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The World's Next Credit Crunch Is About to StrikeBy
Monday, March 22, 2010
One of the largest economies is about to declare bankruptcy.
How do I know? Here's what fund manager Takahiro Kawase had to say…
"The big change for us is that there's no new money to invest, so we may need to be a seller." With $1.37 trillion under management, Takahiro Kawase is the world's largest fund manager...
Uh oh. This is bad news. Today, I'm going to explain how this happens... and show you how to profit from it.
Kawase runs the Japanese public pension fund and has sole discretion over its asset allocation. This fund is enormous… bigger than the 2008 GDPs of countries like Australia, India, and Mexico. It is almost seven times bigger than top U.S. pension fund CalPERS, according to Bloomberg.
Kawase's favorite investments are Japanese government bonds. He has 70% of his portfolio in them. Needless to say, Kawase is the world's largest investor in Japanese government bonds.
Unfortunately, Kawase has to give up investing in Japanese government bonds and begin selling them...
Japan's aging society is the reason. Millions of Japanese are entering retirement and drawing pensions, Kawase has to pay their pensions. Meanwhile, fewer Japanese are entering the workforce, so Kawase's pension fund receives less money.
The result is, Kawase will have to start liquidating some of his Japanese government bonds and says his fund will be a net seller of bonds for the next few years.
If you thought the U.S. government was heavily in debt, you should see Japan. The Japanese government's debt has now reached $10 trillion... almost the same debt load as the U.S. government, except America's GDP is almost triple Japan's. Japan now has the world's highest debt-to-GDP ratio of any country in the world except Zimbabwe, according to the CIA World Fact/book.
Dylan Grice, an analyst at Societe Generale, says about a quarter of Japan's total debt load – $2.36 trillion – will reach maturity in 2010. In other words, the Japanese government has to find new investors for $2.36 trillion in debt – about 45% of its GDP – over the next nine months.
This huge debt rollover comes at the same time as the world's largest investor in Japanese government bonds has said publicly it won't buy any more... (Another huge investor in Japan also said recently it's considering selling Japanese government bonds over the next few years.)
I think the Japanese government is heading for a credit crunch either this year or next year. It won't be able to roll over its bonds, interest rates are going to rise to attract investors, the government won't be able to afford the interest, the debt load will get worse... and before anyone can patch up the problem, confidence in Japan's credit will evaporate. It'll be a nightmare a hundred times worse than the subprime crisis...
What's the easiest way to profit from this? Short the Japanese yen. It's going to implode when the Japanese government tries to inflate its way out of the problem. It's a good time to place this trade... The yen is close to an all-time high against other currencies.
FXY is the symbol for the Japanese yen fund… but the easiest way to place this trade is to buy YCS. It's a double-short Japanese yen fund that rises 2% for every 1% the Japanese yen falls.
Good investing,
Tom
Further Reading:
Earlier this month, Steve Sjuggerud showed DailyWealth readers what a huge value small-cap Japanese companies are. They're cheaper than they've been in 25 years... investors have totally given up on them... and just lately, they've begun an uptrend. Get the story here: Buying the World's Cheapest Stock Market.
Buying an exchange-traded fund like FXY or YCS is a safe, easy way to speculate on big currency shifts. But if you're thinking about moving into high-leverage FOREX trading, watch out. As Porter Stansberry recently wrote, "While this kind of trading can be very profitable, it is extremely risky - especially right now." Read his argument here: The Crowd Is About to Get Destroyed in Currency Trading.
Market NotesNEW HIGHS OF NOTE LAST WEEK
The "America rally" continues…
Starbucks (SBUX)… expensive coffee General Electric (GE)… conglomerate
Intel (INTC)… semiconductors
Boeing (BA)… defense & aerospace
Gap Inc (GPS)… clothing
United Parcel (UPS)… freight
Johnson & Johnson (JNJ)… health care
Nike (NKE)… shoes and apparel
McDonald's (MCD)… fast food
Home Depot (HD)… home improvement Walt Disney (DIS)… media and entertainment
Hershey (HSY)… chocolate and candy Wal-Mart (WMT)… retail giant
Mattel (MAT)… toys
The Cheesecake Factor (CAKE)… restaurants
Lockheed Martin (LMT)… defense
Carnival Corp (CCL)… cruise line
Dillard's (DDS)… department stores AFLAC (AFL)… insurance
Bed Bath & Beyond (BBBY)… home furnishing
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