Japan’s The Tinder That Set The World’s Bad News On Fire

NPC US Geological Survey fire, F Street NW, Washington DC May 18 1913

I can do this in just about random order, the idea should still shine through, and crystal clear at that. We’re on the verge not of a market correction, but of something much bigger. All it takes to know that is to connect a few dots. Ironically, the very same financial press that reports on the dots, refuses to connect them. Don’t they see it, or don’t they want to? It’s not even a very interesting question anymore: they’ll end up commenting only in hindsight.

What happens today in Japan is both a sign of what’s wrong with the entire global financial system, and at the same time the catalyst that will help bring that system to its knees. Japan goes where no man has gone before, because it’s further down the gutter than the rest. But they will all follow. Japan thinks it can escape collapse if the US does fine, and vice versa, and the same goes for China, Europe etc., but none of them can survive the big blow by themselves, let alone that one of them could lift any of the others up by the hair on their heads. It’s a desperate mirage. When you hear anyone say the US will lift up the world economy, switch your channel. Unless you’re already at Comedy Central.

Here’s the litany for the day: China prints $25 trillion and buys Portugal. Japan’s national debt is 750% of tax revenue. US first time homebuyers are at a 27 year low. 40.5% of Greek children grow up in poverty, as Greece is part of the eurozone that should take care of all citizens. In the UK 72% of 18-21-year olds make less than a living wage. US and Japanese QE leads to ‘consumers’ spending less, which is the exact opposite of what QE is supposed to be intended for. China is trapped in the newfangled currency war Japan’s QE has unleashed across Asia, and which will soon be exported across the globe.

The common denominator? Debt. Sovereign debt, personal debt, corporate debt. Japan doesn’t want to recognize it yet, but it’s caught in the same trap with everyone. The difference is that Japan fights debt with more debt, while other parties are starting to find a little more nuance in their approach. Does it matter? Not one bit. Other than Japan’s hole will be deeper than the others. Let’s just track through today’s news. Bloomberg:

Portugal Sees Chinese Do 90% of Bids at Property Auction

As bargain-hunters waited in a packed room at a property auction in Lisbon last month, one language dominated their chat: Mandarin. About 90% of the bidders for the government-owned apartments and stores on offer were Chinese, according to Jorge Oliveira, the official overseeing the asset sale. They ended up acquiring more than two-thirds of the 45 properties, he said. “A Portuguese investor bought a store to start a bakery and coffee shop, but most of the properties went to the Chinese,” Oliveira said in an interview after the sale. Portugal is the latest target for Chinese investors who have been acquiring buildings around the world as China allows freer movement of funds in and out of the country.

Why would you want to sell your assets to a country that simply prints the money it uses to purchase those assets? Why not print that kind of money yourself and buy theirs? China printed $25 trillion and we allow them to buy Lisbon and Madrid and Rome with that? How much worse can this get? Portugal is defenseless, because it’s adopted the euro, but Germany would never allow the Chinese money printers to buy Berlin. Need any more info on why the eurozone is such an abject and perverse failure? Guardian:

More Than One Fifth Of UK Workers Earn Less Than Living Wage

More than a fifth of UK workers earn less than the living wage, with bar staff and shop assistants among the most likely to live “hand to mouth” because of low pay, a report warns on Monday. Published to mark living wage week, the research also finds that younger workers, women and part-timers are more likely to be paid less than the living wage, a voluntary threshold calculated to provide a basic but decent standard of living. New living wage rates will be announced on Monday, with the current rate at £8.80 per hour in London and £7.65 elsewhere. The report by consultancy firm KPMG adds to evidence of low pay remaining prevalent in Britain, despite the economic recovery. The proportion of employees on less than the living wage is now 22%, up from 21% last year, the study found. In real terms, that was a rise of 147,000 people to 5.28 million. [..] It found 72% of 18-21 year olds were earning less than the living wage

22% of your working population on less than a living wage is an insane disgrace. Certainly when at the same time you’re telling everyone your economy is doing great. There’s no excuse for that. But it can get worse: if 72% of your young people can’t survive on what they work for, you’re murdering your nation’s future. And your housing market, just to name an example, people can’t start families, it all ties together. MarketWatch:

US Consumers Resisting Enticements To Increase Spending

The U.S. is adding jobs at the fastest rate since the end of the Great Recession and another strong month of hiring is expected in October, but Americans still aren’t spending like good times are here to stay. The lackluster pace of consumer spending — outlays fell in September for the first time in eight months – largely explains why the U.S. is only growing at a post-recession annual average of 2.2%. Yet most economists think that could change in the near future.

The US is adding jobs that don’t pay enough to get people spending who are still buried in debt, just like Europe, just like Japan. That clear enough? The US economy ‘grows’ despite the American people. But ‘most economists think that could change in the near future’. Get a job. CNBC:

Bank of Japan Bazooka To Spark Currency War

The Bank of Japan’s (BoJ) stimulus blitz raises the specter of currency wars as a rapidly weakening yen threatens the competitiveness of export-driven economies, say strategists. “Whenever you have these kinds of disruptive moves by central banks, there’s always going to be fall out effects,” said Boris Schlossberg at BK Asset Management. Markets were caught off guard by the BoJ’s announcement on Friday that it would expand purchases of exchange-traded funds (ETFs) and real estate investment trusts, extend the duration of its portfolio of Japanese government bonds (JGBs), and increase the pace of monetary base expansion.

