Of Interest


Tuesday, December 21, 2010

Japans Economy Shows signs of Tanking

Crowded street in Japan. Click image to expand.
Will The Rising Suns Economy Set?

When the financial world tries to anticipate the next meltdown, all eyes turn to Europe. Greece needed a bailout, then Ireland did. Talk is that Spain will follow, though the country denies that it has a problem.

But a few contrarians think everyone is looking in the wrong direction. Forget Europe, they say. Check out Japan instead. "A global fiasco is brewing in Japan," predicted Societe Generale analyst Dylan Grice in a recent report. "It's like the Titanic has already hit the iceberg and you know it's going to sink, you just don't know how long it will take to go down," said Vitaliy Katsenelson, a Denver-based money manager, in a recent interview that was printed in well-known analyst John Mauldin's newsletter. One hedge fund analyst I spoke to recently noted that Japan has had no fewer than nine finance ministers in the last 4½ years—one of whom apparently committed suicide after resigning.

Japan was thought to possess a miracle economy before it all went to hell in the early 1990s following a spectacular real estate bust. Today the popular perception is that Japan is stagnant but stable. After the economy slowed down, the Japanese government lowered taxes and increased spending, sending deficits, and also government debt, way up. But the debt hasn't been a problem, because Japan's risk-averse populace—which became even more risk averse after the collapse of the technology bubble a decade ago—has sunk its considerable savings into government bonds, known colloquially as JGBs. What could be safer than government debt? As a result, the vast majority of Japanese debt is funded by its own residents—in stark contrast to the United States, which sells a sizable chunk of its debt overseas. And as deflation struck the Japanese economy, the interest rate on its outstanding debt has fallen to an average of a mere 1.5 percent.
In sum, the Japanese government has been able to increase its debt without driving borrowing costs up because of falling interest rates. That fortunate circumstance has allowed Japan to ramp up government spending even as tax revenue has dropped by nearly one-third .The not-so-lucky part is that even at today's low interest rates, Japan's interest on its debt is eating up a scary proportion of its tax revenue—more than 25 percent (not including the funds that come from issuing yet more debt), according to government figures. In addition, much of Japan's debt is relatively short-term in nature, meaning that the government last year had to "roll" at least 140 trillion yen in debt (i.e., replace retiring debt with new debt) even as it issued some 50 trillion in fresh debt to fund the growing gap between what the government spent and what it took in.
As Bernie Madoff would tell you, this is a game you can play only so long. Japan's savings rate, which was once in the mid-teens, is quickly approaching zero. Meanwhile, the country has the oldest population in the world, with basically no immigration. When people retire, what do they do? They start to withdraw money from the banking system. You begin to see the problem.
Why, you might ask, can't Japan do what us profligate folk in the United States do—sell its debt to international investors? Well, it could, but it would likely have to pay a much higher interest rate than 1.5 percent. After all, if you were an investor, why would you buy Japanese debt yielding 1.5 percent when you could buy U.S. or German debt that paid you more? My source thinks Japan would have to pay roughly 4.5 percent interest on 10-year debt to be competitive, and he says that's a conservative estimate. But that would create a different problem. If Japan's interest rates merely doubled, from 1.5 percent to 3 percent, then interest expense would be more than half of the government's tax revenues. "Any meaningful re-pricing of Japanese sovereign risk would push yields to a level the government would be unable to pay," writes Grice.
Another way for Japan to dig itself out of this hole would be to cut spending. But already, Grice says, Japan's tax revenues can't cover debt service combined with social security. So where the hell do you start?
Those who believe in historical precedent point to examples like Weimar Germany and say Japan is going to swing from deflation to hyperinflation. The Bank of Japan, they say, will print yen in order to pay down debt. "Cash-strapped governments," observes Grice, often resort to "currency debasement." That story never ends happily.
But at least so far, the consensus is that this dire scenario won't, can't, happen. Indeed, it's often said that you aren't a real macro trader (someone who bets on global trends) until you've gotten burned shorting (i.e., betting against) Japan. "You'll find 10,000 people saying I'm an idiot and that people have been saying this, and been wrong, for 15 years, and kid, shut up," laughs my source. The Bank of Japan says the economy is improving; analysts say the government has lots of options, including raising the value-added tax or having the banking system put even more assets into government bonds. (Already, the Bank of Japan is engaged in its own form of "quantitative easing," or purchasing government bonds, which, just as in the United States, is supposed to help the economy recover.) Japan's relatively healthy corporate sector could take over from households in investing its surplus cash into government bonds. "Everyone acknowledges the long term seriousness of Japan's fiscal position," writes Grice. "But people seem almost fatigued with the idea that a country which has defied bond market logic for so long now is ever going to change."
But just because things haven't changed doesn't mean they won't. While any deterioration in Japan's finances should, mathematically speaking, happen gradually—savers don't yank their money out of the system all at once—modern markets have a way of accelerating underlying problems into crises with remarkable speed. If there's a lesson we should all have learned, it's that once fear takes hold, anything can happen. And if Japan is a problem, it's a problem for all of us. After all, Japan is still the world's third-largest economy. Unlike Greece and Ireland, it is simply too big to bail out, even if the world were willing to do so. China and Japan are the largest foreign holders of U.S. debt. One obvious question is, what happens here if Japan starts selling?
There's another way in which Japan's problems might matter, too. In some important ways, the United States is following in Japan's footsteps—for instance by taking advantage of low interest rates to issue a slew of cheap debt. Japan's "more profound influence might be psychological," Grice writes. What he means is that Japan's benign experience with debt (so far) has led other countries (notably ours) to think that it can have a worsening fiscal condition yet still pay a low interest rate on its debt . If bond markets begin to act like that notion is wrong, this story doesn't end happily for anyone.

