By SD Contributor AGXIIK:

The trade between Japan and Europe and China and Europe will be hit very hard when Europe can’t afford goods from China and Japan.  The east will suffer badly as devaluations won’t overcome the recessions and depressions in Europe.

These are real and dangerous tipping points that won’t hold back very long. The people in Italy, Greece and Spain are near the breaking point.  I doubt if the Fed will have enough money to bail out Europe when Benny is spending all his political capital in bailing out the US, although I would not be surprised if the Fed doesn’t give it a try, nonetheless.   
If we thought 2012 was the year of the epic failure, it may have been just a warmup act to 2013.


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Virtually all the big GDP countries are engaged in ZIRP  printing to devalue their currencies, racing to this end to keep the trade engine going.
All the major GDPs are showing red arrows in their economic indicators.  For one country to win, others will be hurt.
Japan, China, the EU and US are all on track to accomplish this rampant devaluation business.   Japan is probably on a fast track to the bottom in their current bout of devaluation.
Abe is out for war, FIAT or hot, it does not seem to matter to him
South Korea is being hammered by the Yen but they are unlikely to launch missiles against the Japanese homelands.
China sees these FAIT effects on their exports.

What affects China in that regard is going to have repercussions that could easily go beyond a war of words and money as these two countries face off over the Sendaku Islands. China’s currency reserves are 300% larger than Japan’s.  That is some serious ammunition to use is trade wars.
The bond bubble could easily be broken in a currency or a shooting war.  Either way, the fragile bubbles could be popped with ease and at the slightest pressure.  Japan’s largest pension fund, with $1.2 trillion in assets, is trying to lightened up on Yen bonds. Other funds are trying to buy gold.

The bubble is going to break and it probably won’t be the UST first.  The US is still considered the world’s safe harbor for excess funds.  It is even more likely that when overseas bond bubble  monies flood to the US, the rates will drop again, like the last time money flowed into the UST market in 2008.
This time the flood could be in the trillions, instead of a few hundred billion.  Money market funds are having enough problems funding a home for the money they see coming in.

One unintended consequence will be NIRP rates offered by the Fed on short term notes.  Laws are being written that will allow MMAs to break the buck.   The Fed can keep our bubble intact for quite some time since they buy most of the debt. The wash of foreign capital will probably help sustain our deficits too boot.

Japan is running out of other people’s money.  Japan  could fail first but Europe is a train wreck moving faster with the Italian bank derivatives losses and Spain’s corruption scandals  building quickly. There’s not a bank in Europe that is worth a hill of beans.  Their leverage is 35 to 1. Greek failure would destroy most of these large Euro banks.

The trade between Japan and Europe and China and Europe will be hit very hard when Europe can’t afford goods from China and Japan.  The east will suffer badly as devaluations won’t overcome the recessions and depressions in Europe.  Consumer sentiments are dropping like rocks and have been for months and even years. The Euro GDP is nearly $18 trillion so big drops here are even more powerful in hurting imports.

These are real and dangerous tipping points that won’t hold back very long. The people in Italy, Greece and Spain are near the breaking point.  I doubt if the Fed will have enough money to bail out Europe when Benny is spending all his political capital in bailing out the US,  although I would not be surprised if the Fed doesn’t give it a try, nonetheless.   QEII slipped $600 billion under the ECB mat, not to mention the trillions is reparations sent to Europe for the fiasco of sub prime losses.  If the Fed does run to the rescue the amount of currency sloshing around could easily kick off some serious inflation on the continent.  It would certainly see FIAT mal-investments in MENA as food shortages this year will bump prices. QE II was a cause of the Arab Spring.

This whole region is exploding with Egypt on edge;  collapse possible in short order.  If we thought 2012 was the year of the epic failure, I think it was just a warmup act to 2013.

  1. “For one country to win, others will be hurt.”
     
    This is known as the “fixed pie theory”, where the size of something (in this case the global economy) remains fixed in size, so the only way to grow a national economy is to take a chunk from someone else’s piece of the pie.  At the moment, this is correct.  However, there are times when the world economy is growing and getting larger, so individual countries can grow their economies via having the same percentage slice from a larger pie.
     
