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  1. #1

    Default General Macro Observations

    Starting a thread in which general macroeconomic observations can be made and discussed.
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  2. #2

    Default Re: General Macro Observations

    Japanese 5yr CDS Spreads. The developed world's most financially ridiculous nation is seeing a sharp decline in the perceived risk of default despite there being no material reforms being made to the fiscal situation which, if left unchecked, is on the path to ... something not very nice.

    20140531 - Japan CDS.png
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  3. #3

    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    ... , if left unchecked, is on the path to ... something not very nice ...
    As the Chinese professor would say,
    "What can I do with this information?"

  4. #4

    Default Re: General Macro Observations

    Quote Originally Posted by burglar View Post
    As the Chinese professor would say,
    "What can I do with this information?"
    Dunno. I just came across it and found it against the grain of my expectations and am puzzled. If you can figure it out, you'll know how to trade USDJPY for a start.

    Great to hear from you.

    The standard belief with Japan is that it is going to implode. "...bug in search of a windshield.." (Mauldin). Of Abe's three arrows, only one has been fired, and it looks like a miss. The fiscal side has been stimulatory, but completely unsustainable. If QE is not working, all you have left in fiscal and supply side reforms. Fiscal is nuts, in terms of debt to GDP. If interest rates were ever to revert to whatever is normal, the place would implode as the debt is rolled at higher rates. And that debt load is increasing rapidly despite a recent sales tax hike.

    There are two things that I can think of which are driving the CDS figures lower. One is increased profitability of domestic firms as a result of the weaker JPY (which seems a weird reason given the current account keeps deteriorating and there is no pop in sales, personal income or industrial production although Nikkei as risen a bit and Tankan is quite strong) and the fact that the BoJ is just an extension of the Treasury which will just keep QE going to destruction. In that kind of event, it is imaginable that default risk declines because you can always be paid in confetti...but that belief should have been there all along...or has been reassessed given recent developments.

    One is bullish JPY, the other is bearish. I think that the hypothesis of BoJ printing to oblivion is nuts and not factored into currency or equity markets. It would have also shown up in gold. BoJ prints pretty much what the Fed does now. USDJPY has been trading in a range all year. Both have near-term effectively zero interest rates making carry fairly neutral if judged by short rates only (it favours the US on long rates). JPY has weakened vs EUR and GBP in the last year. EUR has a Draghi ceiling on it.

    Looks like JPY upside. But, I dunno. Anyone got a perspective?
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  5. #5

    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    ... Great to hear from you ...
    I love to banter!

    Quote Originally Posted by RetiredYoung View Post
    ... Anyone got a perspective?
    Like Warren Buffett, I have no interest in Japan.
    But a Chinese recovery would be of enormous interest to me.

  6. #6
    sydboy007's Avatar
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    Default Re: General Macro Observations

    Is there any successful large economy not built on an unsustainable mountain of debt to invest in?

    Seems like the entire G20 is just floating on a sea of debt, only the inflatable bed seems to be getting more and more leaks.
    The best time to plant a tree was 20 years ago, the second best time is now.

  7. #7

    Default Re: General Macro Observations

    Quote Originally Posted by sydboy007 View Post
    Is there any successful large economy not built on an unsustainable mountain of debt to invest in?

    Seems like the entire G20 is just floating on a sea of debt, only the inflatable bed seems to be getting more and more leaks.
    Check this out:

    20140601 - Debt to GDP.png
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

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    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    Check this out:
    Sums up my perceptions.

    Even the successful looking CAS countries have massive levels of debt. Look at Singapore and it's scary the way their housing boom has taken off. HK has the highest cost housing in the world.

    Is it "safer" to invest in a CAS country? Can their CAS turn to a CAD quickly during the next global downswing in growth?

    I have a feeling mercantlist trade policies will be less effective in a slow growth environment.

