Geopolitical Developments: The Yen For Stocks Depends On The Willingness Of The Japanese To Invest Confidently At Home
Americans are known as perpetual optimists but key to the fragile state of the global order is whether people around the world are becoming more like Americans. In particular, the confidence of the Japanese is key since Japan is a large economy and its past trade surpluses now amount to large investments all over the world. Gauging this confidence boils down to the value of the ¥, since so much trade is invoiced in $US., and avoiding recession depends on a weaker $US. Notwithstanding the past 3 weeks of trading, I see global recession as increasingly likely and am watching the $US for a renewal of its uptrend. Failing confidence in the € and ¥ and large EM nations will signal that the worst is still ahead of us, and that this bear market rally should be shorted. For now the markets are optimistic as the volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is short-term bullish and intermediate-term bearish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days before dropping as summer comes to a close.
The GOP will score big this November because it has its pick of issues to galvanize supporters: the seizure of weaponry documents from Trump’s home and the IRS advertisement for workers able to use deadly force are just the issues of the week. As reasonable as these developments are the most salient fact is they provide an unmistakable signal of the real trend gripping the West, namely the growth of the state. This runs counter to liberalism and the hypocrisy of liberals defending a larger state is key to why so many Americans turn to the GOP.
The pandemic galvanized the state to greater intervention in the ordinary lives of people, and the doubling of IRS agents proposed by the Democrats solidifies the trend as it gets to the last fulsome funding source of the state, namely wealthy taxpayers. Payroll taxes regressively fund entitlements so the Democrats are loathe to either reduce or increase them, while the draw of low-tax states like Texas and Florida make income taxes on the vast middle class off limits as well. There is simply no way for middle-class Americans who would like to be more affluent to tolerate higher taxes on the affluent, when it’s clear the federal tax code and estate tax code have been progressive for generations.
The intelligentsia know this but are also aware that America faces a demographic problem on three fronts: an aging populace, a low fertility rate and an imbalance between the need for immigrants and the cultural resistance to accepting more immigrants. This demographic problem makes the funding for the state an immediate problem, consequently the Democrats are completely dependent on a more effective IRS. There is no way for ordinary Americans to mentally separate a stronger IRS from a stronger state, no matter how many state benefits they enjoy.
Financially savvy Americans recognize a parallel here: the one liberal democracy with both an inventionist state and a longstanding demographic problem is Japan. And Japanification affects not just America but China, which worsens the problem since it means both China and America share a vulnerability and thus have reason to fear the other trying to exploit it. For this reason the politics of Japan matter not just to East Asia but to the West.
And key to Japan is the yen, which reflects the income flows the Japanese get from their investments abroad, as well as the nation’s trade position and propensity to invest externally versus attracting investments internally. The yen has been on a terrible downtrend since the pandemic and an even worse downtrend since the European sovereign debt crisis of 2011. The one solution Japan has to a declining standard of living and rising vulnerability to its adversaries is a stronger private sector. And here Japan offers key lessons.
East Asia Forum notes “With a strong victory in the July 2022 Upper House election, will Kishida summon up the courage to capitalise on new political opportunities? He should consider that many corporate giants which were previously worried that entrepreneurs would disrupt incumbent companies have begun to realise that they need them. At Toyota, the number of software vendors now exceeds traditional parts makers at its top 5000 suppliers. Most of these software companies are newer firms that refuse to become a Toyota satellite. The giant automaker must accept their terms because it lacks the required skills in software, which now accounts for 10 per cent of a car’s value. Such cases drove the conservative big business federation Keidanren to issue an important policy paper on 11 March 2022. ‘Start-up Breakthrough Vision 10X 10X’ calls for a tenfold increase in venture capital (VC) funding for start-ups and the creation of 100,000 new dynamic companies over the next five years.”
Like Japan, America needs a stronger entrepreneurial sector, not a rising state, in order to deal with the demographic problem. I contend the only way to get more entrepreneurship is via a behavioral change among ordinary Americans, not immediately lower taxes or deregulation. The behavioral change needed is shrewdness, which Americans like all people generally lack because they don’t know how to get it. Shrewdness typically comes via trial and error experience, and rarely by lessons passed on via family and friends. A method to develop this type of intelligence is needed to reset the dynamics of the capitalist system and make America stronger. Were researchers to focus on this as the first priority the nation would face a bold future instead of Japanification.
My current positions are a moderate but relatively large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETFs UPRO and SPXU.