My views and perspectives on current and future global macro in a deeply divided and unstable financial world: Part 1

All the chickens will come home to roost

Hi everyone, I hope you’re doing well. We’re currently at the forefront of great macroeconomics and historical changes. Over the last thirty to forty years, there has been a lot of sin committed by global central banks and other actors within the financial system. As always; “run from it, dread it, destiny still arrives” and all the chickens will have to someday come home to roost. The Trump presidential victory, the uncovering of large amounts of wasteful government spending in the United States, the potential imposition of tariffs, the release of DeepSeek and other high performing LLM models from China, and the ensuing volatility caused by all of these things occurring together demonstrates the clear fault lines prevalent within the global financial system. The things that I’ve outlined above are still relatively minor occurrences that have generated a lot of media hype but pale in comparison to the real problems that we face globally in terms of macroeconomic stability, so you can only imagine the real issues that we’ll start to face once the day of reckoning for all these financial sins finally arrives.

Throughout the course of this article, I’ll outline the being faced by the most important countries, regions, and financial institutions of the world and try to tie this into what I’m doing in terms of my investing methodology.

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Japan

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The country at the forefront of the issues plaguing global macro is Japan. To understand this better, let’s digress slightly and take a historical detour through the history of Japan after World War II mapping its rise and eventual slow decline.

The year is 1984 and Japan is booming. Merely 40 years after having two of its cities nuked to smithereens by the United States, Japan has now become the largest industrial power in the world even eclipsing its benefactor— the United States of America ( read: Uncle Sam). Yes, the Japanese people do have to credited for this rapid rise— they at the time were the most productive and at the same time meticulous labor force out there and propelled Japan from being a war torn frontier market to now a highly developed country with average wages and living standards greater than even the US, the hyper power of the world at the time— but what a lot of people conveniently ignore is the fact that Japan’s industrial growth and economic progress was facilitated by and done with the good graces of the United States, who by establishing military bases in Japan pledged to protect it from the wrath of its neighborhood who it had committed notorious and frankly nefarious atrocities against. I don’t think it should surprise you that Japan is the most hated country in East and South East Asia after all their imperial fantasies and subjugation of the region. Come 1984, Uncle Sam had enough off the large trade deficit with Japan and decided to take matters into its own hands by proposing the much dreaded Plaza Accord. As per the Plaza Accord, all the countries that had become great manufacturing powers under the good graces of the United States like Germany, France, and Japan now had to figuratively “open the kimono” and sit and watch the US devalue its currency relative to their currency without taking any action of their own because well the military bases and aircraft carries don’t pay for themselves.

The U.S. leveraged its position as the sole military guarantor of these countries to subjugate them and completely exploit them. The delegations of these countries met at the Plaza Hotel in New York and the US thus began devaluing the dollar. The BOJ started to have a huge headache on its hands, it’s exports were now slowly becoming less and less competitive due to its strong currency that it could do nothing about and for a largely export oriented economy with a small domestic market it spelled imminent trouble. If Japan were a truly independent and sovereign nation they would’ve devalued their currency by the same amount as the U.S. and/or implemented tariffs against U.S. exports to Japan but well Japan had lost its sovereignty and independence a long time ago. The Japanese Yen started to appreciate and from approximately 240 yen per dollar in September 1985 reached 120 yen per dollar by 1987—a doubling of its value in just two years. The BOJ thus chose to pursue aggressive monetary easing to stimulate the economy and boost domestic consumption of the output that it would have otherwise exported; interest rates were slashed from 5% in 1985 to 2.5% by 1987, flooding the economy with cheap money. At the same time, the BOJ also eased up almost all its capital controls and allowed nearly free foreign direct investment into its economy.

Instead of these measures stimulating the economy, they instead propelled a massive asset price bubble across Japan’s financial and real estate markets; the magnitude of the Japanese asset price bubble far and away triumphs the real estate bubble in China and thus its inevitable collapse would prove to be very painful for the Japanese government, the BOJ, and the Japanese economy. Just to emphasize the true scale of the bubble in asset prices, The Nikkei 225 index soared from around 13,000 in 1985 to a peak of 38,915 in December 1989, tripling in value and the Imperial Palace in Tokyo— the residence of the Japanese emperor— was projected to be worth more than all the land in the state of California. This bubble of rising asset values encouraged consumer spending and corporate investment, however, much of the growth was speculative rather than productive, as companies and individuals borrowed heavily to invest in assets rather than innovation or infrastructure.

