Wednesday, October 17, 2018

Euro's Value Is Being Buoyed By Anti-Trump Sentiment

Currently, Euro Trades At About 1.15 To The Dollar
Italy's debt remains a "quiet roar" unnoticed by many even ignored but an unfixable problem that will not go away. We can only speculate as to how events will unfold in the continuing saga playing out in the Euro-zone between Italy and Brussels. If the populist-led Italian government backs down it will not make their debt vanish or result in an improved future for the country, it will only set back for a bit the day when all parties must face the realities of the situation. Few people deny the ingredients of a debt crisis exist in Italy, a huge amount of questionable debt, weak banks, an erratic government. and a sizable economy able to inflict collateral damage outside Italian borders.

The Italian government has no intention of backing down from their budget stance despite threats from the ECB to provoke a Greece-style banking crisis if the Italians don't yield. This should be crushing the euro. Ironically, in many ways, a great deal of the recent support for the euro has been generated as a reaction to the Trump administration's unpopular actions such as unilaterally reimposing sanctions on Iran. Acts like these are eroding the dollar's global appeal. Trump’s unilateralist approach to foreign relationships is reshaping the world in profound ways by undermining multilateral institutions. This means other countries see this as an opportunity to develop new geopolitical capabilities which play out in the currency market.

His Detractors Find Trump's Logic Challenging
The world has reacted poorly to many of the President's policies and whether his supporters want to admit it or not Trumps weaponizing the dollar has played out in a negative way for the dollar. It has also had the effect of bolstering the euro which has in the past been viewed as one of the few real alternatives to the dollar even if it means sweeping under the rug the reality that internal strife is threatening to tear the Euro-zone apart. By focusing on the media's negative spin on Trump and their reports that he can do nothing right, it makes investors more willing to speculate on the dollar falling out of bed and being shunned by one and all. Even the apparent killing of a Saudi born journalist in Turkey has been spun to feed into this narrative.  

The Dollar Remains The Only "Real Option"
The backlash against the dollar has been spurred forward by the US threatening to penalize companies doing business with Iran by denying them access to US banks. This has created a wave of speculation that such talk could hasten the dollar's demise as the main global currency. Currently, the euro is the world’s second-leading currency but it lags far behind the US dollar. Two-thirds of all loans issued by local banks in foreign currencies are denominated in dollars, compared to around just 20% in euros. More important is that similar proportions apply in the area of global foreign-exchange reserves.

It is simply not a case of many countries feeling they must question their bonds with America and whether they can continue to regard the United States as a reliable alliance partner but the pressures of a changing world that are heightening concern of currency valuations. Like all fiat money, the dollar is nothing to brag about. however, at this time the other options are even less compelling. The major Central Banks being well aware of how devastating currency moves can be have gone out of their way behind the scenes to stabilize an unstable situation which they created with a decade of QE policies.

The argument that currencies are trading in a false paradigm extends past simple manipulation and is bolstered by their being sheltered from the storm of volatility by existing in a rather closed system in which wealth tends to become trapped. The reality is that after years of doing "What Ever It Takes" Draghi must be at wit's end. No real solutions exist for the Euro-zone as it confronts the grueling challenges before it of remaining competitive in the global marketplace and the political unrest brewing within its borders only complicates the task.

Footnote; For more on the euro see visit the link below.

Sunday, October 14, 2018

Timing A market Top Takes A Great Deal Of Luck

Those who claim they will be able to predict a market top or crash are often delusional. Even after a market begins to tumble it often reverses and can tear the face off traders convinced they are on a one way street to riches. Only time and looking back in the rear-view mirror confirms what course the market has chosen to take. Timing a market collapse is no easy task and more than once like many market bears I have found myself writing an article predicting the wrath of reality was about to descend upon the economy to be disappointed by a bull market that seems to defy gravity and logic.

  Bull market winding down. Don't panic - 2013

Those of us who have doubted and repeatedly predicted the collapse of this so-called recovery remain wrong because we have underestimated both the breadth and size of the global intervention of central banks and governments. Nobody in their right mind would have ever anticipated the sheer magnitude and scope of what has become a worldwide phenomenon. Still, considering that since 2008 growth has been built on a mountain of debt it is a challenge to become excited and simply go with the flow. Those of us who truly understand the nature of debt and have seen the destruction it can wield fear and respect its power.

