When there is too much complacency in the markets, it is always very wise,to ask yourself , what would it happen, if any unexpected negative event suddenly appears?
The Black Swan scenario, can appear with the burst of the bubble in the bond market,sooner than
later. If the economy of the US keeps improving there will be a return to more normal interest rates,so
in this process there will be periods of high volatility, and significant corrections in the markets
unless Central banks keep for a longer period of time, their accomodative monetary policies.
The other dangerous scenario is what is happening in Japan with its Abenomics.
Before the aggressive monetary stimulus announced by the Central Bank of Japan.
"This country was paying 21% of government revenue on interest payments to support a 236% debt-to-GDP ratio. With annual spending twice as high as its revenue, the government is running a deficit of $455 billion a year and adding to its $11.2 trillion debt. This is all before the monetary stimulus programs announced recently by its central bank.
The announcement by the Bank of Japan to buy 7.5 trillion yen (about $75 billion) in bonds per month and double the monetary base during the next two years is exponentially higher than anything the country has tried in the past two decades. If you think U.S. Federal Reserve Chairman Ben Bernanke and the Fed's $85 billion monthly purchases is extreme, consider that Japan's economy is a third the size of the United States' and that its growth has stalled in the past decade.
anticipating the election of Prime Minister Shinzo Abe,this rally has had a major correction last week
but even counting with it,the Nikkei index is still up 44%, while the exchange US$ dollar/yen was
in the range of 80-83 since July to November 2012 and now it is at 94.
How long will this rally last, it is difficult to say but surely it is going to end badly,given their
236%debt/GDP ratio, the magnitude of this stymulus, and the level of present interest rates.
The third event that could affect global markets, is a hard landing of the chinese economy,which
would affect sharply the growth rate of the global economy.
(1)Street Authority.
The next country to collapse isn't in Europe
The Black Swan scenario, can appear with the burst of the bubble in the bond market,sooner than
later. If the economy of the US keeps improving there will be a return to more normal interest rates,so
in this process there will be periods of high volatility, and significant corrections in the markets
unless Central banks keep for a longer period of time, their accomodative monetary policies.
The other dangerous scenario is what is happening in Japan with its Abenomics.
Before the aggressive monetary stimulus announced by the Central Bank of Japan.
"This country was paying 21% of government revenue on interest payments to support a 236% debt-to-GDP ratio. With annual spending twice as high as its revenue, the government is running a deficit of $455 billion a year and adding to its $11.2 trillion debt. This is all before the monetary stimulus programs announced recently by its central bank.
The announcement by the Bank of Japan to buy 7.5 trillion yen (about $75 billion) in bonds per month and double the monetary base during the next two years is exponentially higher than anything the country has tried in the past two decades. If you think U.S. Federal Reserve Chairman Ben Bernanke and the Fed's $85 billion monthly purchases is extreme, consider that Japan's economy is a third the size of the United States' and that its growth has stalled in the past decade.
So the bank wants to increase inflation to 2% from its current negative rate of 1% deflation. If they are even partially successful, interest rates on the government bonds could jump. If inflation increases to 1% and the rate on the 10-year bond increased to just 1.5%, the government would need to pay out 65% of revenues just to service the interest.
Kyle Bass of Hayman Advisors recently told Barron's that a debt crisis that will rival Argentina's 2001 collapse is "the most obvious scenario of my adult life. The question is when."
Why should investors care about a country that represents less than 10% of global growth? To put Japan's importance in perspective, Greece's economy is less than one-twentieth of Japan's -- and brought the market to its knees last year.
Like the 10-year Treasury note, Japan's government bond has been used by the market to evaluate risk for more than 30 years. A collapse in this market could send shock waves across markets worldwide". (1)
While in the short term Japan's stock market has rallied up to 80% in yen terms in six months,anticipating the election of Prime Minister Shinzo Abe,this rally has had a major correction last week
but even counting with it,the Nikkei index is still up 44%, while the exchange US$ dollar/yen was
in the range of 80-83 since July to November 2012 and now it is at 94.
How long will this rally last, it is difficult to say but surely it is going to end badly,given their
236%debt/GDP ratio, the magnitude of this stymulus, and the level of present interest rates.
The third event that could affect global markets, is a hard landing of the chinese economy,which
would affect sharply the growth rate of the global economy.
(1)Street Authority.
The next country to collapse isn't in Europe
Joseph Houge
