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Betting on the race to the bottom

Bruce Krasting's picture




 

Betting on the race to the bottom

Courtesy of Bruce Krasting

On Monday and Tuesday the market’s attention will be on the USA and the negative economic implications of the Nonfarm payroll (NFP) miss. Market eyes will also be focused on the bond markets in Italy and Spain. As of last Thursday, Europe seemed to be on the verge of another “accident.” The EURCHF closed the week a fraction above the 1.20 peg to the Euro. The Swiss National Bank will likely be forced to show its muscle. While the peg will not break, news of the attack will rile the FX markets.

If this scenario plays out, the Yen should benefit against the dollar and the Euro. If the Yen crosses get cheap, I think it will be a good opportunity to short the Yen. As bad as Euroland appears, and as shaky as the USA looks, Japan looks like it might end up winning the race to the bottom.

 

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There are two very big issues that Japan is confronting; energy and taxes. Both of these issues will come to a head over the next sixty days. I don’t see a soft landing.

Fourteen months ago Japan had 54 operating nukes. Today it has one. By the end of May, it will have none. 

 

 

The Japanese press is discussing options such restarting the nukes, but many people want to shut them all down:

 
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There are two significant consequences of the shutdowns: (A) soaring imports of expensive hydrocarbons (LNG, oil and coal), and (B) this summer, there will be as much as a 12% shortfall in electricity to to cool homes and run factories.

The shutdown of the nukes has already led to a major turnaround of Japan’s external trade position. In 2011 Japan reported its first annual trade deficit in over 30 years. The shortfall came to Y2.5T ($32B). In 2012 that number could be as large as $100B.

 

 

The shortage of “juice” this summer will cause cut backs in supply to big industry. As a result, industrial production will fall. Depending on the severity of the summer slump, Japan could face negative GDP growth for the full year. This will translate into more red ink in the national budget (already 10+% of GDP). More debt will have to be issued to cover the gap. Japan’s already insane Debt to GDP (230%) has nowhere to go but up.

Japan is leading the world into trouble as far as demographics go. The Social Security and medical costs of its aging population are exploding. Unlike in the USA, most of the Japanese leaders have acknowledged that the country's position is un-sustainable. Not a day goes by without it being the subject of an article in the press. On March 31, the Noda government formally proposed doubling the consumption tax from 5% to 10% in a desperate effort to shore up the government’s empty coffers. The proposal for new taxes will be debated in the Japanese Diet in April. A final vote is anticipated in June.

I doubt this critical legislation will pass. The proposal has opposition from many political directions. It has fierce opponents within Mr. Noda's own party, the Democratic Party of Japan, but the real opposition will come from the Liberal Democratic Party (LDP).

Japan’s politics are not unlike that of the USA. The opposition parties will do anything to undermine the efforts of those in power. My reading is that the LDP would support a tax increase as a philosophical matter, but it will oppose Noda’s legislation with the objective of bringing down the government.

It’s a good bet that the LDP will succeed, and the Noda government will be forced to call for new national elections. That would be a "worst case” outcome. As of today, polls show that there is substantial opposition to the new tax. Failure to pass new taxes would put Japan on a debt trajectory pointing to infinity.

Political instability in Japan is becoming a real issue. The country has had six Prime Ministers in six years. Another recession may kick in this summer. The trade deficit will be at levels never seen before. ($500m USDYEN must be bought every trading day to fund the deficit.) The failure of the country to pass new taxes will force downgrades of the public sector debt. Japan will be on track to exceed 300% Debt to GDP.

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I like USDYEN on the long side at 81 and under. EURYEN is hard to call, and for the time being is a “stay-away”. If the EURYEN cross would somehow get down to around 100, I think it would be“safe” to get long.

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Mon, 04/09/2012 - 14:13 | 2328736 disabledvet
disabledvet's picture

I'm not sure what happens here. Japanese equities have staged an extraordinary rebound...Europe is in a deep crisis...and outside of Britain only the USA has a worse fiscal condition (with wars expanding on all fronts.) feels like a "Miller's Crossing" moment is upon us...with beggar thy neighbor the weapon of choice.

Mon, 04/09/2012 - 10:45 | 2327911 Bicycle Repairman
Bicycle Repairman's picture

Eventually we will have to let the evacuated Japanese live in the USA.  Then we will need a lot of lead-lined coffins to bury them.

Long lead miners.

Mon, 04/09/2012 - 09:43 | 2327716 shovelhead
shovelhead's picture

We could harvest tons of useless (to us) liver from Wall St. & Washington and send it to Japan to help out.

