Archive - Mar 14, 2011 - Story

The damage control comes earlier. In an Op-Ed just posted at the FT, Pimco executive Mohamed El-Erian has presented his thoughts on why the Japanese devastation, while disrputive, will eventually lead to another GDP surge: "Japan’s economic growth rate will fall in the immediate aftermath of the natural disasters before rising sharply due to reconstruction activities." Yet even by Pimco standards it is not all good news and the immediate effect will likely be a jump in inflation per the former Harvdardite: "Disruptions to supply chains and the loss of inventories will cause shortages and inflation to spike temporarily from very low levels. The fiscal deficit and public debt will rise meaningfully due to lost revenues and, more importantly, emergency spending. The central bank will ease monetary policy which, given policy interest rates floored at the zero bound, will involve the provision of extraordinary credit and liquidity facilities. Last, the country will receive transfers from abroad, including the repatriation of funds held outside the country by Japanese residents." What however received no mention is Pimco's lamentation that the firm will no longer be able to frontrun Japanese buying of Spanish (and Eurozone in general) bonds: a plan that is certainly put on indefinite hold.

Following the nuclear power plant explosions in Japan over the weekend, the next step once the world gets over its shock, will almost certainly be a worldwide adverse response against any future nuclear developments (explaining the action in shares of Exelon and Areva). It will likely also see countries that have a substantial exposure to nuclear power plants be pressured to migrate to other sources of energy. Below we present a list of the 30 countries that have the largest exposure to nuclear power generation. At the top are Lithuania, France, Slovakia Belgium and Ukraine, all of whom see at least 50% of their energy needs satisfied by nuclear sources. The US is further back, at 20.2% as of 2009 (equivalent to an energy output of roughly 800 TWh). German is at 26.1% while the UK is at 17.9%. It is possible that many of the countries listed below could see social unrest based on concerns of developments comparable to those in Japan, with the respective governments promptly forced to do the old song and dance how nuclear power is the safest available... until the black swan event occurs and it isn't.

A butterfly flapped its wings in Tunisia creating a hurricane that is swirling across the globe, wreaking havoc with the existing social order and sweeping away old crumbling institutions and dictatorships. The linear thinking politicians, pundits and thought leaders have been knocked for a loop. They didn’t see it coming and they don’t know where it’s leading. An examination and understanding of history would have revealed that we have been here before. We were here in 1773. We were here in 1860. We were here in 1929. We are here again. The Fourth Turning has returned in its predictable cycle, just as Winter always follows Fall.

Contrary to prior expectations that all No Fly Zone decisions will have to go through the UN, Reuters reports an Al Jazeera update that US, Britain and France have promised East Libyan rebels the imposition of a No Fly Zone. While the latter two were expected, and hardly relevant considering both are quite impotent at actually imposing "any" zone anywhere in the world, the addition of the US, with its USS Enterprise floating in the region, is rather surprising, especially since the nobel peace prize winning teleprompter announced previously how no unilateral invasion (because that is what a No Fly Zone in essence) decisions would be made.

Gold ticked lower momentarily to $1,417.63/oz on the open in Asia prior to rising to over $1,432/oz where determined sellers sold aggressively, sending gold back down to near Friday's closing price on the London AM Fix (see chart). Silver also rose initially prior to determined selling. Ordinarily, last week's lower silver and gold weekly close would lead to further momentum-driven liquidation but these are no ordinary times. The catastrophe in Japan is already leading to safe haven demand for gold. Premiums for gold bars in Tokyo rose to their highest level since February. Overnight, gold bars were quoted at a premium of $1 an ounce to the spot London prices in Tokyo, up from zero last week and a discount of 50 cents two weeks ago. In Japan, panic buying and stocking up with essentials such as food and gasoline has seen shortages developing, prices rising sharply and concerns of inflation. A bullion dealer in Tokyo said that premiums were higher as the Japanese market is a bit tight on gasoline, so there are inflation risks."