More Money Than God: Hedge Funds and the Making of a New Elite


There was only one reason to read this book and that was to obtain more information on the Medallion methodology. The author does provide information that hitherto was not public. For this I am grateful, but I would have liked, even more, a really deep interview with the various individuals involved in the development of Medallion.

For example, Berlekamp presents himself, on his website, as the creator of Medallion and the solver of its trading problems. He kicks himself for selling his share of this cash-generating marvel to the ruthless Medallion Pool Operator Owner for only six times the amount he had invested. I guess his intense need to play Dots and Boxes just overwhelmed his common sense.

Starting in the 1990's, hedge funds became large enough to move markets of all kinds. They could even overpower governments. This allowed the Tiger Fund in 1998 to approach "Russian friends...to buy the entire stock of nongold precious metals held by the central bank and finance ministry...take the palladium, the rhodium, and the silver. All of it." leaving the logistics problem of getting it into a Swiss bank with Tiger's name on it.

Money can be made in this lucrative venture and Sebastian Mallaby, will give you an education you won't find in any college. If you want to make a million, don't talk to an economic professor, go talk with a millionaire. If you want to make money with hedge funds, buy this book and do what Sebastian Mallaby tells you to do.

- it is often dangerous to trade on statistical evidence unless it can be intuitively explained". "Visceral" is the word meaning deep inward feelings rather than just an intellectual focus.

- "The whole point of leverage, the very definition of the term, is that investors feel ripples of the economy in a magnified way."

- We all rationalize success. One position by the Chanos Fund only worked out because the April 1989 Tiananmen Square demonstration broke out. This earned the comment "The way Ah see it, is that it took a revolution of a bihl-lion people for your darn short to work out."

- "Event driven" investing at Farallon Fund specialized in predicting events that cause existing prices to be wrong e.g. takeover announcements, demergers, avoiding bankruptcy, meeting banking covenants, major economic events, hybrid security maturity dates etc.

- `Pattern investing' used by the Medallion fund looking for patterns in the market. This applies research on French/English translation where the computer finds the grammatical rules not the programmer (using the Canadian Hansard which is conveniently in both languages).

- A Tiger Fund manager "should manage the portfolio aggressively, removing good companies to make way for better ones; should avoid risking more than 5 percent of capital on more than one bet; and should keep swinging through bad times until luck returned".

- Remember that "...the market can stay irrational longer than you can stay solvent".

- "If one of these stocks fell ... it was probably being pushed by an institutional block trader that needed to raise cash...the price would soon revert, creating an opportunity to profit." In other words, why is the seller selling?

- "the biggest danger for buyers of illiquid assets is that in a crisis these assets will collapse the hardest."

- "...the larger an investment fund, the harder it was for a fund manager to generate returns" meaning the small investor has more opportunity.

- And remember, "LTCM calculated that this loss should have occurred less than once in the lifetime of the universe. But it happened anyway." The market does not follow a normal distribution; often it is not random; but then is it often predictable?

Mallaby grapples with the variety of thought behind the success of the hedge funds giving us a workmanlike insight. This attempt to describe how the hedge funds actually operate - as far as he is able (and he tells us when he cannot) - makes this a valuable book indeed.

Saturday, December 18, 2010

Robert Glasper Experiment Live @ The Cotton Club TOKIA Marunouchi Tokyo

Which version of Robert Glasper would it be this time? With one foot in the straight-ahead jazz camp and one planted in hip-hop and funk, the American pianist has been carving out a dual identity. On his album Double Booked the two facets of his personality are laid out for all to see, tracks by his acoustic trio juxtaposed with the contemporary riffs of his other line-up, the Robert Glasper Experiment.

With Chris Dave on drums Glasper was certainly not short of firepower. Dave may be a diminutive figure, but he produced the most electrifying playing seen at this venue for a long time. Some parts of the set, in fact, came close to being a miniature drum concerto, Glasper laying down minimal accompaniment as his partner fired off round after round, at one point surging into a mesmerising drum ’n’ bass tattoo.

Memorable themes were thin on the ground, however. Glasper’s elliptical style, full of staccato runs and knotty harmonies, generates undeniable rhythmic tension but also runs the risk of turning in ever-decreasing circles. Glasper, who was in a jovial mood,  prefers to ditch set-lists to follow the mood of the moment.

