Can Contagion Be Avoided Considering The Magnitude Of Japan’s Woes?

Reggie Middleton's picture


My condolences truly go out to the people of Japan. A massive earthquake, a horrifyingly destructive tsunami, and then multiple nuclear emergencies and radiation poisoning is more distress than any nation had had to endure in such a short period of time in recent history. I am reticent to discuss the ramifications of such, alas that is the crux of the analysis of BoomBustBlog. I have noticed that many professional investors are detached from the real world causes and consequences of volatility and large swings in the markets. In a way, I can sort of understand. It’s like playing a video game. All you are doing is pushing buttons in reactions to changing pixels on a glowing screen. Unfortunately, the reality of the matter is sometimes much more than that. Thus, as we go on to illustrate what I see will probably come out of this situation, let’s keep in mind that real people are getting hurt to very significant extent. Real children, real families, real grandparents…


From CNBC: Japan Braces for Potential Radiation Catastrophe

Prime Minister Naoto Kan urged people
within 30 km (18 miles) of the facility north of Tokyo to remain
indoors and conserve power amid the world’s most serious nuclear
disaster since the Chernobyl disaster in Ukraine in 1986.

As concern about the crippling
economic impact of the nuclear and earthquake disasters mounted,
Japanese stocks fell as much as 14 percent before ending down 9.5
percent, compounding a slide of 7.6 percent the day before. The two-day
fall has wiped some $620 billion off the market.

The French Embassy in Tokyo warned in
an 1 am London time advisory that a low level of radioactive wind
could reach the capital — 240 km (150 miles) south of the plant — in
about 10 hours.

Also in the news, Nikkei Plummets as Panic Spreads, Futures Tumble Worldwide on Japan Nuclear Crisis and BoJ Pumps More Funds.

BOJ Fails to Contain Investor Panic as Nuclear Danger Rises

The Bank of Japan’s step to provide
short-term liquidity and expand an asset-purchase program failed to
contain investor panic today as the risk of nuclear radiation leaks
north of Tokyo escalated.

Stocks Slide as Japan Plummets on Nuclear Concern; Oil Falls

Stocks dropped, with the Topix index
posting its worst two-day plunge since 1987, and Japan’s default risk
jumped as Prime Minister Naoto Kan said the danger of further leaks
from a nuclear power plant damaged by the nation’s biggest earthquake
was increasing. Commodities fell.

While at the same time, those countries on the other side of the world are wish-washing on how to climb out of the hole -  Euro-Area Nations Divided Over Method for Boosting Aid Facility

European governments remained divided over
how to boost the rescue fund for debt-strapped countries, taking the
gloss off a weekend pledge to step up the fight against the fiscal

As I type this at 5:34 am EST, S&P futures are down 35.70 points.
Here’s a snapshot of the rest of the world a couple of hours earlier.

STOXX 50 2793.95 -58.16 -2.04%
FTSE 100 5690.55 -84.69 -1.47%
CAC 40 3804.14 -73.90 -1.91%
DAX 6686.18 -180.45 -2.63%
FTSE MIB 21484.20 -320.15 -1.47%
Nikkei 8605.15 -1015.34 -10.55%
TOPIX 766.73 -80.23 -9.47%
Hang Seng 22678.20 -667.63 -2.86%
S&P/ASX 200 4528.70 -97.70 -2.11%
Shanghai 2896.26 -41.37 -1.41%

In January, I posted
In said missive I illustrated that Japan’s 200%+ debt to GDP ration,
although not the same threat as Europe’s lower but more immediate
issues, simply cannot be ignored, as excerpted:

The Potential for Spillover Effects Simply Cannot Be Ignored If You Look At This From An Empirical Perspective

A key risk in sovereign default is the spillover effect due to interlinkages in the financial system, reference”Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?” Sovereign defaults transmit risks ACROSS
asset classes, and a crisis in one country can easily engulf others due
to cross border exposures. Empirical data points out that sovereign
default are usually clustered. The Asian financial crisis of 1997–98,
when sovereign debt problems hopscotched from economy to economy, is a
testimony to what could happen to Europe this time around. In addition,
the spillover effect also affects corporate bond yields as company’s
ability to borrow money not only depends upon its own creditworthiness,
but also on the financial health of its home-country. When investors
lose confidence in the government’s ability to use public finances they
demand a premium to access capital to corporates, raising the financing
costs. A downgrade in sovereign ratings/default also has negative
affect on the stock markets.