Most people work hard for their money and even harder to save a bit of it but they are often lulled into complacency when it comes to protecting it. One of the saddest things to witness is when someone who has worked very hard suddenly becomes penniless because an investment or economy turns south. I'm reminded of Ernest Hemingway's line from The Sun Also Rises, "How did you go bankrupt?" "Two ways, gradually and then suddenly." It can be used to describable just how wicked markets can be. We should remember the stock market has far exceeded the upside expectations of many bulls while the economy has not fared nearly as well in many respects.

Timing a market top is difficult, the question I again put forth is, are we reaching the turning point? A turning point can signify a historic or watershed event that is looked back on and comment upon for years, market crashes, the great depression, major economic shifts can fall into this category. In the past, I have written about the unpredictability of predictions and how a random black swan crashing through your front window plays havoc with the idea of always and never. For a decade America and much of the world has been washed along on a wave of freshly printed money and low-interest rates and while many people think it has ended, just last week the Peoples Bank Of China unleashed more support to the Chinese market.

This Chart Screams Confusion Clear And Simple
Auto sales and lease programs have flourished and housing has also been pushed along by artificially low-interest rates that distort what might be called the natural laws of economic order. The historically low-interest rates have also masked inflation by lowering payments on loans and debt. In a free market, the law of supply and demand is left to efficiently allocate capital and in doing so determine true market value and price discovery. When you factor in the corrupting force of stock buybacks ushered in by the recently passed tax package those in power have temporarily masked reality and the serious structural problems within the economy.

Several strong reasons exist to be pessimistic about the economy going forward. Washington has failed to make the reforms necessary to make America more competitive and consumers are not in a position to spend the economy forward because a large number of Americans have dropped out of the workforce or chosen to only work part-time often at jobs that pay poorly with few or no benefits. This comes at a time many retails stores are closing under the assault of growing online sales aided by our very own United States Parcel Service delivering packages under cost and even on Sundays. Sadly, the only sector guaranteed to be strong is defense based on government spending but that is not enough to carry us forward.

Circling back to the main theme of this piece which centers on just how difficult it is to time a market top and how costly being wrong can be it should be pointed out that in many ways the stakes have been raised and are much higher than usual in this cycle because it has gone longer and farther than most investors expected. Two things are certain the first is most traders are a bit nervous following the market action last week and the next few days will be fraught with uncertainty. This translates into the idea markets may be volatile and caution is in order. Remember at some point "buy the dip" will become the kiss of death.

Footnote; In my readings today I happened across a passage on another blog where the writer speculated the "Three Amigos of collapse" might be ready to converge, he described these as Murphy’s law meets the law of unintended consequences and the law of diminishing returns. The piece below written in February questions whether it was "Too  Early To Call A Market Top?" We now know it was but we have not been blessed with much in the way of good news since that time. The link to that article can be found below.

Thursday, October 11, 2018

Manageable Inflation Again Deemed The Desirable Goal

Our Goal Is 2% Inflation
In a recent interview with Bloomberg the French economist who served as President of the European Central Bank from 2003 to 2011, Jean-Claude Trichet, opined about his outlook for the global economy and monetary policy it was not surprising that he repeated the line declaring 2% inflation the desirable goal of intelligent central bankers and everything is "data dependent" which translates into the central banks will squash inflation if it begins to run too hot. Much of the interview was based on his feelings about the economy, near-term. Staying within the "established lines" he stated everything looked good for the next year or so. Trichet then warned that "over-leverage that exceeds levels from before the financial crisis" will if not addressed cause problems down the road.

Warnings stated by former and current bankers and contained within their talks adds an air of thoughtfulness and caution to the discussion reinforcing their image of being prudent. The fact is all these heads of central banks, past and present, seem to say the same thing. and tend to reinforce the impression that any real problems ahead should be out at least a year. This allows the speaker to hide in clear sight by simply appearing cautiously optimistic. More notable than the musings of the former ECB President were statements from FED Chairman Powell in a speech recently which was considered a bit more hawkish than the market preferred.