In 1989, the BOJ realized that judgment day for their sins would soon be upon them. The Japanese economy had overheated far too much and some austerity would be needed to prevent it from becoming an armageddon esque situation for the Japanese when the bubble finally bursted. The BOJ started to raise interest rates and took them to about 6% by 1991. The financial markets absolutely despised this and thus the Great Japanese asset price bubble collapsed. The Nikkei took a quantum dump in value— falling about 70% from its peak— while housing prices in major Japanese cities fell about 50-70% as well leaving Japanese banks with a mountain loan of sub prime housing loans which would become non performing loans (NPLs) and thus never be paid back. Japan—famous for its engineering— has produced great financial engineers and these financial engineers working at the large Japanese banks decided to never write the bad loans off and instead kept rolling them over to minimize paper losses to appease investors.

The bursting of the bubble marked the beginning of Japan’s Lost Decades, characterized by low growth, deflation, and high public debt. Falling asset prices meant that consumer and companies— most of whose “wealth” was tied to the property or financial markets— reduced spending drastically as their “wealth” got rapidly eroded by the bursting of the bubble. Hence as a result of this, deflation started to emerge in Japan in the early 1990s which further hampered consumption as well no one wants to consume if they think that prices will lower a few months later (basic human cognition). The NPL problem crippled Japan’s banking sector, limiting credit availability for productive investment and to combat this, the BOJ had the genius idea of cutting rates down to zero and even negative levels to stimulate borrowing, investment, and consumption— needless to say, this schtick completely fell flat on its face due to what Keynes calls the “liquidity trap”( the liquidity trap happens when interest rates are so low that people begin hoarding cash rather than spending or investing it because the return on investment that they would get from investing it is very low and they anticipate further deflation). The Japanese government then had the genius idea of borrowing money to spend the deflation away by undertaking heavy investments— this strategy also failed spectacularly and instead ballooned Japan's debt from around 60% to 200% of GDP by 2010. The BOJ also undertook heavy quantitative easing and while this did spur on asset price inflation in Japan it failed to result in any meaningful improvements in Japan’s overall economy as consumers were still not willing to spend and businesses still not willing to invest.

Fast forward to today, March 14th 2025, and the day of reckoning for the BOJ and Japanese government’s monetary and fiscal sins seems to be upon us relatively soon. Now however, Japan’s problems are ten times worse than those in the past and now present significant global systemic and spill over risks. Now I hear you asking, “ but Dragon, how did this end up happening isn’t Japan just a dying economy undergoing deflation”, to which I’ll respond by saying that times have changed. After heavy quantitative easing and a long time of zero interest rates, the steroids that the BOJ wanted to inject the Japanese with have finally worked their magic— just not exactly how the BOJ had planned. A weak Japanese Yen, relative to global currencies, due to the low interest rate regime means that Japan now has to pay increasingly high costs for its imports—Japan’s a very resource deficient nation with them not having any natural resources whatsoever—burgeoning prices for key Japanese imports like energy and food due to the war in Ukraine and the Middle East coupled with the weak Japanese Yen means that inflation in Japan has skyrocketed. Japan’s trade composition of importing cheap low cost commodities and exporting expensive finished products like automobiles and electronics, which was looked at by the rest of the world with envious eyes, has now become its greatest weakness.

According to recent data, Japan’s headline Consumer Price Index (CPI) inflation reached 4.0% year-over-year in January 2025, up from 3.6% in December 2024. This marks the highest level since January 2023 and reflects a notable increase in price pressures. The core CPI, which excludes volatile fresh food prices, rose to 3.2% in January 2025, up from 3.0% in December 2024. This is the highest since June 2023 and exceeds the Bank of Japan’s (BOJ) 2% target. The "core-core" CPI( I promise you that this is a real metric and not something that I just made up on the spot) , excluding both fresh food and energy, increased slightly to 2.5% in January 2025 from 2.4% the previous month, demonstrating exorbitantly high underlying price pressures. Burgeoning inflation has caused significant resentment amongst the Japanese people against their government as wages have still either remained stagnant or barely grown while rising prices decrease their purchasing power every year. Since Prime Minister Abe got assassinated, Japan has been one of the most unstable countries in Asia and if the inflation problem isn’t addressed soon then the days of Prime Minister Ishiba and the ruling LDP might be very numbered especially with elections fast approaching.