The charts below show bond volatility and
equity volatility across major markets – US, UK, Germany and Japan.
Both equity markets and bond markets across geographies are strongly
correlated thus demonstrating cross border intervention. In addition,
we have also shown interlinks between equity and bond market
demonstrating cross-asset correlation.

Last year, we introducing the “BoomBustBlog Sovereign Contagion Model“,
wherein we spent many analyst man/months to create a realistic model
to capture the potential for social unrest, financial and economic
contagion as they could skip across sovereign borders, continents, asset
classes and hemispheres. We are in the final stages of a significant
update to this model, which still stands as what we consider a tour de
force in realistic risk modeling.

The equity markets quoted towards the beginning of this post, and the
debt markets clearly show the high correlation that I spoke of above. A
country with a 200% debt/GDP ratio is simply not in the condition to
handle near simultaneous earthquakes of historical magnitude, Tsunamis
and multiple nuclear disasters without transmitting contagion to the
world’s already highly indebted countries who are on the margin as it
is. Three clear potential calamities stand out.

First, In A Scramble For Liquidity, Lower Quality Debt (We All Know Who That Is) Will Get Thrown Out The Window

One is the claim from many insurance companies that they don’t stand
to lose much from claims. The property and life insurer’s who did not
explicitly cover earthquakes and tsunamis may be off the hook
claim-wise, but radiation poisoning is not an act of God and can
potentially (and unfortunately) send claims and reserves through the
roof. No matter which way you look at it, insurer’s are going to need
liquidity – be it for business continuity, casualty, property, life
and/or health. They are going to need it now, and for the the longer
tail stuff as well. Where do you think they will get this liquidity
from? Well, the BoJ is Pumping More Funds into the Japanese Economy,
but they have been doing that for 21 years. The need now is greater
than ever. The Japanese insurers (a large industry in Japan), are
probably going to start selling off bond inventory, and that is going to
pressure yields. The will sell off the most liquid stuff immediately
(but hat will be ameliorated in part by the BOJ pumping cash in to
support prices) and look to dump speculative experiments that will be
difficult to move if spreads widen farther (if they are smart). That
means any Eurozone periphery debt will be thrown out. Subscribers can download the current production contagion models below which clearly illustrate who said countries will be:

I’m sure you can all guess what may happen next, with the high volatility, correlation, and added selling pressures.

Second, Real Estate Is All About Location 3,
or Location, Location, Location. There’s Very Little That Is Worse For
Your Real Estate Location Qualities Than Lethal Doses Of Radiation

As you can see, Japan has had a very rough time of it real
estate-wise over the last two decades. This situation will significantly
exacerbate it, particularly with radioactive winds approaching Tokyo
and the possibility of an evacuation existing.

From Reuters: Radiation fears spark panic buying, evacuations in Tokyo

Panic swept Tokyo on Tuesday after a
rise in radioactive levels around an earthquake-hit nuclear power plant
north of the city, causing some to leave the capital or stock up on
food and supplies.

Embassies advised staff to leave
affected areas, tourists cut short vacations and some multinational
companies told staff to move from Tokyo out after low levels of
radiation were detected in one of the world’s biggest and most densely
populated cities.

In one sign of the panic, Don
Quixote, a multistory, 24-hour general store in Tokyo’s Roppongi
district, was sold out of radios, flashlights, candles, fuel cans and
sleeping bags on Tuesday as a Reuters reported visited the shop.

… Winds over the troubled Fukushima
Daiichi nuclear-power complex, about 240 km (150 miles) north of Tokyo,
are blowing slowly southwesterly toward Tokyo but will shift westerly
later on Tuesday, a weather official said.

Some scientists, however, urged Tokyo to stay calm.

“Radioactive material will reach
Tokyo but it is not harmful to human bodies because it will be
dissipated by the time it gets to Tokyo,” said Koji Yamazaki, professor
at Hokkaido University graduate school of environmental science.