Toss in some fava beans and a nice California Chianti...

Win/Win.

Mon, 04/09/2012 - 08:58 | 2327617 I Am Not a Copp...
I Am Not a Copper Top's picture

They would eventually die anyway if all there was to eat was liver, but I do get your point

Mon, 04/09/2012 - 08:38 | 2327555 LawsofPhysics
LawsofPhysics's picture

The funny thing about energy (nukes or otherwise) is that it is an absolute requirement to do anything.

Japan is an island with few natural resources left relative to population.  The population might not like nukes, but that is all they have that can deliver the power they need.  It is either this or back to a pre-WWII lifestyle.

An analogy would be people starving in a remote location with nothing but liver to eat.  They can "vote" against eating the liver all they want, but eventually they either eat the liver or die.

Mon, 04/09/2012 - 10:43 | 2327907 Bicycle Repairman
Bicycle Repairman's picture

See the thing about a pre-WWII lifestyle is that it is a life.  Our grandparents actually lived and some of them actually enjoyed life.  Post-nuclear meltdown, there is no life worth living.

Mon, 04/09/2012 - 08:08 | 2327504 machineh
machineh's picture

'Failure to pass new taxes would put Japan on a debt trajectory pointing to infinity.'

Yes, but the previous 'success' in raising the consumption tax (in 1998) produced an immediate recession, which also increased the deficit.

There is NO level of taxation -- high or low -- which will extract Japan from its structural debt crisis.

Mon, 04/09/2012 - 07:55 | 2327487 AbbeBrel
AbbeBrel's picture

Nice charts BK.   Clearly the last year is just adding pressure to the economy that one writer refers to as "A bug in search of a windshield".   The fascinating question to me is hard question in all financial decisions and crisis predictions - that of timing.   If it was just based on numbers, well then obviously Japan should be in a complete crisis now.   But as it is based on human psychology - that obviously the DSGE models can't quite comprehend (that is a Geek Joke - see the current brawl between Keen and Krugman) - well then we have to look for other leading indicators for when the mental fault lines start shaking one year after the tectonic ones caused such damage.    One thing is clear - that with TRILLIONS (in US$ equivalent) parked with the Japan Post Office - that the poor Japanese SHEEPLE are in for a heavier fiscal shaking than the one a year ago.  The ones who run for the hills (with their money) will be the safest (assuming they can draw it out at all) and the last ones caught in line at the Post Office - well they will be the ones drowned in a wave of empty envelopes!

Mon, 04/09/2012 - 07:49 | 2327466 j0nx
j0nx's picture

Japan is dead man walking. I called it the minute after the reactors melted down. That island is already a veritable no man's land of radioactivity that they have yet to come to grips with due to their cultural save face mentality. 20 years from now they will have the highest cancer rate of any culture on Earth and that's assuming that the reactors are not ready to explode again like what is being said on shadow sites across the net. Unlike the Russians who manned up and got shit done during Chernobyl, the Japs just stuck their head in the sand and pretended that out of sight out of mind will fix their problem. Until they are willing to send thousands of men to their deaths covering that shit with concrete like the Russians did then that island is fucked with a capital F and they are a dead culture long term.

Mon, 04/09/2012 - 10:15 | 2327818 smb12321
smb12321's picture

The real reason there will be fewer Japanese is the most obvious - they are not having babies and even with longer life spans they will lose a huge percentage of their population over the next few decades.   It's on par with the EU (or China with their 1 child policy).   Not sure how these folks expected a social welfare system to operate with fewer payers and increasing payees.

Mon, 04/09/2012 - 10:40 | 2327898 Bicycle Repairman
Bicycle Repairman's picture

The ills of low birthrates, no immigration, and social welfare pale in comparison to being bombarded with nuclear radiation.

Mon, 04/09/2012 - 06:55 | 2327425 wang (not verified)
wang's picture

timing is everything

Yen Gains on Japan Current-Account Surplus; Euro Falls

 

http://www.bloomberg.com/news/2012-04-08/yen-gains-before-japan-current-...

Mon, 04/09/2012 - 03:58 | 2327370 Zero Govt
Zero Govt's picture

Good article Bruce, especially news Japan could shutter all 54 nuclear stations by end of May, stunning!

The one straw i'd split with you is regards, "soaring imports of expensive hydrocarbons.."

