International Investments

This Buying Spree Dwarfs The One That Shook the World in the 80s

They're baaaaack. While the Chinese are busy grabbing all of the headlines, it's really the Japanese who are making the biggest moves.

So far this year, they've very quietly spent $101 billion on overseas acquisitions in a global buying spree that now dwarfs the one undertaken in the late 1980s and early 1990s according to Edward Jones of Dealogic.

S&P Capital IQ reports 45 deals with a value of $18.7 billion year-to-date involving a Japanese investor or buyer and U.S. assets alone. That's a 50% increase in the number of deals and a 64% increase in the valuation versus last year at this time.

To put this binge into perspective, not only is this the highest year on record, but it is on a pace that's three times the acquisition rate that had everybody quaking in their boots 30 years ago.

I think that's very telling on a couple of levels.

First, Japan's economy is faced with a triple disaster. When you add up private, corporate and government debt, it's nearly 500% of GDP according to numbers from Goldman Sachs earlier this year, which makes the Greeks look positively miserly. Even our own fiscal cliff pales in comparison.

Second, fully 25% of their population is going to die off by 2050, according to the Japanese Health Ministry, further exacerbating the near-complete shutdown in domestic demand that repeatedly plagues any attempt to jump-start the Japanese industrial machine.

And third, Japanese corporations themselves are struggling on every level. Decades of low and no growth have paralyzed even the best companies.

That's why so many Japanese companies are now turning their attention to global markets. They have to – it's the only way they're going to survive.

The Japanese Hunt For Growth

Japan's economy is not growing at 7% a year; instead it's fighting to maintain any kind of positive momentum whatsoever.

Its executives are struggling to cope with highly competitive markets that move faster and more decisively than they are prepared to accept. According to McKinsey, productivity per worker is one of the lowest of any developed country.

In short, the Japanese economy is vulnerable rather than in a position of strength.

This changes the game significantly and gives the Japanese a new sense of urgency. Japanese companies literally have no alternative. Almost every market they've dominated for years is failing.

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Investing in Japan: Is There Light at the End of the Tunnel?

Most people have given up on investing in Japan.

With an aging population and far too much government debt, the conventional wisdom is that Japan will never again see the vigorous economic growth it once enjoyed.

The earthquake and tsunami of March 2011 only reinforced this view. However, that tragic episode did have another side.

It showed the resilience and discipline of Japanese society.

There was almost no looting, for example — and recent economic data suggest that the Japanese economy is not as dead as it seemed.

First quarter Japanese gross domestic product (GDP) came in at an annual growth rate of 4.1% –far higher than the United States, Canada, Australia, or anywhere in the Eurozone.

Given that Japan has been in perpetual near-recession for 21 years, with no surges of productivity like the U.S. enjoyed in the late 1990s, it's really not a bad performance.

You can also see Japan's true strength from its exchange rate, which is currently 79 yen to the dollar, up from around 120 five years ago. That makes visiting Tokyo very expensive.

However, it's also sign of a highly competitive economy.

Investing in Japan: What You Need to Know

It's notable that observers in the United States, a country which perpetually runs payment deficits of $500 billion-$600 billion annually, sneer at the economies of Japan and Germany, which are almost always in surplus.

Before 1995, I lived in another economy that was similar. Britain ran deficits much like the U.S. does.

So believe me when I tell you, deficits are not exactly a sign of superior economic health.

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Investing in Mongolia: Is It Time to Buy the World's Fastest Growing Economy?

It is the world's fastest growing economy. It also may be the world's best kept secret.

Yet it is true. Mongolia is growing twice as fast as China and it's a market most investors know little about.

While Chinese GDP is forecast to grow by 7.5% in 2012, the Mongolian economy is set to grow at a blistering pace of 14.9%.

That's down a bit from 2011-but not by much.

According to official statistics, the Mongolian economy grew 17.3% in 2011.

Taking the two together, Mongolia would have the world's fastest growth rate, beating Qatar and Libya over the same two-year time frame.

So is there a way a regular guy can make money out of all this growth?

Or to the larger question: Is the Mongolian market where we should be putting our hard-earned savings?

Investing In Mongolia

To start, it's not all good news when it comes to investing in Mongolia. There is some bad economic news that comes along with the good.

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The Greek Bailout, the CDS Market, and the End of the World

A not-so-funny thing happened on the way to the latest Greek bailout.

The terms and conditions of the bond swap Greece agreed to before getting another handout constitutes a theoretical default – but not a technical default.

That's not funny to CDS holders.

Greece hasn't defaulted (so far), but some of the buyers of credit default swaps, basically insurance policies that pay off if there is a default, claim the terms and conditions of the bond swap constitutes a "credit event" or default.

If it is, they want to get paid.

While on the surface this looks like a fight over the definition of a default, underneath the technicalities, the future of credit default swaps and credit markets is at stake.