Our Goal Is 2% Inflation
Chairman Powell confirmed the jobless rate is running at 3.9 percent (on Friday the jobs report lowered the number to 3.7) and inflation is around the Fed's goal of 2 percent. Powell is now confronted by the fact that historically, low unemployment has fueled inflation and sometimes has forced the Fed into hiking interest rates rapidly. "While these two top-line statistics do not always present an accurate picture of overall economic conditions, a wide range of data on jobs and prices supports a positive view," Powell told economists in Boston conference. "In addition, many forecasters are predicting that these favorable conditions are likely to continue."

The manageable inflation goal of 2%. has become the "holy-grail" of central bankers, however, the 2% inflation target central banks have deemed optimum is not economically valid and is "based only on their opinion" of what conditions will best allow the economy to flourish. For a long time, the ECB and other central banks have claimed deflation drives or allows their QE policy to remain and is central to their ability to stimulate. The moment inflation begins to take root and become solidly entrenched to where it becomes a self-feeding loop their flexibility in policy is lost. What makes the future inflation argument more relevant than usual is that the average American has witnessed in the last 30 years, a growing gap between government reporting of inflation, as measured by the consumer price index (CPI), and the actual cost of living.

What the central bankers have conveniently brushed aside is that the formula that generates the numbers governments pump out was skewed in the 1990s when political Washington moved to change the nature of the CPI in an effort to reduce the federal deficit so nobody in Congress would have to register a vote that would harm the image of Social Security. For proof as to the real cost of inflation just look at the surging replacement cost resulting from recent storms and natural disasters. I further contend that inflation would be much greater if more money was flowing into tangible goods rather than paper investments and promises.

It might be wise not to become too trusting or complacent to the idea that inflation can be contained at 2% especially while deficits explode, debt builds, and central banks continue to stimulate the economy by printing money or that the economy looks good for the next year or so. In the past, I have put forth the theory that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy suddenly collapses which is in truth beyond their control. If inflation does not become the flavor of the day the future may unleash, its sister, the powerful force known as stagflation which is also a threat to the average citizen and will devastate those improperly invested for its arrival.

Footnote; Links for the two articles related to this subject, the first about the CPI and the second focusing on inflation can be found below.

Tuesday, October 9, 2018

China's Decoupling From America Will End In Failure

China's decoupling from America is not occurring by choice and is far from complete or guaranteed to be a success. The fact is China will find it impossible to sell people from undeveloped countries that live in a one room dirt floor shanty anywhere near the amount of goods Americans consume. Many people simply do not understand the illusion that has been created as China over-invested and mis-invested following the crisis of 2008. Like other countries, much of China's growth over the last decade has been constructed upon easy credit and debt, it is important to note that as China's central bank expanded the money supply each stimulus seems to be taking more money to produce the same bump in the economy.

Exports Of Non-tariffed Goods Soar (click to enlarge)
A surge in recent exports before the tariffs take effect have masked the dire situation China faces if a solution is not reached soon. Unfortunately, China has no intention of bending or admitting the unsustainable. After the US imposed a 25% tariff on $34bn of Chinese goods the chart to the right shows that American imports of these goods fell by 10% year over year during July. It also shows those goods not yet having tariffs applied to them soaring as importers rush to buy before they too become more expensive. This trend is expected to continue and a further drop in August for this group of goods will highlight the difficult situation China faces.

We must watch the action of China's government and what is happening to the Chinese currency in order to understand the impact China is about to exert on markets across the globe. As traders returned to work after China's Golden Week holiday they found the latest monetary easing by the People’s Bank of China (PBOC) provided little traction for the market. The PBOC has announced that reserve requirement ratios (RRRs) would be cut by 100 basis points. The injection of cash into the economy, which will be 750bn yuan ($109.2 billion), is an effort to offset the negative impact of higher US tariffs on Chinese exports.  The PBOC is expected to cut this benchmark again before year-end amid ongoing stimulus efforts but the markets fell several percentage points anyway.

