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Zeros Approaching

There was a time – World War II, in the Pacific Theater – when the phrase of our headline today aroused all sorts of mortal fear.

Japanese fighter planes carried the same insignia that adorns the otherwise white flag of the island nation: a large red disc, in the center, representing the sun.

American fighter pilots nicknamed Japanese fighter planes “zeros” because the red disc looked like the numerical digit used to represent “empty.”

Well, there’s a new threat emanating from the Land of the Rising Sun.

Imagine “beyond zero.”

Well, actually, we don’t have to just “imagine.”

It’s happening… in Japan.

Less (!) Than Zero

On Friday, January 29, 2016, a date that may live in infamy, the Bank of Japan (BoJ) suddenly and deliberately set its uncollateralized overnight call rate at minus 0.1%.

It’s the latest attempt to push inflation toward the BoJ’s 2% target, as global headwinds threaten to tilt the domestic economy back into deflation.

Japan’s central bank is already buying JPY80 trillion (USD674 billion) in financial assets per year – including bonds as well as equities in the form of exchange-traded funds.

The impact of these already extraordinary monetary measures has been undermined of late due to weakening growth abroad.

The BoJ wants a weaker yen to stimulate exports and higher stock prices to goose domestic confidence.

What may result, instead, is an all-out currency war.

Japan is now at minus 0.1%, joining Switzerland at minus 0.75%, Sweden at minus 1.1%, and Denmark at minus 0.65%.

It’s a well-known tool of government A: Boost the economy by letting the currency decline. Exports will rise.

But A’s currency must decline relative to trading partners B, C, and D. If B, C, and D respond with rate cuts designed to let their currencies slide, the result is nil.

We’re talking about a devaluation game that everybody’s playing but nobody can win.

Crashes

This week’s Saturday Spotlight features Wall Street Daily Founder and Publisher Robert Williams interviewing Global Markets Analyst Martin Hutchinson.

In a wide-ranging discussion, Bob and Martin talk about an impending crash – likely to occur within the next year – that’s the inevitable result of ultra-low interest rates, extreme confidence, and overbuilding.

  • Signs of an impending crunch include corporate and consumer debt levels that are rising faster than the rate of GDP growth.
  • Indications that the junk bond market is beginning to fall apart, a potential catalyst for a series of events like we saw during the 2007 through 2009 Great Financial Crisis.
  • Reckless monetary policy, with relatively cheap and easy money leading to misallocation of resources and overbuilding.

Cracks are already appearing – witness the collapse of Management LLC’s junk bond fund in December 2015.

http://wallstreetdaily-1.wistia.com/medias/nwkwaoi07e?embedType=async&videoFoam=true&videoWidth=960

A catastrophic erosion of confidence could result from the widespread realization that bonds investors thought had value didn’t.

Watch for small funds going bust. Watch for unexpected corporate bankruptcies.

The window for new credit will begin to close, thus denying refinancing opportunities.

That’s how the whole superstructure will come crashing down.

We’ve had plenty of credit crunches in the past. It doesn’t necessarily mean we have to have a devastating recession.

The setting for the interview is important: Bob and Martin met at a luxury hotel just outside New York City, with a view of the harbor.

“This extremely elegant hotel that’s pretty new,” notes Martin, “and really rather empty suggests to me that there are a lot of other hotels just like this.

“And it suggests to me that the hotel industry is hurting.

“A beautiful, empty hotel won’t be making any money.”

That means a structure likely financed by bonds isn’t generating any cash flow. And its owners won’t be able to service their debt.

There are a lot of hotels in the world. Many of them new. Many of them beautiful.

Many of them empty.

Countermeasures

There aren’t a whole lot of options available to policymakers right now.

Consider: We now have a situation where a quarter of global GDP is produced in 23 countries that are trading with a negative interest rate policy.

It’s heating up out there. But we haven’t yet devolved into a cycle of all-out competitive currency devaluations.

The Currency Cold War is a central theme of Martin’s premium service Currency & Capital.

Indeed, Martin has staked out a position within the Currency & Capital Portfolio that’s designed to help us profit from a steep Japanese downturn.

And his constant surveillance of global financial markets, macroeconomics, and geopolitics reveals actionable ideas on how to not just survive but thrive amid major moves for global currencies.

A Currency Cold War – even one that’s heating up – presents many opportunities for investors.

Make sure you’re among those taking advantage: Check out Currency & Capital.

Around WSD

Global Markets Analyst Martin Hutchinson does have some good things to say about the market right now – particularly when it comes to healthcare stocks.

It’s simply a matter of demographics: Healthcare spending, which was up 5.3% in 2014 to approximately $3 trillion, will rise along with aging Baby Boomers.

Technological advances should also drive spending.

Martin recommends that income investors establish positions in a few high-quality, well-positioned companies.

Chief Income Analyst Alan Gula takes on valuation in the aftermath of the worst start to a trading year in history.

Alan favors a “bottom-up” valuation metric – EV/EBITDA, which takes company debt into account. And on this measure “the market remains expensive.”

Senior Analyst Jonathan Rodriguez, the resident optimist among us, identifies yet another useful tool for traders amid this seesawing market.

According to Jonathan, “The ascending triangle pattern forms as the support line for a stock rises and shares meet overhead resistance at the same time.”

An ascending triangle is a sign that demand for a particular stock is rising.

And that’s bullish.

Senior Analyst Greg Miller ponders cable set-top boxes and the inability of the technology to go “smart” amid a wave of such conversions among cellphones, homes, the electricity grid, and utility meters.

The good news is FCC Chairman Tom Wheeler recently proposed the elimination of cable companies’ monopoly over set-top boxes.

Wheeler’s gambit would force cable companies to make their signals “open source,” so that other companies can also make the devices that control the signal.

About time.

Finally, Senior Correspondent Shelley Goldberg takes a look at what’s going on with the “51st state,” unincorporated U.S. territory Puerto Rico.

The Governor of the Commonwealth of Puerto Rico, Alejandro Garcia Padilla, in a meeting with lawmakers in Washington, said the island is in a “death spiral.”

Padilla warned that “the U.S. faces a humanitarian crisis under its own flag if Congress does not act soon.”

As Shelley notes, “Ultimately, no one will be dancing until this crisis is resolved, and it’s likely to end up in a lengthy court battle unless Washington politicians step in and negotiate.”

David Dittman

, Contributing Writer

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