Guest Post: Made In Japan

By Peter Tchir of TF Market Advisors

Made in Japan

I still remember when there was a certain cachet to Japanese made products.  They were technologically advanced and better built than anything else available.  Sonyo, Toshiba, Toyota, Honda, Kawasaki, Yamaha, etc. were all dominating brands.  You could find products in Electric City in Tokyo that were generations ahead of what you could purchase in New York City.  That gap has narrowed and in many cases reversed over time, but now we might be hitting a stage where 'Made in Japan' is a big negative.

So far, most analysis about the reconstruction of Japan is based on the the experience from prior earthquakes.  I'm not sure how relevant prior earthquakes were to begin with, but Japan has now moved from a tragic earthquake event, to a nuclear event.  The nuclear problem continues to grow, and it is very different from the devastation of the earthquake or tsunami.

As more information comes out indicating much higher levels of radiation than previously thought and no real evidence of the situation getting under control, its time to examine the long term effects of this on any recovery.  The first, and most obvious difference, is you do NOT rebuild in areas that have been exposed to high levels of radiation.  This complicates the rebuilding process immensely as not only does property plant and equipment need to be replaced, you need to find new locations for them.  This is much harder logistically to do than the already difficult task of rebuilding.  Are we at this stage yet?  No, but the likelihood that there will be a large area of land where people do not want to live or work is increasing.  Using prior earthquakes as a guide is far less useful once land that was useful is no longer available.

The second problem is that goods 'Made in Japan' may become viewed as tainted.  So far, people are talking about when the supply chain will be fixed.  Its a function of rebuilding and solving the rolling blackout issue.  That may be the case, but as the radiation problem continues unabated, will people want to purchase products made in Japan?  Will there be a concern, valid or not, about radiation from products produced in Japan?  Given the near panic the U.S. media goes into at any sign of a salmonella or other tainted food outbreak (remember when you couldn't get jalapeno peppers at Chipotle grill) its not hard to imagine the media frenzy over irradiated products from Japan.  I think we already over react to fears of health risks.  I'm not sure why we do, but time after time we act irrationally once fears of health risks are brought up.  We tend to overstate the risk, overstate the potential for it to spread, and understate our medical ability to deal with it.  Tainted food, bird flu, anthrax....all of these hit, create a wave of almost hysteria, and then fade into the background.  Most recently, with the oil spill, shrimp sales nose dived, but that was relatively easy to manage.  Restaurants put up - No Gulf Shrimp signs, and if it didn't look black from oil, people accepted that it was okay.  Radiation is different since it can be in anything, and ironically, many of the products that have Japanese components emit some radiation to begin with (cell phones as a prime example).  Rational people will argue that any radiation detected is normal.  Fear-mongers will claim its related to Japan.  Again, we live in a country where many people worry about what type of plastic bottles are used as they are concerned about long term leaching of the plastic into the water its holding.  Its not much of a stretch to imagine people getting worried about products that potentially have extra radiation having being made in Japan.  I can see the Oprah show already.  Its easy to see why some companies, and even politicians would be happy to jump on the bandwagon, to push a made in America agenda.  Its not hard to see a politician lobbying for stricter controls so that factories in their district can gain market share.  On the surface this would be very bad for Japan, but good for America.  On the other hand, almost everyone agrees protectionism is bad, and we have generally managed to avoid it during this financial crisis, but an event like this could create the conditions for growing protectionism.

None of this has happened, and its still a low probability event, but its not a zero probability anymore.  The chain of events is fairly straightforward and as conditions at the reactor deteriorate from already high levels, the chance that land usage will be affected long term is very real.  Any analysis based simply on prior earthquakes then misses the point.  We need to see more detailed analysis of what happens to the recovery options in Japan under nuclear scenarios.  The most likely is some loss of land use, and a change in the energy mix the country uses (this was not affected by prior earthquakes, but will be affected this time).  Its wrong to compare Fukushima to Chernobyl, but its also wrong to compare this to Kyoto.

The potential that 'Made in Japan' carries a negative stigma affecting long term recovery there is a bit farfetched, but not at all impossible.  Its easy to scare people, and radiation has all the qualities that make it a prime candidate - you cannot see it, its extremely harmful, and since its already there, its hard to determine the source.  Its very easy to see how any evidence of radiation in products coming from Japan can quickly grow to an irrational but devastating movement to avoid 'Made in Japan' and if that occurs, all bets on the recovery there are off.

