Skip to main content

Japan quantitative easing and trade wars?

My favourite flavour has always been geo-politics, I was never comfortable with pure economics, because economics is not really a science (sorry dad & Sis and mom too).  Using complex model that make massive behavioural assumption is a recipe for disaster...  case and point Japan.

Over the past 24 months the Japanese government has begun a massive inflation drive, and a massive devaluation push.  The Yen went from 90 to 110 to the dollar, but the impact on regional currencies has been even more dramatic.  Japan's objective is to create inflation -- so far its been unsuccessful. The means has been massive quantitative easing (e.g. government prints money) and with this cash they have been buying assets -- lots and lots of assets; MBS, bonds (short and long) stocks in a nutshell the Japanese government has depressed the printing button and have been printing Yens like crazy.  In the past 12 months they have issued $750 billion in new money - slightly more than what the US treasury did in 2008, but Japan's economy is a fraction of America's.  Its as if, every year, the US treasury injected US$ 3 trillion per annum.  The idea is that all this money will create inflation -- yes inflation did occur in May 2014 -- but 100% of this rise has been due to rise in sales taxes!! So that policy has not worked.

However, this massive cash injection has done three real things -- it has weakened the currency, its has increase government deficit and it has lead to a massive rise in the value of stocks.  For traders and investors this has been a one way sure thing.  The dominant trade of 2014 is"long Japan short yen" -- it has been one of the most profitable trade of all time.

Now, the impact to the real economy is something else.  First, as the region slows down (demand for goods produced in Japan -- or elsewhere) has slowed.  Excess labor in Japan -- despite a rapid population aging (and the corollary drop in working age population) has generated under-employment and income collapse, over the past 12 months income has shrunk by nearly 6%.

Despite the weaker yen (about 25%) industrial production is in free fall, because Japan's largest and most consistent market for goods and products is:  JAPAN!  A collapse in income means that demand has fallen.  The three pillars of Prime Minister Abe's have worked to weaken demand.  In a nutshell aside from traders and investors this strategy has been not only unproductive but has destroyed real economic value in Japan.

The prime minister's action were driven by a desire to re-create the Japan of the 70s where, like China, Japan's economic growth was driven by exports -- a cheaper yen and loose monetary policy should have been helpful, except that its target markets (Asia) have identical strategy -- grow through exports.  Despite what many commentators say, its impossible for everyone to be a net exporter.  The regional consequences here could be severe;  The risk here is to currency war and possibly a trade war.

That's serious


Popular posts from this blog

Trucker shortage? No a plan to allow driverless rigs

There are still articles on how America is running out of truckers -- and that its a huge problem, except its not a problem, if it was a problem salaries would rise to so that demand would clear. Trucking is one of those industry where the vast majority of participants are owner/operators and therefore free agents.

Salaries and cost are extremely well know, "industry" complains that there are not enough truckers, yet wages continue to fall... Therefore there are still too many truckers around, for if there was a shortage of supply prices would rise, and they don't.

What there is though is something different; there is a push to allow automatic rigs to "operate across the US", so to encourage the various authorities to allow self driving rigs you talk shortage and hope that politicians decided that "Well if people don't want to work, lets get robots to do the work" or words to that effect.

This has nothing to do with shortage of drivers, but every…

Every punter says oil prices are on the rise: Oil hits $48/bbl -- lowest since September 2016

What the hell?

How could this be, punters, advisors, investment bankers all agreed commodity prices  in general and oil prices in particular are on the rise...its a brave new era for producers and exporters -- finally the world is back and demand is going through the roof, except not so much!

What happened?  Well energy is complicated, the world operates in a balance -- 30 days of physical reserves is about all we've got (seriously) this is a just in time business.  So the long term trend always gets hit by short term variations.

Global production over the past 12 months has risen by somewhat less than 1.5% per annum.  As the world market changes production becomes less energy intensive (maybe), but the reality is that the world is growing more slowly -- America Q4 GDP growth was around 1.9% (annualized) Europe is going nowhere fast (the GDP growth in Germany is overshadowed by the lack of growth in France, Italy, Spain (lets say 27 Euro members generated a total GDP growth of 1.2…

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same rese…