Friday, January 28, 2011

More on Japan's Debt Bomb

In a follow up to my last post, about Japan's debt and S&P cutting Japan's credit rating, my good friend Ira Hata, sent this to me:
Here are comments on the Euro, Yen and potential bullish consequences for the US equity markets for the first half of 2011.

While there is serious resistance near 138 & then 140 – 142, the Euro according to the chart below could be ready for more upside in 2011 which should be supportive to US stock market 1st half 2011

As things now stand a rising WLI, growing M2 money supply growth rate, QE2 in full force, and fiscal spending from past packages kicking in, all suggest staying with the trend and buying any market dips. To be a bear right here you would have to be fighting both the Fed and Uncle Sam (fiscal and monetary stimulus) and completely ignoring the message of the markets  … the bull case for the next few months could strengthen even further with another development, subsiding of the euro debt crisis

Thus, if this exchange rate breaks out the bears will have to take a back seat, AGAIN!

What’s changed in Europe?

In reality, there are still clear sovereign debt issues to worry about in Europe, however, a global coalition is moving to support European debt that is lifting their credit markets. Things first began to turn when China and Japan decided to step in the ring and buy European debt, but momentum is building as other Asian countries are looking to do the same. This mutually beneficial decision helps Asian markets particularly by cheapening their currencies and bidding up the Euro to help their export-driven economies.
Euro could stay strong and or Yen could weaken… 
From Bloomberg:
Japan's Credit Rating Cut to AA- by S&P on Debt Load
The yen and bond futures fell on concern the downgrade will push up the cost of borrowing for Japan, where public debt is about twice the size of gross domestic product. Vice Finance Minister Fumihiko Igarashi this week said the government must fix its finances to avoid a debt crisis that could trigger a “global depression.”  …  economist at BNP Paribas in Tokyo. “Once bond yields spike and the fire is lit, the amount needed to finance Japan’s borrowing needs is going to jump and it’s going to be too late.” …  Japan joins developed economies including Portugal and Spainin being downgraded.    Debt to GDP: Japan’s burden exceeds 200 percent … (estimated that China’s ratio of debt to GDP would be 20 percent in 2010)
AA-  is the third-highest grade

Some people have asked why this is so important now as Japan has been getting away with kicking the can down the road for the last twenty year. For a very interesting explanation on that, watch the video below. This video was created originally to promote AGW, but It explains the concept of exponential growth in a very simple and easy to understand way. If you can understand this concept - and the Rule of 70 - then you will understand why Japan's credit rating getting worse and a few points increase in borrowing is a very big deal for Japan.

Thanks to Mish Shedlock for the video

1 comment:

Ira Hata said...

The people manipulating the masses just don't give a shit, Mike.

They figure they won't be around when the shit hits the fan and prefer to live a comfortable life at the expense of others...


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