More Debt Has Failed To Speed Up Growth
A major problem for China is that it has become addicted to debt and any slowing of the economy will put tremendous pressure on those already having difficulty servicing debt. The latest reserve cut is the fourth by the PBOC this year and comes after Beijing pledged to speed up its plans to invest billions of dollars in infrastructure projects to stop the economy from cooling further. The fact is most Chinese companies fund through bank credit so the stock market in China is not as large a factor in their economy as we might expect. What may be more important is how this plays out in lowering the value of their currency, this is a double-edged sword, it should help exports but at the same time it will make imported raw materials more expensive and may raise the ire of trading partners. Still, more important may be whether a falling yuan causes more wealth to exit China in search of a more stable environment.

The fact that the PBOC is already scurrying about in an attempt to mitigate damage flowing from the hard talk being mouthed by the Trump administration is in some ways proof of China's vulnerabilities. While investors assess what continues to lie ahead on the trade front another issue we should not underestimate is that in recent months many of China's woes have been masked by the reality exporters have been loading boats in a rush to ship off extra goods prior to American tariffs going into effect which will subtract from future orders. This could slam demand through the floor going forward as these goods now sitting in inventory work their way through the system.

To those investors wishing to brush off the "China effect," the truth is it is affecting other markets and to think the markets that have suffered will suddenly reverse is a bit optimistic. Many emerging markets are highly dependent on selling raw materials to China and those most deeply in debt are feeling the pain of slowing growth. Those looking to Japan and sighting its equity markets as a beacon of hope may be disappointed to find the Japanese central bank has been a big buyer of stocks and responsible for much of their stock markets gains. This has made true price discovery difficult and such actions tends to contaminate markets across the globe when they feedback into other economies.

Two basic narratives exist about the escalating trade war with China and one is that China has outgrown its need for America and will simply replace it with other markets. Those talking about how trade wars will hit America harder than China and how Americans will capitulate at the first sign of pain ignore just how dependent China is on exports to America. Still, this view seems to be widely held in Beijing, where the US is seen as so politically divided that when the next recession comes political bickering will tear society apart. The other narrative is that China is on the verge of imploding and that it is a house of cards built on debt. While I tend to lean strongly towards the latter time most likely will be the decider of this debate.

Footnote; Private and state-owned Chinese firms act in the interest of the Chinese regime when it comes to foreign investments in the high-tech sectors. Below is the second part of a part-two series which explores why China is on a one-track path that blinds it to other options going forward and why this is a recipe for conflict.
 http://China's Unflexible Path Forward.html

Sunday, October 7, 2018

Home Prices Moderate At Tax Sale As Caution Grows

Buyers Seeking Yield Often Throw Caution To The Wind
This is an article that I had planned to write but had slipped my mind until I was reading an article about slowing home sales in Denver. A year ago an article on this site told of how surprised I was to find buyers had thrown caution to the wind when the county where I live had its annual tax sale. Basically, this is an auction type sale of all the properties that owners had failed to pay property taxes on or those that had fallen delinquent. One thing was very clear at the time and that was the combination of too much money chasing too few properties was creating a bubble in this market. 

This article is a "twofer," it is about the interesting and risky world of investing in tax sale property and about how this market appears to be rapidly cooling including a few ideas as to why. Many of the people entering this area of investing seemed to have cast aside the fair degree of risk involved when it comes to bidding on such properties. When you are the high bidder you must immediately pay the amount you bid then wait for a year while the current owner has total ownership rights to the property. During that time if the owner brings the taxes current including penalties and interest they get to keep the property and the buyer or bidder gets a hefty amount of interest on what amounts to a loan. It may be important to note that this year the sale had a far more subdued feel about it and that bidders seemed more in check. Behind the diminished unbridled lust for these properties could be several factors such as rising bond yields, money is getting more difficult to borrow, a sign the housing market has topped, or simply the return of common sense.

While prices have soared at local tax sales after QE took effect several issues exist relating to the learning curve that new bidders may be unaware of, most of this surrounds the risk they may be overlooking in their enthusiasm for a good return on their investment. Increasing the risk is the fact that seminars are being held telling people this is a fast and easy way to increase the yield they receive on investments and that if the person is unable or simply does not redeem the property the bidder stands to get a very valuable property for a fraction of what it is worth on the open market. Unfortunately, this means you will be bidding against people coming from a seminar or investment workshop loaded with fresh knowledge and are so eager to "get a bargain" that they go plum crazy when it comes to price.

