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Expert on Blockchain-backed firms David Drake Joins DOVU Advisory Board

September 23, 2017 Guest Author 0

DOVU, the blockchain marketplace for transport data, is announcing the addition of a new and highly experienced advisor to their team. David Drake, Chairman at LDJ Capital, will provide counsel on critical issues including investor relations and international business development. ‘Unprecedented insight’ David Drake is a well-known entrepreneur, investor, and speaker. Through his family office, … Continue reading Expert on Blockchain-backed firms David Drake Joins DOVU Advisory Board

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“Japan Has No Illusions That Rates Will Ever Rise”: Is This What The Endgame Looks Like

September 23, 2017 Tyler Durden 0

By Victor Shvets of Macquarie Capital

Japan Debt Mountain: does it matter?

For almost 25 years, Japan’s debt burden has been the poster child of what would happen to others if capital is misallocated, bubbles burst and then clearance and required reforms are either delayed or not implemented. Indeed, at more than 5x GDP, Japan is shouldering a greater debt burden than other key jurisdictions. It is also facing severe demographic challenges, while its labour market remains constrained and the state maintains a sway over the private sector. Since WW II, Japan has always been more statist than most other major economies, with Korea and China subsequently following Japan in developing a similar model. The conventional argument has been that Japan’s debt would ultimately crush its economy and severely crimp public sector spending, while the private sector would be unable to adjust, and hence lose competitiveness. Eventually, the private sector might lose confidence and stop repatriating cash and the country would then suffer from massive capital outflows.

Not only were these dire projections wrong for decades, but as the rest of the world joined Japan in secular stagnation and unorthodox monetary policies, it is no longer perceived as an exception but rather as a pointer to the future. Japan’s success in navigating disruption, deep financialization and permanent overcapacity is now studied and imitated. While there are local nuances, Japan shows the way forward. QEs associated with the Fed were invented in Japan more than a decade earlier. The same applies to fiscal stimuli, collapsing velocity of money and strong disinflation. Whatever are the policies, Japan has already tried them. Japan is far more advanced in fully monetizing its debt by utilizing multiple asset classes, from bonds to equities. It also accepts that normalization is not feasible, and unlike the Fed, it has no illusions that rates could ever rise or that immigration and deep labour market reforms are either possible or desirable. When the US is focusing on returning outdated factories, Japan is building for the future, when labour inputs would no longer be the key.

Although Japan’s cultural and labour market constraints reduce its ability to fully commercialize inventions, it has not prevented the country from maintaining its rating as the most complex economy in the world, while keeping leadership in patents and yielding above-average labour and multi-factor productivity. Japan’s stagnant domestic economy is overshadowed by its competitive externally-facing sectors that are becoming complementary rather than directly competing against China. Even financial repression that Japan practised for decades is becoming a global norm, nowhere more so than in Eurozone. We expect BoJ to quietly abandon its inflation targets while maintaining flexibility in asset acquisitions to keep cost of finance close to zero. This would be a recipe for continuing twilight for years to come, with debt burden neither derailing the economy nor financial markets, even as BoJ assets rise beyond 100% of GDP (~45%+ of JGBs).

Assuming that Abenomics is dead and that there is neither desire nor capacity to lift inflationary outcomes, then it would be positive for ¥. Higher ¥ would erode Topix’s ROEs (corporate governance is unlikely to offset lower returns) but it should also highlight the strength of its globally competitive and thematic plays. In our global portfolios we currently have Yaskawa, Fanuc, Mitsubishi Electric, Nintendo, Nidec, Murata, Keyence, Tokyo Electron and Yamaha. Any further ¥ appreciation should also reduce pressure on Korea and China while extending EM reflationary cycle and its investment ‘goldilocks’.

Why is Debt Mountain not crushing Japan?

“We know that advanced economies with stable governments that borrow in their own currency are capable of running up very high levels of debt without crisis.”

       — Paul Krugman

This quote by Paul Krugman neatly encapsulates the main reasons as to why Japan has not been crushed by ever-rising public sector debt. Japan is state with a high degree of credibility and it borrows almost exclusively in its own currency, with debt owned predominantly by its own citizens. Financial crisis is all about perception rather than reality.

However, one issue that Krugman has not emphasized but which is increasingly important is the ability of central banks (CBs) to support and distort the governments’ cost of funds. Given that the CBs are not economic agents, their bids and bond acquisitions are not designed to discover appropriate pricing levels, but rather to support governments’ objectives (usually to simulate economies by lowering cost of capital). In the past, such aggressive interventionist policies were unique and infrequent events (accompanying wars or other major dislocations), but over the last two decades, they have become an increasingly acceptable tool in the governments’ armoury. Japan has been leading from the front for more than two decades, followed by the rest of the world after GFC.

