Monday, August 9, 2010

More Nikkei Redux & Lack Of Savings

Chris Rock Once said that there was "NO SEX IN THE CHAMPAGNE ROOM".

http://www.youtube.com/watch?v=HBdVpNc9BZ0

It seems that the Federal Reserve Board seems to not agree with Mr. Rock. Sex in the champagne infers that someones is going to get lucky. It infers that we want to bring back the go-go halcyon days of yesteryear. It also infers that we can just throw more money at the problem hoping to ignite inflation. It didn't work in Japan over the last 20 years and it will be a fabulous disaster here. I have said since day one that you cant fix a debt and leverage problem with more debt and leverage. The Japanese tried and failed on a consumer level. It obviously made many in the financial sector more wealthy, just like it had done here. This in the end is really the plan for the Fed as well as Treasury. Re inflate asset bubbles so that the uber wealthy can sleep at night. If the uber wealthy are feeling comfortable, they who own all of the corporations will then reinvigorate the economy via jobs. This is the grand plan from the onset of the economic crisis. Congress along with the administration has done everything possible to re inflate asset prices. For that they have been very successful. The financial economy has not only stabilized but is in a secular bull market following the lead of ZIRP and an never ending wave of QE. This lifts the fortunes of the wealthy class but kills everyone else.

The elite have most of their net worth invested in the stock market, thus its all paper net worth. When Wall Street was going out of business following the days of Lehman and AIG's demise, Congress which is mostly made up of wealthy citizens sprung into action. The sky is falling. The end of the world is here. We have to save the system for everyone is all we heard. This is a blatant lie. The rich are truly different. They have more money than the rest of society. This is how they think. They don't think in how much money they have, but how much money they have lost. They simply don't look at it like - I have 50MM. No, its more like - I just lost 100MM! HELP! When Wall Street gets bailed out, its we saved the system. We did it for everyone in America. If the inner city ever gets bailed out, its welfare economics. If the middle class gets a bone thrown at them, its socialism. You can see this so vividly in regards to the Bush tax cuts. You have to make permanent the tax cuts because its for the good of the country and the economy.  Everyone will be hurt if Bill Gates, Jamie Dimon, Lloyd Blankfein, and Warren Buffet have to pay a measly 3% more. The wealthy along with the MSM has the country living in delusion and denial. We would never have this discussion if the tax cuts were just for the middle class. Congress would just let the cuts expire because we can't talk about extending tax cuts for the middle class when the deficit is so out of control. Its infuriating but this is life in America.

Nikkie Redux Wont Work.

The Bank Of Japan started Quantitative Easing in March 2001. This was an attempt to stem deflationary pressures and try to re inflate prices, for all practical purposes it was an attempt to get animal spirits back into the NIKKEI. For all intensive purposes it didn't work, but for practical purposes it did as it did stabilize the Japanese economy enough for the BOJ to sell more Yen denominated debt. To me that was the intended purpose. The BOJ knew the economy was awful. The economy coming off the dot com implosion never recovered form the late 80's euphoria. The Kobe Earthquake didnt help either. The Japanese economy was about to keel over. They couldn't just watch the zombie die after all they had kept the zombie banking system alive for over 11 years. QE just reinvigorated the Zombie, the Nikkei rallied for a few months and then promptly collapsed over the summer and into the fall. This has been the recipe the last 20 years in Japan. All this has accomplished is a massive liquidity trap living in a fiscal nightmare. It was never a demand issue in Japan, it was too much leverage and bad loans. The corporate/private sector needed to deleverage, not take on more debts. No matter how low rates got, it never stimulated the economy. Japan was experiencing a balance sheet recession, where ZIRP and traditional monetary polices are useless. The US is also experiencing a balance sheet recession, but its more of a consumer leverage issue. No matter how low rates go, consumers are digging themselves out of debt not taking on more. Low rates have stimulated the financial sector (wealthy) as its Christmas Day every day. Borrow at zero and invest at 3%. You don't need to be a genius to do this trade.

http://tradersutra.blogspot.com/2010/08/bizarro-market-nikkei-redux.html

The BOJ is not stupid, in fact they are crazy like a fox. Japan's fiscal situation is dire, its been dire for almost 15 years. Japan has a demographic problem that for the average person would seem catastrophic. They have a serious problem with their retired citizens. As people get older, they save less and demand more social services. Couple this with the fact that the fertility rate in Japan is one of the worst on Earth.  Population shrinkage is a major theme. How are you going to pay for all of the retired and aging? Where is the incremental spending going to come from? Japan was able to finance their debt explosion via exports and a huge household savings rate all through out the last 20 years. To this day they have a comfortable trade balance. Japan's auto companies and consumer electronics are still churning out products even with the Yen appreciating, but the savings rate is almost at zero and with the Yen gaining, exports are poised to drop. We haven't even gotten into where the global economy is going. Who is going to buy products from Japan irregardless of its own fiscal difficulties? But Japan will trudge along, issuing more JGB's. The Nikkei will rally 20-30 even 40% on any given quarter getting investors excited. This is is what ZIRP and QE do at the end of the day. Just delay the inevitable. Japan simply doesn't have the horses going out into the future, but if you can dress up the dead horse on its way to the glue factory maybe it buys them time. It's like the Titanic when it struck the iceberg, it had some finite time frame before it sank. Having all of the deck hands out shoveling sea water is not going to help you as that only buys you minutes. Japan has been buying minutes for 20 years. How much do they have left?

Ben Bernanke and Tim Geithner seem to be following Japan's lead. Lets just do more QE while keeping the official ZIRP. This will make sure the banks get recapitalized. The banks will recapitalize but the bad debts and loans will still be in the system. These loans need to be properly priced and in many instances written off. Our banks are no different than their Japanese counterparts and are zombie institutions more or less.

The scary thing here for the US, is that unlike Japan, we are not an export economy. Even as we have murdered the dollar since the Fed was established, exports keep going down. We currently have a $350B trade deficit. Japan on the other hand today has a $50B surplus. We don't have the savings level to bleed back into our economy. Our auto companies are losing tens of billions of dollars and we don't  manufacture consumer electronics like the Japanese.

The following Youtube clip is vey scary, even though I don't agree with the hyperinflation thesis. Not yet anyway.



The lack of savings in the US is troubling. Why would people care? Countries with high savings rates tend to have strong economies and great stock markets, since there is plenty of excess cash available to pour into investments. Those with low savings rates suffer from weak economies and poor stock markets, because of a shortage of available capital. When the US savings dropped below zero this past decade that was a warning sign that their was no more petrol left. The Nikkei has dropped from near 39,000 to 9500 since 1990, its not by accident that the savings rate as also dropped from 16% to almost 2%. There is simply not enough gas to propel stock prices higher. In the states there has been some 16 straight weeks of money pouring out of stock equity funds, but stocks keep going higher for many reasons (HFT, QE, ZIRP).

You cant expect a bull market to develop when savings rates are collapsing.

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