    I think the saying about currency markets is it's more like a reverse beauty contest with not much talent, so it's kind of like picking the least "ugliest" to invest in. Seems to be similar to stock markets as well.

    http://www.nationmaster.com/country-.../External#2012

    Not Australia has put on another $300B to the credit card till the end of 2013. Not sure if that means our external debt rose by 20% in a year?? if so that's a scary rate.
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    The best time to plant a tree was 20 years ago, the second best time is now.

  9. #9

    Default Re: General Macro Observations

    Quote Originally Posted by sydboy007 View Post

    1. Even the successful looking CAS countries have massive levels of debt. Look at Singapore...

    2. Is it "safer" to invest in a CAS country? Can their CAS turn to a CAD quickly during the next global downswing in growth?

    3. I have a feeling mercantlist trade policies will be less effective in a slow growth environment.

    4. Not Australia has put on another $300B to the credit card till the end of 2013. Not sure if that means our external debt rose by 20% in a year?? if so that's a scary rate.
    1. Actually, in Singapore's case, that debt accumulation is funneled straight into the CPIF in the form of non-tradable securities. I guess it's like pumping money in their Future Fund. The Federal government (at least), has not run a deficit for around 30 years.

    2. I think we cannot say based on that division. In addition to the size, I think it also depends on the gross flows and what they do with it. In terms of whether things switch, clearly it can. This would depend on what their trade basket is and their sensitivities to external and internal developments (micro reform etc.). Each case would need to be considered on its merits. It's not necessarily a bad thing to be a CAD country. It just may be in that time of their development. Being an permanently increasing CAD/GDP obviously can't be sustained though. And then you have the Fragile 5 examples, Tequila Crisis....

    3. Don't know. There is a greater norm nowadays to reject mercantilist policies. Further, there are an increasing number of regional trade pacts being formed which makes it harder to launch one without irritating your neighbours. Having said that, the world was 'happy' to tolerate a depreciation of the JPY.

    4. Need to look into that one...

    For your viewing pleasure, from Mauldin, the composition of Chinese debt. Zombies, and government debt squeeze out the private investors and householders. Given fixed asset investment is now what is keeping the economy afloat...with net exports not making that much of a contribution anymore...this is pretty bearish...

    20140601 - China Debt Components.jpg
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  10. #10
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    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    For your viewing pleasure, from Mauldin, the composition of Chinese debt. Zombies, and government debt squeeze out the private investors and householders. Given fixed asset investment is now what is keeping the economy afloat...with net exports not making that much of a contribution anymore...this is pretty bearish...
    Just another reminder to how much debt is out there. I find it hard to get my head around just how much debt there is, most against assets that have been pumped up in value due to ZIRP.

    Surely it can't all end particularly well? Sometimes I feel like I should be following the Romans and burying gold coins in my backyard. I just don't see as anywhere is particularly safe these days. Pretty much every country has some issue bubbling away underneath just waiting to explode. Even the Swiss are sitting on debt time bombs. Maybe Norway, though the weather suxs
    The best time to plant a tree was 20 years ago, the second best time is now.

  11. #11
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    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    The standard belief with Japan is that it is going to implode. "...bug in search of a windshield.."
    Being a Macro simpleton, I can't see too many concerns about Japanese default. Most of their Government debt is owned by their own private citizens and the country has a very health NIIP.

    To me it just seem like worrying about a husbands debt when most of the debt is owned by the wife and the family has heaps of assets. Mostly the whole issue is just a domestic dance, but there is no way the husband is going to ultimately default to those outside the family - its not in his or the wife's interest to jeopardise the family assets.

    They don't so much need currency devaluation because the majority of the debt is internal - they want price inflation to reduce the debt in real terms because that's more palatable then raising taxes to pay it down. But default? Given their NIIP/GDP is about the same as Australia's but with a POSATIVE sign in front of it, I don't think so - worry about Aus first.
    Last edited by craft; 1st-June-2014 at 05:32 PM.
    There are other ways of doing things.