Thus, there are essentially four reasons as to why most bets against Japan failed on a consistent basis:

  1. Japan is a homogeneous society, with relatively egalitarian income and wealth distribution, and hence, pain has been shared fairly evenly, thus preserving economic and societal coherence.
  2. Japan maintained credibility by selectively boosting and adjusting national commitments to elderly and medical care while irregularly pushing up consumption tax. Although some of these measures were counter-productive on a longer-term basis, they have placated global markets.
  3. Japan borrows in its own currency and the bulk of JGB holders are Japanese residents (over 88%). This massively reduces the degree of external vulnerability.
  4. BoJ has been exceptionally aggressive in driving money supply up and cost of capital down. This aggressiveness coincided with the growing global disinflationary trend, which eroded bond yields and significantly reduced the proportion of the government spending that is spent financing interest commitments.

As can be seen below, despite massive rise in the governments’ gross and net debt burden, the proportion of state spending that is dedicated to servicing interest has declined significantly over the last decade and is now below 5% of total expenditure.

The extent to which BoJ has become the key to Japan’s perceived longer-term sustainability can be seen from the explosion of its balance sheet and how its asset base increased at a pace much faster than state requirements. BoJ has by now accumulated almost 45% of the entire JGB’s market (vs 10% only five years ago), and its balance sheet is rapidly closing on 100% of the country’s GDP (vs 37% G4 average). Also, BoJ is not just buying state paper but it has become actively involved in the corporate and ETF (equities) markets. BoJ already controls 75% of all of Japanese ETFs (although only 4% of overall equities) and as much as 15% of the Japanese corporate bonds.

The public sector over the last two decades did not really have an option but to become far more aggressive in transferring excess debt from private sector and onto government books. While this private sector de-leveraging was largely complete by 2005, the combination of GFC as well as subsequent earthquake (2011), continued to suppress private sector desire for more aggressive spending. Private sector sectoral savings even today remain at ~6% of GDP, whilst velocity of money is at best only stabilizing.

If public sector did not step in, the country would have undergone a massive and uncontrolled deflationary bust. Instead, Japan had simply kept its nominal demand intact, despite the private sector sustaining losses (real estate and equities) of equivalent to 100% of Japan’s GDP in ‘90/91 (or ~US$5 trillion). For perspective, consider that the GFC caused initial contraction of only around 1/3 of the US GDP. In other words, bursting of an asset bubble in the ‘90s Japan was at least three times more powerful than the GFC’s impact.

The net outcome of aggressive public sector policies offsetting sluggish and deleveraging private sectors was a ‘tranquil autumn’ of a civilized relative decline.

The Japanese economy is today a fraction of its importance several decades ago. Whereas in the late ‘80s, Japan was responsible for ~10% of global merchandise exports, its share is now below 3.8%. In the same period, Germany’s share eased from 10%-11% in ‘80s to around 8%, while the US’s share is down from 12% to ~9% and France’s share is down from 5% in the ‘80s to ~3%. The same occurred to Japan’s share of global GDP (whether on a nominal or PPP basis). The growth rates have compressed massively, but the country managed to maintain its overall aggregate demand and per capita income intact.

Japan emerged from this traumatic experience, as land of no inflation (indeed mild deflation for most of the time) and steady demand funded by the fiscal stimulus and resilient private sector productivity.

It has become a land where the central bank has been effectively cancelling national debt by acquiring more securities than the government needed to fund its deficits. While this poses many questions (such as ability of life and insurance companies to price their products, in the absence of a viable JGB market), it also implies that Japan is shifting closer to embracing far more extreme (but necessary) policies, such as minimum income guarantees and abandoning any further consumption taxes.

In the world where labour inputs are becoming increasingly less relevant and where robotics, automation, AI and social capital are likely to play an increasingly important role, even the traditional argument of a negative impact of demographics no longer dooms Japan to oblivion and collapse. It also implies that the conventional arguments in favour of large-scale increase in immigration is not only irrelevant but is likely to be faulty on both theoretical and practical grounds. It is likely that the current age of ‘declining return on humans and conventional capital’ will become far more pronounced over the next decade. It so happens that Japan is in the forefront of this evolution.

