Tag Archives: Japan

Debt in a greying age

The book “Capital in the Twenty-First Century” by Thomas Piketty is unquestioningly one of the books of 2014. This blogger is currently reading Piketty’s book after finding it in his Santa sock this Christmas. There were not many other books from 2014 that caught my attention. One book that I am very much looking forward to in 2015 is the new Steven Drobny book “The New House of Money” with detailed interviews of money managers. On his website, Drobny has already released the first two chapters – one on Kyle Bass and the other with Jim Chanos.

The views of Kyle Bass, in particular, on Japan got me thinking again about demographics and the ability to withstand large debt loads. The views of Bass are also articulated in a piece on the investor perspectives website. For example, Bass states that currently in Japan debt repayments take up 25% of government tax revenues but that a 100bps rise in interest rates in Japan would mean that 100% of tax revenues would go to repayments. That leaves very little room for error!

This week, Buttonwood also has an article on the restrictions that large debt loads places on the effectiveness of monetary policy.

In terms of age profiles, the graphic below shows the profiles of the 9 largest economies (according to the World Bank).

click to enlargeTop 9 Demographics

Japan and Germany clearly stand out as countries with an aging population, currently with 26% and 21% of their populations over 65 respectively. I also compared the age profiles against the public and private debt figures (excluding that from banking and other financial service firms) from the “Deleveraging. What Deleveraging?report (see previous post on that report), as per the graph below.

click to enlargeMajor Country Public & Private Debt ex financial versus Age Profile

The graph does show that there is a clear relationship between debt loads and age profiles, particularly the percentages for the over 55s. However, the outliers of Germany and Russia on the low debt side and indeed Japan on the high debt side show that there are many other factors at play, not least the historic cultural characteristics of each country. The burden that high debt loads places on future generations is clearly an important policy issue for the global economy, one that will become ever more important if interest rates are to return to anyway close to normality.

As a follow-on to this post, I have been looking through the UN population projections and the following graphs represent population profiles I found interesting. The first is the world population historical figures and projections by age profile.

click to enlargeWorld Population Projections & Age Profile

The next graph is the world population split by continent (with Japan and China split out of Asia).

click to enlargeWorld Population Projections by Continent

And finally, a graph of the world population aged over 60 and aged under 15 split by continent.

click to enlargeWorld Population Over 60s & Under 15s by Continent

Judicious Volatility

The market has a tendency to take an extreme position, either everything is on the up or the sky is about to fall in. Well, fear is the flavour of the markets these days and that’s no bad thing given where we have come from. Still it’s annoying to hear the media full of hysterical noise on Ebola, the Middle East, Europe, Japan, Russia, oil, end of QE, deflation, etc. Hopefully, we’ll start to get some more considered arguments on what the medium term economic and earnings outlook may look like. Vitaliy Katsenelson had a nice piece on thinking through the effects of a few scenarios. Hopefully, the end of the happy-clappy market (it will likely not go easily and may well return before long) will lead to some more thoughtful pieces like that.

For now though, the smell of fear is in the air and the graph below on the ups and downs in the S&P500 show that the recent volatility is not even near correction territory (i.e. greater than 10% fall). In fact, we really haven’t had a proper correction since late 2011. As to whether this volatility will turn into a correction, I have no idea (I suspect it might take a while yet but it will get there).

click to enlargeS&P500 ups and downs

The graph below shows that the high beta stocks as measured by the Powershares high beta ETF (SPHB), as you would expect, have been hit hard here compared to the S&P500 and the low volatility ETF.

click to enlargeS&P high beta ETF

It will be interesting to see how the market develops over the coming weeks. Earnings, particularly guidance for Q4, will likely play a large part it how it plays out.

On the debate about whether historically high earnings can continue, McKinsey had an interesting article recently on the earnings and the market. The graph below from McKinsey illustrates the increased important of technology, pharma, and financials in the higher profits.

click to enlargeMckinsey Share of S&P500 profits

Spending time looking for thoughtful arguments on the impact of macro-economic, demographic and social pressure in today’s world on these sectors is a better way to understanding the medium term direction of the market. As McKinsey says “assessing the market’s current value ultimately depends on whether the profit margins are sustainable”. The rest is really just noise, best ignored or viewed from a distance.