They are considerably cheaper than running nuclear energy, so this could be stimulent to industry in the medium/longer term once the massive costs of de-commissioning the nuclear program are out of the way

Mon, 04/09/2012 - 06:08 | 2327410 Element
Element's picture

Time for some gratuitous metal bitchez;

--

'Payback' - by Attila

Who the fuck are you?
Who the fuck do you think you are?!
You betrayed me this whole fucking time
I'm the baddest motherfucker in the building
So remember when it's time for me to get my revenge
I will find your fucking bitch
And fuck her, right in front of you

Some people think that they can get away with murder
But everybody here can see the blood right on their hands
It's a crazy fucking world and there's no one left to trust
As people we have voices, leave the traitors in the dust
Revenge is something lethal and the taste is bittersweet
Their punishment awaits, we'll sweep their bitches off their feet!

Its ironic when she screams my name and begs for more
It's really sick, I'll hand it to you shes a CRAZY BITCH
I like the way she rides this dick

I didn't think I'd have to warn you
You let it go too far again
I thought you knew that I was crazy!
I let my actions speak loud

Tie her to the bed and let a minute get ahead
So I can get a better look and let her settle in the thought of it-
And of course she really wants it I can see her dripping wet and
Salivating at the though of it
Tie her to the bed and let a minute get ahead
So I can get a better look and let her settle in the thought of it-
And of course she really wants it I can see her dripping wet and
Salivating at the thought of it

So let me speak, answer me - WHO THE FUCK ARE YOU

You walk around with your nose up in the air
But you can't smell the shit that comes out of your mouth
You're a liar, you're a bitch, and you're a fake
WHO THE FUCK DO YOU THINK YOU ARE

I've spent my precious time dealing with your problems
And payback is a bitch
What goes around comes around my friend
And you will soon realize it!

PAYBACK IS A BITCH!

http://www.youtube.com/watch?v=tUYSOtNfzm8&feature=branded

Mon, 04/09/2012 - 10:05 | 2327781 Zero Govt
Zero Govt's picture

Element, have you had too much sugar on your cornflakes this morning?

..just asking!

Mon, 04/09/2012 - 01:00 | 2327284 jimmyjames
jimmyjames's picture

The Japanese press is discussing options such restarting the nukes, but many people want to shut them all down:

***************

They'll change their minds as soon as the lights go out-same for all countries eventually-

Long uranium miners-

Mon, 04/09/2012 - 02:56 | 2327340 mkkby
mkkby's picture

An ignorant comment.  Japan cut their power use significantly when after the meltdown.  They'll do it again.

Mon, 04/09/2012 - 00:41 | 2327272 Yen Cross
Yen Cross's picture

 That " Thermal Coal" chart was great! That sqiqqely " RED" Right corner line was perfect!  Good job Tyler!

Mon, 04/09/2012 - 00:33 | 2327262 non_anon
non_anon's picture

soylent yellow

Mon, 04/09/2012 - 00:30 | 2327257 Curt W
Curt W's picture

It doesn't help that the damaged reactors are still spewing radiation.  Slowly killing them.

Mon, 04/09/2012 - 00:13 | 2327245 hangman
hangman's picture

Japan's self proclaimed egotistical phrase, "a country of rising sun," missed by an entire continent, I think what hey meant was China, while they were still attacking China, Korea and indochina, and, Pearl Harbor, etc.  They sell more diapers to seniors than to babies; Japan, is definitely an "a country of decling sun-yen."

 

 

Mon, 04/09/2012 - 07:14 | 2327435 Vlad Tepid
Vlad Tepid's picture

I won't bother to correct your English as I don't like lost causes, but I will correct your historical ignorance.  Japan adopted the name Nihon, Land of the Rising Sun, from the Chinese who coined that name.  Prior to borrowing the name, the Japanese referred to their land as 'Wa,' or peaceful land.

Mon, 04/09/2012 - 00:01 | 2327225 Yen Cross
Yen Cross's picture

 I sincerely hope, Mr. Kasting ( lives a long fruitfull LIFE)

Mon, 04/09/2012 - 00:14 | 2327246 I think I need ...
I think I need to buy a gun's picture

japan was already vaporized just waiting for the rest of us

Mon, 04/09/2012 - 00:30 | 2327258 Yen Cross
Yen Cross's picture

 Japan is the last " Bastian" of Asia .  China= Google/ APPL!

  Long Live MFST!

Mon, 04/09/2012 - 07:17 | 2327438 Vlad Tepid
Vlad Tepid's picture

Always with the epic fails in grammar, spelling and diction.  It seems like you're always on a permament bender.