    “Japan is probably on a fast track to the bottom in their current bout of devaluation.”
     
    Agreed, hence my interest in the YCS double short Japanese Yen ETF.  This ETF increases at twice the rate of the Yen’s fall.  In the past 3 months, the Yen has dropped about 18% in value and this ETF has increased in value by about 36%.  It is not normal for me to use a leveraged fund or a short fund but the case against the Yen at this point is about as solid as investing ever gets.  Since this is an ETF, it can use a stop loss order for some downside protection.  It is volatile, though, so the stop can’t be set too tight.
     
    “China’s currency reserves are 300% larger than Japan’s.  That is some serious ammunition to use is trade wars.”

     
    It could be.  But then again, it is possible that an Asian sphere of prosperity could be forming with China as the big-dog and Japan as 2nd in command.  Asia vs. The West might be a more profitable venture than China vs. Japan.
     
    “Japan’s largest pension fund, with $1.2 trillion in assets, is trying to lightened up on Yen bonds. Other funds are trying to buy gold.”
     
    Indeed.  With serious Yen devaluation on the slate, these funds have been hurt and more pain is on the way.  Japan has no cultural or historical attachments to gold or silver but with the recent Yen devaluation moves, this is likely to change soon.
     
    “It is even more likely that when overseas bond bubble  monies flood to the US, the rates will drop again, like the last time money flowed into the UST market in 2008.”
     
    Interesting.  But can rates drop much from here?
     
    Personally, I do not understand how anyone can invest in government debt or any other bond that cannot at least meet inflation.  Doing that is a money losing proposition.  Unless the bond is tax-sheltered in some way, as munis often are, the so-called “profits” on the bonds will be taxed and another slice of one’s wealth will be pared away.  Currently, with the US Treasury 10-year bond yielding about 2% and real annual inflation running over 9% (as of Nov. 2012), there is no way to own these bonds and make money.  One would think that the investing gurus out there would be aware of this and would avoid these “investments”.  Apparently not, however.
     
    “Laws are being written that will allow MMAs to break the buck.”
     
    Yes, they are.  But it is not the law that has money managers guarding their MM funds so carefully.  AFAIK, no MM fund has ever broken the buck because if one ever did, there would be an immediate and disastrous reaction from their clients who would bail out in droves; and perhaps not just from the MM funds but from other funds that they manage as well.  Many investors view a MM fund as a sacred cow that MUST not be allowed to drop below the $1 share price at any cost.  Numerous MM funds have suffered losses, technically breaking the buck for a very brief period.  The management companies always come in with enough of their own money to shore up any MM fund losses.  Here is an interesting article from recent times on that:
     

    http://usatoday30.usatoday.com/money/perfi/funds/story/2012-08-13/breaking-the-buck-money-market-mutual-fund/57040122/1

     
    “There’s not a bank in Europe that is worth a hill of beans.”
     
    Even Deutsche Bank?  They have no exposure to Greece and only about $30B at risk in Italy and Spain combined.  For a bank of their size and scope, this does not seem excessive unless they have a lot of exposure to derivatives.  Their annual report for 2011 shows about $35B worth of derivatives exposure, which seems minimal compared with the multi-trillions on the books of some of the large US banks.
     
    “The trade between Japan and Europe and China and Europe will be hit very hard when Europe can’t afford goods from China and Japan.”
     
    With Asia as the low cost provider of manufactured goods, where will Europe be able to afford to buy goods if not from Asia?  Or, are you saying that Europe will be so poor that they will not be buying any goods at all?
     
    ” I doubt if the Fed will have enough money to bail out Europe when Benny is spending all his political capital in bailing out the US,  although I would not be surprised if the Fed doesn’t give it a try, nonetheless.”
     
