The World's Next Credit Crunch Is About to Strike
Interest-Rates / Credit Crisis 2010 Mar 26, 2010 - 04:38 AM GMTBy: DailyWealth
Tom Dyson writes: One of the largest economies is about to declare bankruptcy.
How do I know? Here's what fund manager Takahiro Kawase had to say…
"The big change for us is that there's no new money to invest, so we may need to be a seller." With $1.37 trillion under management, Takahiro Kawase is the world's largest fund manager...
Uh oh. This is bad news. Today, I'm going to explain how this happens... and show you how to profit from it.
Kawase runs the Japanese public pension fund and has sole discretion over its asset allocation. This fund is enormous… bigger than the 2008 GDPs of countries like Australia, India, and Mexico. It is almost seven times bigger than top U.S. pension fund CalPERS, according to Bloomberg.
Kawase's favorite investments are Japanese government bonds. He has 70% of his portfolio in them. Needless to say, Kawase is the world's largest investor in Japanese government bonds.
Unfortunately, Kawase has to give up investing in Japanese government bonds and begin selling them...
Japan's aging society is the reason. Millions of Japanese are entering retirement and drawing pensions, Kawase has to pay their pensions. Meanwhile, fewer Japanese are entering the workforce, so Kawase's pension fund receives less money.
The result is, Kawase will have to start liquidating some of his Japanese government bonds and says his fund will be a net seller of bonds for the next few years.
If you thought the U.S. government was heavily in debt, you should see Japan. The Japanese government's debt has now reached $10 trillion... almost the same debt load as the U.S. government, except America's GDP is almost triple Japan's. Japan now has the world's highest debt-to-GDP ratio of any country in the world except Zimbabwe, according to the CIA World Fact/book.
Dylan Grice, an analyst at Societe Generale, says about a quarter of Japan's total debt load – $2.36 trillion – will reach maturity in 2010. In other words, the Japanese government has to find new investors for $2.36 trillion in debt – about 45% of its GDP – over the next nine months.
This huge debt rollover comes at the same time as the world's largest investor in Japanese government bonds has said publicly it won't buy any more... (Another huge investor in Japan also said recently it's considering selling Japanese government bonds over the next few years.)
I think the Japanese government is heading for a credit crunch either this year or next year. It won't be able to roll over its bonds, interest rates are going to rise to attract investors, the government won't be able to afford the interest, the debt load will get worse... and before anyone can patch up the problem, confidence in Japan's credit will evaporate. It'll be a nightmare a hundred times worse than the subprime crisis...
What's the easiest way to profit from this? Short the Japanese yen. It's going to implode when the Japanese government tries to inflate its way out of the problem. It's a good time to place this trade... The yen is close to an all-time high against other currencies.
FXY is the symbol for the Japanese yen fund… but the easiest way to place this trade is to buy YCS. It's a double-short Japanese yen fund that rises 2% for every 1% the Japanese yen falls.
Good investing,
Tom
P.S. This government crisis has huge implications for the Japanese stock market. In today's issue of DailyWealth Premium, Steve Sjuggerud explains how Japan's credit crisis will affect Japan's stocks... and what you can do to take advantage of it... To access DailyWealth Premium for only $5 a month, click here.
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