“If the wind gets stronger, it means the material flies faster but it will be even more dispersed in the air.”

University of Tokyo professor of
bioengineering Hiroyuki Takahashi added: “If the nuclear fuel remains
contained, there will be very little health risk.”

Could you imagine trying to sell your apartment and having to explain
that to the prospective buyers? Imagine if the buyers came back with
the retort: “But the news reports from this morning read:  “The level
seems very high, and there is still a very high risk of more radiation
coming out,” Prime Minsiter Naoto Kan said. Kan said most people have
left the 20-kilometer evacuation zone around the plant, and he advised
people within a 30-kilometer (19-mile) radius to stay indoors to avoid
possible radiation poisoning. “It is likely that the level of radiation
increased sharply due to a fire at Unit 4,” Chief Cabinet Secretary
Yukio Edano said. “Now we are talking about levels that can damage
human health. These are readings taken near the area where we believe
the releases are happening. Far away, the levels should be lower.” UPDATE – Third Reactor Core Exposed to Air in Japan … and Nuclear fuel rods fully exposed at Japan reactor – Jiji – Mar 14, 2011 · … Nuclear fuel rods at aquake-stricken Japanese nuclear reactor are now fully exposed,Jiji …

FLEEING TOKYO… The Czech Symphony Orchestra left Tokyo by bus for Ishikawa prefecture on the west coast.

“Some of them wanted to go home after
the earthquake but it’s pretty much impossible to get tickets for a
hundred people now,” said Hitomi Sakuma, a friend of the orchestra who
was seeing them off at a Tokyo hotel. About 350 Japan-based
expatriates at Infosys Technologies Ltd, India’s second-largest
software services exporter, are returning to India, its chief executive

As reported by the Star: 

Though Kan and other officials urged
calm, Tuesday’s developments fueled a growing panic in Japan and around
the world amid widespread uncertainty over what would happen next. In
the worst case scenario, one or more of the reactor cores would
completely melt down, a disaster that could spew large amounts of
radioactivity into the atmosphere.

“I worry a lot about fallout,” said
Yuta Tadano, a 20-year-old pump technician at the Fukushima plant, who
said he was in the complex when quake hit.

“If we could see it we could escape, but we can’t,” he said, cradling his 4-month-old baby, Shoma, at an evacuation centre.

The radiation fears added to the
catastrophe that has been unfolding in Japan, where at least 10,000
people are believed to have been killed and millions of people have
spent four nights with little food, water or heating in near-freezing
temperatures as they dealt with the loss of homes and loved ones. Up to
450,000 people are in temporary shelters.

Asia’s richest country hasn’t seen
such hardship since World War II. The stock market plunged for a second
day and a spate of panic buying saw stores running out of necessities,
raising government fears that hoarding may hurt the delivery of
emergency food aid to those who really need it.

…  Afterward, officials just south of
the area reported up to 100 times the normal levels of radiation, Kyodo
News agency reported. While those figures are worrying if there is
prolonged exposure, they are far from fatal.

Tokyo reported slightly elevated
radiation levels, but officials said the increase was too small to
threaten the 39 million people in and around the capital, about 270
kilometres away. Closer to the stricken nuclear complex, the streets in
the coastal city of Soma were empty as the few residents who remained
there heeded the government’s warning to stay indoors.

Kan and other officials warned there
is danger of more leaks and told people living within 19 miles (30
kilometres) of the Fukushima Dai-ichi complex to stay indoors to avoid
exposure that could make people sick.

… In Tokyo, slightly
higher-than-normal radiation levels were detected Tuesday but officials
insisted there are no health dangers. “The amount is extremely small,
and it does not raise health concerns. It will not affect us,” Takayuki
Fujiki, a Tokyo government official said. Kyodo reported that
radiation levels nine times higher than normal were briefly detected in
Kanagawa prefecture near Tokyo and that the Tokyo metropolitan
government said it had detected a small amount of radioactive materials
in the air. Edano said the radiation readings had fallen significantly
by the evening.

