I picked up a copy of John Mauldin’s Endgameshortly after joining Dent Research in 2011. It was a great read, especially as a crash course on the massive debt burdens various countries have amassed over the last few decades and how they’ll likely work themselves out of their respective messes. (Spoiler alert: it won’t be pretty!)
Governments, more so than corporations, have shown an incredible ability to finagle their way through increasingly massive debt loads. As governors, they have the opportunity to policy-write their way out of corners, which most corporations don’t (lobbying aside).
Let’s take Japan. At a bare minimum, “Japan, Inc.” should have been pushed into Chapter 11 long ago!
Over-stretched government balance sheets are obviously a concern, from an economic viewpoint. But they also present investment opportunities – on a global macro, five years-plus scale.
The yen is a great example.
Here’s an insightful infographic I’ve found. It’s not from Mauldin’s book, but it presents much the same data that he keenly picks apart in Endgame.
As you can see, Japan is clearly the outlier. And not in a good way.
The x-axis displays Public Debt per Capita. Japan’s is roughly $85,000/person, whereas conservative Switzerland’s is just $22,000.
The y-axis tracks Public Debt as a percentage of GDP. Again, Japan is the big loser with a debt/GDP ratio over 200%. Switzerland’s is below 50%.
Of course, Japan’s dire debt situation only reaches its endgame when its interest rates – currently the second lowest of the countries above (see lower graph) – rise. That’s when interest payments alone will quickly dwarf Japan’s budget.
One way Japan is attempting to thwart this pending disaster is by devaluing the yen. A cheaper yen makes it easier for Japan to pay back its debt. Some call it a “cheap trick,” and warn about the folly of a currency war “to the bottom.” But there’s really not much that could stop Japan from doing it anyway. Just look at how little success the world has achieved pressuring China to stop manipulating its currency.
This – Japan’s massive debt burden and yen devaluation campaign – will be a guaranteed component of any “Top x Global Macro Drivers” list compiled over the next five years. And it will provide investors a lasting trend from which profits can be milked.
Boom & Bust subscribers had the chance to jump on this trend early, as I recommended a bearish yen trade back in July 2012. Since then, that position has accrued open gains of more than 50%.
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