Are You Buying The Property - Not The House!
While I will not argue that a buyer may get lucky and pick up a gem for below market price it is just as possible they may get far more than they bargained for in the way of grief. Higher tax sale prices in recent years are a testament to how QE and low-interest rates are driving people into a frenzy in search of higher yield and how in doing so many of them take undue risk. Speculators now go from town to town with a slew of money both their own and that of investors placing high risks loans in a market they know little about and have had little time to research. This means many of these people really have no idea what they are buying and they often forget just how much prices can vary in different areas, even within a city, location is everything.

With many of these buyers not being real estate savvy and lacking the time to even drive by the property as well as an inability to do the due diligence required they often find that they wind up buying a pig in a poke. Tax sale properties can suffer from a number of problems such as pollution issues, flooding or sewer issues, and any property put on the sales block because of unpaid taxes generally has a great deal of deferred maintenance. It is important to remember the owner of these properties receives all monies bid in excess of the minimum bid if they do not redeem the property, this means if only 1,500 dollars of tax and penalties are owed on a house and it sells for 40,000 dollars at the tax sale the owner whether it is the person living in the house or even the mortgage holder has a claim on the overage. If the property has enough issues do not be surprised if they take the money and run.

The flaw in bidding too much is that you may not get your ten to fifteen percent interest as promised but may indeed get the property and rather than a gem it might turn out to be a lump of coal. This can be even more of a problem for buyers from outside the area who can live hundreds or even thousands of miles away. Staying with the example above the property owner behind roughly a thousand dollars in taxes sees five hundred dollars of penalties and auction fees added on but thinks they will be given a full year to come up with what they think will be around seventeen hundred and fifty dollars. This figure is arrived at by adding fifteen percent interest to the minimum bid of fifteen hundred dollars.

Many Properties Are Trashed And In Very Bad Condition
Owners of property that are struggling to pay taxes often have bad credit and other financial problems leaving them stretched to the limit, with this in mind many who cannot come up with a thousand dollars have little ability to raise a great deal more. Fifteen percent of the forty thousand dollars used as an example above comes to six thousand dollars, which would bring the amount needed to redeem the property to seventy-five hundred dollars, this is an amount totally out of their reach for many of these people but that does not mean they will go gently into the night. Anyone thinking a person having a property taken from them will turn it over clean swept and in good condition will most likely be proven a bit over-optimistic.

As I stated earlier in this article the current owner has total ownership rights to the property and a year to redeem the property. If it is rented it allows the current owner to squirrel away the rents, if empty they can remove or sell off key components of the building such as the heating and cooling system. During that time while a bidder waits for a Tax deed to be granted some rather ugly events can take place. If a fire occurs if insured by the current owner he or she would receive the money and most likely not repair the property if they were about to lose it. In some cases, a house or building is condemned and demolished by the government and a lien for the cost put on the property meaning the bidder would get an empty lot and a rather large bill. The picture above of the house being moved should be warning to anyone buying at a tax sale that it is difficult to know what you are buying. 

Saturday, October 6, 2018

Jobs, Automation, And Raising The Minimum Wage

Now that the latest jobs data has been released it might be a good time to take a look at jobs, automation, and issues related to raising the minimum wage. These issues often become most evident during times of high unemployment, however, today data shows America is probably at or near full employment and recently even higher pay has failed to bring more workers into the workforce. Still, because so many people are struggling economically many people are calling for the minimum wage to be raised to $15 an hour. It is important to remember that hard times have a way of returning and that is when bad policies stand out like a sore thumb. Below is an argument that raising the minimum wage is not the best way to attack inequality because it reduces opportunity.

Have A Good Day You Unemployed Human!
Recently Amazon has been under a great deal of criticism for low pay and the harsh treatment of its workers so it should not come as a surprise that Bezos a proven master of hype and re-framing issues has announced his company will be increasing wages. Amazon also said it will start lobbying for an increase in the federal minimum wage, currently at $7.25 an hour. This translates into "while we move towards automation and utilizing more robots we will try to raise cost for our smaller competitors to put them out of business." Not only would this put pressure on many small businesses but we should all be prepared to see inflation or more likely stagflation soar when wages begin to ratchet higher.