    Agreed… and it is likely that any attempt to save the drowning person that is the EU will also cause the US to fall into the water and drown too.  The US *might* be able to save the UK but not the EU.  It is simply too large to be saved from itself.  We have a similar problem here that will take all of the effort and resources we can muster to prevent a financial collapse right here at home.
     
    “If the Fed does run to the rescue the amount of currency sloshing around could easily kick off some serious inflation on the continent.”
     
    As mobile as money is these days, there will be no way to contain the contagion of inflation once it takes off.  It has already started here in the US but is worse in several other places around the world.  Since agricultural commodities are priced in dollars, we can expect food prices to go higher… perhaps much higher… in the coming 2-3 years.  If this is exacerbated via bad farming weather, as it was with the droughts and floods in 2012, we could see large parts of the world unable to obtain the food needed to keep their populations going.  Hungry people soon become angry and then violent. This could fuel the old cycle of:  currency war… trade war… world war… that has happened many times before.
     
    “If we thought 2012 was the year of the epic failure, I think it was just a warmup act to 2013.”
     
    Yes, 2012 was a year with a great deal going on and a lot of it was not good.  When great events unfold, they tend to do so in stages… slowly and often unrecognized at first and then very quickly in the later stages.  I think that 2013 will be similar to 2012, albeit worse in many ways.  It is 2014-15 that REALLY concern me.  I think that 2014 will be rife with disasters of global proportions and 2015 will be the year of the End Game for the fiat paper Ponzi scheme.  Got phyzz?
     

