Japan’s recent decision to impose negative interest rates smacks of desperation, as does the fact that the central bank is now essentially monetizing Japanese government debt. Japan is still perceived as a solid country economically, but the foundations are actually quite shaky. China is more or less the reverse. That mismatch between perception and reality is why Japan is by far the greater risk right now.
Other risks to keep an eye on.
These are the two major disruptive country risks I see in the short term. Additional non-country risks include:
An oil price spike. Looking at past significant oil price declines, they were almost always followed in the medium term by significant price increases. Both Europe and Asia (particularly China and Japan) have benefited greatly from lower oil prices—two to three times as much as the U.S. on an economic basis. A price increase would hit their economies hard, and the problems they face now would be much worse with higher oil prices.
Ballooning U.S.-dollar debt. There has been an enormous increase in U.S.-dollar debt in many countries outside the U.S. With weak commodity markets and a strong dollar, this is a slow-brewing potential crisis that could rock world financial markets. The problem is getting media coverage, but the actual effects haven’t shown up yet. When and if they do, we could see serious disruption of financial markets, on the order of the Asian financial crisis.
As I see it, these are the big risks outside the U.S., and they are serious—but there are also opportunities on the flip side. We’ll talk about some of those tomorrow.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer.