Tag Archive | inflation

Japan: The last 20 years

What is the first thing that comes to your mind when you hear “JAPAN”? Maybe you’re a gamer and you thought about Sony’s play station or is it you’re hungry and thought about sushi or did you think about a Samurai or a weird Japanese TV show?
I can tell you, economists think about deflation. And there is a good reason for that!

Japan has been in deflation for the past 20 years!


– Inefficient monetary policy
– Financial shocks from Asian crisis in the 1990s, tech bubble of 2000 and 2008 financial crisis
– Decrease in prices after the Japanese real estate bubble burst at the end of the 80’s
– Inflow of inexpensive goods from other Asian countries. To stay competitive Japanese businesses had to decrease their prices.

In a deflationary society, individual businesses cannot raise their prices. If they did their sales would suffer, as they wouldn’t be competitive anymore. Not being able to raise prices means profits will stall. And thus forecasting limited long-term profits, businesses will decrease their investments and keep hiring at a minimum.

In the same manner, households expecting no increase in wages and decreasing prices in the future, will decrease their consumption until prices are lower and lower. Thus limiting growth.

And that is what happened in Japan. Instead of investing, Japanese households and businesses saved their savings for future consumption. Furthermore, it is important to remember that household savings are banks’ liabilities. So banks not being able to lend and increase their assets, started buying safe Japanese government bonds. Meanwhile, a decrease in tax revenues and a growing spending that is needed to support an aging population, increased government debt substantially. In 2013, Japan government debt was 10 Trillion Yen with a GDP of 6 Trillion.

The whole economy was in a vicious cycle. Prices did not increase, sales and profits declined, wages stalled, consumers stopped spending, and prices continued to decrease.

This long-term deflationary trend had a psychological impact on the Japanese society. They got used to saving and investing in safe assets only. However for the country to get out of this deflationary spiral, Japanese people will need to spend and invest in riskier assets.

And that is why the Japanese central bank initiated a QE programs. By buying JGB, the government puts pressure on long-term nominal interest rates.
The goal is to keep interest rates low to stimulate spending. Which should increase inflation. But remember, it needs to be slow and stable inflation otherwise it would be devastating for the country.

If all goes according to plan everyone can live happily ever after. If not, inflation will eat savings, devalue the currency and send the stock and bond markets to perdition.

Georges Boustany


The Ghost of Inflation Future

Follow the Money with Buzzonomics

“A graph is very much like a Bikini. What it reveals is interesting. What it conceals is vital”

On this note, let’s look at some graphs.

1- Security Flow

bond fund flow

In my article “Letter to a 40 yr old friend“ I discussed why bonds were a bad investment going forward. This graph clearly shows the Bond Fund outflow that happened in 2013 due mostly to fear of rate increases. Bonds were in a bull market for the past 30 years. The next 30 will surely not be as wonderful for bond investors.

treasury inflow
Treasuries on the other hand are still seen as a safe haven.

total equity fund
In 2013, we started seeing more funds being allocated to equities.
Over the past 3 months through the week of August 28, the Investment Company Institute (ICI) estimates that bond funds had net cash outflows totaling $438 billion at an annual rate. Over the same period, equity funds had net cash inflows of only $92 billion at an annual rate. So where did the money go? Most probably cash!

Picture 1

P/E has surely rebounded since the lows of 2008, albeit no bubble has formed yet.
On another note, when all you hear on the news is “Markets are at all time highs”. The only thing it should mean to you, an investor, is that it’s time to SELL!!

Dividend and buybacks
An important reason for the increase of the stock market is the increase in dividends and share buybacks. With all the cash corporation have on hand and the low cost of debt, it is no wonder they are spoiling their shareholders.

NYSE volume
This is a big enigma.
Markets hitting all time high -> Investors should in theory be happy, right?
-> Why so little volumes? Anyone?

2- Commodities

China total commodity usage as % of world in 2010

China commodity usage
That is hallucinating!
One has to wonder what will happen to these commodities when China tumbles.
For a preview, listen to the video I posted “Chanos on Shorting

Commodity flow
Remember when gold tanked in the first quarter of the year? This graph clearly displays the fear of commodities. In my article “Gold a heart breaking lover” I discussed the reasons.

oil demand
Is that why we call them Emerging markets?
(Total Demand is approx. 90 Million barrel/Day)

Nothing new here… Saudi Arabia is currently the 2nd largest supplier of Oil with approx. 9 Million barrels/day.

Supply non opec asia
Russia, largest producer of Oil at approx. 11 Million barrels/day.
China with only 4 Million of oil produced is very dependent on foreign oil. They are investing heavily in other sources of energy (Nuclear power, renewable energy…) to sustain their high demand.

non opec africa

non opec americas
US, currently 3rd largest supplier of Oil after Russia and Saudi Arabia, is stated to surpass them between 2017 and 2020.

Canada 3.5 mbd only!

non opec europe
Europe’s oil production shrinkage is a big problem for their economy. They will need to rely on foreign supply. Due to its strategic geography between Europe and Asia and pipelines construction, Turkey will play an important role in the distribution of oil to Europe. (I really like Turkey as a long term investment and will write about it soon)

3- Economics

What do American own
Now that explains a lot!

In a nutshell:
When the stock market is at all time high, it is the top 1% that profit the most as the middle 60% does not own stocks.
On the contrary, the middle 60% own homes. So during the financial crisis, when home prices plummeted they reaaaally got hurt!

M2 velocity

Velocity O Velocity, where art thou going??

Labor participation rate
Very important graph! Labor participation is the number of workers looking for a job. Therefore, if you are not working and not looking for a job you do not count as unemployed!

Participation rate was down to 63.2%, the lowest since August 1978, when Baby Boom women were just starting to enter the labor force in significant numbers. In other words, a staggering 36.8% of the working-age population (90.5 million people) has simply dropped out of the labor force. If the participation rate rose back to 65%, the jobless rate would be at 9.8% today. At 67% participation, it would be up to 12.5%!!!!!!!!!!

Unemployment rate going down, but Employment rate is flat!! This is definitely not good news. Some economists argue there is a big cyclicality part to the participation rate and it is therefore not disastrous.

US inflation
Unfortunately, it was education that increased the most.
Surprisingly, recreation prices decreased but clothing increased. So I guess the new way to have fun is to go shopping!

domestic debt
Since the financial crisis, individuals have decreased their debt!

Bank loans
Bank loans are still a long way from pre-crisis levels. Might explain, low velocity and inflation.

Unemployment by degree

Unemployment for people (25yr and older) with less than a high school diploma = 10.7%
Unemployment for people (25yr and older) with at least a bachelor degree= 3.9%

So get your degree!

Georges Boustany