In other words, the ongoing Greek tragedy is really becoming a global tragedy of epic proportions.

The Next Act in the Greek Bailout?

Here's the long and short of it.

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Should We Be Worried About Iran?

If the Iranian government makes good on its recent threats to stop oil shipments through the Strait of Hormuz, oil prices would shoot up $20 to $30 a barrel within hours and the price of gasoline in the United States would rise by $1 a gallon.

Such a steep spike in crude oil prices would plunge the United States and Europe back into recession, said Money Morning Global Energy Strategist Dr. Kent Moors.

Iran just concluded a 10-day military exercise intended to prove to the West that it can choke off the flow of Persian Gulf oil whenever it wants.

The world's fourth-biggest oil producer is unhappy with fresh U.S. financial sanctions that will make it harder to sell its oil, which accounts for half of the government's revenue.

"Tehran is making a renewed political point here. The message is – we can close this anytime we want to," said Moors, who has studied Iran for more than a decade. "The oil markets are essentially ignoring the likelihood at the moment, but any increase in tensions will increase risk assessment and thereby pricing."

One reason the markets haven't reacted much to Iran's latest rhetoric is that although it has threatened to close the Strait of Hormuz many times over the past 20 years, it has never followed through on the threat.

But a fresh wave of Western sanctions could hurt Iran's economy enough to make Tehran much less cautious.

The latest sanctions, signed into law by U.S. President Barack Obama on Saturday, will make it far more difficult for refiners to buy crude oil from Iran. And looming on the horizon is further action by the European Union (EU), which next month will consider an embargo of Iranian oil.

"The present United Nations, U.S. and EU sanctions have already had a significant toll," said Moors. "They have effectively prevented Iranian access to main international banking networks. Iran now has to use inefficient exchange mechanisms."

Because international oil trade is conducted in U.S. dollars, Moors said, Iran must have a convenient way to convert U.S. dollars into its home currency or other currencies it needs, such as euros.

Pushed to the Brink

The impact of the sanctions combined with internal political instability has driven Iran to turn up the volume on its rhetoric.

"Tehran has limited options remaining," Moors said, noting Iran has historically used verbal attacks on the West to distract its population from the country's problems. "The Iranian economy is seriously weakening, the political division among the ayatollahs is increasing, and unrest is rising."

Analysts worry an Iranian government that feels cornered would be more prone to dangerous risk-taking in its dealings with the West. So while totally shutting down the Strait of Hormuz isn't likely, Iran could still escalate a confrontation beyond mere talk.

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Too-Big-To-Save: Italy Totters on Debt Crisis Cliff

With its 10-year bond yields nearing 7%, Italy's debt is becoming a burden it will no longer be able to handle as it follows the same path as Portugal, Ireland and Greece.

However, Italy's economy – seven times larger than Greece's, nine times larger than Portugal's and 10 times larger than Ireland's – is too big for the Eurozone to rescue.

And because Italy's economy is so large – the third-largest in the Eurozone and the eighth-largest in the world – a default on its sovereign debt would be that much more calamitous.

Yesterday (Tuesday), yields on Italy's 10-year bonds hit 6.77%, a record for Italy in the era of the European Union (EU).

"Now we are really reaching very dangerous levels…We are above yield levels in the 10-year where Portugal and Greece andIrelandissued their last bonds," Alessandro Giansanti, a rate strategist at ING Groep N.V. (NYSE ADR: ING), told Reuters.

The spike in yields reflects rising investor concern that besieged Prime Minister Silvio Berlusconi doesn't have the political muscle to push through the tough budget measures Italy needs, such as pension cuts, to get its debt issues under control.

Those fears were further stoked yesterday when Berlusconi was unable to win a majority on a routine vote on a budget report, but eased when Berlusconi agreed to resign. Yields dipped slightly on Monday in response to rumors that Berlusconi might step down.

"The market's bias is fairly clear. The question is; what comes afterward, assuming he falls?"Peter Schaffrik, head of European rates strategy atRBC Capital Marketsin London, told Bloomberg News.


If Italy's bond yields don't fall significantly, it won't matter who's running the country. The high yields are making Italy's ability to cope with its debt increasingly infeasible.

At 120% of gross domestic product (GDP), Italy's debt load is second only to Greece's among Eurozone nations. Its total debt of $2.7 trillion is the eighth-highest in the world.

As bond yields go up, the cost of rolling over this massive amount of debt increases as well, and is nearing unsustainable levels.

Italy needs to auction $41.5 billion (30 billion euros) of debt less than a week from now, Nov. 14, and another $31.13 billion (22.5 billion euros) in December. Next year Italy will need to borrow $415 billion (300 billion euros).

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One of These Banks is Europe's Lehman Bros. – And We're Going to Profit From Its Collapse

Back in July, I warned you that Europe probably had its own Lehman Bros. – an unstable financial institution on the brink of a collapse.

At the time, I didn't know exactly which institutions were most at risk.

