely understand now.

 

The way I see it, government debts around the world are out of control. Japan US taking the cake. Pretty much the only way out for Japan is default.

 

Japan's numbers are really really ugly. Counting out government held debt: 780 trillion (otherwhise it is well over a quadrillion), tax income little over 40 trillion, spending a little over 90 trillion. Interest alone a little over 20 trillion... Please tell me how they can even close the budget hole without a major collapse lol. Let alone have a chance of paying backt he debt. Inflation is not an option. If inflation ticks up to even 3%, you got a government default as interest would eat up more then what comes in alone. Most of their debt needs to be rolled over within 6 years.

 

The US and the PIIGS are getting close to that point as well. Where basicly debt is so out of control, they will never be able to pay it back, and hyperinflation or default is the only option. And I think Japan has shown that the combination of an aging population and enourmous government debt results in deflation.

 

This graph is  interesting and a key factor in my worries (that is often forgotten):

http://www.rba.gov.au/speeches/2012/images/sp-so-131112-graph3.gif

 

Population in china is aging as well. And that will go really fast with their 1 child policy. So you have all the countries in the world that provide about 2/3 of the world's GDP rapidly aging here for the first time in history.

 

If you dont worry about government debt, or only slightly worry. Running the numbers 10 years from now with a more aged population will worry you, I promise you that.

 

All the rich countries are moving to a shrinking and aging population. Government debts are at all time highs, deflation is likely and tax income from those countries are  unlikely to rise even near enough to pay off those debts and pay for all those policies they promised to the elderly. Because Older people vote, younger people don't. So they promised shit loads of things that are simply not affordable just to get elected. And it is funded by the ponzi scheme that is called government bonds. The last thing politicians will want to do is piss off their voters. So they will simply borrow more money to fund this unsustainable thing untill they can't. I mean who cares, within 4 years your gone anyway!

 

US debt is about 18 trillion$. But if you count in all the shit politicians promised to 65+ population, it could run over a 100 trillion$. Obviously this is not debt that will be called anytime soon. But it will start to increasingly take up the shrinking tax income of only 6 trillion$... Unless US politicians wake up right now, those numbers keep growing, with deflation, and an aging population... How the hell is that ever going to end well? Fewer and fewer people paying taxes, and expenses only going up every year, untill there is no way out but default. And then half the economy suddenly comes to a halt, because so much of the economy runs on government spending.

 

Now for the people who dont worry about this, up untill now we have never been in this situation. In the past, either the population grew quickly, or debt wasn't this high. Now you have a deadly combination of high consumer debt, all time high government debt, and a population that is aging and not growing. So at some point governments will run out of people to borrow from. And you will see major collapses world wide as so many economies run on government spending alone, and decades of stagnation.

 

And finally to give this whole mess a nice topping, there is increasing automation taking away jobs. There seems to be a transition that your services are useless unless you are highly trained and good at abstract thinking (like programming, engineering etc). Because increasingly work that requires only muscle or only simple parts of the brain is automated away. So there will be an ugly transition that our current education system does not seem to be prepared for.

 

The only way out at least for the US and Europe is immigration. The problem is, you usually get the wrong kind of immigrants. You get peasants from Africa that barely know the language and have no training and provide little tax income at first. Especially if they all shack up together and try to hussle the government for benefits every which way they can like in the netherlands.

 

It seems over a 100 year period, the world will be fine. But over a 10 or 20 year period, really ugly things can happen that will dwarf anything we have seen so far in the 21'st and 20th century.

 

Should probably put it on a blog, but thoughts? Im thinking that owning some gold is not such a bad idea after all. I would prefer owning stocks that provide a hedge against this though. Im thinking, pawn stocks? They do very well if gold goes up because they use gold as collateral.

 

I was on the camp of, well we will be fine! But im not so sure anymore now.

[Packer16]

I think they way to think about it is national wealth displayed here:

 

http://en.wikipedia.org/wiki/National_wealth

 

Japan on aggregate basis has stalled out but due to population shrinkage may actually have increased on a per capital basis.  When debt is compared to wealth and deficits to wealth that is slowly growing the picture is much more real IMO.

