Next country to collapse isn't in Europe

If you think the US government is a financial basket case, another country is exponentially worse. A collapse in its currency and stock market is all but certain. The only question is when.

By StreetAuthority Apr 29, 2013 10:45AM
Japan © Stockbyte SuperStockBy Joseph Hogue

Despite the recent market correction threatening the four-year bull market, investors should be partying like it's 2006.

Easy-money programs from the world's central banks and a recovering global economy could push stocks and other assets higher. So why is the comparison to 2006 relevant?

September 2006 was two years before the collapse of Lehman Brothers and a 28% drop in the markets in the span of less than a month. And two years is about the amount of time we may have until the next great market crash.

So what will be the proverbial straw that breaks the market's back? Europe? China? Market contagion from a collapse in commodities prices?

None of the above.

While the rest of the market worries about those issues, there is a bigger threat that could pull down world markets and change the way we measure safety investments.

The next great collapse is unlikely to come from any of these problems. It is more likely to come from a country that has been a haven for investors for more than 30 years and accounts for nearly 10% of world growth.

A look at this country's debt situation, especially relative to the United States, is truly amazing.

This country is paying 21% of government revenue on interest payments to support a 236% debt-to-GDP ratio. With annual spending twice as high as its revenue, the government is running a deficit of $455 billion a year and adding to its $11.2 trillion debt. This is all before the monetary stimulus programs announced recently by its central bank.

If you thought the United States government was a financial basket case, Japan is exponentially worse. A collapse in the yen and the stock market is all but certain -- the only question is when.

The recent easy money program by the Bank of Japan gives us a good idea of the timetable.

The announcement by the Bank of Japan to buy 7.5 trillion yen (about $75 billion) in bonds per month and double the monetary base during the next two years is exponentially higher than anything the country has tried in the past two decades. If you think U.S. Federal Reserve Chairman Ben Bernanke and the Fed's $85 billion monthly purchases is extreme, consider that Japan's economy is a third the size of the United States' and that its growth has stalled in the past decade.

So the bank wants to increase inflation to 2% from its current negative rate of 1% deflation. If they are even partially successful, interest rates on the government bonds could jump. If inflation increases to 1% and the rate on the 10-year bond increased to just 1.5%, the government would need to pay out 65% of revenues just to service the interest.

Kyle Bass of Hayman Advisors recently told Barron's that a debt crisis that will rival Argentina's 2001 collapse is "the most obvious scenario of my adult life. The question is when."

Japan's stock market is up more than 50% since November with the currency depreciating 25% since government officials started pushing their monetary plans. Just like 2006, everyone is talking about the money to be made in the Japanese stock market.

                                         Japan Monetary Base

                                                (trillions of yen)

After two years, the assets held by the Bank of Japan may be as much as 60% of GDP, compared with just 25% for the Federal Reserve. The bank won't be able to sell these assets without driving up rates, and the government will no longer be able to fund its massive deficits with the skyrocketing interest burden.

Why should investors care about a country that represents less than 10% of global growth? To put Japan's importance in perspective, Greece's economy is less than one-twentieth of Japan's -- and brought the market to its knees last year.

Like the 10-year Treasury note, Japan's government bond has been used by the market to evaluate risk for more than 30 years. A collapse in this market could send shock waves across markets worldwide.

Why do I think the scenario could play out over two years?

The Bank of Japan's monetary program will involve buying most of the government's bond issuance for the next two years, which should help keep rates down. As the program winds down, the bond issues are unlikely to attract many buyers, sending rates higher. The government won't be able to pay the high interest burden, and the Bank of Japan will not be able to sell its bonds to fight inflation.

The analogy to 2006 almost certainly will not play out along the same two-year timetable, however. The Bank of Japan's monetary program covers two years. The stock market is fairly reliable as a six-month predictor of the economy, so investors could start running for the exits in as little as a year and a half.

Of course, anyone jumping out of the market in 2006 would have missed out on the remainder of the bull market. The trick is to ride the market further -- while gradually rotating into safer names and assets.

The iShares MSCI Japan Index (EWJ) is up 30% since its November 2012 low, but it has underperformed the S&P 500 by 74% since its launch in 1996, with a 31% loss in that time. The fund is extremely expensive at 21.5 times trailing earnings and may have a tough time adding to gains.

U.S. automakers like General Motors (GM) and Ford (F) have more to lose than most other domestic companies. The yen could collapse along with the financial system, which could make Japanese exports cheap compared with those of international competitors.

While Japanese automakers like Toyota (TM) have factories set up internationally, the country still exports about 1.5 million cars a year to the United States. As the yen weakens, these companies may shift more production back to the mainland, driving the cost of Japanese vehicles down further.

