With just two and a half months in the books, 2010 has already been an odd year from an investment perspective. A small European nation that accounts for just a fraction of global GDP has become a major driver of stock and bond markets around the globe, capable of setting off both buying and selling sprees with every new development. The financial sector, a laggard since its role in sparking the most recent recession, has surged higher, while utilities have been among the worst performers.
But perhaps no development has been more perplexing than the strength of the Japanese yen, an issue that has become a source of major frustration to officials still working to pull Japan’s economy from a prolonged downturn and ward off a period of deflation. A strong yen is a potential problem for Japan because it makes the country’s exports, a major component of the national economy, more expensive to international consumers. For the most part, Japanese equities missed out on the rally of 2009, finishing the year in positive territory but lagging far behind emerging and developed economies. While the drivers of the country’s poor performance are numerous, the relative strength of the yen has frequently been fingered as a major contributor.
Complete Story »
I had the great pleasure of meeting Marc Faber in person over the past couple of days after having exchanged emails with him about various things for the past several years. Marc is not only extremely knowledgeable about investments and strategies, he is also a lot of fun to be with personally.
Marc was in Madison, Wisconsin, for a speech in front of an investment group, CFA Madison. We arranged a couple of Market Tickers with Aaron Task and Henry Blodget at a local ABC affiliate station while in Madison.
Complete Story »
We don’t much trust statistics that come from China, just like we didn’t trust information that came from behind the Iron Curtain back in the Cold War days. But there’s been a lot of news from China in the past few weeks, and it has painted a picture of economic recovery and strength. At 8.7%, GDP growth was faster than expected in 2009. Production, exports and fixed-asset investment in urban areas are up 20.7%, 31.4% and 26.6%, respectively, in the first two months of 2010 versus the same year-ago period. M2 money supply grew at a 25.5% clip and consumer prices rose 2.7% in February.
Believe those numbers at your peril, haircut them as you see fit, but there is one number with regard to China that is unassailable and that makes their growth miracle possible: 6.83. The pegging of the yuan at this artificially low exchange rate is the cornerstone of the Chinese economic miracle. It is the modern-day mercantilist tool, a replacement for tariffs and taxes. In so doing, it allows the country to run an export-driven economy that competes on price, depends on foreigners’ propensity to consume, and builds up huge structural surpluses with which to keep its currency peg. It’s the Walmart of countries, the big box store and category killer that no local shopkeeper wants in his neighborhood. It is the other side of the coin from the United States and Europe at this stage in the global economic cycle - - consumer-based societies that are running huge structural deficits. Despite the obvious economic wisdom of letting the currency float, and the ample cover for doing so that the latest data provide, it is unlikely that China will significantly alter its dollar-peg policy any time soon.
Complete Story »
I am somehow a forex analyst lately - I like watching the currencies game. It is both relaxing and interesting in the same time. And one of my favorite currencies is the Japan Yen (JPY).
Every now and then there comes out a report saying that JPY is obsolete. The argument is simple - Japan has huge debts, its population is aging, its companies are strongly discouraged in repatriating profits by its strong currency. I saw this analysis repeated again and again over the last 3 years in various articles. I saw it on Business Week, on Forbes, even on seekingalpha.com last week. And the logic is the same.
Complete Story »
As we have suggested, one of the possible actions is to simply increase the JPY10 trillion 3-month financing facility launched at the end of last year and that has nearly been exhausted. The government could order intervention if it so decided and that was the message the government was sending. The fact of the matter is that 3-month implied dollar-yen volatility is today at its lowest level since the Lehman collapse.
The three-month risk reversals, which are a gauge of the market's bias toward dollar-yen calls or puts, is the smallest since early 2007. Lastly, we have acknowledged that the new budget includes an increase in financing bills, which are used to raise intervention funds.
Complete Story »
We saw how the collapse of Greece brought down the Euro. Many say that this is just the beginning for Europe – Spain, Portugal, Ireland and other neighboring countries are very unstable. Watching the Euro plummet made me question my take on other currencies as well. The following is why I believe the Japanese Yen may face a downfall.