 

The issue is when debt approaches net worth or interest payments eat into net worth too quickly.  This is similar to Buffet's range analogy, debt is selling off pieces of the ranch to eat.  Japan has the 2nd biggest ranch in the world and the size has stayed about the same (not grown like others) over the past 5 years.

 

Packer

[petec]

The more I study the macro situation in the world today, the more I worry. I always thought it was strange that Michael burry did not want to continue invest in stocks after the crash. But I completely understand now.

 

The way I see it, government debts around the world are out of control. Japan US taking the cake. Pretty much the only way out for Japan is default.

 

Japan's numbers are really really ugly. Counting out government held debt: 780 trillion (otherwhise it is well over a quadrillion), tax income little over 40 trillion, spending a little over 90 trillion. Interest alone a little over 20 trillion... Please tell me how they can even close the budget hole without a major collapse lol. Let alone have a chance of paying backt he debt. Inflation is not an option. If inflation ticks up to even 3%, you got a government default as interest would eat up more then what comes in alone. Most of their debt needs to be rolled over within 6 years.

 

The US and the PIIGS are getting close to that point as well. Where basicly debt is so out of control, they will never be able to pay it back, and hyperinflation or default is the only option. And I think Japan has shown that the combination of an aging population and enourmous government debt results in deflation.

 

This graph is  interesting and a key factor in my worries (that is often forgotten):

http://www.rba.gov.au/speeches/2012/images/sp-so-131112-graph3.gif

 

Population in china is aging as well. And that will go really fast with their 1 child policy. So you have all the countries in the world that provide about 2/3 of the world's GDP rapidly aging here for the first time in history.

 

If you dont worry about government debt, or only slightly worry. Running the numbers 10 years from now with a more aged population will worry you, I promise you that.

 

All the rich countries are moving to a shrinking and aging population. Government debts are at all time highs, deflation is likely and tax income from those countries are  unlikely to rise even near enough to pay off those debts and pay for all those policies they promised to the elderly. Because Older people vote, younger people don't. So they promised shit loads of things that are simply not affordable just to get elected. And it is funded by the ponzi scheme that is called government bonds. The last thing politicians will want to do is piss off their voters. So they will simply borrow more money to fund this unsustainable thing untill they can't. I mean who cares, within 4 years your gone anyway!

 

US debt is about 18 trillion$. But if you count in all the shit politicians promised to 65+ population, it could run over a 100 trillion$. Obviously this is not debt that will be called anytime soon. But it will start to increasingly take up the shrinking tax income of only 6 trillion$... Unless US politicians wake up right now, those numbers keep growing, with deflation, and an aging population... How the hell is that ever going to end well? Fewer and fewer people paying taxes, and expenses only going up every year, untill there is no way out but default. And then half the economy suddenly comes to a halt, because so much of the economy runs on government spending.

 

Now for the people who dont worry about this, up untill now we have never been in this situation. In the past, either the population grew quickly, or debt wasn't this high. Now you have a deadly combination of high consumer debt, all time high government debt, and a population that is aging and not growing. So at some point governments will run out of people to borrow from. And you will see major collapses world wide as so many economies run on government spending alone, and decades of stagnation.

 

And finally to give this whole mess a nice topping, there is increasing automation taking away jobs. There seems to be a transition that your services are useless unless you are highly trained and good at abstract thinking (like programming, engineering etc). Because increasingly work that requires only muscle or only simple parts of the brain is automated away. So there will be an ugly transition that our current education system does not seem to be prepared for.

 

The only way out at least for the US and Europe is immigration. The problem is, you usually get the wrong kind of immigrants. You get peasants from Africa that barely know the language and have no training and provide little tax income at first. Especially if they all shack up together and try to hussle the government for benefits every which way they can like in the netherlands.

 

It seems over a 100 year period, the world will be fine. But over a 10 or 20 year period, really ugly things can happen that will dwarf anything we have seen so far in the 21'st and 20th century.

 

Should probably put it on a blog, but thoughts? Im thinking that owning some gold is not such a bad idea after all. I would prefer owning stocks that provide a hedge against this though. Im thinking, pawn stocks? They do very well if gold goes up because they use gold as collateral.