It is highly unlikely that Japan would ever accept large-scale immigration (whether it applies to high or low skill labour). It is equally unlikely that the Japanese themselves would ever prefer to work and live in foreign jurisdictions. At the same time, the pace of human replacement (whether it is waiters in the restaurants or nurses in hospitals) is accelerating in Japan at a far more robust pace than elsewhere. The unique nature of Japan is also translating into sustainably high levels of private sector productivity while containing income and wealth inequalities. Although Japan is today more unequal than it was in  late 1980s-early 1990s, it still remains one of the most egalitarian societies in the world.

While Japan is yet reluctant to accept the most radical of policies, it is far more advanced in fully monetizing its debt burden and unlike most other countries it no longer requires an ever accelerating pace of financialization (or addition of new debt-driven generations). The objective in Japan is to maintain per capita income rather than generating growth to accommodate a rising population and keeping society intact. The extent to which Japan would be able to achieve this objective would depend critically on Japanese corporates and its overall economy maintaining productivity gains.

* * *

In part 2 tomorrow: “Global lessons from Japan – the future is Red”

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Drone Footage Shows Puerto Rico Devastation From The Air

September 23, 2017 Tyler Durden 0

Hurricane Maria caused widespread damage to Puerto Rico. Drone footage captured the scene in San Juan and Canóvanas on Sept. 21.

As we reported earlier, flash flooding caused by the storm has prompted the NWS to warn that a dam in the northwestern part of the island is in danger of failing, prompting the government to scramble to evacuate the 70,000 residents of the river valley beneath the dam that is in danger of being completely submerged.

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Time to reform the IMF and the World Bank

September 23, 2017 cody 0

This autumn, the International Monetary Fund (IMF) and the World Bank will hold their annual conference. It cannot be business as usual. To remain legitimate, effective and accountable, the Bretton Woods institutions, established in the very different world of 1944, must align representation with countries’ relative economic weight and systemic importance. What about a scenario […]

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Spain In Crisis: Catalan Police Reject Madrid Takeover, Vow To “Resist”

September 23, 2017 Tyler Durden 0

Spain found itself on the verge of a full-blown sovereign crisis on Saturday, after the “rebel region” of Catalonia rejected giving more control to the central government in defiance of authorities in Madrid who are trying to suppress an independence referendum on Oct. 1.

As tensions rise ahead of the planned Catalan referendum on October 1, and as Madrid’s crackdown on separatist passions took a turn for the bizarre overnight when as we reported Spain’s plan to send boatloads of military police to Catalonia to halt the referendum backfired with dockers in two ports staging a boycott and refused access, on Saturday Spain’s Public Prosecutor’s Office told Catalan Police chief Josep Lluis Trapero that his officers must now obey orders from a senior state-appointed police coordinator, Spanish news agency EFE reported on Saturday.

The Catalan Police, however, disagreed and as Bloomberg reports, the SAP union – the largest trade group for the 17,000-member Catalan Police, known as Mossos d’Esquadra – said it would resist hours after prosecutors Saturday ordered that it accept central-government coordination. The rejection echoed comments by Catalan separatist authorities.

“We don’t accept this interference of the state, jumping over all existing coordination mechanisms,” the region’s Interior Department chief Joaquim Forn said in brief televised comments. “The Mossos won’t renounce exercising their functions in loyalty to the Catalan people.”

The Mossos are one of the symbols of Catalonia’s autonomy and for many Catalans the prosecutor’s decision may be reminiscent of the 1936-39 Spanish Civil War and subsequent dictatorship of Francisco Franco, when the Mossos were abolished.

In a joint press conference today with the Catalan home affairs minister Joaquim Forn and the Mossos chief Josep Lluís Trapero, Forn said that the move by Spain was “unacceptable”.

“We denounce the Spanish government’s will of seizing the Mossos, as they did with Catalonia’s finances” Forn said adding that that “the Catalan government does not accept this interference, it bypasses all the institutions that the current legal framework already has in place to guarantee the security of Catalonia.” Additionally, Trapero expressed his intention to not accept the measure, which he described as “interference by the state”, and also warned that “it skips over all the bodies of the legal framework to coordinate the security of Catalonia”.


Catalan minister Joaquim Forn (L) with Mossos chief Josep Lluís Trapero

Earlier on Saturday, El Pais reported that Civil Guard Colonel Diego Perez de los Cobos, chief of staff of the Interior Ministry’s security department, was named by a prosecutor to coordinate the efforts of the Civil Guard, the National Police and the local Mossos.  Spanish media reported unnamed Home Office sources as saying the measure did not mean withdrawing any powers from the Mossos formally, but rather requiring them to submit to a joint coordination operation to stop the Catalan referendum taking place on October 1.