I was long Japan post quake as the market seemed to have over reacted to the earthquake.  The bounce, though, has been large and profitable, so I'm out, and as the situation in Fukushima continues to deteriorate, the market looks expensive as its not pricing in the potential consequences of this being a nuclear event rather than an earthquake event. 

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Guest Post: Top 10 Keynesian Ways To Boost The US Economy

Submitted by Jason Kaspar of Goldshark

Top 10 Keynesian Ways to Boost the US Economy

Keynesian economists are propagandizing the media with a unified message; in one breath lightly touching on the human tragedy in Japan, while in the next anticipating with delight the economic recovery it will (supposedly) create. The natural disaster in Japan is tragic both on a human level and economically. Japan may, possibly, enjoy a GDP boost in six months or so as a result of some rebuilding, but the billions in present-day lost productivity will easily negate any future upside.

The buildings and businesses with billions in loans have (and will continue to) experience enormous losses. Who will realize these losses?  Insurance losses – the capital that would be invested in other productive assets - now must cover billions in claims.  And what about the economic impact resulting from the loss of nuclear efficiency? Consider the power situation in Japan over the coming months with 40% of electricity used in greater Tokyo historically originating from the Niigata and Fukushima prefectures.  In totality, it is mystifying how any economist could predict a net economic positive.

But, then again, here come the Keynesians. Perhaps no statement has been more shocking than Larry Kudlow’s callous gem (he later apologized): "The human toll here looks to be much worse than the economic toll and we can be grateful for that . . . all these markets stocks, commodities, oil, gold, there is no major breakout or breakdown. I have to view that positively." Kudlow's comment may have been a slip up, but it is one example of many.

There’s Mohammed El-Erian writing in the Financial Times:

“Attention also turns towards the extent of the damage to the economy and its reconstruction and rehabilitation plans . . . Japan’s economic growth rate will fall in the immediate aftermath of the natural disasters before rising sharply due to reconstruction activities . . . Moreover, in a really good recovery scenario, Friday’s dreadful shock could even be a catalyst for internal political unity and for overcoming what has been two disappointing decades of economic performance.”

Not to be outdone, Goldman Sachs recently issued a report touting the likelihood of a Japanese recovery.

Let’s follow the Keynesian approach. I have come up with the top ten ways we can boost the US economy using that same Keynesian rationale.

1. Air Force Bombing Practice

For an entire day the Air Force can carpet bomb our interstates and highways. Why should Libya get the economic boost? Roads will be off limits to avoid human casualties (building up productivity for the lost work, right?) and we can kickstart the construction sector still reeling from the housing and commercial real estate nightmare.

2. National Food Fight

Let’s take it back to the college caf and have a food fight. Our processed food tastes terrible anyway. Rules are: any and all food may be thrown at other Americans, but under no circumstances may food be preserved. Think of the fun. Sure, our hybrid, pinkish, crossbred, Monsantified tomatoes aren’t quite as messy as they used to be, but boy do they hurt more. Anyway, this is America. We have drugs for that.

3. Public School Fire Day

Every kid wants to burn down his school, right?  (Ok, ok, besides the homeschoolers.) Well, Keynesian Public School Burning Day is their chance. It can be a teaching experience for Keynesian economics. We can invite George W. Bush, so that no child is left behind.

4. Little Rascals Day

We'll give American children a bucket of baseballs and eight hours to break as many windows as possible - a national event with no spankings, groundings, or consequences. Let them loose on cars, houses, whatever. Think of all the fun in the neighborhoods.  Red houses, blue houses, yellow houses. They could start with the White House.

5. Political Car Bashing Event

We'll have all senators and state representatives bring the cars in their household to Washington, where individuals can take free swings with a baseball bat. Call’em Porsche piñatas. With 100 senators and 435 state representatives, you’d have 1600 vehicles at a minimum. Besides economic stimulus, the electorate could let off some steam. It would be better than cash for clunkers – it would be the bash for flunkers.

6. Skyscraper Demolition

We could just take down the country the old-fashioned way, with a Marlboro and thermite.

7. Cut It Up

Afraid of cutting up credit cards, we can unleash the fiscally irresponsible on the lackluster retail sector and have them cut up, chop up, and rip up poor quality Chinese-made clothing that typically bleeds after one washing anyway. (This plan would actually be a good idea if all of the clothes manufactured for American Don Juans weren’t irrevocably produced in Dongguan).

