Are You Ready for the World's Biggest Bankruptcy?
By Tom Dyson
Wednesday, March 04, 2009
The media have given London a new nickname: Reykjavik-on-Thames.
Britain's economy revolved around banking. British banks hold about $4.4 trillion in foreign debt. The total size of the UK economy is $2.1 trillion. This year, the British government nationalized major parts of the UK's banking system. In total, the UK Treasury is on the hook for over $2 trillion in potential liabilities, according to an estimate by the Office of National Statistics.
But Britain is NOT going to be the world's biggest national bankruptcy. The government debt of the United Kingdom is only around $950 billion... or about $15,000 per capita.
This week, the United States Treasury sunk another $30 billion into AIG... its fourth bailout. It also put another $25 billion into Citigroup. The Treasury is now on the hook for as much as $6 trillion in liabilities. Last week, the White House produced its new budget. President Obama wants to run a deficit of $1.75 trillion in 2009.
The Treasury will pay for these bailouts by borrowing money. The Treasury borrows money by issuing Treasury bonds. Tomorrow, for example, it will auction three-year, 10-year, and 30-year bonds. This auction should raise around $60 billion.
The "debt clock" measures the amount of money the government owes its creditors. Today, the U.S. debt clock reads $11 trillion. To pay off this debt tomorrow, the government would have to collect $36,000 from every American.
But America is NOT about to be the world's biggest bankruptcy.
Of the major industrial economies in the world, Japan's government is the most indebted.
Since its recession began 20 years ago, Japan has plowed trillions into its banking system via numerous bailout programs. Japan's mantra is growth without cost. As a result, the Japanese government has built up the world's most crippling debt load.
The government of Japan owes $7.8 trillion. That's $157,000 per capita.
We've been using government debt per capita to compare the government debts of Britain, the United States, and Japan. But government debt to GDP is the ratio economists use to compare the indebtedness of countries. The UK has a government debt-to-GDP ratio of 48%. The U.S. has a government debt-to-GDP ratio of 75%. Japan has a government debt-to-GDP ratio of 187%.
If there's going to be a major sovereign bankruptcy, it's going to happen in Japan. Its economy is a shambles. For years, Japan has relied on exports... but even that's drying up now. In January, Japan's exports plunged 47%, producing a trade deficit. People talk about Japan as a "nation of savers." But that's not true anymore. Japan's personal savings rate has collapsed from 16% in the early 1990s to 2.2% last year.
Japan has an aging population and no immigration. I can't see where it's going to find the money to pay off its huge pile of debt.
The way to play the collapse in Japan is by shorting the yen. Right now, the Japanese yen is the world's most popular currency. Traders perceive it as a safe haven. In 2008, the yen was the world's best performing currency.... Rising 33% against the Canadian dollar, 40% against the British pound, and 19% against the dollar.
Back in January, I told you a fall in the yen was all but inevitable. The yen is down 12% since that article. But according to
a Merrill lynch report I saw yesterday, large speculators still have a $3.7 billion long position in yen futures. The analyst described it as "crowded."
The Japanese yen has been in a 40-year bull market. I think a new long-term bear market has just started... and it will end in the bankruptcy of Japan's government. FXY is the ETF for the Japanese yen. When then yen falls, this fund falls, too. The easiest way to bet on a fall in yen is to short this fund or buy put options on it.
Good investing,
Tom |
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YOU CAN MAKE A LOT OF MONEY TRADING NEWSPAPERS
Last month's "trend follower" advice on newspaper stocks is turning out to be a heck of a trade...
On September 13, 2008, our colleague Porter Stansberry made the case for newspaper shares to go much lower in the coming years. The industry is getting pinched on all sides: Internet sites offer free content that folks used to pay for... newspaper publishers have massive overhead costs... and online advertising is eating newspaper revenue.
Since that column, newspaper stocks have plunged... far more than the overall market. We updated you on this plunge last month and recommended "trend followers" hop on this giant downtrend. Specifically, we pointed out the downtrend in USA Today publisher Gannett (GCI). Shares are down 56% since that update.
Legendary trader Ed Seykota once claimed he could decide to buy or sell an asset by sticking the chart on the wall and looking at it from across the room. If the trend was clear enough to see from that far away, it was worth jumping on. As our two-year chart of Gannett shows, the trend in newspapers is one of those "I can see it from across the room" charts.
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Standard & Poor's on Monday cut Gannett Co's ratings to junk status, citing worsening prospects for ad spending at the largest U.S. newspaper chain.
S&P also warned that some lenders could recover only a negligible amount of their investment if the company defaults.
Gannett's rating had been in danger of slipping to junk since the publisher of USA Today posted a 36 percent decline in ad revenue in the fourth quarter. A downgrade to junk status can significantly increase a company's borrowing costs.
– Reuters
An annual convention of newspaper editors has been canceled for the first time since World War II, undone by the worst economic crisis since that harrowing era.
The American Society of Newspapers Editors' decision to skip this year's meeting was announced Friday, coinciding with the final edition of the Rocky Mountain News – the largest daily U.S. newspaper to shut down so far during a steep two-year slide in advertising revenue that's draining the life out of the industry.
"The industry is in crisis," said Charlotte Hall, president of the trade group and editor of the Orlando (Fla.) Sentinel. "This is a time when editors need to be in their own news rooms doing everything they can," to help their publications survive.
– Associated Press
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