  12. #12

    Default Re: General Macro Observations

    Quote Originally Posted by sydboy007 View Post

    1. I find it hard to get my head around just how much debt there is, most against assets that have been pumped up in value due to ZIRP.

    2. Sometimes I feel like I should be following the Romans and burying gold coins in my backyard. I just don't see as anywhere is particularly safe these days.

    3. Not Australia has put on another $300B to the credit card till the end of 2013. Not sure if that means our external debt rose by 20% in a year?? if so that's a scary rate
    1. I can't make sense of valuations. They suggest that there will be an ongoing move of share of GDP towards capital and away from labour. With participation rates dropping mostly due to demographic reasons and unemployment dropping, that doesn't seem reasonable.

    Bonds provide a poor after tax return too and credit margins are very low. Cash may indeed be the best long term asset.

    20140601 - GMO Shiller Reversion.png


    2. Not such a bad idea actually. Maybe not such a good idea to broadcast it on ASF.... you might have a 'council request' to dig up your backyard en route.

    20140601 - Citi All-In Gold Cost Curve.png


    3. Rate of growth of offshore net finance is slowing. Interesting composition mix. Banks are getting redeemed (partly as a result of change in funding mix towards deposits) and direct investment to non-financials is increasing. That's a good sign that international credibility for Australian firms is good...or maybe it's because our interest rates are just higher and this is search for yield in play as well.

    20140601 - Australian Capital Flows.png
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  13. #13
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    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    1. I can't make sense of valuations. They suggest that there will be an ongoing move of share of GDP towards capital and away from labour. With participation rates dropping mostly due to demographic reasons and unemployment dropping, that doesn't seem reasonable.

    Bonds provide a poor after tax return too and credit margins are very low. Cash may indeed be the best long term asset.

    20140601 - GMO Shiller Reversion.png
    Not sure I agree bonds are such a bad deal. Maybe euro and US Govt bonds, and japanese govt bonds too are not worth bothering with, though PIMCO tried that a couple of years ago and got badly burned.

    But I'm quite happy with my envestra inflation linked bond providing me a 3.4% yield above CPI - up around 10% so far this year with incom + capital growth. Plenty of corporate bonds from relatively safe companies (compared to most Governments) offering 6-8% yields depending on your risk level. Seems a better bet than casino HFT via the ASX.

    Any inflation linked bond at the moment is doing well in Australia in that it's at least increased the payment level due to the spike in inflation recently CPI came in at 2.9% last qtr. I'm not expecting it to fall too much over the next year because every drop in the AUD is going to see tradeables inflation spike again.

    Are macro observations even important these days? From a macro perspective shouldn't most of the countries with the lowest interest rates actually be facing increasing rates? When half the worlds central banks are spiking the punch is there any macro fundamentals left, or should we be playing to the tune of the banks and forget about the underlying reality?

    I can't help but feel we've been convinced the nearly falling down house of debt is now a new macmansion simply due to a sort of fresh coat of paint and some photoshopped photos of the interior.
    The best time to plant a tree was 20 years ago, the second best time is now.

  14. #14

    Default Re: General Macro Observations

    Quote Originally Posted by sydboy007 View Post
    Are macro observations even important these days? From a macro perspective shouldn't most of the countries with the lowest interest rates actually be facing increasing rates? When half the worlds central banks are spiking the punch is there any macro fundamentals left, or should we be playing to the tune of the banks and forget about the underlying reality?
    I have exactly the same puzzle:
    should we even bother: USD should be just worth the value of the paper it is printed on when considering the amount created monthly,
    yet Gold in USD goes down, and commodities/food/aka real valuable assets do not change much or fall;
    RE in Australia keeps going on as if nothing happens yet there is hardly any job and a lot of at home dads in my circles: project manager/business analyst in Brisbane;
    daily rate have fallen 20% in the last 4 years for the lucky few with work while inflation has taken an extra 10% or so;
    wher does the money come from now? what do we sell?
    yet the AUD is still at 93c;
    And US first quarter are a disaster yet, all is good, it was winter..
    As if this was the first harsh winter in the US

