Turning Japanese

I think I’m turning Japanese

I think I’m turning Japanese

I really think so

The Vapors

“Japanese government warns of low growth and pain,” says a headline in the Financial Times. There is no need to read the article. A busy man can turn the page, confident that he is not missing a thing.

The news from Japan has not changed since George Bush, pere, threw up on Prime Minister Miyazawa 10 years ago – it has been nothing but bad. The Nikkei Dow tells the tale. Nearly 40,000 at the end of 1989, the index stands today at 12,896.

What is the matter with Japan? Have they no central bank?

Yes, they do. If anything, the Bank of Japan is even more central to the Japanese economy than the Federal Reserve system. Then, what is the matter with their central banker? Why can’t Mr. Masaru Hayami accomplish the feats of economic management that are credited to his counterpart in America, Mr. Alan Greenspan?

There are many explanations. Any competent editorial page editor will tell you that the Japanese have ‘failed to restructure’ their economy. Perhaps he has some idea what he means by that, but it is unlikely. Typically, ‘restructuring’ only comes up when the conventional methods – monetary and fiscal policy – have failed.

The Japanese cut interest rates…and kept cutting until they were giving away money. Interest rates have been ‘effectively zero,’ as the Financial Times put it, for many years. Nor did they let good sense stand in the way of fiscal policy. They spent money from the public till to such a point that they now have, proportionally, the world’s largest government debt.

Despite these efforts, Japanese consumers resisted the lure of low interest rates. Instead of spending, they have saved. “The Fed’s number one objective,” to repeat James Stack’s comment from above, “is to prevent a Japan-style scenario.”

But how will it do so? Lower interest rates did not work in Japan, why would they work here? Perhaps they will not.

Business profits, it is reported in this week’s Barron’s, fell 17% in the second quarter, over the same period a year ago. Why are business profits falling, when consumers are still “hanging in there?”

The answer is that capital spending has collapsed. When a company builds a new plant, it does not take the cost as a current business expense. Instead, it is entered onto the capital account and deducted over a period of years.

But the company that sells, installs, and services the capital equipment takes the money it receives as current income – so its profits go up. Over the entire economy, capital spending has the effect of raising sales figures, with no offsetting cost in the current year. The result: profits go up overall. “Net investment is typically the business sector’s most important single profit source,” says Dr. Kurt Richebacher.

There is a parallel in the consumer area. Employees’ salaries are a cost to employers. But, then, employees use the money to buy goods and services – so it comes back to the employers. But businesses get a real boost when consumers spend money that didn’t come from salary checks. This is what happens when new credit is made available or when people take money out of savings and spend it. Consumers spend money that employers do not have to take as a salary expense. The net result: higher corporate profits.

“Within just two years,” writes Dr. Richebacher, explaining America’s financial boom of the late ’90s, “consumer dissaving poured almost $300 billion into the economy…the absolutely dominating influence on the U.S. economy… The consumer’s dissaving binge of 1999- 2000 became the business sector’s profit bonanza during those years.”

The problem with dissaving is that you can’t do it for long. Pretty soon, you have no more savings to dis. Then, you have to start saving again – whether you want to or not. The virtue of spending more than you can afford becomes the vice of financial prudence: businesses pay out wages, but the money doesn’t come back in sales. If consumers begin acting, ever so slightly, like the Japanese, business profits will fall even further.

This danger is compounded by the fact that the baby boomers are approaching retirement age – or at least the age when they begin taking retirement seriously. Suppose they decide to save just a little bit of their earnings? Suppose they decide that they are getting a little too close to retirement age to risk all of their savings in the stock market?

Welcome to Hiroshima, mon amour.

Your correspondent, going for out for some sushi…

Bill Bonner
Paris, France
June 25, 2001

*** “Inflation? We don’t see any inflation,” say bond investors. Long bonds rose last week, with the yield on 10-year Treasury notes falling to 5.12% on Friday.

*** The National Bureau of Economic Research says we may already be in recession. Even if they don’t lose their jobs, people tend to earn less money in a recession: they get smaller bonuses and less over-time pay.

*** But Treasury Secretary, Paul O’Neill, is not concerned. He says we are entering a “golden age” of prosperity…thanks to the heroic efforts of consumers, who are ‘hanging in there’…spending rates are quite good.”

*** Consumers do not lack the will…it is the means that may get away from them. “A startling new study,” done by MGIC Capital Markets Group and reported here in the words of the San Jose Mercury News, says “American homeowners are in the process of rewriting the traditional rules of refinancing: rather than getting a new mortgage at a lower interest rate, they are taking out larger loans at rates slightly higher than what they were paying before.

