Japan will run out of savings to buy JGBs by 2016, but the market will respond sooner. If the Japanese government continues to issue debt, the Japanese economy is going to run out of savings to buy the new debt. The share of government debt to total currency and deposits will soon reach close to 100%. At this point of the endgame, there is no way out for Japan; either the central bank or foreigners must take up the bid, or Japan must begin to sell off foreign assets. Markets will price in the endgame before it happens.
-Claus Vistesen of Variant Perception

The big news over the weekend was of course that Spain has finally agreed to an “unconditional” bank bailout. But please, let us not have a DELUSIVE HOPE – like most honourable Members of the European Parliament nowadays – that everything will be fine, and we can safely invest in risk assets again.

It even seems reasonable to me if one takes advantage of this rebound to sell on strength because in reality nothing has been solved and the problems in the Spanish banking sector are just being papered over. Also JP Morgan (JPM) tried to explain on Saturday why the bailout train in Spain will lead to much more pain in the future.

According to JPM, “a key question is whether this request for external support will serve to improve conditions in the Spanish bond market and raise Spain’s chances of avoiding a broader support package. Our best guess is that it will not.”

JPM goes on to note that “the request for support has at least three negative consequences:

  • It implies some degree of subordination of other holders of Spanish sovereign debt.
  • It provides a clear demonstration of the limits of the ability of the sovereign to raise funds on its behalf.
  • And it crystallizes banking losses accruing to the State which it had hoped to avoid.

“We suggest that a banking support package would be likely to turn out to be a stepping stone to a broader package of support for Spain, with that likely to be in place by the end of August. That remains our central view.”

And the always skeptical Tyler Durden at www.zerohedge.com gives us a clear WARNING:

Keep a close eye on Spanish sovereign bonds at the moment when the bond market understands what just happened, and once the euphoria over the very short-term bailout of insolvent Spanish banks passes. Because a month from today another €100 billion will be required, then another €100, and so on.

At that point even the officially acknowledged Spanish debt/GDP will surpass 100%.

Tyler Durden, yes he again, had a field day with this chart below, showing global sovereign debt as a percentage of total government revenues.

The chart was accompanied by the following comment from Hayman Capital Management: “Is there now any doubt after seeing this why the proverbial four horsemen are really just one giant black swan, only not one of failed bond auctions or something quite as dramatic, but something as simple and mundane as the smallest uptick higher in rates which would blow up the entire global financial farce, starting with the most imbalanced domino of all – the land of the rising sun? … And that at least Greece is not Japan?”

This is indeed an accident waiting to happen, or as John Mauldin and Jonathan Tepper call it in their book ‘ENDGAME, The End of the Debt Supercycle and How It Changes Everything’, “Japan is a bug in search of a windshield”.

Furthermore on pp 253-254 they write that “all bubbles burst when financing becomes an issue. The Japanese bond market will, in the not too distant future, face a fiscal crisis that will require either draconian tax increases and spending cuts that would be extremely socially divisive or the decision to monetize its own debt, which is default by another name. The first option implies a massive economic contraction, given that Japanese domestic consumption is extremely weak, and the second implies an inflationary holocaust.”

And on page 258 they conclude that “governments typically print money rather than doom the economy to a severe recession or a depression induced by economic contraction. When this happens, the yen is likely to fall dramatically in value, Japanese interest rates will go up, and Japanese bonds will sell off.

Can we hear a bid for 100 yen to the dollar? 125? 150? 200? 250? 300? It seems unthinkable now, but it is quite possible unless the Japanese willingly embrace a contractionary, severely deflationary depression. Not a good set of choices.”

Anyway, I suggest everybody to read this book because it is a treasure trove full of amazing charts and actionable investment advice on how to cope with the debt crisis that is currently unfolding.

Elliot Wave International’s Global Market Perspective had to say the following about USDJPY on June 1, 2012:

And … don’t forget that Japan would be a massive buy if it embarked on a major devaluation. A 40% or 50% drop in yen would be very bad news for everybody else, but really great for Japan and its stock market! I am personally looking for a move below 7000 on the Nikkei 225 in the next few months, which would give us an excellent entry point for the long term.

Nigel Farage, MEP (Member of the European Parliament), had some very interesting thoughts - as usual – about the deteriorating situation in Europe. Here is what he said in an interview with King World News on June 7, 2012:

Of course, over the last couple of years we’ve had two bailouts of Greece, a bailout of Ireland, Portugal. We’re now on the verge of needing a bailout in Cyprus, but perhaps more significantly, a bailout in Spain.

“There are all sorts of twisting and turning going on with the Spanish saying, ‘Please save our banks, but don’t put us under the austerity measures that you’ve put the other countries under.’

“If one looks globally, we’ve got people like David Cameron, and importantly, President Obama, who are basically saying, ‘The euro project must be saved. It must be saved at all costs.’

“For that to happen the Euro zone has to turn into a state, and a state that effectively has a Fed.