Mon, 04/09/2012 - 08:38 | 2327556 g speed
g speed's picture

oops---permament(misspelled)/always=redundant.

Sun, 04/08/2012 - 23:49 | 2327207 billsbest
billsbest's picture
Another Credit Agency Downgrades US Bond Ratings

The US jumps to the lead in the race to the bottom!!

Sun, 04/08/2012 - 23:36 | 2327195 Money Squid
Money Squid's picture

Noone has yet showed me any reason why nuclear power is not the answer. The US dropped two, that's two, nuclear weapons on Japan and they are first world manufacturing powerhouse. Fukushima? Ha, TEPCO acheived cold shutdown long ago, and what is the real damage? Nothing major. Nuclear power is warm and safe. I support a necleon in every pot.

Wind power? Those giant blades are leathal, culling birds right out of the sky. Creating flashing shadows when the sun is low, making that whoosh...whoosh...whoosh sound 24/7. And, gasp, when those blades race out of control and bring the tower crashing down? Terrible. Those turbines catch fire spewing smoke downwind for miles.

Coal plants? The cancerous soot, the environmental devastation wrecked on the face of the planet to remove mountain tops to get to the coal, the acid drainage, the barren valley left after the open pits are abandoned.

Geothermal - earthquakes anyone? Why are there so many earthquakes where the geothermal plants are? They remove the heat from the brine and pump down a "cold" water under pressure which fractures the rocks....boom...earthquakes.

You can keep your hippy tree huggin crap. Give me nuclear power....its too cheap to meter.

Mon, 04/09/2012 - 10:21 | 2327833 Imminent Crucible
Imminent Crucible's picture

We won't know whether nuclear energy is cheap or not until we settle the issue of spent fuel disposal. Once that happens, we can begin to determine the real cost of nuclear power. Note I said "begin", because there are many more costs not yet defined (see Fukushima, Three Mile Island, Chernobyl...)

Mon, 04/09/2012 - 09:58 | 2327753 Dr. Kenneth Noi...
Dr. Kenneth Noisewater's picture

High-temp low-pressure thorium LFTRs are safer, cheaper and more reliable than high-pressure uranium fission.  There should be LFTRs in every county in the US, churning out cheap, safe, local power and waste heat (usable for synthetic fuels, water purification/desalinization, etc).  Minimal post-fission waste (in fact, LFTRs can be fueled by waste, consuming it and leaving less behind with shorter half-lives) and in fact numerous marketable byproducts.

Westinghouse, GE, etc. will never let that happen tho.  Oh well.

Mon, 04/09/2012 - 09:24 | 2327664 GeezerGeek
GeezerGeek's picture

I find it unfortunate that everyone assumes that 'nuclear' power plants use uranium to the exclusion of alternatives. Uranium is great for a power plant if you want to make material for nuclear bombs as a byproduct. I'm not sure what the current state of thorium reactor development is, but there have been efforts made for at least two decades. Thorium has so many benefits over uranium as fuel for a reactor that it is almost impossible to understand why a bigger push for its use has not been made. I say almost because thorium has one major drawback (if you care to characterize it thusly): it is not nearly as useful for producing nuclear weapons.

Rather than dumping government money into all the green-energy failures like solar and wind, Obama should have pushed for more expenditures to perfect and build thorium reactors. I guess he just couldn't find sufficient players in that field who also were prone to make political contributions. It would have been great had one of our recent presidents confronted Iran when they made the claim that their nuke program was for domestic energy production, not weapons, and offered to build thorium reactors for them free of charge.

Mon, 04/09/2012 - 08:52 | 2327600 AnAnonymous
AnAnonymous's picture

Noone has yet showed me any reason why nuclear power is not the answer.

________________________________________________

Answers indeed. I have them all if you have the questions. And what are the questions for these answers?

Mon, 04/09/2012 - 07:19 | 2327441 Vlad Tepid
Vlad Tepid's picture

If I didn't think you were trolling, I'd call you a drooling idiot for equating low-yield airburst nuclear weapons with a modern nuclear reactor meltdown.

Mon, 04/09/2012 - 07:01 | 2327429 Bicycle Repairman
Bicycle Repairman's picture

Money squid, go check out Fukushima unit #4, personally.  Then report back.  I want all you nuke guys to make a personal pilgrimmage to Fukushima.