However, shortly after the reshuffling, Catalan police chief Josep Lluis Trapero rejected giving up control to the central government during a meeting with the heads of the other police forces on Saturday, adding that all possible legal challenges would be studied. According to La Vanguardia Trapero “protested at that meeting about the decision to impose central government control” on the regional police force.

Also on Saturday morning, as the police meeting in Barcelona took place, the regional interior minister, Forn, published a defiant message on Twitter: “We will encounter many difficulties. The state wants to take control of our self-government, but they will not stop us! #HelloRepublic”.

Ens trobarem amb moltes adversitats. L’Estat vol intervenir la nostra autonomia, però no ens aturaran! #HolaRepúbica pic.twitter.com/7Wdodq3AA0

— Joaquim Forn (@quimforn) September 23, 2017

Ironically, as Bloomberg writes, while Mossos chief Trapero reports to the regional government, his force’s funding is mostly provided by Madrid and it’s supposed to take orders from judges and prosecutors from across the country. Article 155 of the Spanish Constitution lets the central government take control of a regional administration if it poses a threat to the national interest. Rajoy has already made moves in that direction.

Earlier this week, the budget ministry took over management of Catalan’s finances and will issue paychecks to more than 200,000 public workers in the region, including the police.

That said, any more direct challenge to the Mossos would be fraught with risk because Trapero, its leader, has become something of a local hero since leading the response to the terrorist attacks in August. Separatists are selling T-shirts with his face printed on them.

According to Reuters, the Catalan government also believes that the Mossos takeover bypasses the Catalan statute  – article 164 – and constitutional law and the Spanish prosecutor that ruled in favour of Madrid taking control had overstepped his legal boundaries, saying that it had no power to rule on who had the authority to issue orders to Mossos.

The prosecutor had ordered that the Catalan police, the Spanish National Police and Spain’s Guardia Civil be managed from the Ministry of Home Affairs in Madrid. The decision, according to the prosecution, aims at “reinforcing the operation to prevent crime and to keep public order” a week before the October 1 independence referendum.

 

The decision was announced during a meeting between the prosecutor and the chiefs of the three police forces.

The disobedience will fuel further speculation the Mossos will not work with the national Civil Guard in Spain’s largest regional economy. The standoff came a day after Prime Minister Mariano Rajoy’s government acknowledged it’s sending more reinforcements to help control street demonstrations and carry out a separate court order to halt the vote.

Additionally, the latest move by Madrid will also increase the tension between the two sides which increasingly looks like it could descend into a direct confrontation as neither side appears to be willing to back down.


Catalan President Carles Puigdemont speaking a pro-independence rally

Carles Puigdemont, Catalonia’s president, called the independence vote in an attempt to push the secession movement forward after decades of political and legal fights over the region’s traditions and language. Since Rajoy took office in 2011, he’s had persistent clashes with separatists seeking to foment a backlash against Madrid. Catalonia is home to about 7.5 million people, or 16 percent of the population, but accounts for a fifth of the economy, on a par with Portugal and Finland.

Several pro-independence groups have called for widespread protests on Sunday in central Barcelona. “Let’s respond to the state with an unstoppable wave of democracy,” a Whatsapp message which was used to organize the demonstration read.

The Catalonian government opened a new website on Saturday with details of how and where to vote on Oct. 1, challenging several court rulings that had blocked previous sites and declared the referendum unconstitutional.

“You can’t stem the tide,” Catalonia’s president Carles Puigdemont said on Twitter in giving the link to the new website.

But Spanish Prime Minister Mariano Rajoy insisted again that the vote should not go ahead. “It will not happen because this would mean liquidating the law,” he said at the PP event in Palma de Mallorca. Acting on court orders, the Spanish state police has already raided the regional government offices, arrested temporarily several senior Catalan officials accused of organizing the referendum and seized ballot papers, ballot boxes, voting lists and electoral material and literature. The finance ministry in Madrid has also taken control of regional finances to make sure public money is not being spent to pay for the logistics the vote or to campaign.

How this escalating clash between Madrid and Catalonia is resolved over the coming week will define the fate of Spain for years to come.

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Amazon Will not Accept Bitcoin Payments Anytime Soon

September 23, 2017 JP Buntinx 0

A lot of people are excited about the news involving Amazon and Bitcoin payments. Some sources claim the company will enable cryptocurrency payments soon While that is an interesting opinion, it is also highly unlikely that will happen. In fact, Amazon shows no interest in any additional payment methods right now. It would be an … Continue reading Amazon Will not Accept Bitcoin Payments Anytime Soon

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