Japan

The Fed's most irrelevant report, the Beige Book, is out. Here is the gist

• Fed Beige Book Says U.S. Economy Slowed in Eight of 12 Regions
• Droughts, flooding adversely affected seven regions
• Wage pressures ‘subdued,’’ inflation pressures ‘‘weakened”
• Spending in majority of regions saw modest growth of nonauto retail sales
• Inventories still lean due to Japanese supply chain disruptions.
• Manufacturing was steady or slowed in many regions
• Most of residential real estate market still weak

We get it: it's all the weather and Japan's fault. Also, somehow Japan is to blame for "lean" inventories which somehow have increased for 2 years running.

The Treasury released its May Treasury International Capital data today, which confirms recent trends: while China, both domestically and through the UK, and Japan both added to their gross exposure of US debt in May, Russia's holdings continued to tumble in line with warnings out of Moscow discussed previously and with the continued Kremlin rotation out of Treasurys and into gold. And while Putin has obviously had enough with shenanigans in the US, the same can not be said for his posturing colleagues in China (and Japan) who at least two months ago, brought their holdings of US to 2011 (and record) highs of $1159.8MM and $912.4MM respectively. So much for China dumping bonds. Another source of Treasury demand: petrodollars, which saw their UST holdings in May hit an all time high of $229.8 billion. Overall, gross purchases of Long-Term US securities by official and private foreign buyers declined modestly to $44.6 billion from $44.8 billion. Netting out foreign securities purchased of $21 billion, yields net flows of $23.6 billion on expectations of $40 billion, or in other words May saw a modestly lower inflationary impact due to an influx in foreign capital in the US economy. Also when netting out US purchases of foreign securities as well as changes in bank dollar-denominated liabilities the net number was -$67.5 billion.

Just when one thinks news can't get any more... what's the right word here... here it comes. Per Reuters, Japan has decided to justify the credibility of its nukes, by, get this, performing stress tests. "Japan's trade minister Banri Kaieda said the government would conduct stress tests on all nuclear power reactors in Japan, Jiji news agency reported on Wednesday. The minister also said he would ensure there were no problems with power supplies, Jiji reported." Where does one start here: that the ECB is not the one conducting the tests - after all who has more expertise with stress tests... Or that the tests come after the biggest nuclear catastrophe since Chernobyl: after all what's the downside - one more Fukushima and Japan would convert into the Prypiat level from Call of Duty... Or that the tests will just accidentally forget to test for such 60 sigma events as earthquakes or tsunamis... Or that the announcement comes a day after the Japanese reconstruction minister quit after a week on the job... Or that the ECB will announce it will accept Japan's nukes as collateral until at least 10 major networks show footage of a mushroom cloud.... Or that ISDA will shortly determine that another nuclear explosion is not really a nuclear explosion and that all CDS against nuclear explosions will be null and void as soon as there is an actual explosion... Or that Tim Geithner is currently in Tokyo explaining there is nothing more credible than a stress tested nuke... Or that Basel VIIIXLC will find a NPP safe if its ratio of gamma to alpha radiation is more than 1 megaroentgen, promptly followed by Jamie Dimon bitching to BOJ president Shirakawa that 1 megaroentgen is too much to demand from Fukushima Street.... And it continues. Etc. Etc. Etc.

Cover up? What cover up?

Nearly all of Japan's corporate pension funds, which collectively manage more than $900 billion, have lowered their guaranteed yield in the last decade from about 5.5 percent to below 3.5 percent on average, and are now looking at hedge funds and other alternatives to juice their returns...