According to Alexander Tepper of TKNG Capital, the Japanese labor force is shrinking because the population is starting to age and retire. The retirees will demand Japanese goods, then eventually go to imports because of the lack of production from fewer workers. As the Japanese retire and exit the work force, the economy will face an unhealthy supply shock, which will inevitably lead to the Yen falling. The population is declining, and so is the savings rate. This is not a good sign for the economy, or the currency. This will make financing government deficits an incredible challenge.
Complete Story »
I must admit that I have a hard time maintaining an open mind on the yen. I see so many issues impacting the currency relative to the other G-7 that when good news does happen, I tend to discount it (my own Confirmatory Bias peeking through). So let’s start with my predilection that the Yen is due for a fall, and then try to discredit it.
The fundamentals certainly do give one pause. The central bank rate has been 0.1% for years, and of course gave rise to the Carry Trade. With the recent increases moving short term US interest rates above Japanese rates, a resurgence of the Carry Trade will drive the Yen lower. Other measures of the economy are woeful too. The GDP took the worst fall of all the G-7 last year (-12.7% annualized in March 2009), and monthly change in GDP remains negative, although improved from a year ago. Amongst the G-7, the budget deficit is third worst (behind the US and UK) at -7.8%.
Complete Story »
Internet Initiative Japan (IIJI) (3774) is a Japanese internet service provider offering a full suite of connectivity and outsourcing services. It is a pioneer among Japanese internet-related companies, having originally listed its shares on the Nasdaq in 1999, before eventually listing in Tokyo (Mothers) in 2005 and later transitioning to Topix 1st Section.
At the end of February, I submitted a letter to the company’s chairman (Mr. Suzuki) and its other directors. While applauding them for their prior decision to repurchase shares, the timing of which coincided with the bottoming of IIJ’s stock, and also for maintaining the dividend, I voiced some concerns and submitted proposals that are either to be actioned or designated for resolution at the Annual Shareholders’ Meeting this June. IIJ’s Investor Relations Officer has been helpful and cordial, and has already forwarded my letter and proposals. Below, I will briefly outline my position.
Complete Story »
The last rally the dollar had versus the yen was sponsored by the Non-Farm Payroll report, showing fewer job loses than anticipated, and indications that the Finance Minister was urging the Bank of Japan to increase the money supply. This move has stalled short of the 91 level.
As the evidence continues to grow that the global recession has ended, the yen, because of its perceived safety, becomes less attractive. Yesterday's report that Chinese exports has surged in February to 46% above last year's levels confirms their recovery is progressing. Today we get a number of Chinese reports, including Industrial production, forecasted to be up 19.5% and retail sales up an amazing 18.3% from year ago numbers. As one of China's biggest trading partners, Japan will benefit from the increased activity, but their recovery seems to be lagging.
Complete Story »
Alexander Tepper is Chief Economist at TKNG Capital, a global macro hedge fund based in New York. Previously, Mr. Tepper was a senior economic policy aide to U.S. Senator Frank Lautenberg. He also has experience at Oliver, Wyman & Company advising Fortune 500 financial institutions on risk management and as an investment banking Associate at Credit Suisse. He has a masters degree in Economics from Oxford University, and a BA in Physics from Princeton University.
We recently had the opportunity to ask Alexander about the single highest conviction position he currently holds in his fund.
Complete Story »
Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, March 8th):
...[T]he insightful Puru Saxena’s writes:
Complete Story »
When former Morgan Stanley chief Asian economist Andy Xie comments on the United States, he focuses on a bailout nation keen on perpetuating a bubble economy predicated on malinvestment and overconsumption. In this he sees parallels with Japan and its long malaise.
Japan has experienced two decades of economic stagnation since the collapse of the infamous bubble it suffered in the 1980s. The most popular explanations are that Tokyo wasn’t aggressive enough in stimulating the economy after the bubble burst, or that it withdrew its stimulus too early – or both. This line of thinking is popular among elite economists in the US, where it is rarely challenged. But few Japanese analysts buy it…
Complete Story »
There are several factors weighing on the yen:
1. Speculation spurred by a unsourced story in an English version of a Japanese paper suggesting that the BOJ is considering additional monetary measures to combat deflation and lower yen borrowing costs. The BOJ seems to be under some pressure from the MOF to do more on this front. The BOJ's response appears to be that the government needs to reduce its deficit financing.
