August 8, 2013 Update

DJIA:15,471 S&P 500:1,691 NASDAQ:3,654 Gold:$1,289 Oil:$104.10 EURO:$1.33 YEN:96.79

On Japan: The Story of the Lack of Creation

Ever since the asset bubble burst in Japan, the level of public indebtedness has grown faster than the economy has been able to expand. In 1989, when properties and stocks were the most valuable, Japan’s gross public debt was roughly 60% of GDP. Twenty-four years later, public debt now represents more than 200% of GDP while the total debt to GDP ratio hovers over 450%! Tragedies and natural disasters, like the 2011 earthquake, have contributed to the debt burden, but that’s hardly an excuse for the poor policies that are responsible for the stagnant recovery. More than 90% of the Japanese government bonds (JGB) are held by investors domestically. The Japanese people are proud owners of the largest portion of their country’s debt, a reflection the culture’s nationalistic spirit. And because of this profound ability to generate funding internally, Japan does not have a need to rely on external sources in order to fund its operations. But despite the unionized sense of nationalism, the Japanese people are the cause of their own country’s indebtedness. Debt has been able to accumulate so quickly simply because of the generational gap that greatly strains the economy. For the past few years, there has been an insufficient supply of workers to support the older generation. More than 35% of the population are over 55, which is only going to increase as modern medicine helps people live longer than ever before. The Japanese population is growing inversely, people are aging faster than they’re recreating; a problem that has no immediate fix. Policy has yet to curb the social welfare bill that has been rising in tandem with the aging community, and the Japanese are the most reluctant to tax hikes, regardless of their nationalistic pride. In addition, Abe’s attempt to inflate part of Japan’s way out of debt is destroying yields on the JGB (which have been less than 2% on the ten-year since 1998); which is hurting his own people the most as they are the biggest holders of their debt. But by devaluing the currency, Abe has lured the people internationally into investing in the stock market, which is still significantly below it’s highs. I think people have become so desperate for return since the crisis that many have become blinded to fundamental reasoning. Japan is a highly leveraged country with questionable corporate governance. It’s population is dying. Quantitative easing has made Japanese equities seem more attractive than they really are. Numbers may never tell a lie, but at the unexpected moment when liquidity starts to taper off the story the numbers tell will become far more important than the statistics alone that attracted investors in the place. Don’t let Abe’s distorted numbers fool you, create the story the recent growth of the Nikkei tells before deciding to invest. 

Domestic News

• Market Update Futures are up ahead of jobless claims.
• Weekly jobless claims will be released at 8:30, and are expected to come in at 339,000 for the week ending August 3, which is an increase compared to 326,00 during the last week of July. 

International Updates

Asia

• Market Update Markets rallied as a result of better-than-expected data on Chinese trade.
• Chinese exports and imports rose in July. Exports increased 5.1% from a year earlier and imports rose 10.9%.

Europe

• Market Update Markets traded up, with mining firms taking the lead after China’s announcement of better-than-expected trade data.