The bull case for the euro took a hit from a bunch of baguettes this week.
The Economist magazine ran a cover of some tasty bread sticks wrapped in French colors and topped off with a burning fuse. The headline was, ‘The time-bomb at the heart of Europe’.
Those baguettes will blow some day. France has big debts and a stupid and oversized government. But it’s hardly alone in that regard. Take Japan, for example.
The industrial and financial titan of the last forty years is on the same path to ruin as France. It’s the time bomb at the heart of Asia.
Today’s Money Weekend will show why the crisis in Japan could be the catalyst for the rerating of certain Aussie stocks.
Japan is a warning for the shemozzle practically every Western country is in. It has an enormous debt-to-GDP ratio of over 200%, zero interest rates, a stagnant domestic economy and an ageing population.
Now the last pillar of its strength is beginning to show serious weakness – its export sector. Japan began to run a trade deficit in 2011, after thirty years of surpluses. The government also continues to borrow money to pay for its spending.
Because of this, Japan will soon need to attract foreign money because its domestic savings can no longer support the current level of government borrowing.
But why would anyone invest in Japan with interest rates practically non-existent? Not to mention the currency risk of the yen falling thrown in as well.
The answer is they probably won’t – unless the return rises to make the risk worth it. That means the Japanese government must offer higher interest rates.
But the Japanese government can’t afford higher interest rates because paying higher rates on its huge debt would consume too much tax revenue.
That’s one reason the Japanese government is using Japanese celebrities such as a national sumo wrestling champion and an all-girl pop group to encourage the Japanese public to buy more government bonds (JGB’s).
The Japanese government is going to these lengths because the number of retail investors in JGB’s has been declining since 2009, according to the Japanese Ministry of Finance.
One reason is that Japan isn’t just running out of money, it’s running out of Japanese!
With a falling birth rate, closed immigration policy and ageing population, there just aren’t enough people to save at the rate needed to support the government by buying government bonds.
And so with a shortfall of domestic savings and the limited potential for foreign investment, the only other choice is for the Bank of Japan to print money to buy the government’s bonds (‘monetize the debt’).
Hedge fund manager Kyle Bass pointed all this out in his latest report to investors. You might’ve heard of him before. If you haven’t, he made millions (after founding his own firm, Hayman Capital) shorting the US subprime housing market before it blew up.
Now Japan is his target. He wrote, ‘Japan now sits on the doorstep to its own demise. We believe they have reached zero hour, where things will begin to unwind altogether.’ He also says, ‘Japan is teetering on the precipice of financial collapse.’
Now, many a trader and speculator has bet against Japan and lost money over the last twenty years. But the current situation puts the spotlight on one key industry – energy.
A major reason for Japan’s trade deficit is that it now has to import almost all of its energy. Japan has few natural resources. Previously it used nuclear power to generate the majority of its electricity.
But after the Fukushima disaster in 2011 it shut down its nuclear reactors. This caused a spike in liquefied natural gas (LNG) imports.
You may have heard recently that the glut of cheap gas in the USA might find a welcome export market in Asia looking to cut its energy costs. That’s bad news for the Aussie companies with billion dollar LNG projects that now face the possibility of a major competitor and smaller revenues than they’d budgeted for.
But a US LNG export industry would take time to develop. Time is something Japan is short on. After all, it has bills to pay. That puts nuclear power back on the agenda in Japan.
Japan restarted two of its reactors in the middle of this year. This was despite considerable public protest at the time.
Check out his from Money Morning (USA): ‘The Prime Minister of Japan called restarting the reactors a “matter of national survival “, because the high cost of imported liquid natural gas was crippling the economy.’
That also explains this in the New York Times last month:
‘Japan’s stated policy of eventually ending its dependence on nuclear power has suffered another apparent setback with the announcement Monday that construction will restart on a nuclear plant in northern Japan after three local municipalities gave their consent.’
Nuclear reactors that were approved for construction before the Fukushima disaster are still getting the go-ahead for completion.
The politics of this are murky. But an obvious conclusion is this will stimulate demand for uranium.
And don’t forget that the US, China, South Korea and the Middle East all have nuclear energy in the mix to different degrees. China has the most aggressive expansion plans.
But there’s a crunch brewing in the uranium market because of supply. The current spot price for uranium is just over US$40 per pound. This is down from a high of US$140 before the global financial crisis.
That’s cheap energy for the existing reactors. The problem is at that price there’s no incentive to go into the uranium mining business.
You might’ve heard of Aussie uranium industry player Paladin Energy (ASX: PDN). Perth Now reported earlier this month that the company was slashing costs in the face of the falling uranium price:
‘The company said it would not expand or develop new projects in the current price environment.‘”Paladin is of the view it would require a sustainable uranium price at or above $US85 per pound ($A81.78) to warrant any further expansion or new mine development.”‘
No new mines or projects means no new supply. Every day existing reserves are run down. It means the uranium price will have to rise, or uranium producers will go out of business.
That brings us to commodity veteran Rick Rule. He has decades of experience in the resource market. So his opinion counts. He put it like this earlier this month:
‘For the uranium industry to continue supplying power around the world, the uranium price has to go up.‘And the uranium price can go up because the price of uranium is as little as 3% of the total cost of delivering electricity from a nuclear power plant. Even if the uranium price were to double, it would make an almost imperceptible difference in the final cost of producing electricity from a nuclear power plant.’
Uranium is shaping up to be a classic resource scenario Rule loves – a contracting industry in the face of a supply/demand imbalance in a market everybody hates.
This is a good reason to put uranium stocks on your speculative watch list.
Callum Newman
Editor, Money Weekend
The Most Important Story This Week
A key signal professional stock market traders watch is the ’200 day moving average’. When the market breaks below or above this point, it’s often a reliable guide for which way the market is going to go. The Aussie stock market had dipped below this level but rallied this week. But don’t trust the rally – the market is at the risk of a big drop according to Slipstream Trader Murray Dawes. See why in The Stock Market Gets Squeezed. Keep your eye out for an update this afternoon, too!
Highlights in Money Morning This Week…
Merryn Somerset-Webb on Two Reasons to Steer Clear of the Chinese Stock Market: ‘The real argument against anyone but stock traders investing in the Chinese stock market isn’t really anything to do with the current price or with the various theories about how equities should or could be valued, or about the noise surrounding the political changes and economic slowdown. Instead…’
Kris Sayce on Don’t be Fooled by Australian Housing’s Death Fart: ‘Bottom line: Investments should make you money. That’s not to say all investments will make you money, but that’s the goal. One thing’s for sure, borrowing to buy an expensive house is the easiest way to lose cash hand over fist.’
Dr. Alex Cowie on Picking the Hot Commodity Stocks of 2013: ‘First, a recap of previous ‘hot commodities’…In 2011 it was potash. In 2010 is was rare earths. And in 2009 it was lithium. In each case there was a trigger factor that pushed the simmering fundamentals to boiling point, triggering a mania phase in the stocks exposed to that commodity.’
John Stepek on Beware the Bank of England: UK Economy Going Down: ‘There’s one book that every central banker should read. It’s not by Friedrich Hayek or John Maynard Keynes. It’s Mary Shelley’s Frankenstein. In it, Dr Frankenstein has the hubris to believe he can use science to short-circuit nature, and re-animate something that should be dead…The parallels are striking.’