“The Germans are saying, “Hang on guys, we don’t really want to take on the debt for the whole of ‘Club Mediterranean’ countries.” There’s been a meeting in Berlin today, and Angela Merkel has, for the first time, said that she’s prepared to countenance this becoming a full fiscal and political union, but it has to be constructed on German terms.

“So it would appear that despite the fact that the euro zone is a disaster, despite the fact that nobody is prepared to recognize just what a mess our banks are in, despite all of this, our political classes in Europe and America are prepared to continue this project of total failure.

“If we continue with this route, we are heading for money printing on a scale that has never been seen before in the history of mankind. Clearly, as history teaches us, that will lead to massive inflation, and huge asset depreciation.

“All I can tell you is when I look into the eyes of the leaders of Europe, and as a leader of a group in the European Parliament I do get eyeball to eyeball with them, when I look into the eyes of these people, frankly what I’m seeing now is madness, absolute, total and utter madness.

“The project, the idea is what must be protected and to hell with the consequences. I really believe that when we look back in decades or centuries to come, we will see what is happening now in the euro zone as something of huge historical significance.

“People will say to themselves in classrooms, in a couple of hundred years time, ‘How could they have been so stupid?’”

Although I come from the same country as Herman Van Rompuy, who serves as the first President of the European Union, I have to admit that I agree completely with Mr. Farage. The sooner they stop pretending that everything is under control, the better I would say.

There is nothing wrong with making mistakes because we are all human after all. But not willing to face the facts and just trying to preserve something which is unsustainable seems plain wrong to me.

Hopefully not only Nigel Farage dares to tell people what a disaster the whole euro zone is. More brave politicians are indeed needed who can make a difference to the future course of Europe.

Mark Grant, author of Out of the Box, was certainly not beating around the bush when he wrote the following in ‘The Fat Lady Is Clearing Her Throat’:

“Greece has hit the wall and its financial engine lies in tatters. Spain has hit the wall and just not made the announcement yet. Portugal has hit the wall and will bang it again for good measure. Ireland has hit the wall and is bathing in its financial self-pity. Germany is staring at the wall, declared “no Eurobonds under any circumstances” over the weekend while Monti says Eurobonds “will come” and so we are about to have a re-do of the Battle of Verdun. France is warming up to the wall and wants to spend even more to climb the damn thing. America is in self-denial that there is any wall at all. China is about to hit the wall and is adjusting its parachute.

“Treasuries are the needle on the speedometer and if there is one clear indication of very serious trouble ahead you can read it there.

“The fat lady is about to sing. If you don’t wish to listen then don’t show up later and say I didn’t warn you.”

I just would like to add, ironically though, that China indeed already has the Chinese Wall so it just gets to hit it. Anyway in the end I suppose we will all have to face the reality that nothing has been fixed during the last four years, and sooner or later the chickens will come home to roost.

Last Thursday UBS’ Art Cashin noted the pending three-day rally that has seen European and US markets soar smacks of a short-covering squeeze, as some of the biggest percentage gains came in the most heavily shorted stocks. Moreover he conjured Thatcher’s prophetic ‘euro folly’ call in one of his daily comments:

The Other Woman – Part II – My mention of Margaret Thatcher’s fears and concerns about the Euro brought two enjoyable results. First, it prompted some friends to pass along several articles on the topic – mostly from the UK Telegraph. Second, it allowed for a rather extended discussion of Thatcher’s foresight with my friend, Carl Quintanilla, in the last hour Tuesday of “Squawk on the Street”.

Thatcher called the concept of the Euro – “perhaps the greatest folly of the modern era”. As Peter Osborne noted in the Telegraph back in 2010:

“Today, Margaret Thatcher’s autobiography, first published in 1993, reads like a prophecy. It shows how deeply and with what extraordinary wisdom she had examined Delors’ proposals for the single currency. Her overriding objection was not ill-considered or xenophobic, as subsequent critics have repeatedly claimed.

“They were economic. Right back in 1990, Mrs. Thatcher foresaw with painful clarity the devastation it was bound to cause. Her autobiography records how she warned John Major, her euro-friendly chancellor of the exchequer, that the single currency could not accommodate both industrial powerhouses such as Germany and smaller countries such as Greece. Germany, forecast Thatcher, would be phobic about inflation, while the euro would prove fatal to the poorer countries because it would “devastate their inefficient economies”.

“It is as if, all those years ago, the British prime minister possessed a crystal ball that enabled her to foresee the catastrophic events of the past year or so in Ireland, Greece and Portugal. Indeed, it is one of the tragedies of European history that the world chose not to believe her.

Thatcher’s warnings read like headlines on page 1 today. Leaders aren’t always listened to. How unfortunate.

What a pity indeed we don’t have these kinds of leaders anymore with a lot of foresight, and the courage to take decisive action amid great uncertainty. So can the REAL leader stand up please?

Posted by Nico Omer Jonckheere | VP Research and Analysis, PT. Valbury Asia Futures