Mon, 04/09/2012 - 04:06 | 2327373 Zero Govt
Zero Govt's picture

Nuclear, like solar, wind and algae are a State subsidised pile of red ink ..you may not have noticed the correlation between the State taking a bankrupt business model to its busom before (look at trains, buses even space)

Nuclear energy is an economic disaster ..only politicians are dumb enough to prop this tregedy up

Mon, 04/09/2012 - 00:39 | 2327270 barliman
barliman's picture

 

Money Squid,

Time to review your meds with your doctor ...

no hard feelings, just trying to help a fellow off the ledge

barliman

Mon, 04/09/2012 - 00:37 | 2327268 jse111
jse111's picture

May your tombstone glow brightly!

Mon, 04/09/2012 - 08:26 | 2327527 BiggerInJapan
BiggerInJapan's picture

Well said and easily done if the dumb pro nuclear troll/bastard decides to take advantage of the tax promotion for how ever is stupid enough to go north of Akihabara. 

Sun, 04/08/2012 - 23:11 | 2327163 sangell
sangell's picture

I bought some US coal stocks recently on this problem. They are cheap and natural gas is going to be a transport fuel rather than a electric power fuel. Panama Canal expansion, a railroad to the west coast from Powder River coal deposits and the US is going to export lots of coal to Asia.

Mon, 04/09/2012 - 03:11 | 2327354 The Alarmist
The Alarmist's picture

LNG is already a huge power-generation fuel.

Mon, 04/09/2012 - 00:19 | 2327250 Yancey Ward
Yancey Ward's picture

The EPA will eventually rule that coal can't be exported.

Mon, 04/09/2012 - 01:54 | 2327313 Bear
Bear's picture

I wish they would do that with gasolene, our top export.

Mon, 04/09/2012 - 03:18 | 2327356 The Alarmist
The Alarmist's picture

Careful what you wish for ... The price of gas is considerably lower in the
US because it can free-ride on the fact that the world uses it to turn its crude oil into gasoline. Ban exports of the finished product, and the rest of the world will source refining of the raw material elsewhere.

Mon, 04/09/2012 - 06:58 | 2327427 Bicycle Repairman
Bicycle Repairman's picture

The price of gasoline is cheaper in the US due to lower gasoline taxes.  That's it.  No other reason.

Mon, 04/09/2012 - 08:54 | 2327601 LawsofPhysics
LawsofPhysics's picture

Bullshit.  You are ignoring the petrodollar. When the U.S. loses the reserve currency status, then you will see true "price discovery" and you won't like it.  The U.S. also does a lot of refining and essentially owns the world military protecting oil from origin to all delivery points.

Mon, 04/09/2012 - 09:42 | 2327713 Bicycle Repairman
Bicycle Repairman's picture

Right now under the current system, Europe and Japan pay what the US pays for gasoline.  The difference is tax policy.

What is the "real" price of gasoline/oil?  What is "price discovery", and under what circumstances could it occur?  We'll never experience it, whatever it is.  There is no free market for these products and there never will be.

The US military is protecting the oil?  Do they protect Russia's oil?  Iran's oil?  Protects it from whom?

Mon, 04/09/2012 - 09:55 | 2327745 LawsofPhysics
LawsofPhysics's picture

Read between the lines moron.  No shit the paradigm is shifting, what I am referring to is the old paradigm, which is changing.  And YES, during the collapse of the USSR, guess who came in and secured a lot of the oil sites in troublesome areas of the old USSR?  The U.S. military and more to the point, the CIA and black ops. guys are everywhere. I still talk to many of my brothers in arms.  Wake the fuck up.  Whether it is sustainable is another question altogether.  I'd bet that it isn't, but I also bet that collapse will take considerably longer than your lifetime, because most sheep will continue to support the devils they know.

The world has stockholm syndrome and no one will risk their slavery or life for real freedom.  Everyone still wants to believe the promises and bullshit.

Mon, 04/09/2012 - 10:04 | 2327774 Bicycle Repairman
Bicycle Repairman's picture

There's nothing between the lines, fucktard.

The US military secured oil sites in the USSR?  Really?  Which ones?  How?  From whom?  Your proof is what, exactly?  Tom Clancy?

And now who secures Russia's oil, Iran's oil, Venezuela's oil?  From whom?  What would happen if "they" got control of this oil?

Mon, 04/09/2012 - 09:21 | 2327662 Bicycle Repairman
Bicycle Repairman's picture

Anyone who doubts me, I invite them to strip out American and European gas taxes and review the results.  It's all about taxes.  Nothing else.

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