US Stock Imbalance, Soaring Japanese Bond Market

Preface

In recent years, the global geopolitical landscape has been as unpredictable as a clouded sky.

First, the economic globalization system was declared "brain dead," with two regional powers shifting from a friendly stance to bitter enmity, causing other countries and regions to follow suit with unease.

Next, the two largest beneficiaries of the past began to fiercely compete for dominance in the next wave of globalization, engaging in battles across trade, finance, and now the technology sector, seemingly sparing no area in their fight to the finish.

Then, these two great powers officially parted ways from their previously complementary trade systems, each forming a development model starkly different from the other.

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Now in the early stages of their "breakup," this has transformed the current globalized economy into a dire situation where regional trade protectionism runs rampant and international multilateral cooperation mechanisms are on the brink of collapse.

If we delve into the main factors that have led the global political and economic situation to its current state, I believe that while many "black swan" events have contributed, in reality, some issues or events that were not resolved at the turn of the millennium, at the end of the last century, or even further back in history, have continued to fester, becoming historical legacy issues that are most likely to become "gray rhino" events.

Given that the author is a writer deeply involved in the financial and economic field, this discussion will not elaborate on the "gray rhino" events in global politics, but will focus on the historical legacy issues in the economic sphere.

The reason why some far-reaching events are called "gray rhinos" is that, although their development process moves forward as heavily as a gray rhino, the consequences they bring are often much worse than those of "black swans." However, precisely because they are so heavy, their development trends can be predicted in advance, and even the events themselves can be addressed step by step.

Looking at the development and evolution of the global economic situation from half a century ago to the present, both opportunities and risks seem to be inseparable from the most dynamic and highly developed regions in the world, which possess the most considerable wealth scale globally and, of course, the largest systemic economic risks, even affecting the development of the global trade system's security concerns.Looking at the present, the "gray rhino" of the global economy is largely hidden in the three world-class markets that claim to have the largest asset bubbles and the most development risks. They are: the U.S. stock market, Japan's bond market, and our country's real estate market.

01

Let's first look at the U.S. stock market, whose value investment opportunities began in the mid-1980s of the last century, and the risks and hidden dangers also began to accumulate at that time.

Since the Great Depression of 1929, the U.S. stock market seemed to be in a long bear market for many years, and even the baby boom after World War II did not change the downward trend. The reason may be that the Great Depression began with a stock market crash, causing great pain to the people and making them suffer from traumatic stress disorder.

However, as the U.S. dollar assets gradually strengthened, the federal funds, including veterans and pension funds, held a large amount of national debt. Seeing that the stock market was booming again, they sold most of the national debt in the 1960s, turned it into capital flow, and invested it in stock trading. At that time, it was the early stage of the third industrial revolution, and large-scale computers and semiconductor industries, as the rising industries at that time, were obtaining capital through the direct financing method of listing.

Although the Great Depression of 1929 made a whole generation of people afraid of wells for ten years after being bitten by a snake, at least more than thirty years have passed, and the next generation has generally grown to the age of adults. They are not as conservative as their parents and are very adventurous, making them the mainstay after World War II and throughout the entire Cold War period. Among them are outstanding figures such as Reagan, Clinton, Volcker, Greenspan, and Friedman. After experiencing a decade of stagflation, they decided to abandon Keynes' legacy and turn to Mises and Hayek's free market economic theories. History and facts have proven that they are correct.

In the mid-1980s of the 20th century, the Reagan cycle began to sweep the world. Under the guidance of free market theory, the financial industry expanded its territory and started the most outstanding and bold paradigm innovation in the history of human civilization. Along with the rise of Wall Street came the advanced information internet and semiconductor industry clusters in Silicon Valley, as well as the steam wave neon lights all over the streets of Tokyo, Japan.

In the late 1990s, Japan's economy began to decline due to the burst of the real estate bubble, coupled with high production costs and other factors, forcing the supply value chain of mid-to-low-end manufacturing industries to start a goose migration, moving from Japan to the Four Asian Tigers region. After the millennium, it gradually transferred to the mainland of China. Now, it has migrated from the mainland to Southeast Asia, India, Mexico, and other regions.

This development trend has driven the phenomenon of benefiting other regions of the world within the global economic and trade integration order and the international division of labor cooperation system, allowing the global economic benefits to grow larger, both in terms of increment and stock, which is a rare positive-sum game, positive evolution, and a Nash dynamic equilibrium period that is infinitely close to Pareto optimality in the history of human civilization.

Since the collapse of the Bretton Woods system based on the gold standard, human civilization has entered the era of credit money based on rights. The U.S. dollar has become the world's currency, the main settlement and reserve currency, due to its first-mover advantage in historical credit accumulation, as well as its advantages in commodity pricing and premium capabilities of advanced technology industries. It has built global economic and trade and financial systems such as SWIFT.All of the above events are reflected in the three major stock markets in the United States, which are the key factors that have allowed it to emerge from a slow and long bull market.

After discussing the value investment opportunities in the U.S. stock market, let's now focus on its risks and hidden dangers.

Firstly, the financial industry, based on the free market theory, has led to excessive innovation in technological paradigms or business models, resulting in the premature withdrawal of capital controls. This has given rise to some industry chaos, which then became the spark for the 2008 financial crisis.

Secondly, there is a contradiction between the over-liberalization of finance and the stock market itself, which has always been unable to escape Keynesian methods such as administrative intervention. There is a conflict between wanting the stocks to be stable as a major asset class and wanting the market to be liquid as a trading venue.

