Wednesday, May 29, 2013

Facts That May Matter

I spend a good deal of time each week consuming news.  I read a lot and I am constantly looking for interesting information, facts or charts that provide context for what is going on in the world.

Here are a couple of facts that may matter at some point.  On the other hand, they may mean nothing in the fullness of time.  In any event, they each tell me there may be trouble ahead for someone.  These are the kind of facts that make me sit up and take notice when I see them.

First, let's take a look at Japan.

Japan has an enormous debt problem.  It has also been dealing with deflation and a lagging economy for over 20 years.

You have probably read that Japan is undertaking a massive quantitative easing program to try to solve their problems.  Japan's Central Bank has stated it is committed to purchasing up to 50 trillion yen ($520 billion) of government bonds this year.  That is the equivalent of almost 10% of Japan's annual GDP.

All of this QE has sent Japan's stock market soaring since last Fall while the yen has fallen by about 30% compared to the dollar.  The big question is what does all this QE do to bond yields in Japan.  Interest rates in Japan have been extraordinarily low for a long time in Japan.  However, the recent moves by Japan's Central Bank may be finally making the bondholders in Japan nervous. Rates have started to rise and the bond prices have fallen.  In fact, 10-year sovereign bonds have trebled in yield since early April.  Of course, that still means they are only yielding 1% which shows just how low rates have been in Japan.  That is less than half of the current U.S. 10-year yield.

Against this background is the fact that got my attention.

Grant Williams who writes Things That Make You Go Hmmmm notes the following.

The real problem, of course, is the enormous amount of debt overhanging (Japan). Currently, debt-service costs take up 24% of GDP — and should Esenapaj yields rise to just 2.2%, a staggering 80% of government revenue will be needed to pay the interest cost on the country's debt. However, the bond market will not wait to react until the numbers no longer work. (emphasis mine)
Did you catch that?

A rise in Japanese government bond yields to just 2.2% (about what U.S. yields are right now) would require that 80% of all government revenue would need to go just to pay interest on the country's debt.

Game over!

Keep your eye on Japan.  It may become a cautionary tale to the rest of the world of the dangers of massive debt and the attempt by a Central Bank and politicians to ignore the reality of mathematics.

Kyle Bass is a well-repected investor who has been warning that Japan is a train wreck for some time.  He paints a bleak picture for what happens next in Japan.

We believe that Japan is teetering on the precipice of financial collapse, and any number of data points or events in the coming weeks and months could be the proverbial tipping point. It could be as significant as a negative structural current account, a revocation of BoJ policy independence, or even political and economic conflict with regional neighbors or perhaps something as innocuous as ratings actions or Basel III regulations that force financial institutions to reduce their hugely concentrated exposure to JGBs. 
What we do know is that when it does break loose, 20 years of suppressed, spring-loaded interest rate volatility on the back of the largest peacetime accumulation of sovereign debt will afford no time to readjust portfolios to get out of the way.
The second little fact I came across was in an article in the Washington Examiner and involves the IRS Scandal.

The Obama Administration stated from the beginning that the entire targeting of conservative groups was nothing but a mistake by some low level employees in the Cincinnati office of the IRS.

Of course, this has been shown to be a complete untruth as the facts have come out.

Photo Credit:AP

The path then led to Lois Lerner, the IRS head of Exempt Organizations who pled the Fifth Amendment before Congress last week.  Ms. Lerner is now on "paid administrative leave".

The fact that I found interesting in the Washington Examiner reporting on the scandal was that IRS Commissioner Doug Shulman visited the Obama White House 118 times in 2010 and 2011.  Of course, this also happened to be the same time period that the Tea Party and other conservative groups were being harassed by the IRS.  Coincidence?  By comparison, would you like to know how many visits the IRS Commissioner made to the Bush White House between 2003 and 2007? ONE!

Asked by the Congressional Committee investigating the IRS Scandal why he visited The White House, Shulman's initial answer was he went there for the Annual Easter Egg Roll with his kids.  He later mentioned he visited to talk about Obamacare.

Something smells and I don't think it is the leftover eggs from the Easter Egg Roll.  There clearly is a path leading from the White House to the IRS Scandal that eventually will come to light.  There is just too much going on here to mark this up to a bunch of bureaucrats running wild.

The big question is how close did that path run to the Oval Office?  That answer could very well define the final legacy of Barack Obama's Presidency.

Update:  The Daily Caller reports on 5/30/13 that IRS Commissioner Shulman visited The White House more than any other Obama cabinet member.  Over twice as many as Attorney General Holder, three times as many as Secretary of State Clinton and nine times as many as Defense Secretary Robert Gates. What's up with that?

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