Now, I think I should also explain another important thing that the low Japanese interest rate environment has fostered and why it blowing over poses a significant threat to asset prices globally. The low borrowing rates in Japan meant that foreign financial institutions ( investment banks, hedge funds, banks, investment funds, family offices etc) could borrow money between at egregiously low interest rates and then use this borrowed money to buy assets like equities, bonds, real estate etc which would earn them a much higher yield than the interest rate on their borrowings. Hence profiting off the interest rate and yield arbitrage. This schtick has gone on for many years now and is responsible for elevating asset prices globally as institutions had a constant source of cheap liquidity and a highly profitable arbitrage. Any potential rise in Japanese interest rates possesses the threat of disturbing this highly profitable arbitrage and triggering a large scale margin call on these financial institutions which would lead them to liquidate the assets they had purchased with the borrowed Japanese money to pay back their dues. The exact impact this would have on global equities is unclear, (as in the total amount of downside) what is clear is that it’s going to be bad— especially for highly speculative equities which for years now have been riding on a wave of liquidity and narratives driving the prices higher and higher. This provides the perfect segue for me to tell you about the impossible set of choices that the BOJ is faced with today.

The BOJ now faces a situation which can be very eloquently termed as an “impossible trinity”( I nabbed this terminology from Moatless Capital give him a follow on substack and X). Even despite the recent small interest rate hike by the BOJ, Japanese interest rates remain at near historic lows while inflation is at historic highs (as previously outlined). Basic macroeconomics 101 from high school dictates that to control inflation and bring it down, the BOJ needs to increase interest rates and this is where the problems begin. Through my historical detour, I think I’ve sufficiently proven that Japan is not an independent, sovereign country when it comes to policymaking and defense but rather an American protectorate like South Korea and the entirety of NATO. An increase in Japanese interest rates threatens to undermine the U.S.’s stock market and other asset prices and in electoral democracies these things are important electoral marketing tools. Any attempt to raise interest rates to the levels which would sufficiently control Japanese domestic inflation would threaten the carry trade and hence would be faced with significant American pushback as we all know that the financial industry’s lobbying is responsible for financing the lives of politicians on both sides of the American political spectrum. Also an increase in interest rates would threaten Japan’s own asset price bubble (just like it did in the 1990s) and in a period of high inflation, low wage growth, and deep dissent and deep dissatisfaction against the government among the Japanese people against their government has the potential to tip over into wide scale instability as a large portion of Japanese household wealth is tied to asset prices like housing prices. China faced a similar situation with its property a few years ago but unlike China—Japan's economy does not possess the structural strength to be able to handle a significant contraction in asset prices. Very interestingly, if the BOJ raises interest rates then the Yen will strengthen against major currencies which would make already expensive Japanese exports that are being outcompeted by Chinese exports even more expensive thus hurting Japanese companies and the overall economy at large.

If the BOJ decides to keep interest rates constant or even decrease them then well they have to deal with burgeoning inflation driving instability domestically. If inflation continues to rise then well the Japanese people won’t hesitate to vote out the ruling LDP in favor of any party or candidate who promises to deal with the inflation issue. What proponents of MMT fail to explain is that MMT only works when inflation domestically can be exported internationally like the U.S. manages to do because its currency is the global reserve currency and used for trade everywhere. Japan does not have this privilege, there is no permanent demand for the Japanese Yen as there is for the U.S. dollar thus the wrath of Japan’s inflation debacle will all have to borne domestically. I don’t think anyone of us would want to be in the BOJ’s place right now

Think about it this way. Suppose Thailand does trade with Vietnam by selling durian and receiving payments in U.S. dollars, Thailand will use these U.S. dollars to trade with other countries globally and the remaining dollar balance (forex reserves) at the end of the year will be put back into buying U.S. treasuries since money simply cannot be kept idle and must always be put somewhere to earn interest— thus a part of all global trade flows back to the United States every year through its borrowings allowing it to export its inflation globally. Japan does not have this privilege as the Yen is not the global reserve currency. Japanese exporters thus cannot pass on domestic inflation to international customers by raising prices since on the international stage, they have to compete with Chinese exporters who now have the ability to produce and sell similar and/or higher quality goods at cheaper prices.

