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Why You Should Dump Everything in Japan
During my ten years in Japan, I suffered through many earthquakes. One shaker caught me on the 20th floor of the Foreign Correspondents’ Club of Japan, where the building swayed two feet on either side and I saw my life flash before me. The staff started throwing up from the sea sickness. Thank goodness for Japanese engineering.
The ground was still rolling when the calls came in from friends in Tokyo with details about the disaster. Their goal was to get the news out before the lines went down and the trans-Pacific network was swamped. By the next morning I concluded that the death toll would easily exceed 10,000 and could go to six figures. The million residents of Sendai were only given 15 minutes to evacuate, and thousands were swept out to sea. Trains packed with passengers were completely destroyed, as were busloads of fleeing residents.
As I live on a mountain peak overlooking the Golden Gate Bridge, there were hundreds standing on my street waiting for a giant wave to strike the next morning. At 8:25 am, a series of lazy two foot high tidal bores rolled into San Francisco Bay, clearly visible with a telescope. Nearby Santa Cruz harbor fared less well with a seven foot surge, major damage, and 30 boats sunk. The rotten mooring lines on the old boats snapped, freeing them to smash into the new ones.
The investment community has always known that “a big one” would hit Japan someday, and the various scenarios and market impacts were thought out a long time ago. All that remained was to pull them off the shelf, dust them off, and see how much still applied today. It may seem hard hearted to consider economic consequences when the dead are yet to be cremated. But as long as markets never rest, not shall we.
For a start, you don’t rush out and short Japanese insurance companies. Earthquake insurance in Japan is very expensive, so most individuals don’t buy it. The government has always required the commercial policies written to be 95% reinsured abroad. So there is far more Japanese earthquake risk on books in the US and Europe than there is in Japan.
I have heard the argument that you should be shorting bonds, as insurance companies everywhere will rush to liquidate reserves to meet claims. But as anyone who has ever dealt with insurance companies will tell you, it can take years, if not decades to get them to acknowledge claims, let alone pay them out. This isn’t going to be the driver for the fixed income markets Monday morning.
I remember all too well the Kobe earthquake, when another 5,000 died, and one of my analysts there called for advice on how to get out of his apartment (the door was jammed). I was caught long Japanese stocks that day, and bled for six months while the Nikkei fell 25%. But I fared better than Barings Bank, whose enormous long position in the Japanese indexes, which thanks to rogue trader Nick Leeson they didn’t know they had, drove it into insolvency.
The immediate impact of the earthquake will be to shave at least 2% off of Japanese GDP this year, and they didn’t have much to give away in the first place. Japan is almost certainly in recession once again. The disruption to the economy will be national, as practically everyone relies on obtaining parts and electric power from this low costs section of the country.
Since Japan has the world’s third largest economy, after the US and China, this will take a bite out of global economic growth as well. International trade will take a hit. This is bad for oil, commodity, and metals prices, but good for bonds.
It hurts Nissan more than Toyota, as they have many more factories closer to the epicenter. This makes nonsense of all existing earnings forecasts for Japanese companies, although it will takes weeks for the downgrades to feed into the marketplace. So I will continue to avoid Japanese equities (EWJ), as I have done for decades.
The outlook for the yen (FXY), (YCS) is a little more complex. After Kobe, the yen shot up 20% against the dollar. But past is not prologue. That was the final blow off top of a 35 year bull market for the Japanese currency, from ¥360 to ¥79.5, and it fell for a decade after that. It has taken 15 years to get back up to that level. It is more than ironic that the double tops on a 60 year chart for the yen correspond with giant killer earthquakes.
The Bank of Japan can’t exactly lower interest rates to stimulate the economy, as they have been at near zero for 15 years. They could become more aggressive with their quantitative easing by stepping up asset purchases. A global flight to safety trade could trigger some yen carry trade unwinds which will generate some yen buying. The BOJ is anticipating this and is holding an emergency meeting on Monday morning to consider more aggressive intervention measures to weaken their currency.
I think this is how it is going to play out. Short term traders and momentum players are going to gun the yen to the upside in an attempt to trigger the mountain of stop loss orders to buy yen that exist just under ¥80. This will force the BOJ to play its cards with a massive round of intervention. This is why I am keeping stop-loss orders on my short position in the yen at ¥79.50.
Then an awareness will start to sink in that a weak economy is bad news for the yen. This will draw in many more players on the short side who, tempted by Japanese’s terrible fundamentals, have until now wisely remained on the sidelines. The final capitulation has arrived. This will bring our long awaited break out move to ¥90. Whether this takes hors, day, weeks, or months to occur is anyone’s guess.
So be prepared for a lot of volatility in the currency markets until the fundamentals assert themselves. The faint hearted may want to watch all of this unfold from the sidelines. And say a prayer for your good fortune that you are not one of thousands picking your way through the rubble this weekend looking for the battered and lifeless bodies of loved ones.
For a fascinating discussion of the scientific analysis of the largest earthquakes in history, please click here for the blog at http://blogs.agu.org/mountainbeltway/2011/03/11/japan-m8-9-quake-tsunami/ .
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home pa
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This is a good analogy. An exhausted bubble world coming to a fork in the road and both roads lead off a deflationary cliff. Seems there are bulls in everything but the dollar. For one, the damage to the electricity industry in Japan is a massive blow that I don't believe is even partially comprehended by most people. These people still have to live, pay expenses and consume, yet their capacity to recover has had the crap knocked out of it. We aren't talking about temporary rolling blackouts, but permanent ones.
Second, the Japanese government is for all accounts and purposes broke. Generational demographics have turned against the country, as are they about to turn against China as well. Per capita income in Japan is such that a 1% increase there is about the same as a 10% increase in China. The raw material game is all riding on perpetual over investment in China, a situation that cannot go on forever and won't.
Lastly, GDP is nonsense. Japan just had a massive amount of its capital stock flushed down the toilet of nature. Sure there is a big industry in rebuilding this stuff, but if I lost $100 bill on the way to dinner and had to get another one from the bank to have spending money, I would still be out the hundred. The broken window theory is fallacy.
Debt, not value is what provides a base for currencies. There will be a loss of capital position that central banks cannot fix and a struggle for liquidity. Liquidity has to come from collateral, not from QE and nonsense like that. Margin calls will hit soon and the scramble will be for dollars.
Anybody seen if Marc Faber has commented post-tsunami Japan? He was quite bullish just days before the catastrophe. There's now a case for a much weaker ¥, which isn't all bad for exporting companies.
Unfuckingbelievable.
You think maybe we could get a certified death count and a few nuclear plants shut down before we start making money off their irradiated corpses?
ZG just described Wash DC. Actually Japanese make pretty good cars for a small Island . Dedicated workers, commitment trump individualism in this case . But you are right, deficit financing is an invention of big government ,for big government and taking away from the individual.
In 1995 Peter Hadfield's book, "Sixty Seconds that Will Change the World" examined the economic effect of a hypothetical huge earthquake that devastated Tokyo. I.e., one much worse than the current one. But his analysis may still have insights about this one. Here's a synopsis of the book, from Amazon, where cheap used paperback copies are available:
"In the 1990s Tokyo will start to experience earthquakes culminating in a catastrophe on the scale of the 1923 tremor that killed 140,000 people. This time however the effects of such an earthquake in Tokyo will be world-wide. The collapse of Japan's industrial production will lead to a major world recession together with a dramatic fall in currency values and world GNPs. Peter Hadfield, a Tokyo-based journalist and former geologist, has talked in detail to Japan's leading geologists, engineers and economists. He predicts what will happen during and after the earthquake, and at its effect on the world economy. He also looks at the psychology that leads millions of Japanese to ignore the danger signals - even now, a vast new city is being constructed in Tokyo Bay - and at the corruption that spurs such developments on."
Here's the link:
http://www.amazon.com/Sixty-Seconds-That-Change-World/dp/0804830657/ref=...
Nikkei down -6.20% today ...looks like your "sell everything in Japan" advise Mr Summers is being followed to the letter!
Now hands up the brave/mad men who'll be buying into the dead cat bounce???
My first visit to Japan was in 1966. Stayed at the Okura Hotel during an anti -Nuclear , anti-West mass demonstration of millions marching down boulevard 25 -30 abreast as far as the eye could see. It was truly frightening to witness. Current government had better play their cards right over this disaster. Japanese have a placid nature until they are aroused. Seems the entire world is getting up tight. Hmm, I wonder why ?
the Japanese Govt are Marxists... they micro-manage the people beyond belief and the compliant people with their cultural heritage for 'consensus' have bowed their heads and just gone along thinking their leaders know best (the biggest mistake any people can ever make) ....with 20 years of unremitting failure by the Jap Govt, stagnating deflating economy because of the Zombie Corps and the patent failure of the Govts policies to revive these walking dead this tsunami could be the sparking point for real and necessary social change in Japan ....who sited nuclear power stations on coastal tsunami runway zones? ...this question is begging an answer ....wake up Japan, you need to move to individualism and not this suffocating belief in consensus and that leaders or Govts know best ...history teaches us leaders and authority structures are dumber than mud and worse, almost always delusional at dealing with reality
I used to be able to say "Nails that stick out get hammered down" in Japanese. - Ned
how do you say "nuclear plants sited on the shoreline get hammered by tsunamis" in Japanese?
So, MHFT, are you now long bonds after being short for over a year?
Why let facts get in the way of a good story, eh?
Re Nick Leeson and Barings, which actually happened from 1992 - 1994, Yale Economist Robert Schiller told CNBC today the Nikkei and global markets went down -26% after the 17 Jan 1995 Kobe EQ
http://en.wikipedia.org/wiki/Nick_Leeson
http://classic.cnbc.com/id/42071187
Good catch. MHFT should STFU.
I wonder what the Emperor told MHFT when he was in High School
Poutin is laughing to the bank as his gas will be in great demand. So is Khaddafi who is now heading to Benghazi. We forget all the other potential black swans still in the air.
Yes, fundamentally they are in trouble. But when has that meant anything lately?
The CB inventory of stick saves may have capacity, still?
"Only a turn of a button,
a flip of the switch, we can create liquidity out of thin air,
bitch!"
Actually, I am looking for an entry into EWJ....I'll start nibbling at 9.50
For margined accounts, I suggest selling 8-9 put spreads....
I think it is a prety big gamble trading yen or japanese stocks, so unless you are feeling very lucky, the advice would be to stay out of trouble.
Terrible times for people who lost someone in that wave, and even if I knew what is going to happen on the markets, I am not sure I would want to make gains on back of this.
it will be interesting to see present carry trades in next year or 2. Any ideas?
judging by recent activity, I think it is fair to say that any and all global events be they positive or negative can be profited from by shorting the USD which appears to be in what is looking more and more like a death spiral.
I lived in Japan from 1991 to 2002. During that time, the govt. started to prop up the zombie banks and other key industries. Keep in mind that the keiretsu system (the Powers that Be network) is actually stronger in many ways than it is here in the States.
Now, the economy will only get worse since imports and exports are affected. Another key point: while outwardly polite, many powerful politicians and others in Japan don't like foreigners coming in and dictating to them. You may go there and think it's normal business negotiations. To them however, it could possibly seem like interfearence.
Small cultural points that the fear hyping corporate MSM will never tell you.
keiretsu sucked up complete japanese society. I am afraid that after all this mega tremble settles (+decade) - poor island will be abandoned... simply 1st major worldwide nation officialy dead.
fingers crossed it marks the death of the "keiretsu system" and marks the revival of the Japanese nation (freedom of the people from the suffocating influence of this 20 year long failed leadership system)
Japan is Dead, Long Live the Japanese
first off this is a good post. you're on a roll. second i disagree with much but not all of it--but this is to be expected from all "first reports from the front line." Japan of course is not nearly as "bad off" as many simply assumed "going into the disaster." second tho "this is the BIG ONE" so we must ignore the "one off crowd" of Wall Street and various elements of the insurance sector. (These "one off's" are becoming rather routine now, yes?) I would argue this is yet again "great news for the commodity space" as "the entire world now agrees worthless currencies is the only answer." We like that of course now as it means we may safely ignore everthing that comes out of Larry Kudlow's mouth! More to the point "there is an advantageous type of hell" here--but one must not be too "wound up" to see it. Without going into great detail "it's called the American mid-west" and "they are the epicenter of money" for now and for the forseeable future as "what was once a one off is clearly a pattern representing a new and permanent condition." And of course the economy is roaring ahead with no need to look back. To parphrase "they just call it small-ville." Isn't it interesting: those that have given the fullest measure of their devotions and still found it within themselves to return and work and believe are in fact the prime beneficiary of this "end of the world." needless to say there is the "always entertaining counterpoint" to these "little people."
I think this is a bunch of alarmist bullshit. If Japan could recover relatively quickly from losing WWII and being bombed into dust, there is no reason to think they can't recover from this.