8. The E-Party

We can develop a clay pigeon iphone app and finally give the gun-totin’ Palin-lovin’ domestic militiamen something to shoot at. We can call it the E-Party against smartphones. Actually -- this may not work. Doubtful the drug companies need more stimulus.

9. Bumper Planes

This one might not work either. I was thinking we could have some destructive fun on the tarmac with Boeings and Airbusses (ya know, to help boost the economy), but getting through security screeners would be a radiation hazard, and getting a rubdown from an agent would be worse.

10. Control-Alt-Delete Day

Now here’s one that will definitely boost the economy. We can dump the computers of air-head economists into a pool of highly fluoridated toxic tap water. Biggest splash wins!  Let's begin with Paul Krugman.

In all seriousness, how can any economist interpret the tsunami disaster as economically positive without logically supporting the controlled demolition of the United States? How would the results not equate? This is the irrationality of Keynesian models. Regardless of debt levels, inflation levels, natural disasters, inventory gluts, etc. the answer to economic problems always culminates in further spending.

There can be positives and negatives to spending. During the Reagan years, the economy was not over leveraged, so spending created a net positive for growth. But when the economy is over leveraged (including governments) like it is today, and like it is in Japan, both destruction and spending can be catastrophic.  When inflation accelerates, further spending becomes the problem and not the solution.

Many economists would laugh off my attempt at sarcasm with the top ten listed above, but inwardly their economic theories serve to justify such irrational policies, only they couch their theories under academic names.  Debt spending can work for awhile….but it cannot work forever.

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Guest Post: 2008 Financial Crisis The European Sequel

Submitted by MacroStory.com

2008 Financial Crisis The European Sequel

The European Union is facing a similar set of events as those leading up to the 2008 US financial crisis.  In 2007/08 the US economy was teetering on the brink of recession and the talk among many was that of a goldilocks soft landing. Economic data was still somewhat positive including job growth while equity markets were still holding up. The housing market was beginning to show signs of exhaustion.  Manufacturers were confronting rising input costs while consumers were paying more at the pump. The Federal Reserve introduced a new chairman who tried to calm markets with his infamous quote on March 28, 2007, "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

Today Europe is faced with a subprime crisis of their own in terms of sovereign debt.  Greece and Ireland have been bailed out and Portugal is only weeks from joining the esteemed list.  Spain and Italy are a shock event away from joining as well.  The EU also has their overconfident leadership as witnessed by the ECB Chief Economist Jurgen Stark on July 9, 2010 "The worst is over” (for Europe’s sovereign debt crisis). 

According to a 2009 BIS report EU creditors had over 1.5 trillion euros in exposure to Spain, Ireland, Portugal and Greece.  Of that amount, Germany and France accounted for 493 billion euros and 465 euros respectively. This is not a PIIGS "problem."  In reality the debtors have equal or greater negotiating power over the creditors.  TARP bailed out the insolvent banks at the expense of the taxpayer while the EFSF is bailing out the German and French banks at the expense of the PIIGS taxpayer.  The similarities don't stop though.

The EU produced positive economic data in the latter part of 2010 while the euro was trading on average 1.28 (eur/usd).  Over the past six months the euro has traded 6% higher at 1.36 which will reverse that positive trend.  The impact of a rising euro on export driven economies like Germany which have been the only real source of growth in the EU will be negative.  Rising input costs have been a worldwide phenomenon of late and the EU is not immune.  Watch for shrinking corporate profits in the near future.  The consumer is not immune either as record gas prices are now hitting the pumps across the EU.  What will the shock event be though?  In 2008 it was Lehman. 

The US was able to delay the inevitable after Bear Stearns and so did the EU with Greece.  Will Ireland be the Lehman failure that forces a massive hit to creditor and not taxpayer balance sheets?  If so it will force a similar credit contraction among various credit facilities from commercial paper, interbank lending and more as witnessed in the US in 2008.  In July 2008 oil was moving up very quickly until topping at 147 on July 14 (Bastille day, another similarity), just months before Lehman failed.  Today as the global economy faces rising oil prices, the impact on the EU are far greater with Ireland and Italy alone importing over 20% of oil from Libya.  With Libyan oil production all but shutdown, it is arguable that $147 oil has already arrived.

The US economy will not be immune to a sovereign debt crisis as the EU was not immune to the subprime crisis.  It is not a "Greek debt problem" nor is it a "Middle East problem."  The world is more connected today than ever before in history.  We have seen this movie before and as we all know the sequel is usually far worse than the original. 

