Japanese conditions – low inflation is going to stay for some time!

Dear Ladies and Gentlemen

Japanese conditions in global government bond markets are more and more likely. But what does it mean for our investors with reference currency Euro or Swiss Francs, if Germany’s 10-year government bond yields 0% or almost 0%, Switzerland’s 10-year government bond even yields -0.75%. What does it mean, if central banks own large portions of their countries’ government bonds (the Bank of Japan owns 49% of Japanese government bonds, the European Central Bank owns 20% of European government bonds and the U.S. Federal Reserve System owns 13% of U.S. government bonds)?

The answer is not so trivial and since we do not have any long-lasting experience in this, we cannot really know where the situation is heading. One thing is certain though, as long as central banks are buying government bonds in the primary (direct at source) or secondary (at exchanges) markets at current or even increased rate, government bond markets will not become free markets (free in an economic sense) but stay manipulated. Manipulated may be a strong word for one or the other of you and I am not judging, but let’s face it if in any market of any product in the world one single buyer buys all the “leftovers” there will never be a fair price defined by offer and demand for that very product. In the case of government bonds one would assume that a country as over-indebted as Japan would have to pay much higher interest rates to sell their government bonds to investors than for example Germany a country running on a much, much lower debt to GDP ratio than Japan, only that this is not the case. The reason for this is central bank intervention.

Personally I believe Japan is indicating a direction in this respect as Japan is somewhat running ahead of us sitting here in Europe. Japan is running on low or ultra-low interest rates for decades already and Japan is in a situation of constantly increasing government debt levels that have reached roughly 250% of GDP. What we can learn from Japan and what we can expect to experience in Europe including Switzerland (at least partially and maybe to some lesser extent) is the following:

• Debt to GDP ratios will rise.
• Interest rates will stay low due to central bank interaction.
• Government spending discipline is not going to increase.
• Government bond markets stay manipulated by central bank interaction.
• Government bond markets’ liquidity problem is going to stay due to central bank interaction.
• Inflation will stay low.
• Central bank status quo for decades.

This list is by all means not complete. But it shows why I believe there will not be either a quick fix or hyper-inflation anywhere soon.

Therefore, ask yourself if you really want to invest your money following an unlikely scenario? Because maybe it makes sense to invest in cashflow returning strategies and keep some precious metals for the ultimate worst-case scenario, no?

What is your opinion?

As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG