Lance

Buying Gold to Keep Up with Inflation

The bad news for equities is probably bad news for gold as well.

The Fed is not entirely stupid, and it realizes that the excess money creation has to be reversed as soon as economic conditions allow. They will probably act sooner than the equity market will prefer, and that may keep demand well at bay, which would not promise any return for gold investors either.

Inflation really takes off from a *combination* of money creation and strong goods demand. We'll have to wait for the latter to really materialize before we can understand Fed strategy, and if it is in front of or behind the curve. But we may have a while to wait for demand to develop to a point that it begins to push inflation. And without serious demand: no serious inflation.

Hamstringing U.S. Banks Is Not the Answer

"...Japanese shareholders have been given a bigger voice in how the banks are run..."

I didn't realize this is version of The Daily Show, and that you are apparently a Jon Stewart impersonator.

Have you ever *been* to Japan? Can you speak Japanese? Have you ever owned a Japanese bank share, and have you ever tried to influence Japanese management by virtue of such ownership?

Do tell us how it turned out.

Big is not beautiful, when big endangers the entire economy through ignorance and greed. There is absolutely a threshold beyond which a bank becomes big enough to be a systemic risk. For some time to come, if a bank crosses that threshold, it's not going to be free to do whatever it wants. One person's "hamstringing" is another person's common sense.

Japanese Don't Think the U.S. Crisis Is So Bad

Consumer sentiment will rebound when employment, and more importantly, real wages, rebounds.

Apparently, you haven't paid much attention to Japanese wages over the past decade. Here's a tip: They ain't what they used to be. So it's no wonder that consumer sentiment is now "high" when it rebounds to around 50 percent.

I think all you are seeing in the consumer confidence "rebound" is a sort of second derivative. Everyone is pleased that the system didn't completely melt down. That doesn't mean they are about to go on a spending spree.

If you think Japanese consumers are going to pick up the slack for Americans, you're betting on the wrong horse. It just is not going to happen. Able-bodied adults are now stuffing mailboxes with circulars in Japan. Yeah, they have a job, so to speak. No, they aren't going to be replacing their flat screens.

Is Japan's Government Doing Enough to Help the Economy?

As for the dollar-yen cross: It's patently obvious that the BoJ is not reacting at these levels -- in fact it hasn't intervened in about six years -- because it knows it would be fighting a losing battle. To be sure, these are levels that used to draw massive intervention. But with the US dollar destined to lose value, drawing a line in the sand here would be folly. (And Mrs. Watenabe, who is using 200:1 leverage betting that the yen is going back to 110 or so, has another think coming.)

Rate cuts? How low can you go?

What Japan needs to do is to foster a culture in which people want to have children. As long as world economics rests on the principle of non-stop population growth, there is no other "fix" for Japanese society.

All this said, I don't see your proposals in the article. Zero. The BoJ and government should "do something". Well, exactly what, I might ask.

Outlook for Japanese Stocks: A Rising Sun

I should get excited about Japanese shares in general because DoCoMo is buying a majority stake in a business that they seem to have absolutely little or no experience in? A business seemingly well outside the boundaries of its traditional business? A business that seems to have done well last year marketing a workout DVD?

While it does suggest the DoCoMo had some chump change (~300 million dollars) burning a hole it its pocket, it also suggests that DoCoMo believes that its own business is not where it should be investing money right now. Generally, to me, this is not a "The Sun Is Rising" kind of signal.

I think you need to pay more attention to employment in Japan. Right now, pretty much no one feels secure about his or her job. Until that changes, the economy is not going to show much life.

And Seven & I Holdings is not really what I would call an exporter, either.

Japan's Nikkei: Black Hole or Buying Opportunity?

I cannot imagine what it will take to spur domestic consumption here in Japan. Not only is job stability quite precarious right now, but people who still have their jobs know that with even the hint of a recovery, the consumption tax is going to probably double. Pent-up demand and a desire to beat such a hike might trigger a temporary rally in consumption, but I have a hard time imagining that any rally would be durable.

So unable and/or unwilling to fix itself, Japan will wait for the rest of the world to heal and hope for the best. It might be a long wait.

One possible ray of hope for Japanese exporters: The government could simply decide to put the consumption tax hike off for longer than prudent (seemingly plausible excuses for that would be easy to manufacture), and thus trigger a yen slide. "No, we haven't intervened in the currency markets." "Well, not directly, anyway."

Will This Be Japan's Longest Running Recession?

As long as your income isn't declining. Of course that is exactly the problem for a large number of people. Did anyone catch the IBM "PET bottle toss" on NHK this morning? Middle-aged IBM full-timers are being given the choice between resignation (severance pay) and being axed (no severance). The situation calmed down only after the manager threatened to call security.

I've been here since 1993. One small subway fare hike down here in Tokyo since then. When I arrived, I estimated "middle class" salaries at around 7 to 8 million yen. It's significantly lower than that now. I recently saw an article that said 38 percent of Japanese wage earners now make less than 3 million yen a year. Three million yen is the level at which companies that sponsor working visa applicants need to guarantee salaries (i.e. English teachers). So nearly 40 percent of Japanese would now be working for less than the salary of a typical English teacher.

Will This Be Japan's Longest Running Recession?

It's very funny to be severely worried about inflation in July, only to become severely worried about deflation by Thanksgiving, isn't it?

Should Japan Investors Welcome the Return of Inflation?

CLH: Inflation is certainly apparent in Japan -- I live here, and I can tell you that for the first time in a decade and a half prices are rising.

And yes, as the article implies, it's cost-push inflation, not the best kind.

But as is typical with many phenomena in equity markets, the inflation is likely to be harmful in some cases, potentially helpful in others. Manufacturers will have to weigh resistance to price hikes. There very well might be enough resistance to hurt. But if the inflation is bothersome enough to manufacturers, the BoJ may have to respond, and that could make Japanese banks look even cheaper than they already do as spreads might widen.

Disclosure: Long Japanese banks since winter and loving it.

Nikkei Weekly Outlook: Eye on I-banks, Inflation and the Yen

Hello Steven,

We've also got 63.3 percent of the issues in the TSE 1st section trading above their 10-week MAs. That number reached a rather eye-catching 84.4 percent in mid May, and it's been stubbornly high since then, even with the recent pullback. Either the market is embarking on a serious trend higher, which I would tend to doubt, or that number needs to come down below 50 percent, perhaps to 40 or just below, where I would expect safer buying.

I continue to like Sumitomo Trust, and full disclosure: I have a position. At below 850 (closed up 29 at 852 today), it yields more than 2 percent, and the dividend is solid. Actually, some of the banks here are still trading at undeserved discounts, IMHO. Indeed, Wall Street will either erase some of those discounts or pad them this week. But I continue to buy on bouts of weakness. The systemic risk seems to be over there (stateside), not over here.

Japanese Market Awakening from Its Long Slumber?

Lies, damned lies, and statistics.

Sure, Japan is outperforming in the short time frame of less than 90 days. Yes, Japan is up from the March lows ~20 percent versus ~10 percent for the US.

But one would assume that you are aware that Japan bottomed nearly a full 35 percent (!) off its 2007 highs, whereas the US bottomed roughly 19 percent off its 2007 highs.

So the US currently stands (basis the S&P 500) about 11 or 12 percent off its 2007 highs, while Japan's Nikkei 225 still remains, after this 20 percent rally, about 21 percent below its 2007 highs. Yes, Virgina, it takes more of a percentage gain to get back the larger percentage loss, and Japan is still hanging on to a dandy loss from last year. In fact, Japan is still farther down from it's 2007 highs than the S&P 500 was at the apparent *bottom* of its swoon on March 17.

Now tell me who is outperforming whom in, say, the past 11 months.

Note: The TOPIX is running about 3 percent better than the Nikkei, but both Japanese indices languish much lower compared to their 2007 highs than the S&P 500. An equivalent S&P 500 loss from the 2007 highs would have taken that index down to somewhere just above 1,000. So far, it's never gotten close.

Bespoke's Country Snapshot (5/6/08)

Japan in a "perpetual downtrend"? I guess perpetual would be since the end of last July, then. Prior to the end of last July, Japan spent nearly a year in an uptrend coming off the mid-year '06 worldwide equity snap-correction. Prior to that '06 correction, Japan had risen about 40 percent in the previous 12 months. So, no, hardly "perpetual" at all. While Japan has certainly lagged in some time frames (like the past 18 years as a time frame), it has not been, particularly recently, a perpetual laggard. It just seems that way to some people, especially to those who don't time the market very well.

If Not Now, When Mr. Bernanke?

