Germany’s biggest bank, Deutsche Bank is in the news again today with solvency issues, as many big institutional investors appear to be pulling their money over safety concerns.  Will Chancellor Angela Merkel bail them out (she is currently adamantly denying she will)?  Will Mario Draghi bail them out?  Is this shades of 2008? 

Europe’s banking system is a major weak link for the whole world economy and could cause huge problems.

The NASDAQ Europe Bank Index has fallen almost 50% in the last 18 months.  

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Based upon Nobel Prize winning economist, Robert Shiller of Yale, when stocks are as over-valued as they are today, the rates of return are typically very poor over the next 5-10 years as shown in the table.

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As you can see from this demographic chart, Japan’s long term demographics are a terrible mess! The largest population cohort is between the ages of 65 and 69. This chart demonstrates trends toward delayed marriage and smaller families, which have resulted in very few young people coming up to support the social spending programs of the Japanese government for retirees. Believe it or not, there are more females between the ages of 80 and 85 than there are between the ages of 0 and 5.

With Japan having the highest level of government debt vs. GDP of any industrialized nation, (Japan’s government debt is 280% of it’s economy or GDP compared with 104% for U.S.) the government’s long term financial picture is horrendous. They are currently printing more money and buying government bonds and other assets at a higher rate than any other central bank in the world. They are also offering negative interest rates for savers and have seen an enormous drop in land prices (down approximately 80% since 1990) along with a very bad stock market (down more than 50% since 1990) and continuously bounce in and out of recessions and deflation.

Thus, with little or no good options apparent for investments for their citizens and slowly sinking economic and demographic quicksand Japan’s economic problems could reach catastrophic proportions in the not too distant future.

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The over-optimistic analysts at Wall Street have done it again! It seems at the top of every cycle they project earnings to go straight up, which is what part of what creates such a shock for the market once the economy goes into a slow down or recession. It is inconceivable, in my opinion, that earnings could bounce screaming upward in this slow growth economy globally which is set to contract. See BCA comments below:

“According to BIS data, global credit growth is contracting. That is significant, because credit greases the wheels of the global economy.  Corporate profit margins are already narrowing, but bottom up forecasts discount an aggressive move out to new highs in the coming quarters (middle panel). The growth backdrop is not conducive to such a development. Specifically, cyclical sectors such as industrials, materials, energy and technology are slated to show broad-based improvement in profitability. That would not be far-fetched if the world were on the cusp of a V-shaped, post-recession type of acceleration. However, deleveraging and the global credit contraction warn that global growth is not about to rebound.” (Source: BCA, U.S. Equity Strategy, 6/21/16)

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Source: BCA Research 2016