The CurrencyShares Japanese Yen Trust (FXY), down almost 20% since November, could eventually implode as a debt crisis ruins the currency's status as a safe haven and massive depreciation follows. Investors may be able to use the fund as a hedge against market losses in their portfolio if a collapse does happen.

Risks to consider: As the great economist John Maynard Keynes said, "Markets can stay irrational longer than you can stay solvent" -- so shorting the Japanese market may not be recommended as the bubble inflates. Japan is still the third-largest global economic power, and it could stave off the inevitable for a couple of years.

Action to take --> I firmly believe this event could send the world into a recession. Japanese stocks and the yen could be the hardest-hit, and shorting them may provide a good hedge against drops in other markets. Take your profits on Japanese equities and keep the situation on your radar.

Joseph Hogue does not personally hold positions in any securities mentioned in this article.

More from StreetAuthority
Apr 29, 2013 1:22PM
The philosophy of a government will determine its future. With our current spending exceeding 16  trillion dollars our leaders think we will keep our people happy from the cradle to their grave. A socialistic policy will lead us into a bottomless pit of debt that we will never be able to pay. Is this what you want to leave to your grandchildren, that by the way cannot find jobs even after graduating from college and have thousands of dollars to pay off ?.We as a society have not educated our children to learn to be responsible citizens and it has also been a serious problem with our liberal college teachers that have infected the minds of all students who have  pushed the idea that more government controls are needed. If this should happen say goodbye to all your freedoms. Bigger government is not the solution, it is the problem as said by President Ronald Reagan. 
Apr 29, 2013 1:34PM
Let's not blame Japan or Obama or Somalia; this obviously does not solve anything. Rather, we all need to agree that the current spending & taxation increases & National debt and Obamacare are a true disaster that needs to be fixed, starting right now and further corrected in the November 2014 elections. Better that some of the less fortunate suffer somewhat more now instead of the whole Country 5-10 years from now.



Someone is behind the ball here.


Japan has already collapsed and is insolvent. It;s trade with China has collapsed over the island dispute with China. The Chinese government told it's people to protest the Japanese declaring the islands theirs and had to back down when hundreds of thousands of Chinese started to smash Japanese businesses in China and Japanese cars in China.


However the government is still telling people to not to buy or work for the Japanese just don't destroy their things for the moment.


This was the death blow to the Japanese economy.


It is not going to recover.


As far as GDP goes the holdings of the Japanese Central bank and for that matter the US Federal Reserve should not be counted.


Considering this the Japanese GDP to debt ratio is probably 1 to 5 -- collapse of its economy


The USA GDP taking out 25 percent or $4 trillion for the Federal Reserve and the $4 trillion we would make our GDP to debt ratio 1 to 2 -- about ready to collapsed. And considering of the $8 trillion we have left in real GDP only $2.5 trillion is real wages to most Americans is not enough to keep the economy going when things are priced at someone making $120,000 not the $30,000 most people get.


Apr 29, 2013 2:27PM

Classic Marxist theory, right out of 'Das Kapital'....   In order to form a socialist society it is necessary to eliminate the middle class.   The easiest way  to accomplish this is through the destruction of the bourgeoisie by fiat currency creation.  This will lower their wages and eliminate their savings.   Once this is done the rich will be easy to dispose off...

The only problem is people will not work, except for personal reward.  This is why workers demand a paycheck.   Eventually all socialists run out of other peoples money and have to resort to the bayonet.  
Apr 29, 2013 12:05PM
Japan is following Uncle Ben's lead.
Apr 29, 2013 2:06PM
Just another case of a country trying to Tax and Print it's way to Prosperity and Borrow and Spend its way out of debt.

One more time for the dense liberals out there....  In order for government to SPEND a dime, first they have to remove it from the economy via Taxation, Borrowing or Printing.  This destroys demand and creates a NEGATIVE multipler effect slowing the economy and growth.  Then government redeploys this money to non-productive endeavors in an attempt to 'Stimulate' growth.  

But they had to FIRST destroy an amount equal to whatever they spend.