Honestly, it is these “The situation is contained” comforts issued by
government officials that should give the populace pause. Just ask the
US citizens about the subprime crisis.

Third, At 200% Debt to GDP, Can Japan Afford This Without A Resustucturing?

This is the question of the day. I will go though the subscriber
contagion models and trace the potential linkages of Japanese contagion
in my next post on the topic. In the meantime, I
have also made an FX trend model available for all to download. Its 10
mb, containing a lot of data, but you’ll definitely get your money’s
worth. The model is available here: BoomBustBlog Complimentary FX Index model

Related inflationary reading:

Inflation Cartoons From The BoomBustBog Constituency

The Spectre of Stagflation is STILL Raising Its Ugly Head!

Continuing the Deflation/Inflation/Stagflation/Depression/Recession Rant…

Throughout Last Year and During the Inflation/Deflation Camp Debates,
I Warned of the Risks of Stagflation. Did I Have a Point? Let’s Look
at the Numbers Behind the Numbers…

BoomBustBlog China Focus: Inflation?

BoomBustBlog China Focus: Interest Rates

(The Unmistakeable, Yet Thoroughly Argued Chinese Bubble),
Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other

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Arthur's picture

...but radiation poisoning is not an act of God and can potentially (and unfortunately) send claims and reserves through the roof.


The underlying event was an act of God and therefor would be a force majure type event that would allow insurance companies an out.   A lot depends on exactly how the policies were written.  Earthquake rider?  Yes, then does it apply to indirect quake damage such as radiation leakage?  If this occurred in the USA, there would be years of coverage litigation.  I can't comment on how this would be handled in Japan.  It won't be pretty and no matter what, there won't be enough insurance.

MrSteve's picture

Mitsuibishi announced it had two weeks of parts for its Illinois assembly plant. After that, they don't know.

That seems about right, a huge factory would need large quantities of parts to assemble, the economies of scale in a global supply chain. This is contrast to the food supply which is three days deep on USA grocery stores and local warehouses.

moneymutt's picture

the sad thing is the avoidable disaster, the nukes are so distracting from the needs of so many starving, thristy, cold people.

And radiation is a real estate killer, its one of things people overestimate the risk of. Not that its not a real issue, the long-term risks to health are real but so is coal, and have you seen China's skies? Many other real issues get ignored, like the danger of a swimming pool in your yard. But radiation, people pay attention. When there was some radiation scare in So America (Brazil?) a some 100+k people showed up immediately for screening....people leave, people avoid...this is bad.

moneymutt's picture

unfortunately, my choice for the word of the year for 2011, based on Reggie's analysis: Contagion... is looking way too probable, arrrggg.

Is there a word for flock of black swans?

It seems like the whole world has been risk on since WWII, markets, technology, environmental damage etc.. and now we are being humbled in far too many ways.

And why is mother nature picking on the islanders so, Indonesia, Haiti, NZ, Japan?



GottaBKiddn's picture

We've been waiting for something to happen that would act as a tipping point to global contagion that would topple the house of cards ponzi that is the Global Economy. Yeah, that new interconnected global economic savior of the New World Order is going to have waves of destruction spread through it like economic tsunami it was built for. The purpose of all this is to usher in a new "restructuring" of global finance, one that will settle the question about whether we are actually slaves or just hampsters in a spinning cage.

anony's picture

re:  sentiments about Japan.

Firstly, building a nukular reactor on an island which is in the path of tsunamis as a routine is EXPECTED to produce a catastrophe.  secondly,to build same reactor on the same island prone to earthquakes, squares the stupidity of doing it.

Thirdly, the people of Japan who have ignored these twin monstrously idiotic moves in order to obtain their energy have who to blame for the completely foreseeable?

I suppose when the big one hits San Francisco we'll have to endure all the great weeping and gnashing of teeth for the completely foreseeable as well.

Please excuse Anony from this useless, pitiful sentiment. 

Get the hell ouf of a town, state, city or country that has the arrogance, the hubris, the complete insanity to think that they can hide from completely predictable natural and manmade tragedies.