Complete Story »
Tokyo. December 25, 1989:
The Bank of Japan surprised markets when it sharply increased its key interest rate to 4.25% (the move was meant to tighten policy to curb inflation and prevent an asset bubble). The result: the market crashed, credit tightened up, and a debt crisis ensued. Economic growth stagnated, and Japan entered what became known as the "Lost Decade": the period of 1990 to 2000.
Complete Story »
The gradual gain of the yen versus the dollar this past week ended with this morning's encouraging US economic news. New unemployment claims at 469k were a little better than expected, as government warnings of inclement weather lay offs proved unfounded. US factory orders did increase, up 1.7%, better than the expected +1.4%, and retail sales reports were positive. Pending home sales were down 7.6%, a bearish surprise, but this was not enough to contain a sharp rally of the USD versus the yen. The early morning low of 88.12 against the yen turned into a 107 pip rally. With the always provocative Non Farm Employment looming tomorrow, is today's volatility merely a training session for tomorrow?
Last week's COT report revealed little conviction among the players. The large specs were long 22.2% of the OI and short 19.9%, while the small spec is long 18.0% and 23.6% short, in the report through 02-23-2010. Daily changes in the open interest since the report show an increase of over 10,000 futures contracts, so some traders are getting an opinion of the yen. It is interesting to observe that the commercial has recently been a buyer of size in the yen. Perhaps this is a hedge by exporters, repatriating profits to Japan ahead of the fiscal year end in March.
Complete Story »
After such a long entry last week I thought I would spare my readers and do something much briefer. A few days ago I read a good article (“Stuck on Neutral”) about Japan in the August 18 issue of the Economist. You can find the article on the Economist website if you are a premium subscriber, but if not, it has been partly reprinted elsewhere.
It may seem strange to be reading an August article in March, but in fact I often find myself a year or more behind in my reading. This may seem a little perverse, but it does let me see what the smartest people were thinking at the time while knowing what subsequently happened. Among other things this makes it clear how often informed consensus gets bogged down in the minutiae of everyday events while trying to understand the bigger picture.
Complete Story »
There has been some unusual action on the Japanese commodities markets that demands a comment.
I mentioned earlier this week that during the last two weeks the Japanese have revved up several new structured investment products tracking commodities. There are now some "seismic signals" registering in those markets, showing these new ETFs and trusts may be having an immediate impact.
Complete Story »
Jason Kelly submits: I'm hearing lots of rumors about Japan's economy teetering on the brink of implosion -- again. This comes up on a fairly regular schedule. The cycle began 20 years ago when the bubble popped, Japan nationalized most bank debt so that the bad assets never went away but instead became public liabilities, and its economic growth has been crippled ever since. Notice anything familiar, America?
The problem with calling for the end of Japan is the same one we face when calling for the end of the world: there's an abundance of evidence suggesting it's imminent, but somehow it never happens. I'm not saying that sovereign debt risk is not real -- it is, and is one of the highest priority risks we're watching this year -- but I can't help but notice that the latest round of reasons to expect Japan's economic collapse are the same ones I've heard each year for 20 years. The difference is that the numbers in the debt column are bigger than ever, but that, too, is trotted out every year.
Complete Story »
New Yorkers looking to catch a glimpse of the world’s hottest car have until late April to visit the Cooper-Hewitt National Design Museum, which is displaying the $2,200 Tata Nano as an achievement in efficient design.
I was fortunate enough to drive “the people’s car” on a recent trip to India (that’s me in the photo).
Complete Story »
We've seen headlines all over asking who is the next Greece? Will Greece take the rest of the PIGS (Spain, Portugal, and Ireland) with it? This may very well happen, but if we are talking about sovereign risk, one should definitely keep an eye out for Japan.
ContrarianEdge has an interesting research piece on Japan. The Japanese budget deficit is growing (click to enlarge images):
Complete Story »