Now I have a pretty good idea and want to share that with you.

One big firm, the Brussels-based Dexia SA, is already set to be dismantled.

And based on an analysis of 50 European banks with a combined $129 billion (92 billion euros) tied up in Greek sovereign debt, I've identified two other suspect institutions: BNP Paribas SA, and Societe Generale SA (PINK: SCGLY).

These banks have a high level of exposure to Greek sovereign debt and once they're forced to acknowledge the precariousness of their situation investors will stampede for the exits. That will have negative effects for both European and U.S. banks, as well as the overall markets. But there is a way to not only protect yourself, but turn a serious profit.

I will explain that to you shortly, but first, let me give you an idea of what it is we're dealing with.

Europe's Lehman Bros.

Basically, there are two ways to judge which banks are most at risk. You can look at how expensive the credit default swaps on these banks are compared to their peer group. And you can look at how quickly those credit default swaps have climbed.

Credit default swaps, in case you are not familiar with them, were originally created as "insurance" that protected the lender in case of a default. When they are purchased, the loan is turned into an "asset" and is then "swappable" for cash if the borrower defaults.

Generally speaking, the more expensive a credit default swap is and the faster its price has increased, the greater the risk there is associated with it.

As of Oct. 4 , the senior debt of the top 25 global banks with tradable CDS instruments was at 289 basis points. (A basis point is equal to 1/100 of a percentage point . They are commonly used to denote a rate change or, in this case, the difference or spread between two interest rates.)

However, the five-year senior credit default swaps for Societe Generale and BNP Paribas are considerably out of line with that figure – or at least they were as of Oct . 6. They've recovered since rumors of another rescue surfaced, but they're still dangerously high. Five-year senior credit default swaps were recently valued at about 386 points for Societe Generale and 287 basis points for BNP Paribas.

As for how fast the cost of insuring that debt has risen, the data is even more incriminating. Since 2009 Societe General's credit default swaps are up 294.17% and BNP Paribas credit default swaps have risen 199.60%.

This suggests two possibilities: 1) Traders are betting that the banks are substantially undercapitalized – meaning they may not have enough money to meet potential losses; or 2) They've got way too much exposure to Greek debt to withstand the country's failure.

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What the Euro Will Look Like in Five Years

Believe it or not, there was a time when investors saw the euro as the savior currency of the world.

People talked about how the euro would replace the dollar as the world's reserve currency – and there was plenty of proof to support that opinion.

At the time, t he European Central Bank (ECB) had the right monetary solutions in place to fight inflation, while the U.S. Federal Reserve was struggling to keep inflation under control . That was another point for the euro, and a strike for the dollar.

So not surprisingly, central banks started replacing some of their U.S. dollar reserves with euros, and the euro became a second "reserve currency" for central banks.

The euro also soared past the dollar in just a few years. In fact, the euro shot up from 82 cents at its inception to $1.60 in less than 10 years.

Yes, it seemed that the planets were aligned for the euro to step up to the plate and become the world's reserve currency.

But that's because the euro had never experienced a real "rough patch," or serious monetary crisis.

Fast forward to 2008.

The Euro Gets its First Test

Once the credit crisis was in full bloom in mid-2008, loans dried up and unemployment went to 10% in the United States and Eurozone.

That's when the euro had its first real test.

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In Today's Crazy Markets, Here's the One Global Region to Invest in Now

Money Morning global investing guru Martin Hutchinson has identified the one global region that he's focusing on as the world's next big profit play.

You'll be stunned to see what he's discovered.

But you'll also be wise to listen.

Read More…

European Union Debt Crisis Stings France, Putting U.S. Banks at Risk

While investors in the United States have been preoccupied with the debt-ceiling crisis and volatile stock markets, the European Union debt crisis has worsened.

Now France is under suspicion, and if its debt troubles spiral out of control, then there's a good chance the country will take U.S. banks down with it.

Despite denials from the major ratings agencies, some believe France could be in danger of losing its AAA credit rating, just as the United States did recently.

In fact, it was Standard & Poor's unprecedented downgrade of the United States that put investors on notice that no nation was safe. France became a target because many of its large banks hold a lot of debt from troubled nations like Greece, and because France has a lot of debt of its own.

The cost of insuring French sovereign debt via credit default swaps edged up last week as rumors swirled and concerns accelerated.

French sovereign debt has grown alarmingly quickly, rising from just 64% of its gross domestic product (GDP) in 2007 to 85.3% of GDP this year, according to International Monetary Fund (IMF) estimates.

A weakening French economy – on Friday the French statistics office reported that second quarter GDP growth was zero – and inadequate government policies have added to investor jitters about the country's ability to repay its debt.

"We've been really cautious, and the sovereign crisis is now escalating," Philip Finch, global bank strategist for UBS AG (NYSE: UBS), told The New York Times. "It boils down to a crisis of confidence. We haven't seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible."

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