While raising wages is seen by many as a solution and viewed as an "easy answer" to push back against growing inequality it will fail to address the real pain being inflicted on society as a smaller and smaller percentage of our wealth goes to those languishing on the lower rungs of the economic ladder. Simply raising the minimum wage without a corresponding rise in productivity does not work. The fact is higher wages would roll through the economy affecting the prices we pay for everything and send inflation soaring which is particularly damaging to the poor. States such as New York and California have taken steps to increase the minimum wage but many economists point out it will make America less competitive, slow job growth, and may increase the divide between the poor and middle-class. 

The real problem is that mandating a higher minimum wage to address growing inequality sidesteps the core issues we face and in doing so creates more problems than it addresses.  Those advocating we increase the minimum wage are often oblivious or are unaware of the unintended consequences it will usher in. We cannot circumvent economic reality, nothing is free and as wages move up we should expect prices will go in tandem  This means those on fixed incomes and savers in our current super low-interest rate environment will be directly impacted by the inflation caused by these wage increases. Still, this debate is destined to continue until it is raised and without a doubt, the minimum wage will go up because polls show a majority of Americans support such a move thinking it will put more money into the consumers pocket and thus create economic growth.

Higher Wages Stand To Devastate Small Business
What these people fail to recognize is that it will also spark inflation and reduce opportunity. Unfortunately, much of the impact and pain from raising the minimum wage falls upon small business, the chief creator of jobs, and directly upon the heads of the very workers it is intended to help. Note big business will almost certainly benefit from such a move in that they can afford to replace workers with labor-saving machines and robots. This means people at the lower end of the pay spectrum will soon find employers are simply doing away with many of the positions they hold as raising wages make entry-level jobs even more scarce and in many cases cause them to be eliminated or disappear.

In many ways the minimum wage is more of a psychological benchmark than a tool for solving issues of inequality. While the idea is considered politically popular raising it without considering the negative consequences that accompany it would be a mistake but that is often the way Washington works and this issue has been framed in a way that makes saying no difficult. No politician standing for re-election want to be the person to say "no" to "giving poor downtrodden hard working" Americans a raise. The fact is politicians pandering to the masses has contributed greatly towards getting us in the bind we find ourselves in today and the reality is as long as people in other parts of the world can produce the same goods for less we are shooting ourselves in the foot.

A major issue that many Americans and our government continue to ignore is how much the cost of living varies throughout the country. Raising wages in these high-cost areas will only exasperate the problem. It is common knowledge the cost of a house in California or along the coast is far more expensive than the same house in the Midwest, often demand in certain locations reflects a geographical preference. This should be reflected more in government social programs and programs should be configured to encourage people to locate in less expensive areas rather than feed money into local economies already showing high demand. Current payouts from these programs fail to incentivize those receiving "generous" government payments to relocate to lower-cost areas of the country where it is much easier to make ends meet.

Do Not Underestimate Value Of Entry Level Jobs
To some workers, a salary may represent what they as a person are worth, but in many ways, it reflects more on the value of our currency, what it will buy in society and whether a person should or needs to work. Few Americans are actually paid the minimum wage so the real reason the minimum wage issue is so important is that mandating one creates a wall for those just entering the workforce by eliminating many entry and low-level jobs. Higher wages act as a barrier to gaining the experience that leads to a better job because it can stop young workers from ever getting their foot in the door. 

Expect a big change in the employment picture throughout America and the world as robots gain new skills and become less expensive.  Through its safety net of social programs and subsidies, the government has done unmeasurable long-term harm to the lower ranks of society by weakening the structures that supported our shrinking middle class. Inequality is not only an issue that separates the poor from being middle class, but much of it centers on how the elite and big business have high-jacked a majority of the economic pie. The fruit of our labor now flows to very few. Raising wages on the low end may make a few people feel better but when it comes to addressing the crux of our problem it is like putting lipstick on a pig as you take the animal to the butcher.

