Following on from an earlier piece, Ben Davies of Hinde Capital discusses the current Japanese economic environment before wrapping up with the precious metals market, in the King World interview below:
Davies thinks the Japanese are in an unenviable position because they are being squeezed on the export front by China with the Chinese government’s revaluation downwards of their Yuan. Although I would hedge some personal reservations about his positive opinion on this, Davies thinks the Japanese must devalue the Yen to avoid having their export markets devoured by the Chinese.
The Japanese government are also no longer able to issue more debt because their national savings rate has collapsed, and they cannot go to the international capital markets and offer their government debt for close to 0% and get any takers. With 95% of JGBs (Japanese Government Bonds) being held by Japanese citizens and with a savings rate collapse partially caused by an ageing demographic — where older Japanese people are beginning to consume stored wealth after decades of previous saving — Davies thinks the Japanese have nowhere to go but down in Peter Schiff’s Race to the Bottom.[We can perhaps leave till another day the discussion on whether gross financial mis-management by government is what causes negative ageing demographics — go here, here, or here for more on how government financial policies of all kinds can wreck a country’s otherwise healthy demographics in the age old story of reaping what you sow.]
Despite concluding that Japan should engage in a race to the bottom with the Chinese, with national debt greater than 160% of national revenues, Davies thinks Japan is on the same road as Lebanon, Zimbabwe, Jamaica, and Sudan — which possessed similar debt/revenue ratios; i.e. heading towards hyperinflation.[There are 900 trillion Yen’s worth of JGBs outstanding, which is approximately $10 trillion dollars worth of debt, which is approximately 240,000 tons of gold at $1300 dollars an ounce. As only 165,000 tons of gold have ever been mined in human history, then you can see that this is somewhat of a problem.]
With almost 40% of Japanese government tax receipts currently being spent on paying interest on their debt, if interest rates go up by just 1%, then coupon payments on JGBs will soak up more than 60% of current tax receipts. Davies therefore believes that Japan will experience a monetary frenzy over the next few years, as various global government submarines race to find the sea floor in this cataclysmic race to the fiat currency bottom.
“This bear market will be about the collapse of fiat money. In all history, no fiat currency has ever survived. The fundamental of this bear market will be about the collapse of the world’s fiat currency and all the fake prosperity that has been created through fiat currency. In other words, cold reality will prevail. The people of the world will, at last, realize that money by fiat is not reality, it’s fantasy money and a dream created by man.”
Richard Russell, Dow Theory Letters, October 4th, 2010
Moving on to the gold market, where I have absolutely no qualms with his opinions, Davies believes that as we are into new territory with the gold price, that a short squeeze will take place because so few people are willing to sell their gold, with few other assets (except other commodities, especially silver) looking very positive.
Very low returns are being offered on government bonds [which many see as being in a gigantic bubble] and stocks are hugely volatile. Because of the relative attractiveness of gold, as compared to bonds and stocks, Davies sees $1400 and $1500 gold prices as being within range, in the short term, and possibly even shooting up above that.
On silver, Davies is pleased he managed to get his investors into the silver game early on, but does expect more volatility on silver, as once again we are into relatively new price discovery territory.[If we exclude the Hunt Brothers’ unsuccessful silver squeeze, which various governments snuffed out when the squeeze exposed their fiat currency shenanigans, we are in similar virgin territory to the gold price.]