 

I was on the camp of, well we will be fine! But im not so sure anymore now.

 

While I agree with the general gist of this, I'd argue that inflation is the only option in Japan (you can't default on debt owned by your own population; what you can do is print like crazy to buy government bonds, creating inflation to extinguish the debt while holding bond yields low - this is Abenomics by another name). 

[Vish_ram]

I feel nauseated when ever I read long term predictions and particularly the ones that predict gloom and doom.

 

Every time I go to the county library, I see a rows and rows of books that have titles like "coming collapse of dollar", "coming inflation", "coming deflation", "oil at $XXX"...I wonder if those authors are spending the rest of their lives writing apologies. None of them have materialized. US continues to march ahead

 

Any prediction of unfunded liab is useless. we're seeing great advances in medical technologies (one eg is Elizabeth Holmes).

 

The prognosticators merely want attention and are no different from those clowns standing in street corner holding a sign "The end is near".

 

[petec]

I feel nauseated when ever I read long term predictions and particularly the ones that predict gloom and doom.

 

Every time I go to the county library, I see a rows and rows of books that have titles like "coming collapse of dollar", "coming inflation", "coming deflation", "oil at $XXX"...I wonder if those authors are spending the rest of their lives writing apologies. None of them have materialized. US continues to march ahead

 

Any prediction of unfunded liab is useless. we're seeing great advances in medical technologies (one eg is Elizabeth Holmes).

 

The prognosticators merely want attention and are no different from those clowns standing in street corner holding a sign "The end is near".

 

Say 'none have materialised' to anyone who lived through the Great Depression, or any one of Japan's last few Finance ministers (turnover in this position is stupendously high so you have plenty of candidates).

 

My point is not that the current situation is identical to either of those, but simply that progress isn't assured.  Liabilities do matter, and things can go wrong.  Predicting the future may be stupid, but being aware of the risks isn't.

[yadayada]

I feel nauseated when ever I read long term predictions and particularly the ones that predict gloom and doom.

 

Every time I go to the county library, I see a rows and rows of books that have titles like "coming collapse of dollar", "coming inflation", "coming deflation", "oil at $XXX"...I wonder if those authors are spending the rest of their lives writing apologies. None of them have materialized. US continues to march ahead

 

Any prediction of unfunded liab is useless. we're seeing great advances in medical technologies (one eg is Elizabeth Holmes).

 

The prognosticators merely want attention and are no different from those clowns standing in street corner holding a sign "The end is near".

Im a fan of looking at the numbers, and looking at those numbers, it has not looked this bad in almost a 100 years. But you make a very good point about medical  technology. Allthough if that means people live longer, it could also make it more expensive for the state (but stretch it out more). So a person that is 65 now becomes 120, instead of 85 or whatever. And it is cheaper every year, but it will drag on longer, and you will need reforms eventually when the costs build up. But that will take at least short term pressure away.

 

Basicly immigration and technology could be the wildcard here that saves the day.

 

For example the aging population thing has never been a problem before on this scale in the history of the world. So looking at history is not really an option. The conditions change constantly, and you have to look at each situation as if it is unique.

 

Ironically, the republicans want less government spending, but no immigration. And the democrats want the opposite. While both less spending, and more immigrations are solutions to go broke basically.

 

I will be following the yen closely though. Anyone know any other signals that could foreshadow a Japan collapse? There were some clear ones in the 08-09 crisis. I think when they run out of people to borrow from, it can go very fast, and the yen can collapse within days when the panic hits. At least you can prepare by selling leveraged stocks and financials, and free up some cash. When nothing happens, you are still invested in your safest bets.

[Packer16]

I think you guys who think Japan is going to collapse are looking at data that is not being presented in context.  As long as Japanese wealth continues to increase as has been the case since 2000 (up almost 20%) you are not going to see a collapse.  With over Yen2.3 quadrillon in net worth and growing, the deficit and debt load are quite manageable.  All of this net worth is in yen thus a continued demand for yen and is second largest net worth next to the US.