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Guest Post: The Coming Rout (In Stocks, Bonds, Commodities and Precious Metals)

The following article has been contributed by market analyst and contrarian thinker Chris Martenson.

Editor’s Note: As stock markets, commodities, and precious metals heat up due to a variety of factors, including excessive quantitative easing and stimulus, Chris Martenson warns that prices may be set to collapse. For years we’ve maintained that the longer-term trend for essential goods like food, energy, gold and silver will be higher prices, as central banks the world over, starting with our very own Federal Reserve, continue to intervene in the free market by printing more and more money to stimulate and stabilize the economy. So too have we warned economic crisis and confusion lead to extreme global volatility, not just in financial markets, but geo-politics. As food costs go through the roof, oil approaches $150 a barrel, and gold reaches new historic highs, caution is called for.

If there’s one thing we should have learned over the last few years, it’s that the consensus is usually well behind the curve, and when everybody believes the same thing is going to happen (in this case, continued rising prices), the exact opposite takes place. If you own a 401k or IRA with stocks, bonds and commodities, we suggest you consider Chris Martenson’s views on what we may see in financial markets in the near term.

As we did in the summer of 2008, we may now be approaching another breaking point. And as we saw in 2008, nothing but the US dollar was spared. Does this mean you should immediately sell all of your precious metals and other safe haven assets? Chris Martenson suggests not, especially if you’ve planned to hold those asset for a long investment horizon of years as opposed to months. Nonetheless, given what has transpired so far, it is important to understand that nothing is outside the realm of possibility. We urge our readers to remain vigilant, and if Mr. Martenson is correct in his forecast, there may be yet another great opportunity for investment and preparedness, especially in precious metals, in the very near future. If the ‘S’ hits the fan within global asset prices, we shouldn’t be surprised. Rather, we should embrace the opportunity, as it may not last long, especially in investments that have historically been the assets of last resort, such as commodities and precious metals. If Mr. Martenson’s forecasted scenario were to play out, we strongly believe that governments will act immediately, in unison, and without restriction to flood the economic system with yet more monetary stimulus.

The Coming Rout
By Chris Martenson

There’s a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%.  The trigger will be the cessation of QE II and a multi-month pause before QE III.

This is a reversal in my thinking from the outright inflationary ‘buy with both hands’ bent that I have held for the past two years.  Even though it’s quite a speculative analysis at this early stage, it is a possibility that we must consider.

Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals.  The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view.

But over the next 3-6 months, I have a few specific concerns.

It’s time to build on the idea I planted in the Insider article entitled Blame the Victim (February 28, 2011) where I speculated on the idea that the Fed might be forced to end its quantitative easing programs, almost certainly because of behind-the-scenes pressure.

Here’s what I said:

How I read [the Fed's recent propaganda tour] is that the Fed is taking some heat for its inflationary policies, mainly behind closed doors, and it is trying to do what it can — with words — to soothe the situation. Perhaps China is making noises, or perhaps Brazil’s finance minister is making the phone lines feeding the Eccles building smoke ominously, or perhaps it is internal pressure coming from politicians with restless voters. Or all three.

The big risk here is that the Fed will be forced by this rising pressure to discontinue the QE program in June at the normal ending of the QE II efforts. Couple that with a possible federal showdown over the debt ceiling right at the same time, and you have the makings for a massive fireworks display, possibly involving derivative mortars bursting in air.

At the time, I speculated that all of the Fed’s pronouncements about inflation being almost nonexistent were actually signs that the Fed was taking some behind-the-scenes heat for the inflation its policies was creating.  And I worried about what would happen if the Fed were to end the QE program in June.

Let’s just say it won’t be pretty.

Everything would tank.  Stocks, bonds, and commodities.  All of the risk assets that have been unnaturally supported by a flood of liquidity, too-low interest rates, and thin-air base money would give up those ill-gotten gains.  Gold might behave a bit differently, because along with these market declines will come an enormous amount of uncertainty about the financial system itself, usually a condition for higher gold prices.  So I expect gold to correct somewhat, but not nearly as much as everything else, and it could even gain.

The story is, admittedly, getting more confusing by the week, with some calling for hyperinflation and some calling for massive, outright deflation.  I am trying to surf the probabilities and stay one step ahead of whatever curve balls are coming our way.