Furthermore, the structure of the stock market's trading entities shows a phenomenon of the 80/20 rule and the Matthew effect. The stocks of a dozen or so leading companies drive the overall market value to rise slowly, while the stocks of hundreds or even thousands of other companies remain in a state of long-term stagnation. This creates a structural imbalance in the distribution of the main entities.

Additionally, as the largest capital market in the world, its degree of asset bubble formation is certainly higher than other markets. However, the strong引流 ability of the U.S. dollar makes this concern not a fatal injury.

In fact, thanks to the fully market-oriented legal system, there is no need to worry too much that the above risks or hidden dangers will become a reality. As long as the dominant position of the U.S. dollar in the global financial system is maintained, the leading role in the innovation cycle is maintained, and the global trade and economic integration order is upheld, the stock market can be cleared normally through creative destruction. The growth of assets can be used as a weapon to achieve a coexistence of liquidity and stability, thereby forming a virtuous cycle in the economic system.

02

After discussing the U.S. stock market, let's look at the Japanese bond market.

Before that, I would like to mention the bond market in Europe.Since the formal establishment of the European Union, there has been a phenomenon of uneven development in the balance sheets of assets and debts supporting the euro across various regions. The debt scale of old developed countries such as France, Italy, and Spain is relatively small, while their net asset scale is relatively large. In contrast, Eastern European countries, due to the long-term influence of the Soviet system, relied on borrowing to address the issues of modernization development in the early stages, hence their debt scale is greater than their net wealth scale.

Even within Germany, the situation is better in the west than in the east. Therefore, despite the 2012 Eurozone debt crisis, it could only lead to the formation of a transfer payment system within the Eurozone. Old developed countries continue to subsidize Southeast European countries for debt resolution using their existing resources and wealth, and this is also one of the main reasons for Brexit. The UK believes that such transfer payments violate the obligations of sovereign states.

However, Japan's situation is different from that of the Eurozone. It is a relatively complete sovereign state with no such internal regional differences. After the real estate market bubble burst in 1991, it allowed small and medium-sized enterprises to issue corporate bonds in the bond market, which is to replace short-term high-interest debt with long-term low-interest debt.

Then, as one of the earliest countries to practice MMT (Modern Monetary Theory), the Bank of Japan and the Ministry of Finance implemented quantitative easing, taking over the debts of zombie enterprises that should have been cleared by the market. This has continuously expanded the bond market, but in essence, it is a fiscal deficit monetization method between the central bank and the Ministry of Finance, akin to passing money from one hand to another.

It is important to understand that debt and assets are two sides of the same coin. The administrative action of digesting debt is influenced by the snowball effect, which is a common evolutionary characteristic of both, with a cycle that lasts as long as thirty years.

Until now, Japan's administrative debt ratio is the highest in the world, and it is ultimately trapped in the long years of repairing balance sheets along with the Eurozone. It is also a shackle for the traditional industry sector to advance into the advanced technology industry, providing a special warning to our country.

03

After discussing U.S. stocks and Japanese bonds, let's focus on analyzing Chinese real estate.

Until now, I still believe that the main culprit behind the many risks and hidden dangers of Chinese real estate is the three administrative regulations, namely the 2008 four trillion yuan fiscal infrastructure plan, the 2016 shantytown renovation and monetary resettlement project, and the 2021 real estate financing rectification action.

To be precise, it is excessive administrative intervention and debt-driven financialization, which is not much different from U.S. stocks, both being rampant Keynesianism. However, the degree of administrative intervention in the latter is far less than that in the former. The former is a reservoir of base money liquidity and a shock absorber for large asset prices, but in any case, it is not entirely a free trading market.Although the bubble in China's real estate market is not as severe as it was in previous years, the rapid decline in asset prices has led to a significant devaluation of residents' assets. The pressure to destock and reduce overcapacity remains high, which could trigger a series of real estate crises, such as insolvency, a surge in non-performing loans, a net decrease in existing wealth, and a net contraction of incremental resources.

In addition to these issues, I believe the risks and hidden dangers also lie in the following points:

1. Oversupply and land contraction have allowed the destock and de-capacity cycles to continue.

2. Treating it as a pillar industry and allowing it to grow and expand to serve macroeconomic goals has magnified the risks associated with its industry operations and development.

3. Using real estate as an asset anchor for credit expansion and sovereign credit weakens its commodity function and strengthens its financial attributes, which goes against the inherent characteristics of real estate and economic laws.

4. It has combined the negative effects of the American and Japanese markets: it cannot balance liquidity with stability, nor does it have growth potential; the public ownership system occupies a large share of social resources, making market clearance difficult; debt-to-loan conversion and the proliferation of subprime loans are both path dependencies, ultimately leading to the "lost N years" and the outbreak of subprime financial crises.

5. A large amount of social capital is invested in rescuing the real estate market and other traditional industries, resulting in insufficient efficiency in capital invested in advanced technology industries. This leads to a long-term decline in the natural interest rate and natural output, thereby dragging down the growth trend of total factor productivity and significantly increasing the probability of falling into the middle-income trap.

In conclusion, the U.S. stock market, Japanese bonds, and Chinese real estate are three world-class markets, each with its own risks and hidden dangers. These issues have not been effectively resolved for a long time and are now difficult to solve, becoming "gray rhino" events.

Now, these "gray rhinos" continue to impact the safety and development of the global economy. We must try every means to resolve these "gray rhino" events and return peace to human civilization, just as climate deterioration requires the common attention and assistance of all humanity.