 

Packer 

[petec]

I think you guys who think Japan is going to collapse are looking at data that is not being presented in context.  As long as Japanese wealth continues to increase as has been the case since 2000 (up almost 20%) you are not going to see a collapse.  With over Yen2.3 quadrillon in net worth and growing, the deficit and debt load are quite manageable.  All of this net worth is in yen thus a continued demand for yen and is second largest net worth next to the US.

 

Packer

 

Interesting.  What's in that net wealth?  If it's all JGBs then it might be grossly overstated.  And if it's not, what is it?  Given that (as I understand it) equities and land values have collapsed and stayed down since the 1990 (ish) peak.

 

Also is this household net wealth or total country including government and corporate?

[yadayada]

I think you guys who think Japan is going to collapse are looking at data that is not being presented in context.  As long as Japanese wealth continues to increase as has been the case since 2000 (up almost 20%) you are not going to see a collapse.  With over Yen2.3 quadrillon in net worth and growing, the deficit and debt load are quite manageable.  All of this net worth is in yen thus a continued demand for yen and is second largest net worth next to the US.

 

Packer

Is the state going to sell assets to pay for this? The state cannot monetize assets that are privately owned unless they seize them? And isn't a lot of this wealth in the hands of few? Unless the state takes this away, they will go broke. And isn't a lot of this networth owned by the 1%? How many of those assets are in Japan?

 

They also tried to raise taxes, and I think GDP went down? They would really have to double tax income to climb out of this hole at this point. I think tax income was even higher in 2005. But how will they double taxes?

 

It seems at some point investors will realized how bad the situation is and demand higher interest rates. As right now the market is gambling someone else will roll over their debt before the music stops?

 

So 60 trillion yen is the most they will be able to get in tax income probably. Debt servicing is about 23 trillion now. And when the markets will demand higher rates, the whole thing collapses right away, unless the government manages to pull out several trillion $ somewhere in state assets?

 

http://www.economist.com/news/briefing/21593458-advanced-countries-have-been-slow-sell-or-make-better-use-their-assets-they-are-missing

 

Value of state owned firms is 500 billion$. And total value of non financial assets is about 6.6 trillion $. If you look at it like that, isnt the situation suddenly very ugly? Also if it collapses, will it not end in a firesale? Who says the state will not have to get a discount on the value of state owned assets? Since they are basicly insolvent if that happens.

 

edit: Oh nevermind, national wealth is assets - liabilities. Reading comprehension :). Some of my points still stand though.

[Packer16]

The reason rates are low and will stay low is the coverage ratio (value of Japanese asset/Japanese liabilities) is low and its decline from 2000 to 2014.  The Japanese assets are denominated in yen and represent the cumulative surpluses of the past plus return on that surplus.  So Japan has 2.3 quadrillion of net worth and 780 trillion of debt.  Its net worth has grown by 20% over the past 15 years so how is Japan going to default and the yen collapse?  I agree the current situation in isolation appears bad but the cumulative savings of the past is what is keeping the yen stable.  If the net worth declines by a large amount then there may be issues.  This appears to be the case with Russia.  See previous post on details of NW calculations.

 

Packer

[yadayada]

Im probably out of my dept here, but isn't the 23 trillion $ all assets - all liabilities? So that would be about 66 trillion $ in assets? and 47 trillion $ in total liabilities.

 

But where do pension liabilities and health care liabilities come in? And what will happens when they run out of people to borrow from? It seems government assets is not nearly that same figure. That is only a little over 6 trillion $ vs 6.5 trillion $ of debt now. Against what assets is that debt secured? Government cant borrow against private assets can they? So it seems those 66 trillion $ in assets is largely irrelevant.

And since the economy relies for such a large % on government spending, what will happen when that grinds to a halt? Wont a lot of assets evaporate?

 

It seems when they dont close the hole, and run out of lenders, the government goes broke? Also, can they really sell things like roads and bridges and train stations to private companies or their citizens? And when they do run out of lenders, the market will be scared of hyperinflation, and everyone will start offloading their yen, causing the yen to collapse?

 

Im just curious what will happen when they cannot borrow anymore. I guess that is what my post boils down to. They would need to borrow against private assets? Which is not possible. And what will happen then?

