Monday, March 09, 2009
"japan until further notice"
To wit, he sees three outcomes - two of which are downright scary:
- Successful policy intervention:The problem with the successful policy intervention scenario is that we doubt policy action can be successful in a short period of time, especially if much of the policy action focuses on spending more and saving less. It may be that there is just too much debt in the system; that a debt transfer from the private to the public sector is too large and that governments cannot finance it without rising financing costs; that time is the best healer, and that there is no quick fix or magic bullet.
- Bankruptices and defaults:In this equity market scenario à la 1929-32, markets become victim of the realisation that authorities have tried everything to stabilise the situation rather quickly, but in vain, and that at some point there are no policy bullets left. This results in a deepening of the current global synchronous recession. The debt problem reduces through mass bankruptcies or defaults. Thus we may now be what is the equivalent of 1931, in the sense that everyone knows about the bad news, and still markets will go much lower as the crisis deepens and authorities are not in control.
- Debt deflation and the passage of time:In this debt-deflation scenario, the problem of too much debt is simply too big, and there are no magic policy bullets. Indeed, if we look at the US alone, debt over GDP in 2007 at 340% was much higher than the 185% in 1929, so the debt problem to start with was almost twice as big! At the depth of the Great Depression, US credit market debt-to-GDP had risen to 299% because GDP had fallen and most of the debt was still there, and it took all the way till 1951 before it bottomed at 130%. The presence of too much debt in private and public hands erodes confidence and risk-taking and thus growth and risk appetite will remain in the doldrums for a long time.
draaisma is convinced this last is most likely, meaning many years of stagnation and mild depression. indeed i think this would represent a success if it is even possible for the united states, a society whose demographics are not as bad as japan's but whose external financing needs add considerably instability.
this is not vastly different a take on america than that of CLSA's christopher wood -- but of note are elements of wood's japanese observations:
There is no doubt where the best investment opportunity lies in Japan for those with cash to spend. That is the physical property market where handsome double digit rental yields are now widely available. The Japanese property market was the one domestic sector contaminated by the credit bubble.
the united states is almost certainly headed there too. even more interesting is wood's concern over the possibility of a hyperinflation in the yen.
If there is a country where the risk posed by surging government debt is greatest it is surely Japan given the dramatically higher levels of government debt to GDP. This threat also relates to the issue of when deflation slips over into hyperinflation. In GREED & fear’s view the risk of this extreme outcome is greater in Japan than anywhere else since Japan has been in the deflationary trend for so much longer.
The yen’s decline could mark a significant trend change since the Japanese currency started declining in a week when risk aversion was rising. GREED & fear would now be more nervous about owning Japanese government bonds than British or American ones.
UPDATE: via alphaville -- even paul krugman is comgin around to love japan.