For those who may not have noticed it, the headline says "deficit" and pertains to Japan: once upon a time a booming export economy. The reason: the ongoing collapse in export trade, after May exports dropped by 10.3% from a year ago, and just better than April severe economic contraction of 12.4%. Consensus was for an 8.4% decline. The net result was a monthly deficit of 853.7 billion yen, or $10.7 billion, the second biggest inverse surplus ever. And just like in Europe, where things are going to go from insolvent to perfectly solvent any minute now... just not yet... so in Japan the economic renaissance which will cause the economy to surge (unclear how: no new monetary stimulus, and the recently announced fiscal stimulus of Y500 billion in new loans will do precisely nothing to boost anything except for some corrupt bureaucrats Swiss bank accounts) is coming any minute.... just not yet. Bloomberg says: "Shortages of power and parts have disrupted production and slowed overseas sales, prompting Japanese companies including Honda Motor Co. to forecast weaker earnings. Higher unemployment in the U.S. and weakening demand in Asia indicate Japan won’t be able to rely on global demand to pull itself out of a slump caused by the quake." And the understatement of the weekend comes from BNP economist Azusa Kato: "The state of the global economy is a little worrying. Both the U.S. and Europe aren’t doing that great and emerging economies are also tightening at an incredible pace, increasing uncertainty." Surely this enough is enough to explain why futures are up, since the Fed has no option but to do QE3. Alas, as the dumber by the minute algos continue to not realize, the market has to plunge from here (just like what crude has been doing for the past 2 weeks), before the Fed gets the greenlight to engage in Operation Twist 2.

The firm, whose only job now as in 2010, is to pave the way for QE "Oliver Twist" 3, pulls one of the crutches used by the depression apologists, and makes the secular decline case that much stronger. To wit: "Weakness in the Philly Fed cannot be obviously explained by
supply-chain disruptions or other special factors, as we argued in
yesterday's US Daily. For example, the latest Beige Book comments on
Philadelphia Fed district manufacturing activity said "declines in
orders broadened from producers of apparel and rubber products to
include producers of electronic equipment and instruments. Failure to
pass a multiyear transportation infrastructure reauthorization bill and
the ongoing real estate slump were cited by five different manufacturing
sectors as hampering the recovery" (these comments refer to May rather
than June). Slowing in "electronic equipment and instruments" could be
related to supply-chain problems, but otherwise the weakness looks
related to other factors." As to whether this means that the next stimulus is another payroll tax cut as Obama is hoping the republicans will allow, or more 2 Year rate caps, is unclear. What is certain is that the Keynesian monster must be fed.

The BOJ just concluded its two-day operation, and while not announcing any new monetary program or changing its interest rate, both of which had been widely anticipated, it did announce a new Y500 billion loan program for "growth industries" the result of which is some substantial strength in overnight equity markets. Alas, just like everything else by BOJ terms, this stimulus will prove largely insufficient, and will be followed by yet another loan program, until finally Shirakawa relents and restarts the printers. And in other ridiculous news, the BOJ raised its outlook of the second half, saying the economy was "picking up." There is no point in even commenting on this, suffice to say that instead of engaging in what it does best, i.e., monetary stimulus, Japan, and of course the US, will now be delighted to live in bizarro world that things will improve on their own. Best of luck with that.

The first rule of media (especially when dealing with an idiot audience that has a 7 second attention span): when all else fails, redirect. That's precisely what Eurogroup president, and certified, sanctimonious, pompous liar, Jean-Claude Juncker just did today, as it is becoming increasingly clear that nobody in Europe has any clue just what the Greek bailout #2 will look like now that the ECB and Germany are at polar opposites on how to proceed, the ECB thinks it is a rating agency and can dictate what an Event of Default is, and German bankers are willing to cede to private involvement in the bailout, but in a way that is voluntary. The problem is that these three are very much mutually exclusive. So what does Juncker go ahead and do - he redirects to highlighting the problems of the US: "The debt level of the USA is disastrous," Mr. Juncker said. "The real problem is that no one can explain well why the euro zone is in the epicenter of a global financial challenge at a moment, at which the fundamental indicators of the euro zone are substantially better than those of the U.S. or Japanese economy." That may well be the defining moment: by now everyone knows that the global economy is a massive pyramid scheme. Yet to this point, those in control have at least kept their mouths shut. However, when in order to explain one's insolvency, those at the very top of the control pyramid have no other choice than to point out just how broke others are (when in reality it is all one big, interconnected, "globalized" and truly insolvent Ponzi), then the unwind has begin.