[frommi]

Im just curious what will happen when they cannot borrow anymore.

 

Thats the weak point of your theory. They can always borrow short term where the BoJ has full control over the rates, and when there is inflation their tax income will grow because they get a share of the inflation as tax. But in the end nobody knows how it will exactly play out, there are dozens of possibilities with second and third grade consequences that can be good or bad. Think about the butterfly in china that influences the weather in the US.

[yadayada]

interest rates go up more then inflation. There is also more anticipated inflation priced in. Especially with such a huge debt load compared to tax revenue. Interest rates do not exactly trace inflation.

 

And im not so sure about increased tax revenue either. If things get more expensive, that does not have to mean total spending goes up. There is a slice of consumer networth that spends money. And if this value goes down, it simply means people spend less. It could also mean people will want to save more for later. Japan household savings are not exactly high.

[frommi]

Long term interest rates track inflation, yes. But short term rates are set by the BoJ.

And since the government taxes capital gains or interest, they get a higher tax income with higher inflation.

[yadayada]

The population of japan will be poorer with price increases. They will not magically make more money. It is not a given taht will happen. So you will not see much taxation increase, and you could see a panicky interest rate increase on anything longer then short term rates. And because these figures are so enourmous compared to tax income, any increase will kill them.

 

So you could see a shrinkage in profits, not much increased taxes from wages, and interest rates on longer term securities that outpace inflation.

 

And even if they manage to stay at 2% inflation, that still means their debt is growing faster then it shrinks, because it does not fill up their tax revenue hole. If anything that is more likely to become bigger.

 

And cap gains tax, you will see when they sell. When people just flee into those things, that is not immidiate profit the the japanese government?

 

Finally if the central bank buys up these obligations, isnt the problem simply moved? Interest still needs to be paid, and if they lose value, the bill is on the tax payer. A central bank only creates money by borrowing it, they dont actually create  money?

 

This is also why it could be problematic if the FED would want to offload their 4 trillion $. That is only possible over a longer time, because if they do it wrong, the US tax payer foots the bill.

 

Also with over 10% of inflation at the end of the 70's, take a look at the S&P 500:

http://upload.wikimedia.org/wikipedia/en/a/a3/Daily_Linear_Chart_of_S%26P_500_from_1950_to_2013.png

 

It did not really spike up, it stayed kind of flat... So increased cap gains tax is not a given at all.

[yadayada]

http://www.gatesnotes.com/~/media/Images/Books/Making-the-Modern-World/making-the-modern-world-cement-A_800_v2.ashx

 

more cement in 3 years for china, then last 100 years in the US.

 

http://www.bloombergview.com/articles/2014-02-24/laughing-along-with-the-fed-ritholtz-chart

[physdude]

At this point, the BoJ is essentially setting the long term interest rate as well as the short term through QE. They just need to go the next step and simply monetize all the debt completely by buying up any excess bonds (both existing and newly issued ones) and driving down the entire yield curve to zero. This might be just enough to get some inflation going though I won't be surprised if even this fails to overcome the highly deflationary demographic trends. If inflation resumes, their problem is solved as long they continue to maintain nominal yields at zero as the debt will be inflated away. Hyperinflation is almost impossible as a rapidly devaluing yen will only make them more competitive and increase the value of their vast foreign reserves in yen. Hence, I think this situation is manageable and will, at worst, lead to a significantly, but not catastrophically, weaker yen. If inflation does not resume, they can continue to monetize any new debt away essentially making the debt free of cost to the govt so they can do fine this way too (at least until inflation kicks in and the debt is finally inflated away).

 

I was earlier of the opinion that the situation will have to implode at some point but I am not so sure anymore. If JGB yields of 0.33% cannot move them to their inflation target why should yields of 0% do so? At 0%, the debt can be rolled over perpetually at no cost whatsoever.

[yadayada]

yeah so forex reserves are about 150 trillion yen. Enough to fill to hole for a few years I guess. I guess it wont collapse in the next few years.

 

At some point though, BoJ will be the only one able to give the japanese government money at such low rates, and ofcourse that leads to massive inflation.