*** “After a statistical analysis of recent refinance transactions in a 14 million-loan national database,” the article continues, “mortgage market researchers report that the average borrowers in the current refi boom took out loans $41,000 larger and at an interest rate 0.6 of a percentage point higher than they had prior to the refinance.”

*** Why would people do that? Because they have credit card debt and other debts that at even higher rates! And it’s getting harder and harder to pay them.

Eric, what’s the news from Wall Street?


– Last Friday was a day for taking some chips off the table while waiting for the next hand of Greenspan deals. He and the other honchos on the Federal Open Market Committee will convene next Wednesday to decide how much to cut short-term interest rates.

– The Dow and the Nasdaq each fell about 1% – the Dow dropping 111 points and the Nasdaq 24.

– Contributing to the skittish tone in the stock market were reports of weakness from two sectors that had been bastions of relative strength – pharmaceuticals and retailers.

– Merck shares lost $6.67 to $67.80 after the third- largest drug maker warned that its second-quarter earnings might be a few pennies per-share less than expected.

– Meanwhile, shares of The Gap Inc. fell almost 9%, when the No. 1 U.S. apparel chain announced it would slash more than 500 jobs from its 10,000-strong workforce.

– Both Merck and Gap belong to the select minority of big-cap stocks that have posted gains over the last 12 months. If the grim tidings that have become routine in the technology sector fan out into the economy at large, Mr. Market will become inconsolable.

– “At this fragile point,” says James B. Stack, editor of Investment Research, “monetary policy has truly turned into a job of bubble management. And the Fed’s number one objective is to prevent a Japan-style (deflationary) scenario.” [More on this below…]

– Surely Greenspan will prescribe his interest rate tonic in sufficient doses to cure our ailing economy. But will the patient take the cure?

– International Strategy & Investment (ISI) points out that despite a blistering money supply growth rate that features MZM (money of zero maturity) zooming ahead at an annualized 23% pace, credit creation is actually heading into reverse – a 4% rate of decline. “In the past, the two have moved together, in sharp contrast to their current divergence.”

– “Bottom line,” says ISI, “the U.S. economy is still weakening… The good news is the rate of slowdown has slowed significantly.”

– “In the past two years, 100 million miles of optical fiber – enough to reach the sun – were laid around the world as companies spent $35 billion to build Internet- inspired communications networks,” the New York Times reports. After spending all that money, the world has a lot more fiber-optic cable in the ground and then it knows what to do with.

– How much is $35 billion anyway? Well, for one thing, it is slightly larger than the total value of all the world’s gold mining company stocks. Maybe these companies should be worth a lot more money. Or maybe, the world has a lot more gold in the ground that it knows what to do with.

– Then again, if the dollar should suffer an extended decline, somebody, somewhere might find a worthwhile use for all that yellow metal. My friend, gold-stock analyst and broker, Michael Martin, told me on Friday, “I know ‘they’ don’t ring a bell at the bottom, but I am. You need to own a few gold stocks right now. The Fed’s going to cut rates again this week, Greenspan says he sees no threat of inflation and the dollar is starting to weaken… Owning a gold stock or two is not a bad idea.”


*** Total derivative positions currently exceed US$95 trillion, according to the Bank for International Settlements (BIS)… World GDP is only estimated to be US$30 trillion.

*** DR Blue Teamer Marc Faber: “Every major invention or innovation leads first to a boom, then inevitably to speculative excesses and a vicious downturn for the revolutionary new sector. But why should this well- established pattern only apply to industrial and tech inventions and not also to financial innovations? Given the complacency and the intellect of the central bankers, it is a question of when – and not if.”

*** “The glitzy Emerald Coast of Sardinia,” writes International Living’s Steenie Harvey, “is the summertime domain of the rich and famous…Italian millionaires and movie stars…but property is still cheap: a small apartment in a restored building in Alghero’s centro storico (historic center) listed for 95 million lire ($42,000). Out at the Alghero Lido, prices start at 52 million lire ($23,000).”

*** What else? A group of International Living readers has come to Paris to enjoy the epicurean delights of the city. And just in time. Paris is sweltering. The temperature must be in the low 80s. Few places have air- conditioning. So, people leave their windows wide open at night – and Paris’s famous ‘cat burglars’ take advantage of it.

*** No, they don’t steal pets. But they sneak up onto the roof and then use ropes to lower themselves onto balconies or in through open windows. Obviously, they do not steal pianos this way either. Instead, they target the apartments of wealthy women and take their jewelry and small works of art – often cutting paintings out of the frame and rolling them up in order to make off with them.

*** On Saturday night, the people who live in the top floor of our apartment building heard footsteps on the roof. They took a camera out onto the balcony and managed to get a photo of the prowlers – which they turned over to police.