The basic idea is this:  The Fed has been dumping roughly $4 billion of thin-air money into the US markets each trading day since November 2010.  The markets, all of them, are higher than they would be without this money.  $4 billion per trading day is an enormous amount of money.  It’s gigantic by historical standards.  As soon as the QE program ends, the markets will have to subsist on a lot less money and liquidity, and the result is almost perfectly predictable.

Hello, downdraft.

The markets are quite substantially elevated due to the efforts of the Fed.  T, and then some, is quite likely to be rapidly eliminated as soon as the QE program has ended.

It’s really that simple.

To make the story even more difficult to follow, the Fed has been sending out teams of PR agents in an effort to guide the markets with their words.

First, on March 2, 2011 Bernanke said this:

Bernanke Signals No Rush to Tighten When Asset-Buying Ends

March 2, 2011

Federal Reserve Chairman Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.

A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy. A “sustained period of stronger job creation” is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an “extended period,” he said.

The “no rush to tighten credit” statement is a signal that the Fed will neither raise rates at the end of the QE program nor perform reverse POMOs where it reels cash back in and pushes MBS and/or Treasury paper back out.

Upon the cessation of the QE efforts, and the cessation of $4 billion a day in Treasury buying pressure, it’s a safe bet that market interest rates will rise.  Bernanke is at least on record as saying that if this happens, it won’t be because the Fed has taken the lead.

Bernanke was being a little bit sloppy in his statements, because stopping QE will serve to tighten credit simply because there will be a lot less liquidity sloshing around the system.  It’s a situation where the absence of excess is the same as the presence of tightness, if that makes any sense.

Then on March 5th, a much stronger and clearer signal was given, confirming my worries:

Fed Policy Makers Signal Abrupt End to Bond Purchases in June

March 4, 2011

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Whoa.  This is important news.  Not only a cessation of QE, but the possibility of a sudden stop is being telegraphed.  This will change everything.

The old saying ‘sell in May and go away’ might never be truer than this year, although with this sort of a warning, the cautious investor may want to get a head start on things and sell in March or April.

For some time there have been rumors that the Fed has been splitting into factions, with some of the inner team becoming increasingly uncomfortable with the QE program and its effects.  But so far they’ve either spoken in code to reveal their displeasure or quietly resigned.  So we’re pretty sure there’s an admirable level of support within the Fed for ending QE, and it has now bubbled to the surface and reached the public arena.

Of course, there’s some form of gobbledy-gook reasoning being floated to justify the plan for a sudden stop rather than a gentle wind-down, and it involves the distinction between ‘stocks and flows’ (from the same article as above):

Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.

“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”

The idea that Brian Sack, a 40-year-old economist with a PhD from MIT, is winning the day in the argument of “stocks over flows” is somewhat troubling to me.  MIT is a quantitative shop, home to some very brilliant people, but how markets will actually respond is another specialty altogether, one that requires a bit of on-the-street experience.  Markets have a bad habit of not being logical, not fitting neatly into tidy formulas, and ignoring things like ‘stocks and flows.’

I’ll go even further. I’ll take the other side of that bet and opine that the flows are much more important than the stocks, because it is the flows that support the continued budget deficits of the US government — which, it should be noted, will still be with us each and every month long after June 2011.  Those deficits are baked into the cake and will require in excess of $125 billion in new Treasury sales each and every month.

Who will buy all the Treasury bonds after the Fed steps aside?  That is unclear.  If there are not enough buyers at these artificially inflated prices, then the price will have to fall until sufficient buyers can be found.  Falling bond prices are at the other side of the financial see-saw from rising bond yields; one goes down while the other goes up, and the Fed has been pressing firmly down on yields for a while via the QE II program.  When that’s over, pressure will be reduced and yields will rise.

So what to do? For those concerned enough about this possible scenario to consider taking action, please see Part II of this article (free executive summary; paid enrollment required to access). In it, I predict the extent to which stocks, commodities, Treasury bonds and precious metals prices may be impacted in the near term.  I also detail the key indicators to look out for in order to determine if and when this scenario is unfolding - as well as recommended strategies to preserve capital during this corrective phase.

Chris Martenson is the father of three young children; author; obsessive financial observer; trained as a scientist; experienced in business; has made profound changes in his lifestyle because of what he sees coming.

As we did in the summer of 2008, we may now be approaching another breaking point.

Author: Contributing Author
Date: March 8th, 2011
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