 

If you say that it will be inflated away, doesn't that basicly destroy a lot of networth, unless at some point the BoJ owns the entire debt load? And in that case it is the tax payers that pay the bill...

 

If it is inflated away, that has to mean tax income will have to exceed spending at some point. Otherwhise the debt load will just keep growing. So that means that interest rates cannot track inflation, and that basicly means the BoJ has to finance the government. Isn't that going to lead to serious inflation with such a massive debt load? They would have to 'give' the government about 400 billion $ each year on top of a GDP of 5000 billion $.. How is that not going to lead to really serious inflation? This will hurt tax income ofcourse because everyone will be poorer, and savings aren't exactly high. Causing tax revenue to drop...

 

It seems before that happens people will start dumping the yen? And isn't the massive debt load on the BoJ's balance sheet a problem then? I just cannot believe they will inflate away the debt load with such a huge spending gap, without any serious consequences. At some point only the BoJ can give the government money as they cannot afford to borrow anywhere else. But the Yen will be rapidly declining, because that can only result in large inflation. And those civil cervants will only get a currency that is quickly losing its purchasing power.

 

Anyway, interesting to think about.

 

[physdude]

My take is that the BoJ will finally probably end up holding most or all of the JGBs once the onset of inflation becomes clear as everyone will sell their JGBs at that point. Then the BoJ+govt together will not see any real loss or gain as there will be a huge transfer of real wealth from the BoJ to the govt. This has no direct impact on the BoJ as they only care about nominal losses of which they will have none. Inflation and zero rates will force people to spend thus raising consumption and tax revenue and they will probably be finally able to raise taxes to a reasonable level. Of course, the Japanese could respond by investing abroad and forcing down the yen a lot so some sort of financial repression will have to be imposed. This will also be necessary as Japanese savings will decline significantly in real value at the same time as higher taxes are imposed and that is where the main part of the pain will come. However, this is likely to take some time to play out as the money illusion is strong and it might be some time before savers realize they have been left holding the bag.

 

The only spanner in the works might be that inflation rises too fast and the money illusion becomes too weak to pacify the savers. I seriously doubt this will happen as the fundamentals in Japan heavily favor deflation in the absence of large scale money printing but I have to admit that I have no way of knowing how well these two gigantic forces (debt monetization and fundamental deflationary pressures) will balance each other out. I think we might be in for some interesting times.

[yadayada]

i guess we will see who is right.

 

http://www.theepochtimes.com/n2/china-news/chinese-tv-host-says-regime-nearly-bankrupt-141214.html

 

That is sort of worrying too. But that was 3 years ago. China is sort of a black box. If you hear figures of 50 million appartments being built and no one living in it, you also have to realize they have 1.3 billion inhabitants. So probably about 400-500 million houses at least.

 

Seems a lot of the economic machine is built on sentiment. As long as you can fool people it will keep going. But once fear sets in, it can quickly go very wrong. Like how in early 2007 there wasn't really any worry, and in 2009 it was armageddon. And when those GDP figures turn out to be a lie, it could get very ugly very quickly

[yadayada]

Is there a good data that offers data on tax revenue and gdp etc and is up to date? For example I get 2 different numbers for japan, almost 200 trillion and 45 trillion. There doesn't seem to be a free website that has this data for all the countries?

 

http://en.wikipedia.org/wiki/Government_spending

 

Judging by that list, the deficit in the US would be 3 trillion $... That is not right.

[physdude]

I think the Japanese MoF's website http://www.mof.go.jp/english/budget/budget/ should have what you want.

[yadayada]

http://www.icecapassetmanagement.com/uploads/documents/2014.12%20IceCap%20Global%20Market%20Outlook.pdf

[giofranchi]

US 10 yr Treasuries yield below 2%…

It looks like Fairfax’s bonds portfolio might post strong results in Q1 2015 too. ;)

 

Cheers,

 

Gio

 

[physdude]

With JGBs now yielding less than 0.3%, is it finally the time to take the short JGB aka widowmaker bet? It looks like you can lose at the most 4-5% of your capital (barring seriously long term negative yields - hey with Japan anything might be possible  ;) ) and could gain quite a lot depending on precisely how things play out in the long run.