Wednesday, October 3, 2018

Japan - Economic Update - End Of Third Quarter

Japan's Government Debt To GDP (click to enlarge)
With so much attention on Italy and trade talks, we sometimes forget to pay attention to Japan. With a government gross debt to GDP ratio of 253 percent, Japan has the unwanted title of ranking highest in the developed world. The recent budget requests by Japan's central government ministries and agencies for fiscal 2019 total a record-high 102.77 trillion yen ($928.5 billion), the Finance Ministry has announced. The new figure sets the stage for the initial general account budget to top 100 trillion yen for the first time when it is eventually approved by the Diet. Of this amount, spending by the central government is expected to be 78.18 trillion yen, while the remainder is to be used for debt-servicing costs which are expected to total 24.59 trillion yen.

As for taking the temperature of the Japanese economy, it appears things are not about to get better going forward. The Health, Labor and Welfare Ministry asked for a record 31.90 trillion yen as the costs of caring for the country's graying population through spending on pensions and medical care continues to soar and the Defense Ministry has asked for 5.30 trillion yen, another "all-time high," part of this money will be used to purchase a missile defense system from the United States to act as a shield against potential North Korean attacks. The Land, Infrastructure, Transport, and Tourism Ministry looking towards public works that bolster response to natural disasters such as the massive flooding in western Japan in July and Hokkaido earthquake also needs more money and has requested 7.07 trillion yen.

This is happening as Prime Minister Shinzo Abe's administration attempts to balance surging social security costs and increased defense spending with fiscal consolidation. To complicate matters the Prime Minister has also promised a stimulus package to offset the negative impact of a planned increase in the nationwide consumption tax set to take place in October 2019. This makes it highly unlikely that Japan will shed its status as having the worst fiscal health among advanced economies anytime soon.
Japan Balance of Trade
Japan's Trade Balance Is In Deficit Territory 

For some Japan watchers, a bigger concern may be that Japan's trade balance has again swung into deficit territory in August. Trade is very important to Japan and its trade balance has been all over the place hitting a high of 1608.67 JPY billion in September of 2007 and a record low of -2795 JPY billion in January of 2014. The possibility of escalating trade friction cloud the outlook for Japan's export-reliant economy which until now has been able to sidestepped problems and not become a major target of President Donald Trump concerning trade. Still, another area they are vulnerable is that if China's economy takes a hit they will absorb a bit of the pain.

While many people are unaware of it, Japan has strong economic ties to China, that formed over decades as direct Japanese investments flowed into China. Japanese technology has played a critical role in the development and competitiveness of China’s global supply chains. China, as usual, exploited this relationship to learn the advanced industrial skills and production techniques of its neighbor. This is apparent at call centers in China where young workers speaking flawless Japanese answer customer service calls for a Japanese insurance company in western Japan. Another example is a new commercial Chinatown that grew in Kobe City's rebuilt port area but instead of the gaudy restaurants of old Chinatown, the new area contains nondescript office buildings that are leased to Chinese companies focusing on everything including biotechnology. 

In part, it has been this increased trade with China that has bolstered the Japanese economy at the same time cheap imports from China have driven prices significantly lower for Japan's long-suffering consumers. Ironically, this has also played into creating the deflation that has plagued Japan since the late 1990s following a property bubble that burst earlier in the decade. This tight relationship can be seen each time trouble surfaces in China's economy, when this happens the yen rises in value as wealth exits China often through business back-channels. This should not be misinterpreted as the yen strengthening, but rather a temporary bump before the wealth moves on to an even safer place.

A matter that has not garnered enough attention is how the economic problems that continue to develop in China will most likely spill over and affect Japan. The Japanese economy is very vulnerable to a negative economic feedback loop flowing from China. As stated earlier, over the decades the two countries have joined together in an effort to maximize profiting from exporting to America and as a result of this their economic interdependence has intensified. China and Japan have become major trading partners and the links they share may come back to haunt Japan if a trade war between America and China escalates. The bottom-line is that if Japan did not have enough problems of its own for now it seems bad news flowing out of China is about to further undermine Japan's hopes for growth.