Several years ago SocGen's Albert Edwards coined the term "IceAge" (here, here, here, here) to describe the long, unexciting financial and economic slog that follows any credit bust. Recently, after observing (technically it was Dylan Grice but one can be forgiven for thinking they are the same person) the most recent failure by Central Planners to prevent a mean reversion (which however will certainly not stop them from trying - there is a status quo to be preserved), Albert has dusted off the trusty charts that inevitably lead to a very sad conclusion for the central planning brigade: "The Ice Age theme is now well known. In a world of very low inflation and near deflation, equities de-rate both absolutely and relative to government bonds, which also re-rate in absolute terms. After the obscene extremes of equity valuations seen during the 2000 bubble, we have entered a long valuation bear market which should end in extreme levels of cheapness consistent with an S&P around 400. The unavoidable deep recession associated with this level (not forgetting the inevitable China bust) will drag an already  ?expensive? bond market to even higher extremes. One of the key themes of our longer-term analysis is that at the end of one of these lengthy 15-year phases for the financial markets (shown below), investors believe that the current investment phase will continue indefinitely. That was not the case in 2009 and is not the case now. There is still far too much hope to call a bottom." Ergo the selling of #hope (alas the #change has now replaced fiat paper) by the oligarchs. More important than even confidence, the market continues to run on pure unbridled optimism. Take away the monetary spigot and the hope will collapse faster than artificial "record" corporate profit margins. And make no mistake: Bernanke is all too aware of this constantly reappearing and developing dynamic which threatens to end the debt-funded status quo. And the last thing he will ever allow is for it to materialize, $1000/gallon gas be damned.

Tastes fine, and saves on lighting bills!

The down leg of the “V” is well underway. When does the up leg begin, and when should we start positioning for it? Toyota’s Motor’s stunning year on year decline in domestic sales of -69%. Quantitative easing nearly triple the Federal Reserve’s own recent QE2 efforts on a per capita basis. GDP growth as high as 3% in 2012, taking it to the top of the pack of developed nations. (EW), (FXY), (YCS), (TM), (NSANY), (FANUY), (CAJ), (KMTUY).

According to the just released Beige Book, there was slower growth seen in New York, Philadelphia, Atlanta, Chicago districts. Only Dallas reported acceleration. And yet the denials continue: "wage growth generally remained modest", and there was "widespread improvement reported in credit quality." We wonder where they get these imaginary data feeds from. More from the report: "Manufacturing activity continued to expand in most parts of the country, though a number of Districts noted some slowing in the pace of growth. Activity in the non-financial service sectors expanded at a steady pace, led by industries related to information technology  and business and professional services." Shockingly, the Fed admits there is food price inflation: "Elevated food and energy prices, as  well as unfavorable weather in some parts of the country, were said to be weighing on consumers’ propensity to spend." Lastly, Japan is the new snow: "Widespread supply disruptions—primarily related to the disaster in Japan—were reported to have substantially reduced the flow of new automobiles into dealers’ inventories, which in turn held down sales in some Districts. Widespread shortages of used cars were also reported to be driving up prices....Many Districts indicated that supply disruptions, primarily from Japan, have contributed to lean inventories, which have impeded auto sales somewhat....Inventory levels are mixed, with one retailer explaining inventory has been temporarily increased due to global supply concerns, such as output disruptions in Japan." And so forth. Key word count of the word: Japan - 25 times; Inflation - 1 time; Deflation - zero.

Perhaps the reason why so far nobody has been too concerned about the radiation levels in and around Tokyo, some 140  miles southwest of Fukushima, be that everyone is looking for radiation in all the wrong places? As the following very disturbing video demonstrates, a quick trip down the street with your personal Geiger counter indicates, the radiation gradient between the air and the ground is orders of magnitude. It is unclear if the ground is such a more generous source of radiation due to radioactive rains seeping into the ground, due to irradiated water in the subsoil, or for some other reason. What is pretty certain, is that unless Japanese citizens have learned to fly and avoid the ground altogether, by walking each and every day, they absorb substantial abnormal amounts of radiation. How soon before we transition from videos of earless mutant bunnies to those of something far more tragic?

In a double whammy of bad news from the mainstream media blackouted Fukushima (or perhaps the general population just doesn't care any more) today we learn that not only did The Nuclear and Industrial Safety Agency (NISA) double its estimate of the radiation leak in the early days of the Fukushima catastrophe, something we had predicted would happen eventually courtesy of the secretive Japanese government, but that Plutonium from Fukushima has now been found in the town of Okuma, over 1 mile away from the stricken Nuclear Power Plant.