The way to restore economic growth is to REDUCE government spending let those that EARN their money spend it creating REAL, sustainable demand. 
Apr 29, 2013 12:40PM
Excellent article. When Japan or any other nation prints artificial money it falls under the category of finance, but once it's out there it converts to credit. If indeed, real economy was using it to make and sustain progress or even stability, the return is substantiated. But when they just print it and all it does is dilute the fragile motion that exists (think- every nation on Earth right now) it stops generating and it starts degenerating- taking cash flow OUT of the economy to cover its costs. In spite of the flak I got as big wig Central Banks loan sharked PIIGS nations into complete insolvency... we needed those places to keep going to work, not bail their banks. We need to close banks worldwide, end centralized banking and no longer recognize the two additional currencies they created-- debt contracts and derivatives. A HUGE weight on enterprise lifts when billionaires go bust. A HUGE swing happens when Risk trickles up and real cash flow restores Main Streets not Wall Streets. Balloonheads abound on these blogs but my history never got Fed funded, real people wanted real returns at the end of each day. The author is accurate... we can pretty much count the days to our own catastrophic failure. Your Plan B- which isn't metals, cash, stocks, bonds, property or contracts associated with any of these... has to be based on realism. Broke people don't buy gold and no baker will trade it for bread. Twice in my career I saw well-known people give property away to cover basic necessities. We have massive oversupply. One thing we don't have are companies anyone really wants to work for, much less patronize. Quality, sincerity, trust, respect... these are the race horses that will lead our recovery but you have to be cultivating, breeding, building and/or securing the means NOW. Inevitability isn't vague. We WILL crash. It WILL be bad. Dumb people WILL be surprised. The world WILL turn the next day. Remember that.  
Apr 29, 2013 2:28PM


"One thing we don't have are companies anyone really wants to work for"


Very good point Veteran.  Painfull, but good.



Apr 29, 2013 1:47PM
While I agree that Japan will collapse from it's policies and demographics, I wouldn't be certain that it is the NEXT country to collapse.  These collapses seem to come out of nowhere (Cyprus, for example).
Apr 29, 2013 2:34PM
Japan may have double our debt to GDP, but it spends 10% of GDP on healthcare instead of the 18.3% we spend. And it spends less than 1% of GDP on the military compared to 4.7% for us.  So that's 12% of GDP: $1 out of every $8 dollars made, that's available for combating potential collapse that we don't have.

Apr 29, 2013 3:12PM

Well I'm glad SOMEONE in the country knows what's going on. THERE ARE ONLY THREE WAYS OF GOVERNMENT GETTING MONEY:  TAXATION [stealing], BORROWING, OR THE PRINTING PRESS. There is no OTHER way you liberal and fascist idiots.  I'm glad to see MirageGuy finally say it.


It is NOT Obama's or Bush's fault.  IT'S BOTH OF THEIR FAULTS.


GOVERNMENT GOT US IN THIS MESS, and the ONLY way out is going to be currency collapse [like Germany in the early 1920s] or worse.

Apr 29, 2013 4:27PM

If the United States continues to support the world, and protect countries with its military,

we will join the third world failing economy!

Apr 29, 2013 3:17PM

Hey Dave1230,


News Flash!  We haven't had a truly free market in this country since the FED was established in 1913.


What we have now is STATE capitalism/Corporate socialism.


there is a difference.

Apr 29, 2013 3:27PM
Just like a line of dominos. It just takes one to go down and the rest follow. We already know about Greece, Italy,  and Spain. The US is starting to wobble too. My only advise is to stock pile food now.
Apr 29, 2013 3:09PM
The actual defense spending increase is closer to 3 Trillion over 11 years. I left off the last year. That's 3 Trillion dollars added to the Debt. Anyone want to guess how much Crude manipulation has cost us over the last 11 years?

We live in a Global society so what happens in Japan where they are selling worthless debt affects us since we are doing the same. I think everyone gets that.

Apr 29, 2013 1:44PM
This notion of lower taxes as  we have Soaring Debt is pure fantasy. We still have two ongoing Conflicts that have to be funded yet some folks don't think the ones that pushed for it, should have to pay for it. It seems that Gravity will have it's way with Global Economies that supported the super Rich while paying little attention to the needs of the Middle-Class. This is what happens when Governments are bought and paid for by Mega Corporations.
Apr 29, 2013 4:11PM
People get the leaders they deserve. If they are incapable of understanding how they are being fleeced, the fleecing will continue. In a media world where only sound bites get talked about, who will bother to explain how deficit spending and money-printing fleece everyone who has bothered to be reponsible and save their money, to the benefit of the irresponsible who run up debts: governments, corporations, and individuals.
Apr 29, 2013 12:53PM

Regal, I suggest you RE-READ this article, as your statements show that you didn't....

Good for a laugh, but not very smart Regal.

Apr 29, 2013 4:09PM
The real problem here. The rich have more money then ever before, more then what the rest of us make combined. The one percent of people have all the power and they make a lot of the bills and laws threw there lobbyist. It is unfortunate that the majority is loosing some much power. We have become the sheep. The Government is in a state of nothingness only things that they personally want to accomplish or in cases of emergency's ( and there not very good at that). We the people are having a hard time these days. Remember where this all began that's why this statement has a lot to do with all this mess. GREED and MORE GREED pathetic bring a world down for personal gain 
Apr 29, 2013 5:04PM

MIRAGE GUY: I`ll gladly spend my hard earned money for quality.I`ve worked hard all my life.Don`t assume everybody wants something for nothing.If the other industrialized nations can have

healthcare we should too.We`re overpaying for bad coverage.

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