  15. #15
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    Default Re: General Macro Observations

    Quote Originally Posted by qldfrog View Post
    I have exactly the same puzzle:
    should we even bother: USD should be just worth the value of the paper it is printed on when considering the amount created monthly,
    yet Gold in USD goes down, and commodities/food/aka real valuable assets do not change much or fall;
    RE in Australia keeps going on as if nothing happens yet there is hardly any job and a lot of at home dads in my circles: project manager/business analyst in Brisbane;
    daily rate have fallen 20% in the last 4 years for the lucky few with work while inflation has taken an extra 10% or so;
    wher does the money come from now? what do we sell?
    yet the AUD is still at 93c;
    And US first quarter are a disaster yet, all is good, it was winter..
    As if this was the first harsh winter in the US
    I think it's all about perception. For a long time after teh GFC pretty much everything was viewed as bad, now it seems like we can just ignore all the bad stats coming out.

    We have a wimpy RBA not taking action to get the AUD down to a more real worth level, so the hollowing out of manufacturing and other sectors will continue until there's nothing really left.

    I keep thinking maybe it's best to invest in the truly global companies that do well because they can eek out growth somewhere, or do like a Heinz and move production from Australia to NZ over 5c a bottle of sauce cost reduction.
    The best time to plant a tree was 20 years ago, the second best time is now.

  16. #16

    Default Re: General Macro Observations

    Quote Originally Posted by craft View Post
    Being a Macro simpleton, I can't see too many concerns about Japanese default. Most of their Government debt is owned by their own private citizens and the country has a very health NIIP.

    To me it just seem like worrying about a husbands debt when most of the debt is owned by the wife and the family has heaps of assets. Mostly the whole issue is just a domestic dance, but there is no way the husband is going to ultimately default to those outside the family - its not in his or the wife's interest to jeopardise the family assets.

    They don't so much need currency devaluation because the majority of the debt is internal - they want price inflation to reduce the debt in real terms because that's more palatable then raising taxes to pay it down. But default? Given their NIIP/GDP is about the same as Australia's but with a POSATIVE sign in front of it, I don't think so - worry about Aus first.
    Totally awesome.

    Japan vies with China for the biggest owner of US Treasury debt. It does so to finance the surplus it has with the US. Geopolitically, it is evident that Japan is the US extension in the Pacific sphere, so the whole thing ties in to a wider picture which is not seen with China.

    Japan is a bit like China in that it manages its foreign reserves to ensure that exports are competitive. Japan has more or less the same US treasury holdings as China. Virtually its entire FX reserves are held in that way. China's are not. Although having this type of situation might seem advantageous, it actually comes with a lot of risk.

    It means that the US needs to tolerate a country which has a seemingly permanent trade surplus financed fairly significantly with accumulation of foreign reserves. This has been in place since the Plaza Accord and remains something of an understanding...probably for stuffing up the Japanese Banking system and bringing in the Lost Decade (or two...maybe three). The Japanese trade surplus was an issue in 1985. It remains one now.

    Additionally, it is a way of supporting industry over the compliant laborer.

    Interestingly, reserve accumulation has slowed dramatically in since about late 2011. This reflects a deterioration of Japan's trade position and current account.

    Because China's reserves are so large, it can effectively absorb a stack of JPY in circulation that arises through sale of Japanese bonds abroad. If China were to hold a stack of JPY, it is possible to force regional trade to take place in JPY. China has already negotiated a deal to trade oil with Russia in Yuan. Oil was central to making the USD the key currency in a post Bretton Woods world. There are a stack of JPY gov't bonds in circulation. So any discussion of net IIP needs to be considered along with Gross.

