The idea for this post started with an email from a colleague who was wondering about the relative strength in the yen vs. the dollar. After all, isn't the mainstream media and zombie-worshipped CNBC telling us that Japan is the next Europe? What the heck? Isn't the strength in the yen vs. the dollar seemingly a contradiction? I say flat out, "no." Let's look at a chart - I love weekly charts in order to look at long term trends and eliminate the daytrader/technical/algorithmic noise (click on the chart to enlarge)
It would be hard to argue that this chart is anything but bullish. And it has been in a bull trend for over 8 years (almost as long as the bull trend in gold!). So where's the non-contradiction that appears to be a contradiction? Examine the fundamental economic condition of Japan vs. the U.S. You can google for the data. The easiest one would be total country debt/GDP. Bubblevision likes to look at just Government debt to GDP. Japan has a lot of Government debt. However, the U.S. has a lot of overt Government debt - over $13 trillion now - and an absurdly enormous amount of off-balance-sheet implied debt (the net present value of all of the entitlement programs which take total U.S. Government obligations to north of $50 trillion on a GAAP accounting basis), AND an enormous amount of private sector debt. The Japanese people are net savers. When you combine all of the U.S. debt in aggregate, the U.S. systemically has more debt than anyplace that we know of in the universe. As the article linked below alludes, the total U.S. debt/GDP is 360% (this excludes the entitlement obligation component).
Furthermore, the U.S. spending deficit, when you include on and off-budget spending (see yesterday's post), dwarfs the spending deficits and borrowing requirements of Europe and Japan. Can you see now why investors with a big dollar exposure would be quietly, under the cover and distraction of the false information promoted on CNBC, be swapping out of dollars and into yen? Per the chart above, this has been occurring for over 8 years. I would bet good money (i.e. gold) that smart money, Chinese money, Russian money, etc is using the yen as a diversification instrument because the yen is probably the second most liquid piece of paper after dollars and Japan is in better shape fiscally than the U.S.
In support of my view, I am linking a fabulous essay written by David Stockman, who was one of Reagan's Budget Directors. As you read his piece, one has to wonder if Stockman is now more of the Libertarian view of Government, given that Reagan's Administration was really the first one to take advantage of an unbacked, fiat U.S. dollar reserve currency and the ability to issue more debt than could be serviced out of economic growth. Of course, back then, our system was just starting to really gorge on deficit spending and debt issuance. Now, we're past the tipping point. In this piece, Stockman points out the necessity of looking at both public and private debt combined. He also demonstrates that total debt in the U.S. has been increasing, contrary to the financial media/deflationist myth that the private sector is deleveraging (remember, check those premises):
Under present realities, though, the problem isn't the flows; it's the massive, never-before-seen stock of combined public and private debt that's depressing the economy, which overwhelms any "flow" effects from fiscal policy. Specifically, at $52 trillion, credit-market debt today is 3.6 times that of GDP...
Here's the link to the article - warning: it's full of dry numerical analysis - you know, the kind of stuff that's seeded in Truth: Must read If you read through this, you will have a much greater understanding why the yen is in a bull market vs. the U.S. dollar AND you will see why this is not a contradiction.
0 comments:
Post a Comment