I can't watch one second of this mishmash without feeling that if they invested even one half of the money, time, and torture they are undergoing now, to then put in energy systems that are relatively safe FOR THEiR hazardous circumstances, how unnecessary this all is.



onlooker's picture

Contagion requires a look at by everyone. First we may need to move out large numbers of Japanese population to --- where---- and feed them -----how. Loss of food stocks, agriculture production, and government food reserves will apply even more upward pressure on food stocks World wide. The loss and damage to the ship fleet will decrease the fishing, and reduce that food supply.


Disease from lack of ability to clean up and the contaminated water supply may be daunting. Water may become the main emergency.


GM should do well selling cars in that Japanese cars and parts will be scarce for some months. That is about the only upside I see. US unemployment should go higher with our business supplier and trade partner out of action.


In that this is an emergency, will American leadership take the responsibility to rebuild American manufacturing for the National interest??? I don’t think there are any excuses left.

Boilermaker's picture

Check out the REITS now...less than 1% loss on the day and climbing like a Saturn V rocket.

LOL, man, you simply can't make this shit up.  IYR and RMZ zooming...

hettygreen's picture


Appreciate your articles and am 99% aligned with your views on things financial but please correct your spelling of 'their.'

johny2's picture

While I am not gambling right now at the markets, and just follow the news becouse it is a hobby, I think that Reggie needs to get out of " sell the europe " mindset that he is firmly in. Mind you I have to say I dont worry much if he looses his own money, but giving this kind of advice in a storm of black swans is irresponsible, unless he backs it with his own cash, or better PM's. The red flag is his opinion that the real estate in Tokyo in danger of a radioactive cloud is a less risky ( 2 nd place ) to the Spain bonds. Wake up! 


stormsailor's picture

great article reggie,  the ptb seem to be keeping it pumped up for the time-being, but another news flash could blow a smoking hole in their balance sheet

geno-econ's picture

Contagion will surface in supply-chain bottlenecks. Many small manufacturers are shutdown . Port traffic completly shutdown, same with truck, and rail. Clean up at least 3 mo., rebuilding at least 1yr. Slack can be picked up by other regions and nations ,but not entirely or smoothly. All this without considering nuclear or medical/health consequences . Fragil financial situation in Japan, US and EU leaves little cushion, especially if stockmarket confidence wains and unemployment rises in Japan wiping out savings.

Picture not good and calls for extraordinary measures by UN, IMF and World Bank who so far have been silent.  

Boilermaker's picture

Look at the REITs...LMFAO...

Un-be-lievable hijacking of the equities and ETFs.

What's the point?

Reggie Middleton's picture

I noticed you have made this point before. REITs are basically derivatives. Look at the real estate behind them and let me know how good they will be doing over time, and how well they did up till now. They had a little bubble bump, but all in all the price of real estate and the price REITs very well may have diverge.

It's easy to fake a digital value in flash memory or a piece of paper, but at the end of the day you still have to fall back on the bricks, the dirt and the actual cash that they generate. Then you will see games start to fall apart.


QQQBall's picture

I gotta call from a friend of a friend. He has a large office bldg that is over 50% occupied by one tenant. He had to cut their lease rate by 67% (like from $3/SF per month to $1/SF ) on a 1-year extension and he also ate the CAMS. He had a choice of going through lease-up (revenue loss & commissions) and likely $3/4MM in Tenant Improvements, plus the risk. From the outside, everything looks cool, but the Income Statement is getting trashed. One more thing - they just refi'ed it via an inflated appraisal; the appraisal also failed to note that the main tenant's lease was about to roll. 

Boilermaker's picture


1. deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage. 2. a particular instance of such deceit or trickery: mail fraud; election frauds. 3. any deception, trickery, or humbug: That diet book is a fraud and a waste of time. 4. a person who makes deceitful pretenses; sham; poseur. CHECK!
Boilermaker's picture

Reggie, man, I'm with you.  It's awful.  I'm on your side 100%.  I'm just pointing out the EPIC fraud going on.

dugorama's picture

Let's talk contagion... of the usual sense of the word.  What I haven't yet heard discussed is the inevitable next shoe to drop..... there will now be disease outbreaks.  While the Japanese certainly have modern sanitation and medicine normally, they do not now.  Not in the north.  And they are densely populated with nowhere to go.  For investors, I'm not sure what the play is.  But I sincerely hope the medical community is readying a response.