Reports suggest foreign intervention in Bahrain, or at least the possibility that the Bahraini military is taking over the security reins. Such moves mean the regime is getting increasingly concerned with Shiite unrest, which does not seem to be subsiding despite dialogue calls from Bahraini Crown Prince Sheikh Salman bin Hamad al-Khalifa. The ongoing unrest is exacerbated by the split between Bahrain’s Shiite movement, which became clearer during protests on March 11. The more hardline faction of the Shiite movement, led by the Wafa and al-Haq blocs, has been increasing the tension on the streets in the hopes of stalling the talks between the Shiite al-Wefaq-led coalition’s negotiations with the regime. Military intervention from GCC countries means the situation is increasingly untenable for the regime. The paradox the Bahraini regime faces is that it cannot contain the unrest while trying to kick off talks with al-Wefaq. Al-Wefaq finds itself in a difficult position, since it risks losing ground against hardliners if it appears too close to the regime while Shiite protesters are beaten by the police.

The Nikkei 225 plummeted to its lowest point in two years as the damage due to Japan’s recent earthquake became realized. The Bank of Japan injected ¥15T ($183B) into money markets this morning to maintain financial stability within Japan’s economy, while boosting asset purchasing capability to ¥40T from ¥35T to head off a likely decline in business sentiment. Reports put Japan’s insured earthquake losses at $14.5-35B, excluding tsunami-related losses. As a leading global consumer, Japan’s weakened state will likely affect commodity prices and its main trade partners. Although Australia’s second largest export market is Japan, the Australian press reported that its companies are not exposed to Japan’s recent disaster.

While geopolitical/logical news continues to dominate, the global economy still is supposed to be driven by something (even as the major slowdown to Japanese GDP is about to be factored in by economists). Today's important news in regard to marginal economic drivers comes from China where commercial banks extended CNY 535.6 billion in loans in February, down from CNY 1.04 trillion in January, substantially below market consensus: of CNY 650 billion. Same with existing credit: outstanding CNY loans grew by 17.7% yoy in February, down from 18.5% yoy in January (market consensus: 18.0% yoy). Just as importantly, M2 growth came in at 15.7% yoy, down from 17.2% yoy in January (market consensus: 17.0% yoy). China was officially slowing down long before of of the devastating news from Japan hit the tape.

Just headlines for now that war may just have broken out in the Persian Gulf. Look for America to have an official statement on this supposed act of war if for no other reason than to indicate on whose side the massive Fifth Fleet is on (for the time being).

And yes, in a day when a perfect clusterflock of black swans hits, news will be just a little faster than usual.

Our expectation that TEPCO CDS will fly this morning has just been confirmed with a market indicated 92 bps wider from Friday close at 133 bps. We expect this number will soon be at multiples as the fall out to the company is increasingly exposed to the market: to wit - news from Kyodo that the fuel rods at Reactor number 2 at Fukushima (which has so far not exploded) have now been fully exposed. Should there be a trifecta of explosions at Fukushima, TEPCO will likely not survive the public fury aftermath. And in related news, the Japanese government had just announced it will release 3 days worth of oil reserves. Per Wikipedia, Japan has the world's second largest strategic reserve, with state controlled reserves of petroleum at eleven different locations totaling 324,000,000 barrels.

And the hits just keep on coming. The news, first noted yesterday that Saudi Arabia would send troops into Bahrain, has just been confirmed with a Saudi Official reporting that more than 1,000 Saudi troops have entered the tiny island home to the US Fifth fleet. Just headlines for now and we will bring you more as we see it. But far more troubling is the rumor that oil exporting countries have now started dumping Treasurys, leading to a soft patch in the govvie space earlier. We have not yet confirmed the rumor, which may have confused the seller of bonds (Japanese insurance companies come to mind).

The latest in an endless escalation of bad news comes from Seattle Times: "Pentagon officials reported Sunday that helicopters flying 60 miles from the Fukushima Daiichi nuclear plant picked up small amounts of radioactive particulates — still being analyzed, but presumed to include cesium-137 and iodine-121 — suggesting widening environmental contamination. The detection of the highly radioactive elements heralds the beginning of an ecological and human tragedy. The two radioactive isotopes can mean only one thing: One or more of the reactor cores is badly damaged and at least partially melted down." If true, this also means that the Japanese government is blatantly lying to its people and the world, in its relentless determination to prevent panic and to pursue the party line that after two massive blasts the cores are still stable. And judging by the time stamp, this was announced before last night's second blast: if radioactivity had spread then, how about now? And who can blame Americans and people around the world who are concerned that radiation may be coming their way if nobody is to be trusted.