11 Jul 2016

A Few More Left Field Themes

Following on from electric, driverless cars, here are a few more left field themes….

Japan takes off

There is a saying – “don’t underestimate the Japanese people’s ability to suffer for the common good, and don’t underestimate the government’s willingness to test this”

The common opinion on Japan this that it is impossible for the government to get out of the hole it has dug itself.  That opinion is understandable.  It currently spends 10 trillion Yen, or circa 16% of its tax revenue, to pay for the interest on its debt.  If interest rates were to rise by 2%, it would take 70% or more of total tax revenue just to pay the interest!  The Japanese government also needs to borrow more as it is currently running a budget deficit of 18 trillion Yen.  Not a pretty picture.

Keep the above saying in mind. We propose an elegant solution for Mr Abe.  One major positive regarding the Japan Government’s debt is that it is mainly owed to its people.  If the government defaulted on restructured half of this debt it might not be as catastrophic as you might think. At 0.6% interest, very little income is earned off this debt so there would be little impact on GDP.  In fact, savers might decide to spend some of what is remaining or invest it elsewhere, before it is taken away too, which could be highly stimulative to the economy.  The government can still print money sell bonds to the Bank of Japan to pay its Yen bills. 

Any financial institution that is hit too hard by the restructure might be offered relief from the Bank of Japan.  And don’t forget that the Bank of Japan already owns over 20% of all outstanding government debt anyway. This is genuine, full blown money printing, not money printing in disguise, and it should be highly inflationary but Japan is currently worried about deflation, not inflation.

With the interest bill halved and a bit of extra consumer spending balancing the budget becomes more achievable.  Lower oil prices will also be helping the government to balance its books.

It is also worth remembering that while the Japan Government has serious financial troubles, Japan’s companies and people are the world’s largest creditors, by a long way.  A currency run would see these creditors’ Yen wealth increase and might encourage investment into Yen denominated assets.

Mr Abe would obviously do the honourable thing and resign again, but if he can convince the public that 50% of what they had in a strong, growing Japan is better than 100% and stagnation, he might even get voted back in.  

 

Oil stays below $50/bl

"We didn't leave the stone age because we ran out of stones."

Something quite big happened when oil prices were peaking in 2008.  The United States finally worked out that it shouldn't be funding potential foes.  It is our opinion that the strongest structural theme for oil is US determination to become not just energy, but oil independent.  This has involved not only investment in fracking but also investment in oil alternatives (LanzaTech for example) and efficiency technology.  The technology around fracking is also quickly improving.  IHS, a research firm, believes that the cost of a typical fracking project has dropped from US$70 per barrel to US$57 in the past year.

Other countries will benefit from these technologies.  If higher cost oil supply is no longer required, there is a long way down to go before you hit the cash cost of supply from the Middle East.

 

Inflation, inflation, inflation

We will not harp on about this as we have discussed it previously.  Big inflation will come as it will be the only thing that will stop governments printing money.  When it does, be prepared.   It is the way developed world governments will swindle you out of your savings and investments to pay for their debts.  While falling oil prices reduce near term inflation it is a medium term stimulus.  The Economist estimates that the typical American motorist, who spent $3,000 in 2013, might be $800 better off, equivalent to a 2% pay rise.  Historically, big inflation has often been preceded by deflation.

 

Big Brother is everywhere

Already Google starts telling me how long it will take me to get home about the time I start thinking about leaving work for the day.

Cabs will follow me down the street because their networks will know you are likely to want a cab at that point in time.  Waiters will come out of restaurants I have never gone to, as I walk past offering me a discount on my favourite dish (which they know is pan-fried snapper).  Movies will be made with you personally in mind, when they are finished and ready for you will be emailed (probably with a voucher for your favourite beverage included).

 

The Smartphone of Things

We thought it might be interesting to see how much value is, and in the future might be, stored in your phone…

Now:

1. Music player $300
2. Alarm clock $30
3. Newspaper $800
4. Books $100
5. Navman $200
6. Camera $ 200
7. Camcorder $400
8. Chart plotter $2,000
9. Metronome $60
10. Spirit level $50
11. Calculator $50
12. Every note pad you would have ever owned $500
13. ...and, ah yes, don't forget the phone! $50
  Total $4,740

The future:

14. Home phone $50
15. PC $1,000
16. Every remote control you use                                                        $200
17. Most of your HiFi system $2,000
18. Personal shopper $10,000
19. Child minder priceless!