QQQBall's picture

Yes, what is being completely lost in this is the imapct of the Quake & Tsunami. Lots of damage, lots sick, dead or dying...

A Texan's picture

"A massive earthquake, a horrifyingly destructive tsunami, and then multiple nuclear emergencies and radiation poisoning is more distress than any nation had had to endure in such a short period of time in recent history."


About the only thing that would make this worse would be having Godzilla show up.


In all seriousness, my heart goes out to the people of Japan - every time there's a natural disaster like this, I try to imagine my self and my family having to deal with it, and being thankful that the worst we have to deal with here in South Texas is the annual Mountain Cedar pollen dump and some hot weather from May - October.  Big deal.  I hope for as few casualties as possible, that those alive under rubble still be alive and be able to recover, and that the nuke plants get fixed with minimal additional damage and discharge of radiation.

Boilermaker's picture

US REITs 'hangin tough'...reversing the losses today and magically floating higher!!!!

aerojet's picture

Japan has been living on borrowed time for 20 years--they did not address their own banking calamity and then did not invest in needed updates to their infrastructure and now ticking time bombs are going off.  Believe me, I feel terrible about it, but there's a lesson for the US in all this--we have been eating our seed corn, too, and building stupid stadiums instead of repairing gas mains and power plants. 

f16hoser's picture

Absolutely! Spot-on. Patch-and-Pray will get you by only so long. But hey, the banks will bail us out right?

Reggie Middleton's picture

Japan has been living on borrowed time for 20 years--they did not address their own banking calamity

As if the US has addressed thiers??? The US banking system is currently an ongoing joke without a punch line. Our bubbles, as you can see in the graph above, was/is much worse than thiers...


moneymutt's picture

until 3 11, Japans working folk were doing spectacular compared to US even tho they had lower per person GDP...did you see how nice those cars and houses that were floating away were, how nice their clothes were, compare to Katrina rescue shots, do they even have any ghettos or impoverished areas like Indian reservations? shoot immigrants in Cali live in rental space tighter than a Tokyo apt...their GPD was spread around way better and their supposed lost decade would have been wonderland for American workers, real estate prices and stock prices matter to rich more than poor, Japans workers were doing well even with all the old people they had to support, til mother nature showed no mercy.  Japan hid their economic success and let China get all the heat.

A Texan's picture

I think that Aerojet was pointing out that we've been irresponsible, too, and that we can learn lessons from this.  If we are in worse shape than Japan financially (well, at least until this week), then we had better learn that lesson damned quickly and take steps to fix the problem.   Alas, the idiots in DC (but I repeat myself) won't learn, not even if kicked out of office - just read the memoirs of those in the past that got promoted to the private sector, they are unrepentant.

Reggie Middleton's picture

I didn't mean to sound as if I overreacted, but the US did EXACTLY what Japan did when thier property bubble burst and thier bank loans went bad. We have spent many trillions of dollars in blew resources to rescue zombified banks. What happens if we have a major calamity and need to call on said resources?

IMO, it is too late to speculate on whether we have learned from Japan's mistakes. We have not, and we have re-enacted said mistakes with the full faith and power of the US Federal Reserve!

malikai's picture

Which is exactly why so many are clamouring for the exit. The only question is, where do you hide when the world's reserve currency/sole empire dies?

vxpatel's picture

Wet swan event...let's see what their appetite for US treasuries/real estate/equities investment will be like in the coming months...

celticgold's picture

reggie , once again ...clear concise and right on the money ..... and a cool head while others around are losing theirs. 

Vlad Tepid's picture

An interesting overview. If some of the Japanese majors go lower, especially the dividend yielding ones, I think it would be a great time to buy.  Of course, I'm in a 1:1 ratio for equities to PM in my buying, so will get some silver on the cheap(er).

I really appreciate your humanitarian introduction.  Japan is my first love and very dear to me, especially the beautiful region and people that were wiped out a few days ago.  I look forward to putting my hands to work when I get there this summer.  Until then, I just pray.