EVERYTHING IS BETTER IN ASIA (Guest: Vincent Deluard)

Vincent Deluard frames Japan as the road not taken for Europe, arguing that allowing housing prices to collapse, permitting the yen to depreciate roughly 75 percent in real terms, and holding pension payments flat as a share of GDP preserved a manufacturing base distributed across small towns that most European countries have lost. He views currency depreciation as the most powerful economic adjustment tool available and describes a strong currency as a wealth transfer from the young and working to the old and idle. He rejects the fiscal dominance collapse thesis for Japan, pointing to a near-surplus primary balance excluding interest, a roughly 25 percent of GDP decline in net debt over five years, and tax collections growing at six to seven percent annually, and argues France, the United Kingdom, and the United States are far more credible candidates for fiscal crisis.

Deluard sees multiple converging forces pointing toward yen appreciation. The 30-year JGB yield has risen to close to 4 percent, representing approximately 95 percent of convergence toward US long rates, narrowing the carry trade differential. Japanese pension funds that shifted to a 25-25-25-25 domestic and foreign asset split under Abenomics are likely to reverse those outflows. Japan holds approximately 1.2 trillion dollars in US Treasuries likely purchased when the yen was around 80, and Japan's new prime minister has repeatedly stated a desire to repatriate capital held abroad. His preferred expression of European fiscal risk is a short euro versus yen trade, and he has shifted his sovereign spread recommendation from the BTP-OAT trade to shorting French debt against German Bunds, reasoning that a flight-to-safety bid would benefit Bunds even though the German model is itself broken.

France runs a large primary deficit, depends on foreign buyers, and faces a negative debt dynamic where the 10-year yield is around 4 percent while nominal growth is below that level with inflation near 1 percent and real GDP growth below 1 percent. Jean-Luc Melenchon was approximately 10,000 votes from qualifying for the second round in the last presidential election and is now polling roughly double his prior level, with a growing voter base of Muslim voters where he sometimes receives over 90 percent support and disgruntled young educated workers. Deluard predicts Melenchon qualifies for the second round against Marine Le Pen rather than a centrist, with maximum market vulnerability arriving in late winter to spring. Melenchon's stated solution to the French deficit is to default on debt and stop paying interest. Deluard also notes that Japanese investors historically favored French debt for its triple-A rating and spread over Bunds, and that any Japanese rebalancing toward domestic assets must come at the expense of non-US international holdings such as French bonds because the US will not allow repatriation of Treasury holdings.

Deluard describes himself as turning bearish on US equities without yet calling a full recession. Personal income and employment tax collections were growing at 10 percent in February but have slowed to approximately 5 percent. He estimates a sequential fiscal stimulus of close to 350 billion dollars from tariff reimbursements, tax deferrals, and reform receipts, but predicts this impulse will not repeat, that Trump will reimpose tariffs ahead of the midterms, and that a planned 500 billion dollar increase in military spending may not pass. He assigns at least a two-thirds probability that the December 2027 SOFR contract has already seen its bottom and argues the 1982 to 2008 model of Fed rate cuts stimulating private borrowing broke down in 2008, with fiscal spending replacing private credit creation as the transmission mechanism since 2020.

On Latin America, Deluard argues the region benefits from the China shock because there is no competing Argentinian car or Colombian machine tool, so cheap Chinese goods raise regional productivity rather than destroy industries. Brazilian TIPS are offering six to seven percent real yields, and he notes the largest bull market in Brazilian equities occurred during Lula's first two terms, with endemic corruption and political checks meaning no leader can enact dramatic policy changes regardless of ideology. A left-wing election win in Brazil in the near term could delay his bullish case on the Brazilian real.

Deluard's most underappreciated long-term risk is inflation arriving in a third wave roughly five years after the 2021 spike, placing the next potential wave around 2026. Current El Nino conditions in the East Pacific are running seven degrees hotter than usual, raising the risk of agricultural price shocks through flooding in Latin America and drought in East Asia and Europe, with lingering fertilizer supply issues adding further pressure. He cannot identify the specific trigger but believes institutional and political conditions guarantee a strong inflationary response to whatever arrives, and predicts a left-wing populist takeover of US politics is likely in 2028 with markets not pricing that risk. He attributes a generational cultural shift toward East Asia among young people in the West to popular culture, and predicts that within five years more foreigners will visit Japan annually than visit the United States, with tourism already Japan's second largest export nearly on par with cars.