Welcome to the 03-15-2018 update from your Pocono Summit Certified Financial Planner and retirement planner, Mike Savage. Today, Mike discusses Japanese ETFs and negative (!) interest rates.
As far as I know this may be a first. I have been reporting for quite some time about the Japanese Central bank being the largest buyers of Japanese ETFs, which in turn makes them the largest buyers also of Japanese stocks. In addition, they have been buying virtually all of the Japanese government debt in recent years and they have become -if you can still call it a market- THE market for Japanese government debt. On Tuesday March 13th. A stark reminder was given where, for the first time I am aware of, not ONE single Japanese government 10-year note was traded.
In a market where hundreds of billions trade daily (sovereign government debt) not one single trade was made for Japanese 10 year notes. I think this is a GREAT illustration that if an entity offers negative interest rates the only buyers will be those who can “print up” the money. There are virtually no bids for these bonds. Anyone who worked for that money wouldn’t want to put in $10.00 and get back $9.75 10 years from now. Of course, this is the main reason that people like me never dreamed that negative interest rates could ever be a possibility. Who knew?
To me, this is proof positive that Japan has defaulted on its debt. Without “printing” up the yen to purchase these assets the yields on these bonds would have likely risen dramatically and would have pushed Japan into an obvious default. The only question is when the rest of the world will realize what a precarious state the Japanese government is actually in.
I have had many people tell me that this is different. I believe that to be true. I believe that things are far worse now than they have ever been in the past. There is no place in history where “printing” money has led to anything but tears. There is not one illustration in recorded history where “printing” money led to more wealth but has ALWAYS led to a destroyed currency, a destroyed economy and destroyed civil societies. Zimbabwe and Venezuela are the most recent examples but there is plenty of evidence prior to that in Germany, Russia, Brazil, Argentina, etc.
Speaking of the past, how many defaults have we seen in sovereign debts in the past 200 years or so? According to Carmen Reinhart and Kenneth Rogoff from 1800-2014 we saw no fewer than 181 sovereign defaults. I believe that we can add Zimbabwe and Venezuela since to get to at least 183 and if many developed economies were not “printing up” money from nowhere that list would likely be far higher as we speak.
There are some serial offenders during this period of time like :
Country Number of defaults Country Defaults
Ecuador 10 Brazil 9
Venezuela 10 (11) Chile 9
Argentina 8 Spain 6
Mexico 8 Russia 5
Brazil 9 Germany 4
As you can clearly see, going too far into debt is not an unusual occurrence in many places. It seems to me the problem now is that the entire world (at least the developed world) is reliant on “money from nowhere” to continue the illusion of solvency. Basically, since 2008 we have been treating a solvency problem (not enough economic activity to be able to service our debts) as a liquidity problem (short-term funding problem). This has created a situation where virtually no developed country could even pay interest on their debts while running their governments at the same time if interest rates just rose a little bit- let alone get near any historical norms. In addition, debt to GDP has grown from 170% debt to global GDP to over 320% debt to global GDP. (Money GPS, ZeroHedge) If we couldn’t afford 170% how in the world could anyone think we could handle almost double the amount???
Of course, all of this money “printing” appears to now be leading to inflation outside of just financial assets. When this happens in earnest it is likely that the central banks will learn- as they have all throughout history- that markets can overwhelm them.
I don’t expect they will go silently into the night. I believe they will “print” money in denominations that we were never taught in schools- starting with quadrillion- that’s a new one for me in the past few years as the derivative bets of banks are over that amount already.
Does this sound like a stable system? Could it possibly make sense to make some plans in case of disruption in this system whether it be rising interest rates that are out of control or stock markets pulling back in a disorderly manner? Do you have plans that will allow you to maintain your lifestyle and independence if the financial system runs into a problem?
All I can say is that I hope it won’t come to this but a little preparation could mean the difference between you being dependent upon the state or the kindness of others, or maintaining a sense of normalcy and independence.
The next default could lead to a domino effect. It doesn’t have to be a country’s default that causes that domino effect. Many US states are teetering on the edge of insolvency (Illinois, New Jersey, etc.)
It may pay to expect the unexpected.
Mike Savage, ChFC, Financial Advisor
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