So now, I think I’ve made it evidently clear that Japan and the BOJ is stuck between a rock and a hard place and every choice that the BOJ makes will now have heavy consequences. Repenting for your sins isn’t a task for the faint hearted. Let's try and quantify some of Japan’s debt problems shall we? Japan’s public debt to GDP is around 263% while including corporate and household debt this figure jumps up to around 414%. The corporate and household debt, I’m less worried about since in East Asia, most corporate and household is backed by heavy collateral such as land and/or cash and access to credit is exceptionally difficult so these loans are usually very high quality loans. The issue for Japan is that yields cannot remain high for very long as existing public debt levels are already so high, so under a situation where rates have to be kept high for a prolonged period of time the BOJ shall have significant solvency issues.

What does higher yields and a collapse of the carry trade mean for the global equity markets at large? well every time the BOJ has acted somewhat hawkish, the Nasdaq corrects about 2-3% so if we see indications from the BOJ that they’re willing to raise rates for say two years like Jerome Powell did from 22-24 then we may be looking at a 20% overall correction in global equities. So if you’re an investor in speculative equities that have only gone up off the back of heightened liquidity prevalent within the financial system then this is your chance to get out.

I want to clarify that my objective is not to sell you doomsday porn but just present an account of things as I “rationally” see them. Obviously, I don’t expect people to die on the streets— Japanese households have very high savings. What I’m trying to convey is that Japan is about to have a major down cycle because of the BOJ’s impossible trinity that I’ve outlined and that this is going to have a major impact on the rest of the world because we live in a highly financialized world.

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The passive investing bubble

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Something that I’ve wanted to talk about for a very long time is the passive investing bubble. Ever since 2008, there has been a very large narrative almost cult like obsession with passive mostly index investing. For about 17 years now, news channels, financial influencers and even stock market moguls have gone on and on about how getting rich is really easy and that all you need to do is keep dollar cost averaging (DCAing) into the SPY or any other index. What this has caused according to market veteran Porter Collins,— who heads Seawolf Capital, delivered 66% CAGR last year, and featured in the Big Short movie— is that passive investing through ETFs now represents about 65% of the total market volume. These passive flows represent the dumbest form of dumb money as they don’t much care about fundamentals or valuations or any other investment parameter merely momentum and market cap. Irregardless of fundamentals, valuations, and corporate governance, if a stock is a part of one of the major indices then it has a steady stream of liquidity always supporting the stock price. What this has done is eliminate price discovery from the markets altogether and made things like short selling basically impossible unless you have impeccable luck as the liquidity game works against you. The same thing goes for investing in lesser known small and mid cap names because it’s almost impossible for these things to get properly noticed by the markets when so much for the market is passive.

Corporate governance also matters lesser and lesser now because the index algorithms simply don’t care what the management is doing, they’re like brainless monkeys operating with the headless chicken approach of “if it in index then I buy” which is frankly exceptionally stupid.

From an ethical standpoint, passive investing is also quite predatory as voting rights are not given to passive shareholders but instead handed out to market intermediaries such as BlackRock, State Street, and Vanguard who abuse these voting rights and large scale market influence built off the back of our money to enforce their draconian mandates such as ESG and DEI on companies. Passive ETFs have also now tended to trade more on dark pools rather than on the open market making it difficult to track their market activities almost forming a cartel of their own.

