Archives of “fiscal policy” tag

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Japan: Land of the Rising Debt

  
Analysis, Economy, Education
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Investors are understandably scared of the sovereign debt crisis unfolding in Europe. Amid their angst, however, they are ignoring a more likely, and significantly larger, debt catastrophe that is about to hit the nation with the second-largest economy in the world — Japan. Two decades of stimulative, low-interest-rate fiscal policy have made Japan the most indebted nation in the developed world, and as new Prime Minister Naoto Kan recently said, in his first address to Parliament, that situation is not sustainable. Japan has little choice but to raise interest rates substantially, with dire consequences far beyond its shores.

The prelude to the current crisis began in the early 1990s, after Japan’s housing and stock market bubbles burst and its economy slipped into recession. For the next 20 years, using flashy names like Fiscal Structural Reform Act, Emergency Employment Measures and Policy Measures of Economic Rebirth, the government cut taxes, increased spending and borrowed money to finance itself. Today, Japan’s ratio of debt to gross domestic product stands at almost 200 percent, more than twice that of the U.S. and Germany and second only to Zimbabwe. (more…)

The Secret Sauce: A Knowledge Advantage

  
  Education
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“What is your secret sauce?

Click here to find out more!

No. 1, it’s possible, especially in inefficient markets, to gain a knowledge advantage. By definition, an inefficient market is one where hard work and skill can pay off. We can also control our psyche and emotions so that we don’t make the human mistakes that are so common. Of course the other thing is we have a philosophy of controlling risk. So that doesn’t necessarily make us the winner rather than the loser in the transaction, but it increases the probability that we engage in transactions of the sort that we and our clients want.”

There are a few ways to access better knowledge in an inefficient market.  You either have better sources, illegal information or you just simply have a superior understanding.  That’s why I always emphasize the importance of a sound top-down approach.  If you don’t understand the monetary system you’re more inclined to make mistakes in micro managing your portfolio.  You make silly mistakes like misunderstanding how the Fed operates, how QE works, how fiscal policy impacts the economy, how bond auctions works, etc etc. Misunderstanding these important macro functions has resulted in endless predictions for hyperinflation, rising bond yields, falling stock prices, etc.  But if you had a sound understanding of the system – if you had a better understanding – you sidestepped all of these predictions that were clearly wrong if you understood how the system works.

You don’t need to cheat or steal to get better information or knowledge.  Sometimes it’s a matter of putting in the effort to obtain it.

Biggest Bubble Ever? 2017 Recapped In 15 Bullet Points

  
Analysis, Education
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Here are his 15 bullet points that show why in 2017 we may have seen the biggest bubble ever (and why we can’t wait to see what 2018 reveals).

  1. Da Vinci’s “Salvator Mundi” sold for staggering record $450mn
  2. Bitcoin soared 677% from $952 to $7890
  3. BoJ and ECB were bull catalysts, buying $2.0tn of financial assets
  4. Number of global interest rate cuts since Lehman hit: 702
  5. Global debt rose to a record $226tn, record 324% of global GDP
  6. US corporates issued record $1.75tn of bonds
  7. Yield of European HY bonds fell below yield of US Treasuries
  8. Argentina (8 debt defaults in past 200 years) issued 100-year bond
  9. Global stock market cap jumped1 $15.5tn to $85.6tn, record 113% of GDP
  10. S&P500 volatility sank to 50-year low; US Treasury volatility to 30-year low
  11. Market cap of FAANG+BAT grew $1.5tn, more than entire German market cap
  12. 7855 ETFs accounted for 70% of global daily equity volume
  13. The first AI/robot-managed ETF was launched (it’s underperforming)
  14. Big performance winners: ACWI, EM equities, China, Tech, European HY, euro
  15. Big performance losers: US$, Russia, Telecoms, UST 2-year, Turkish lira

As Hartnett summarizes, “2017 was a perfect encapsulation of an 8-year QE-led bull market”

  • Positioning was too bearish for either a bear market or a correction in risk assets.
  • Profits were higher than expected (global EPS jumped 13.4%) this time thanks to a synchronized global PMI recovery.
  • Policy was aggressively easy, as the ECB and BoJ bought a massive $2.0tn of financial assets; fiscal policy also easy (e.g., US federal deficit up $81bn to $666bn).
  • Returns were abnormally high in 2017 (Table 3); corporate bonds and equities soared, but the biggest surprise was stubbornly low government bond yields: thematic leadership of scarce “growth” (e.g. tech stocks), “yield” (e.g., HY, EM and peripheral EU bonds) and “volatility” once again remained the core of the bull.

Rogoff Sees Sovereign Defaults

  
Economy, Education
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rogoff01

Feb. 24 (Bloomberg) — Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks.

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said.

Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”

Click here to read more

$60 Trillion Of World Debt In One Visualization

  
Analysis, Economy, Education
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Today’s visualization breaks down $59.7 trillion of world debt by country, as well as highlighting each country’s debt-to-GDP ratio using colour. The data comes from the IMF and only covers external government debt.  

It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based on USD. 

(more…)

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