    I love the husband/wife analogy. It is this which has kept this whole thing going for a lot longer than almost anyone had imagined would be possible. But at some stage, self interest takes over from the interests of the nation. The longer this goes, the more intense any crack will be felt.

    Let me borrow from this fantastic analogy.

    Husband: Fetch me my dinner woman!

    Wife: Here sweetheart, your favorite bento box. Now, do I get a hug?

    Husband: Not now woman, here's an IOU instead.

    ....a year passes. 365 IOUs are issued.

    ....a decade passes. 3,650 IOUs are issued. Leap days had hugs.

    The wife realizes that she will never get the hugs back and realizes that this is a scam played by the recalcitrant husband. She withholds 'services'. The man tries to hug, but the hugs are now severely deflated due to the surfeit of IOUs and decay in the quality of hugs as a result of not being subject to the rigors of the capitalist system. Now it goes (even more) nuts. The husband has a mate. When the husband calls for his dinner and the pissed off wife delivers it, the IOU goes to the mate who promises never to cash it in in the form of requiring a man hug. This is QE. Together, they are trying to inflate the value of the outstanding IOUs whilst getting the wife to keep doing all the work. As in Japan, every chore is now unpaid in the hope that the IOU base decreases relative to production (creating inflation). Every dinner she brings is now supposedly worth less hugs. The harder she works, the less hugs she will get per dinner served. Interesting incentive.

    One day the wife gets up, looks at herself in the mirror and starts buying AUD bonds instead. The husband starves and the IOUs cannot be repaid. The mate is left holding confetti that is not going to go very far.

    It's like money. It only works if each of us believes that another will value it. The moment doubt arises...it's not nice. Until that time, all looks fine. Japan looks fine in the way a tightrope walker at 50 storeys looks fine....until it doesn't.
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  17. #17

    Default Re: General Macro Observations

    Quote Originally Posted by sydboy007 View Post

    1. Not sure I agree bonds are such a bad deal. Maybe euro and US Govt bonds, and japanese govt bonds too are not worth bothering with, though PIMCO tried that a couple of years ago and got badly burned.

    2. But I'm quite happy with my envestra inflation linked bond providing me a 3.4% yield above CPI - up around 10% so far this year with incom + capital growth. Plenty of corporate bonds from relatively safe companies (compared to most Governments) offering 6-8% yields depending on your risk level. Seems a better bet than casino HFT via the ASX.

    Any inflation linked bond at the moment is doing well in Australia in that it's at least increased the payment level due to the spike in inflation recently CPI came in at 2.9% last qtr. I'm not expecting it to fall too much over the next year because every drop in the AUD is going to see tradeables inflation spike again.

    3. Are macro observations even important these days? From a macro perspective shouldn't most of the countries with the lowest interest rates actually be facing increasing rates? When half the worlds central banks are spiking the punch is there any macro fundamentals left, or should we be playing to the tune of the banks and forget about the underlying reality?

    I can't help but feel we've been convinced the nearly falling down house of debt is now a new macmansion simply due to a sort of fresh coat of paint and some photoshopped photos of the interior.
    1. I guess you mean that Aust corporate debt looks alright, and possibly so does Aust Gov't. Just FYI only, yield spread on BBB (as an example) has now compressed to levels not seen since the start of the GFC. I think it is clear to most that risk was underpriced prior to the GFC, so maybe this is as good as it gets for corporate credit?

    20140601 - Yield Spreads.png


    2. Yeah, good stuff. Part of the reason you've done so well is that nominal bonds came in and affected the discount rate applied to the expected real coupon/capital stream and probably also a compression in the credit spread. Just watch out for extending that expectation.

    With nominal Aust gov't yield and credit yield now very low against inflation expectations (at least, RBA mid band), real yields just weren't what they used to be. Treasury 1.25% Feb 2022 offers only 1% real. What the heck is that? Aust Gov't is credit sound, but I hear you about other countries and it wouldn't be the first time that corporate yields have been preferred to sovereign.

