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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: macavity who wrote (41162)	11/8/2003 6:10:05 PM
From: macavity	Read Replies (1) \| Respond to of 74559

Low Long-Term Rates With Japan, I know a little bit about this. Firstly let us look at what is happening. After their own bubble there was/is little to no demand for new investments as they have a wee bit of a capacity problem that still needs to be resolved. The Goverment is trying to create demand 'to keep the economy going'. To do this the Government is borrowing money and the price of money is dropping! This in itself is a miracle, no? How can they do this? They issue bonds (denominated in Yen) and they 'convince' The Postal Savings Funds to buy these bonds. Obviously this money will be paid back from future governement revenues which can only arrive from two sources: i) A Taxation program - the explicit seizure of (current and future) savings/ surpluses. ii) An Inflation program - the implicit devaluation of (past and current) savings/surpluses. Firstly the projects that they (The Govt) determine to spend the money on have not been decided by the Market. This is Statism at its worse and is up there with Uncle Joe's 5 year plans. This is why they have been covering islands in concrete, pursuing pork-barrel politics, and lending more money to bankrupt companies. All things that no-one in their right mind would do. The excesses continue! These investments will most likely [sarcasm] not generate the returns to compensate the owners of these bonds for the surplus goods and services that they performed to generate their confiscated savings. Secondly the the rate of interest is most likely false!! Assuming that The Govt were unable to inflate the money supply then there is a possiblility that savings could simply be rushing to seek a sure haven in a post-bubble rush for safety. (This would only apply to sovereign-issued domestic currency bonds and not to non-sovereigns or non-domestic.) But they have been increasing the money supply so they have effectively been printing money to buy bonds to finance government projects. As they have been printing money they have created in effect pseudo savings. These pseudo savings (fresh from the printing presses) exist and compete side by side with the real savings (surpluses from the production of past goods and services) within the economy. It therefore appears that there is an excess of savings in The MarketPlace relative to the demand for borrowings. Therefore the Market price for money will stay low, as long as i)savings are not withdrawn, ii)printing continues, iii)the demand for real investements in the economy remains muted. If/When the US gets to this point it will have no savings to rely upon and will have to inflate to keep long-term rates down. Hence my quip (and Ben Bernanke's) that should rates rise to threaten this bull The Fed will step in to buy US Treasuries. Buying either the old ones from forigners, or the fresh ones issued by The Treasury to finance any government deficit. This will support the government and the mortgage market if rates rise and this is seen as causing 'pain' to the economy. The Govt will be bringing its own psuedo savings into the marketplace. As long-term rates in Japan appear to be rising from a bottom, I am actually more long-term bullish Japan than the US, as it would indicate that there may be real investments out there. share.esignal.com Rates needs to see 2% as support - some way to go. -macavity

To: macavity who wrote (41162)	11/9/2003 3:42:25 PM
From: Mark Adams	Read Replies (4) \| Respond to of 74559

re Japan- as Malcolm confirmed, the Japanese do have a preference for the animal they know. This might be part of the definition of a 'closed' society. Closed being a relative term; there are many shades of grey between black and white. I must be slightly out of sync with time, as the story of Japan, the US, and China reminds me of xmas Past, Present and Future. And all this talk of dancing girls makes me think of sugar plums, for reasons I cannot fathom. And we have yet to see Thanksgiving! If Japan represents one path the US could choose (xmas past choices: save much, invest locally, buy Japan) then calls for higher US savings/reduced US debt are calls for the US to follow in Japan's footsteps. As Jay Chen points out, not all of history has been written, so Japan's deflation and reported stagnation may not be such a horrible story ending. After all, the elders have funds to finance their final days without threat of being placed on ice flows like some eskimos. Though I do hear murmurs of younger generations finding it a bit harder to maintain the savings rates of the previous era. I'd like to look again at the disparity between the rates paid on JGB's vs Treasuries. I did a bit of a google search, and found JGB represents a range of maturities, but 10 yr JGBs are paying roughly 1.5% vs 4.5% for US treasuries. In the process, I found there are tax incentives for citizens of Japan to hold these, up to a certain level. Which reminded me of the tax deferral for US savings bonds. I didn't spend more than a few minutes on studying JGB's, so I can't say much more than this. In the era of global capital flows and hot money, you would think someone would arbitrage the rate differences. In this case, that would mean selling short JGBs and buying US Treasuries long, hedging the exchange rate differences via derivatives. Surely the exchange rate risk could be hedged for less than the 3%+ spread earned? And this need not be limited to US debt instruments; why the whole G7 and beyond could represent a gigantic playing field. If this were taking place, you might see signs of it in worldwide yields converging. From another tangent, Japanese JGBs could represent a real positive return potential even at 0% yield, if the Yen were 'as good as gold'. Should the Yen appreciate against other currencies, quite handsome returns might accrue. This seems quite an odd thought, given the Japanese Debt ratings, and their GovtDebt to GDP ratios. Then you have the US reverse carry trade now proposed. Borrow US dollars and go long foreign assets. That might be land, equity or debt. Borrowing dollars today to buy JGBs in the expectation that the dollar would be cheaper in the future, well that seems the opposite of the arbitrage I just described. This would drive US debt levels higher, and depress JGB yields. Fits some of recent circumstances. I wonder how this might impact the trade deficit, if it were taking place over the past 18 months or so? Perhaps the reverse dollar carry trade is yesterdays trade? On another note, I think you have the interactions of the actors described in the Gold story understood quite well. I wish watching that dance play out in my head led to new insights, but thus far they elude me. It is a shame that we have to wait a decade or more to see how Xmas future plays out.