“The hottest currency war today is Japan vs Korea. That’s probably the one to keep an eye on. The yen-won cross rate is very sensitive as Japan and Korea compete in a lot of key areas,” said Sean Callow at Westpac. The Japanese currency has fallen around 20% against the won since the BoJ launched its unprecedented stimulus program in April 2013. Currency strategists say the BoJ’s actions could encourage the Bank of Korea (BoK) to become more defensive against local currency strength through intervention in the foreign exchange market or a rate cut.

That’s the big one for now. It’s not just Japan and Korea, Thailand, Indonesia, Vietnam and quite a few others are in the same merry go round. And of course China, as the following MarketWatch piece identifies: “The move will be particularly problematic for China, as its slow-crawling managed rate to the U.S. dollar renders it is effectively defenseless when confronted by currency wars.”

China Faces Trap In Currency War

Last Friday, the Bank of Japan effectively tossed a grenade into the region’s currency markets with its surprise announcement of a new round of quantitative easing sending the yen to fresh lows. The move will be particularly problematic for China, as its slow-crawling managed rate to the U.S. dollar renders it is effectively defenseless when confronted by currency wars, in which countries try to steal growth from their trading partners through competitive devaluations. It also comes at a time when Beijing is already battling foes on two fronts: hot-money outflows and an economy flirting with deflation. The consensus is that the world’s largest trading nation will resist the temptation to enter the fray with a competitive devaluation or move to a market-based exchange rate. Yet Japan’s latest actions will hurt, as they hold Beijing’s feet to the fire.

As long as China holds its (semi) peg to the USD, it may wake up to some ugly surprises, certainly when USDJPY goes to 120 or beyond. But the, when that happens, China won’t be alone. The next piece by Pater Tenebrarum, h/t Durden, may be the best I’ve read on Japan‘s despair move on Friday:

The Experiment that Will Blow Up the World

In order to explain why the pursuit of Kuroda’s policy is edging ever closer to a catastrophic outcome, we have to delve a bit into the details of Japan’s monetary data. In spite of the BoJ’s “QE” reaching record highs, it mainly creates bank reserves and furthers carry trades. The economy sees no private credit growth so far. Commercial banks in Japan continue to shrink the stock of fiduciary media – this is to say, they are reducing outstanding credit, which makes more and more unbacked deposit money disappear. Hence, Japan’s money supply growth has recently declined to a mere 4.3% year-on-year.

“… the markets are pouncing on the yen because they are forward-looking: the BoJ is monetizing ever more government debt and this is expected to continue, because the public debtberg has become too large to be funded by any other means. In spite of the relatively low money supply growth this debt monetization has produced so far, it also creates the perverse situation that an ever greater portion of the government’s outstanding stock of debt consists actually of debt the government literally “owes to itself”.

Japan has debt levels that are unequalled not just in the world, but most likely in human history, and I’m not saying that to take anything away from the demise of Rome:

And then we get back home with the NAR and Lawrence Yun and all of its cheerleaders, who got their faces all full of mud and shit and sand, and will never admit to it. Zero Hedge:

Why Housing Is Dead: First-Time Buyers Collapse To 27-Year Lows

The Millennials (one of the biggest generations in US history) are just not getting with the status quo program. As we detailed previously, with lower credit scores, less disposable income, and a soaring number of people living with their parents; so it should be no surprise that The National Association of Realtors (NAR) today admitted that first-time homebuyers plunged to the lowest level in 27 years. The blame – of course – rather than low/no-growth fiscal policies, student debt servitude, and inequality-driving cheap-funding monetary policy, is price competition from ‘investors’ and too “stringent credit standards,” perfectly mirroring FHFA’s Mel Watt’s Einsteinian insanity desire to dramatically ease lending standards and slash minimum down-payments (as we noted previously). Perhaps NAR accidentally stumbles on the biggest reason no one is buying in their profiling: the typical first-time buyer was 31-years-old, while the typical repeat buyer was 53 – smack in the middle of the Millennial collapse.

We’ve been keeping the long lost idea of our long lost society alive by squeezing our own children wherever we can, and telling them that if they only work hard enough, they can be whoever they want to be. But they can’t, that notion is also long lost. When you keep home prices artificially high, homeowners don’t suffer as much, even if they bought at insanely high prices, but the suffering is switched to potential buyers, who remain just that, potential, while they live in their mom’s basements for years.

A surefire way to kill a society while everyone’s eagerly awaiting the growth that is just around the corner and will forever remain there. Take it from your kids. Take it from somewhere else in the world.

And that’s where we’re now passing a barrier: there’s no-one to take it from anymore. Not through sleight of hand or spin or propaganda. You can only keep a quarter of your people below living wage levels for so long. Japan can only wage a currency war on its neighbors for so long (not very long). Japan can only wage a consumer price war on its own people for so long.

Japan’s QE9 has set the world on fire. It didn’t need much of a spark to begin with, but it’s certainly got one now.