Micheal Burry has spoken at length about the passive investing bubble and he explains it using the analogy of a crowded theatre. I’ll try to explain the rationale to the best of my abilities. Imagine a full theatre of people wanting to watch the latest chartbuster movie; this theatre is so full that people are not only sitting to watch it but there’s also people standing all across the aisle to watch it. Imagine if a sprinkler alarm were to go off during this time, there would be a mad rush to exit the theatre causing a stampede. This is exactly what’s happened with the passive investing cult. There’s too many people chasing the same exact thing and the fact that most of these don’t really know anything about investing or macroeconomics makes this a lot worse. As Porter Collins calls it, “ the dumbest form of dumb money”.

Now think about this and maybe even ask yourself this question, “if you hypothetically knew nothing about the markets and were invested in passive ETFs and the market were to crash during a global down cycle then would you have the encourage to even hold onto your investments, let alone buy more and keep DCAing”. 99% of people would not have the temperament to even hold onto to their positions thus creating a cascading stampede effect all over the public equity markets. Governments all over the world fear the bursting of the asset price bubble since historically we’ve never had this large of a proportion of household wealth directly linked to financialisation and asset prices. A drastic fall in asset prices has the potential to destroy public opinion and trust in governments and lead to another round of revolutions and guillotines as we’ve seen in the past hence governments have in the recent past have been quite rapid in intervening through quantitative easing. Since 2008— when the whole passive investing cult began— there hasn’t been a black swan event as such that would threaten the whole bubble apart from 2020 when the COVID pandemic spread through the world and we had to go into lockdowns. Just 30-40 days after the market crash began, central banks all over the world stepped in with massive quantitative easing to steady the ship— the amount of quantitative easing that the world witnessed in 2020 was larger than any period in history before it— and governments were able to get away with it because there was no inflation. In the future, however things will be different.

With the way things have been going, you cannot possibly call me crazy for assuming that there will come a down cycle soon enough in our lifetime when governments all over the world won’t be able to step in with large amounts of QE for fear of massive hyper inflationary pressure through the economy. In fact a large reason why inflation has remained so low globally for so many years is because China through its large industrial apparatus exported deflation globally as a counter to the U.S. exporting inflation. Now with de-globalization and de-dollarization in full swing and the U.S. and the West becoming more and more protectionist by imposing artificial trade barriers on Chinese imports, inflation in the West is bound to skyrocket.

Once this down cycle finally dawns upon us which world governments particularly those in the West can’t print away by doing quantitative easing then we’ll have a situation where the pendulum will finally swing back. Money will begin flowing from passively managed funds to actively managed funds— such is the beauty of life— the pendulum always swings back without fail. Investing—as a journey— transcends the individual, whether you’re 19 years old or 80 years old— investing for your future or your kids’/ grandkids’ future— the markets always look forward and so should you. Never chase what’s in trend but rather what the pendulum will inevitably swing back once times get tough. It’s only in a down cycle that essential aspects of investing and valuation theory and methodology like price discovery will become paramount.

Now I hear you saying, “Dragon, ever since I’ve been alive the SPY has always gone up and the DCA strategy has always made outsized returns for investors; people have been talking about the bubble bursting for years now but it never happens. You are officially a doomer”; well to that I say: that’s also what people buying houses in 2007 said to justify their actions or what Issac Newton said when yoloing his family fortune into tulips during the tulip mania or what buyers of Cisco stock in 1999 said to justify their actions. You might say that I’m one of those doomers waiting for storms and I would agree; why you ask, because I believe that time is on my side even if the day of reckoning doesn’t arrive today but arrives 10,20, or even 40 years later— time doesn’t and won’t end with me, there will always be people after him who would maybe appreciate my insight in the past.

So now finally I hear you asking, “ so what do you want us to do”, well I just want you to devote some time out of your day every day to research equities, to understand valuations, and to understand investing methodologies, it’s a life that will only serve you well now and in the future. If you cannot under any circumstance devote time to personal research then just invest using actively managed mutual funds, yes the fees might seem a bit high at first but trust me, a well managed expertly run mutual fund with a competent funder will make the fees that you pay him/her worthwhile in the future especially when shit finally hits the fan because unlike the passive ETF, the guy running the mutual fund has his entire livelihood depending on the fund’s performance and has actually given professional exams and been certified by multiple authorities to serve in his position. Human competence and knowledge particularly in times of distress is second to none.