    Having said that, linkers definitely have a role to play. You mentioned FIIG in an earlier post about how much you need to live on $30k or something....I opened an account.


    3. In relation to rising rates, you'd think so. But then why do they keep falling? Liability matching, less supply of US bonds meeting with increased demand from people leaving equities?? Lower equilibrium rate assessment? PbOC reserve management and FFX management?

    All of this affects macro variables which then affect the stuff we invest in.

    If you are saying this is severely rigged...yep. But somehow, sometime, gravity takes hold. I want to know where the most egregious gaps are between a rigged situation and what it should be in reality. The markets are bigger than the banks ultimately. The banks are also reacting to macro developments.

    As to McMansions...no doubt about it that they need to act calm whilst the house is on fire. Ahhhhhhhhh!!!
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  18. #18
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    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    One day the wife gets up, looks at herself in the mirror and starts buying AUD bonds instead.
    It’s an arranged marriage with no way out. It’s truly until death do we part.
    If the Japanese citizens don’t continue to fund the government’s debt then they will be face increased taxation. (Don’t think I’ll translate that into the analogy)

    Only if those tax increase impacts the economy and national psychology to such an extent that the Japanese turns from net saver to net spender and spend all their accumulated foreign assets would the circumstances be in place for default.

    Japan’s Net International Investment position is around positive 60% of GDP
    Australia’s NIIP/GDP is around negative 60% and our earnings are cyclical.

    Japanese Government debt is way down my list of things to worry about. But in my case maybe it’s just a case of ignorance is bliss.
    Last edited by craft; 1st-June-2014 at 11:31 PM.
    There are other ways of doing things.

  19. #19

    Default Re: General Macro Observations

    Quote Originally Posted by craft View Post

    Only if those tax increase impacts the economy and national psychology to such an extent that the Japanese turns from net saver to net spender and spend all their accumulated foreign assets would the circumstances be in place for default.
    Here is how it ends on the tax and net saver/spender front. Japan is a demographic train wreck in slow-motion:

    20140601 - Japan demographic.png


    The NIIP includes private and public debt and equity investment of a portfolio and direct nature. The official reserves component is quite a bit smaller. When you have a debt load of 220% of GDP, net official reserves won't mean a lot. Also, if they are deployed, it would raise the value of the JPY due to FFX pressures and hurt GDP more...requiring more stimulus, more tax...

    From Debelle (RBA) 2014:

    20140601 - Debelle.png


    Yet, Japan has always been idiosyncratic. The JPY rises vs other smaller currencies in stress. So it is something of a safe haven...just like you say.
    Disclaimer: This is not advice. I do not endorse any person, product or organization. Nor am I suggesting the purchase/sale of securities. Pls do your own work.

  20. #20
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    Default Re: General Macro Observations

    Quote Originally Posted by RetiredYoung View Post
    It means that the US needs to tolerate a country which has a seemingly permanent trade surplus financed fairly significantly with accumulation of foreign reserves. This has been in place since the Plaza Accord and remains something of an understanding...probably for stuffing up the Japanese Banking system and bringing in the Lost Decade (or two...maybe three). The Japanese trade surplus was an issue in 1985. It remains one now.
    I think any talk of Japan's lost decade(s) need to be viewed slightly differently. I'd argue they've done amazingly well for at first a rapidly aging population, and probably the last decade or so, for a falling population. When you view per capita GDP for the country things don't look too bad.

    Conversely you look at Australia and it seems we've got good GDP growth so things should be sweet, but once you look at the per capita figures you start to notice the paint falling off and what's probably termite damage hollowing out much of the structure.

    I do think Japan is borked unless they can get enough nuclear power stations back on line that they can significantly reduce their LNG imports. Since the fukushima shutdown it's decimated their trade surplus. The only reason their massive govt debt hasn't been an issue is the trade surplus. Too many CADs and maybe Soros will decide to take them on
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