If the Fed has to react to every market correction, then something is wrong with the market. If the market is going to "crash" unless the Fed acts, then something was already wrong with the market.

Maybe they want to do something. But maybe they want to do something at a time when the market isn't going to drive over them like cheap roadkill 5 minutes after they do it. You get more bang for your buck by picking your shots carefully. It's also very doubtful that the situation is that dire, except perhaps to people who thought S&P 1550 five years into a bull market was a good place to hop on board.

I'd like to see this panic extended a few days so I can buy some values. I don't need a 5 percent Fed-induced burp that will fade like last summer's suntan, thanks.

Why I'm Not 100% Convinced That We've Entered A Bear Market

First, even if we are in a bear market, they are notoriously difficult to play. Slow slides followed by short covering rallies that will make your head swim.

I think you've made some good points, and considered this from several angles. The way I would play this if I was in US equities is pretty straightforward. I'd be oscillating between zero and about 50 percent long, as apparent buying opportunities presented themselves. I would hold the other 50 percent in reserve for the 25 to 35 percent pullback, which may never come, but which is much more likely under the current circumstances than it was before. I think if you go 100 percent long here, at any point near term, you risk getting trapped.

I agree, there is no bubble waiting to be popped. The downside is very, very unlikely to be 50 percent, or 70 percent. But the downside is certainly 20 to 30 percent possibly. Thirty percent off S&P 500 at 1500 is way, way down there at about 1,050. Even 20 percent puts it at about 1200. Anybody willing to have 100 percent get trapped like that? Anybody think it can't happen?

Try 120-dollar oil for starters. Try and imagine what earnings might be like in the next two "earnings seasons".

P/Es are reasonable? Sure, but not cheap. I go back to when they have slumped to 12, or even 10. It happens.

The game is rigged to the upside, and anyone who doesn't realize that is not too clever. But from time to time there is substantial downside risk. This next 6 to 12 months is one of those times, I think. Keep an oar in the water if you must, but don't get sucked in. There are times, not often, but I think this is one of them, that call for more substantial cash reserves than normal. I want to buy at 1100 or 1200. It will take cash. I will have some.

Big Mac Index Supports Japanese Bullishness

I keep hearing this drumbeat ... Japan has underperformed ... Japan has underperformed.

On June 1, 2005, the Nikkei 225 closed at about 11,350. On June 1 two years later it closed at 17,958. In case anyone is math challenged, that's a gain of about FIFTY-EIGHT PERCENT in two years. Mean reversion, you say???

Sure, most of the gain came in late 2005. So what? That kind of performance cannot continue forever. This is a market that has more than doubled since the spring of 2003. Yes, it was a depressed low, yada, yada, yada.

Moreover, Japan is now trading at better than 20x earnings by most estimates. Can it go higher? Sure. Can stocks in a mature economy with a potential growth rate of around 2 percent and a declining, aging population also go lower from here? You better believe it. Japanese stocks are presently priced for a continuation of good news. Anyone getting real greedy here may manage 10 percent before the end of the year, or may get a 10 percent haircut.

In case anyone hasn't noticed, this place is not exactly shareholder heaven. The cash yield is barely 1 percent, and managers will use equity warrants like artillery to keep it there.

A POSSIBLE currency play exists with EWJ and dollars, but there is absolutely no guarantee that the yen must rise appreciably from here against the dollar, an no guarantee that it won't be 130 by next year either.

I converted my first US dollars to Japanese yen in the winter of 1992-1993. I still remember getting 121 yen to the buck. Sure, the exchange rate has seen some wild gyrations since then, but look where we are today. Machinery orders were an upside surprise today; the market was up about six-tenths; virtually everyone is pricing in a BoJ rate hike next month. The yen sank nonetheless.

Whenever there is a severe economic disruption, or merely the threat of one, what currency does everyone flock to? The yen?

The BoJ is also likely to be VERY gradual in raising rates, particularly once the sales tax issue re-surfaces after the election. (It's a political IED that nobody wants to get anywhere close to until the election is over.) If commodities keep going higher, the Fed is likely to maintain the rate differential anyway. Then it gets real ugly anyway, as it is bound to get sooner or later.

Like I said, this place (Tokyo) is priced for only good outcomes, with few or no bumps in the road. I'm happy to entertain less risk here at the moment than I was willing to entertain a few years ago.