Back on June 29th, our cover story in "Signals" headlined EQS CONTINUES TO WATCH CHINA AS THE WORLD WATCHES GREECE, once the media circus ended on the Greece saga, it was the Chinese economy that rocked our financial markets in Au-gust and it is still in front and center today.
So what is the next news story? Goldman Sachs released a report that oil could bot-tom at $20/bbl and the media pumped the story hard so the market took a dive. How-ever, the bulls put up a good fight and as this volatility becomes normal, a march down to $20/bbl or a jump up to $60/bbl at this point would not even seem extreme or news worthy. Another story un-folding is the start of the Shemitah which in the Old Testament of the Bible means "the forgiving of debts and letting fields rest", but when, what and where should we focus our attention?
The global economic outlook becomes more bearish everyday as the media highlights the worst case of everything. The Goldman
Sachs research shows that economic weakness is the global reality of the coming year. As this business cycle comes to a close, we have witnessed unyielding supply as producers pump more to meet budgets. It is worthy of repeating that cheap oil is good for Americans and net importing countries such as China and Japan. Most of the producing countries will be faced with budget deficits and have to pump more oil to support those deficits, which starts the cycle of over-supply and could lead to the Goldman Sachs $20 oil scenario.
Just like we wrote about back in June, the story of interest is not the story in front and center, but the story that has been quietly unfolding outside of the media spotlight. The Japanese economy is that story.
Years of bad fiscal policy led to the "Lost Decade" in Japan from 1991 to 2000, but now tends to be known as the "Lost Two Decades," as 2001 to 2010 did not hold much better, and for that matter Japan could be entering the "Lost Three Decades" as their economy is again retracting and could become yet another recession.
It has cost the Japanese economy greatly to stimulate any and every ounce of growth from the last 25 years. It was really Japan, and not China that mastered the "Bag of Tricks" to prop up their economy, and thanks to their great fiscal experimentation we now know many economic policies which would NOT work when it comes to fiscal and monetary policy.
What we need to turn our attention to now is NOT the actual problems that a Chinese economic slowdown or recession will cause, but the ripple effects of a slowdown. The Chinese ripple could be the splash that moves from country and picks up steam and eventually turns into a massive tidal wave, of which Japan is not ready to handle.
The Japanese economy is the 3rd largest in the world, and it is especially venerable to the Chinese economy as China is their largest trading partner in the form of BOTH imports and exports. Japan is deep into their 9th round of QE (note that using the numerical standard which has been applied to the Federal Reserve, there may have been as many as 22 or more actual rounds of QE) and they may not be able to fend off their 5th recession since 2008!
The stimulus by the Bank of Japan (BOJ) is massive; they have pumped $648 Billion into their $4.2 Trillion economy. If you do the math for the last quarter, 15% of their 1.7% GDP growth is only there because their central bank is burning up the Yen printing presses.
The honor of the highest debt-to-GDP ratio of the developed world thus falls square on the shoulder of Japan. Japan, with just under 230% of debt to their GDP, makes Greece look like child's play. So why was and is Greece getting all the media attention for their debt "crisis"? It is because Greece has reached the point where they simply cannot pay back their debts. How-ever, Japan is one ripple away from a tidal wave that sets off their similar reality of debt default.
So it is not the headline news stories we need to be concerned with, it is how the headline news will set up ripples that become tidal waves. Chinese economic slowdown, increased interest rates by the Federal government, low global commodity prices putting pressure on emerging market economies, or an American government shut down could be all it takes to set up a chain of events that could cause government debt defaults in Japan or elsewhere. When you talk about the straw that breaks the camel's back, it just so happens that Japan's camel is saddled down with the most weight, so it would only make sense that Japan happens to have the camel we should be watching the closest.
The above article is an excerpt from EQS Trading's Weekly Publication on the Commodity Markets called "Signals" which we write and publish every Monday. EQS Trading also publishes a daily "Trade Signals" email that provides in-depth "short" and "long" recommendations and trade strategies for the commodity market with entry prices and stop loss levels.
-To learn more about EQS Capital Management, and the Commodity Hedge Fund we manage you can visit us at: www.eqscapital.com
-To learn more and subscribe to EQS's daily "Trade Signals" and our weekly "Signals" publication please visit us at www.eqstrading.com
-To learn more about EQS Capital Management, and the Commodity Hedge Fund we manage you can visit us at: eqscapital.com
-To learn more and subscribe to EQS's daily "Trade Signals" and our weekly "Signals" publication please visit us at eqstrading.com