  2. Ed B    B for Braveheart  Those leveraged funds can be a fun ride  Good luck with them. I used to trade leveraged ETFs, sell coveraged calls and bank those profits in phyzz  It worked ok but, as usual, i got greedy and had my ass handed to me a few times. 
    All of the large scale GDPs are seeing shrinkage so the fixed pie is shrinking and those folks at the top know it. The folks in the middle and bottom are really in the squeezy zone  Ouch!!
    Rockets, you have the eye for that ‘consequences’ statement.  Like they say in politics, if it looks like a coincidence, it’s not  There are no coinkidinks in politics or so said FDR and he should know.  IMO the people running the show are either reacting to bad situations like Abe in Japan;  those who are trying to hurt their economies (tough as that might seem Kirchner and Chavez)) or are just economically and financially inept and ignorant.  We are in uncharted times.   Just because someone got elected doesn’t they know jack about the business of running a donut shop.  See Obama.  But there is one thing you can count on.  The old beltway adage.  ‘Screw up and Move up.’  Jack Lew, Hagel and all the other drones in this administration are perfect examples of the Peter Principle.  I’d say anyone one of us on silver Doctors could do immeasurably better at running the show.  Take any 5 of the SD Irregulars,  like you, Pat Fields, Charlie, Mary B,  Mammoth, Ranger and 2 Oz.  That would be like cleaning out the Aegean Stables with a 1000  ton hydraulic whatchamacallit.  Kind of like a high colonic and a 20 mile hike.
    Willie thinks the Japanese and Chinese will ally themselves.  China’ll be the big dog.  Japan will not commit suicide if it means staying with the west and  the US if  China makes them as offer they can’t refuse.  Asia vs the West.  It’s estimated that China has at least 750 nuke warheads with another 1,000 in their storage caves. They have subs with nukes too.
    Japan still has the Fukishima problem and China has lots of empty cities. Maybe Japan will put the nuclear option and evacuate the island, sending the young people to China and leaving the demographic problem of the seniors and oldsters to do what the finance minister suggested. “Please hurry up and die’
     Plus the power plug was pulled with the nuke plant shutdowns. Japan is hurtin’ for certain
    The UST rates dropped to about 1.45% when Europe was in the first bad stage of their problems. The Fed was well into the their big QE II round so our debt was a  safe harbor and could offered crappy rates. Willie thought they would go to 1.25% or lower.  He missed that call but not by much. There are some rumors the Fed will offer NIRP if a lot more money flows into the country.  French and Swiss funds offer as low as .5% negative rate
    This could come to pass with the MMA.  At this point in time the notion of breaking the buck won’t be so hard to sell. The last time it happened was right around the Lehman crash. There was a Money Market type fund that dropped to about to  .97% of its value.  They  had a few hundred million in Lehman securities  When Lehman went tits up, those securities went to zero even though they were highly rated  Ooops.  Bad S&P ratings!
    That made the Fed hysterical and someone did some neat tricks to refill the well.  This was a couple of months before the huge financial FUBAR and TARPs $700,000,000,000 rescue funds.  Today, with the gangsters, banksters and thieves running the show, IMO nothing is safe or sacred.  My Fidelity MMA was negative .02% yield after Fidelity took their rake and toke.  They generously gave back about .04% so that the ‘little people’ didn’t get screwed.   Eye Roll. 
    If you had $100,000 in Fidelity you made .02%. I’m bad at math but that sounds like $5.
     I know this because I had a good chunk with Fidelity when I got this notice and told them to F.O.  Pumped, dumped; Ijumped to phyzz and went all in early last year.  I called them and told them the reason. 
    Willie is no fan of DBank   That one and Buba are very exposed to Euro bonds of every sort.  Merkel set up a $600 billion rainy day fund to shore up these banks in case the whole ECB, ESM and EFSF bond fiasco took large losses.  Spain and Italy could bankrupt every Euro bank  They are leverages at 27 to 35 to 1.  Not so good. Even a bank like DBank could be dragged down with the sewage.
    Re China and japanese trade.  The auto makers and electronic firms are losing sales in the double digits all over the eurozone.  Peugeot just got some sort of $billion plus bail out. They lost 4.7 billion Euros last year. The heavy weight employee rich industries are laying off by the hundreds of thousands and thats not including Greece and Spain.
    France is being hit very hard with umemployment nearly 12%. How’s that Socialism working out for you Hollande.  Sino Euro trade flow was off 18% last year.   Euro GDP is bigger than US at about $17 trillion so those are pretty big numbers.
    I won’t guess where the trigger(s) is or are pulled but Venezuela and Argentine have me concerned.  V is an OPEC biggie.  A has $35 billion in loans in technical default.  Egypy is on the razor edge with hardly enough dollar dinero to buy  cookies and milk.  Well be  exporting food inflation into the double digits in 2013,  just like the QE II Arab Spring turmoil. 
    If we can even float the food commodity boats down the ‘Ole Miss’ the drought hit worldwide last year and this year could rotate from food inflation to large food shortages. Food inflation causes riots and tyrants being overthrown. Food shortages are way different.  No food at any price. Millions die.    We already have food insufficiency here at home.  With food prices up low double digits,  SNAP, EBT, unemployment, SS and SSI payments are not going to keep up with inflation. Anyone on a limited budget will be hit.  These mandated entitlement and transfer payments will either stay level with 0% increase or SS at 1.7% this year.   EBT balances were dropped about $8 from 2012 into 2013.
    My guesses are just BHAGS.  We, the people,  may muddle, struggle or sideskirt the worst this year.  QE  capital flows  may put off that day of reckoning. But 2014 and 2015 are most certainly going to represent some serious tipping points for our country.
    As for the rest of the world, I’m not so certain or sanguine about the prospects.  North Korea appears to have a miniature nuke.  Iran will get get one or more this year.  Either of those countries could rachet up the pucker factor several levels.
    I always appreciate your thoughts  and inputs.  It makes me think and add to the theme

  3. Thanks for the insight AG   if I was to add anything, it would be……Keep stackin, live yer life the best you can, surround yourself with quality people and hope for the best, while preparing for whatever you think might be coming.
    I don’t remember the exact quote or who said it but
    If preperations are made and the worst doesn’t happen, nothing is lost. If no preperations are made and the worst happens, ALL is be lost

  4. Born and raised in Victoria BC  I used to speak Canadian.  You hit the mark just fine. And the comment resonates
    Kind of like my opinions.  If I’m wrong, and I hope I am, then no harm is done.
    If I/we are right, we’re in the vanguard of the informed and have done as much as we can to prepare

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