donderdag 13 december 2012

How Japan is a premonition of what's to come to the U.S.

The media has always compared the U.S. to Japan because of its debt burden. Many analysts claim that Japan cannot be compared to the U.S. because Japan has a current account surplus as opposed to the U.S. (Chart 1 and Chart 2) and most of its government debt is held domestically. Still, there are a lot of similarities between the two countries. I will discuss several of them and present chart evidence on interest payments, budget deficits, outlay spending, current account, currency and bond yields.

It's difficult to see the big picture here, but it all comes down to this. People have started to back away from the dollar as the Federal Reserve runs out of bullets. Bond yields are now kept low by the Federal Reserve by buying bonds directly in the market and this is highly inflationary to the U.S. dollar. Even though the Federal Reserve tries keeping U.S. bond yields low, U.S. bond prices (TLT) have stopped gaining value just recently. From the case of Japan we can see that there is a point where debt is so high that interest payments will go up no matter how low yields on government bonds are. A good sign of people backing away from the U.S. dollar can be seen in the decoupling theory of which I talked here. The Hang Seng Index has been making new highs while the Dow Jones is trending down. Investors should prepare to get out of the U.S. dollar soon and go for emerging market securities like the iShares MSCI Emerging Markets Index (EEM) or precious metals (GLD) (SLV).

To read more about my analysis on the market outlook in the U.S. go here.

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