The venue was Tokyo's Cotton Club in Marunouchi Finance precinct.
I attended the gig with Masayuki Koito (Finance Researcher) & Editor of Japans Jazz Magazine "The Walker".
The Cotton Club is high-end and offers a nice and more elegant change for the usual Tokyo nightspots.
The acoustics where brilliant while the band stage showcases a nostalgic remake of the Harlem Theater.
All in all, one of the best live performances I have every seen.
James Sleeman

Robert Glasper Experiment Live Cotton Club Tokyo 17/12/2010 -jimmy james by Spirit-Fingers

Rob's Birthday

the real robert glasper | Myspace Music Videos

2010 And Beyond - Deflation Japanese Style

"The cause of sustained price falls is a lack of demand. When demand itself is weak, prices won´t rise just through liquidity provision." – Masaaki Shirakawa, central bank governor of Japan
Japan’s structural problems are substantial and well known. A massively indebted government is under pressure to reduce the scale of its borrowings. Demographics are conducive to a contraction in the overall economy, given the impact of ageing is not being offset by net immigration, and Japan’s globally competitive exporters continue to face patchy conditions in most of their overseas markets. Furthermore, the savings rate remains high and bank lending is stagnant, therefore Japan remains susceptible to deflation.

None of this augurs well for Japan’s long-embattled commercial real estate sector. There is also the problem of gross oversupply of property – with the partial exception of the office and retail sub-sectors of Osaka. Over the last decade, Japan has essentially become over developed relative to the needs of its economy.

The last two years have been particularly harsh for the sector. data provided to me in March and July 2010 – confirm that rental rates fell sharply during 2009. Where there were property transactions, they generally resulted in substantial drops in capital values. More recently, there appear to have been minor rises in rents across the board. However, given the actual conditions and protagonists’ expectations, this appears to be little more than a bounce in the wake of a horrendous year. Our in-country sources expect rental rates to track sideways through 2011. Yields have moved in differing directions across the various sub-sectors. The fall in yields in Yokohama over the last year or so is probably reflective of an absence of transactions. The market clearing capital values and yields are, we suspect, respectively lower and higher than they currently appear to be. Looking forward, we expect that yields will track sideways. 
Looking back at the ‘Weak Decade´, we can´t avoid being reminded of Japan´s TWIN decades of weakness. Today, at about 10´380, the Nikkei 225 stands pretty much at the same (nominal) level as it did around 1987. And, it´s A LOT LOWER than it was at the end of its great bull market in 1989. On December 29, 1989, the Nikkei peaked at 38,876. In other words, the price levels of the Nikkei today stand at roughly a quarter of what they were 20 years ago...TWO decades later!

Saturday, December 11, 2010

James Howard Kunster – A Sense of Place.

Here’s another great TED talk that really has the ability to change the way you think about your surroundings, if you let it. James Howard Kunster tells it like it is. When talking about public spaces, urban sprawl, and creating a sense of place he describes, in general terms, what went wrong and how to fix it. I’ve posted some notes below, but I recommend you take 20 minutes and watch the video for yourself, it’s worth it:

Sense of Place – Your ability to make places that are meaningful and places of quality and character. This depends entirely on your ability to define space with buildings.
The public realm mainly comes in the form of the street in America because we don’t have the 1,000 year old cathedrals and market squares of older cultures.
The culture of civic design – a body of knowledge, methods, skills, and principles that we threw in the garbage after WWII and we can see the result all around us.
The public realm has to inform us not only where we are geographically, but it has to inform us where we are in our culture – where we’ve come from, what kind of people we are, and by doing that it needs to afford us a glimpse to where we’re going.
The places we’ve created over the past 50 years have deprived us of the ability to live in a hopeful present.
To create a place of character and quality you have to be able to define space.
We have about 38,000 places that are not worth caring about in the United States. When we have enough of them, we’re going to have a Nation that’s not worth defending.
The remedy for mutilated urbanism is good urbanism and good buildings, not just flower beds not just cartoons of the Sierra Nevada Mountains, that’s not good enough, we have to do good buildings.
The industrial city was such a trauma that we developed this tremendous aversion for the whole idea of the city, city life, and everything connected with it.
We have to downscale, rescale, and resize virtually everything in this country and we cannot start soon enough.
We’re gonna have to live closer to where we work, we’re gonna have to live closer to each other, we’re gonna have to live closer to where we produce food, we’re gonna have to improve our railroad system.
We have to re-learn how to compose meaningful places, places that are integral and are living organisms.
We need revivified town centers – our cities grew where they are because they occupy all the important sites.
Life in the 20th century is going to be about living locally. Be prepared to be good neighbors, be prepared to find vocations that make you useful to your neighbors and fellow citizens.
Stop referring to yourself as consumers. Consumers are different than citizens, consumers do not have responsibilities to their fellow human beings.

Commercial Real Estate Videos of the Week

Nicholas Smith, director & strategist at MF Global, explains his investment strategy for Japan and suggests investing in the country’s property and financial plays.

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