Shopping List
There hasn’t been a lot going on in the US lately. We’re in between quarterly earnings and stocks have seen little volatility. These are the times when you do your research and build a shopping list of companies to pick up/add to on the next pullback in the market. I’ve noticed that most additions to my list recently are in the healthcare/biotech industry.
US Dollar
I used the bounce in the Euro this week to add a position in the US Dollar ETF (UUP) – which is basically taking a double position in US Dollars since cash in our portfolios is already held in US Dollars. I’m using this, like Treasury Bonds, as a short-term hedge against our international investments and Gold. With Japan now accelerating the destruction of the Yen and Europe quickly deteriorating, I expect a continued flow of capital into the US.
Japan
The Bank of Japan is on a mission to end 20+ years of deflation with a target of hitting 2% inflation by the end of 2014. I’m wondering how they plan to pay for this… If they achieve their inflation target (and that’s a REALLY big “if”), they’ll double their debt service costs! There’s no way nominal yields on Japanese Government Bonds will remain down around 1% if inflation is 2%. It just goes to show how important demographics are when it comes to economics. Japan’s biggest issue is not having enough workers for the number of retirees – and creating inflation is not going to magically fix that. Here are some quick stats:
- Social Security expenditures over the last decade have increased from approximately 20% of GDP to over 30%
- Long-term debt outstanding is around 200% of GDP
- Annual Debt Service (interest payments, etc.) is now 24% of GDP – with average interest rates close to 1%!!
Japan is now making Central Bank purchases of JGB’s at a ridiculous pace. They know the only way to keep the game going is to expand their balance sheet and buy the bonds off the market themselves. In doing so, they also plan to trash the Yen to boost exports at rate that they hope is greater than the increase in government expenditures. Unfortunately, it’s becoming clear to the Japanese people that they’re greatly losing purchasing power and capital is starting to flow out of Japan. This has the potential to create some serious political and social issues that only exacerbate the problem. Click here to see Japan’s current fiscal condition: Japan 2013 Fiscal Condition. The charts tell the whole story – it’s downright scary!
Recommended Reading
I think the most relevant book for what’s going on in the world these days is Currency Wars by James Rickards. It walks through past currency wars as well as discussing the major issues the world currently faces. It’s a good read if you find this stuff as interesting as I do.
Thanks for following!
Nick