Jess,
**mostly OT - Asian/Japan stuff**
On a quiet Saturday morning with a little time to think through the events of the week, I have new found optimism for the situation in Japan. Unfortunately, this almost directly resulted in pessimism of equal proportions for the US market.
Japan's problem started with a case of having too much money and no where to put it. As a result, the natural pressure of supply and demand forced the money into unsound loans and investments. Do you remember the joke of the late 80s? ".... Japan should not have invaded Hawaii. They could have just waited 40 years and buy it..."
That trail of highly inflated purchases and bad loans are finally coming back to haunt them. Japan, typical of many investors, deployed a wait-it-out strategy. It has not worked. There is still no need for Japan to panic. In fact, the countries that are panicking are the debtor nations, including the US. These nations are like junkies hooked on the infusion of capital from Japan to finance growth and are desperately looking for the next fix.
Japan does NOT have a problem. Why? They have the money. They don't need the US, the IMF, the World Bank, G7 or anyone.
After the RTC was formed by Congress in 1987(?), informercials pushing seminars on how to buy properties pennies on the dollar were popping up everywhere. In the end, the major benefactors of this government give away program are Goldman Sachs, Bass brothers, GE Capital, Bears Stearns and other big boys. Some bought real estate dirt cheap while others picked up loan portfolios at severe discounts. The taxpayers, obviously, were the ones who ended up footing the bill.
The Japanese are not going to allow the foreign devils to infiltrate their domain by buying up the prime stuff on their home turf.
Japan owns the Japanese people. Other nations exist for the benefit of Japan. Think of Japan as an ant colony. US is the nice strong tree on which they farm the aphides - the Asian debtor nations. Though symbiotic, it is the ants who run the show. Any change of order is unacceptable. For the US to think that they can penetrate the financial system and have a direct link to the Japanese people is a pipe dream. I am willing to bet that when the dust settles, there will still be no Bank of America/Tokyo or LTCB/CitiBank type mergers. It is perfectly fine, to Japan, for Japanese banks to buy up US banks but the reverse? I don't think so.
To solve the banking and bad debt problem in Japan, all they have to do is set up their version of the RTC. The government, which has plenty of money, simply takes all bad debts of every institution at book value. The assets are steeply discounted and written down to current value. All deficiencies are booked as loans to these institution, to be repaid when times are better. The US did something like this for a company called Crysler and worked out fantastically.
This wipes the slate clean for the banks so they can resume business as usual. The only difference is the government became the largest shareholder. Instead of dumping immediately, they just hold them as long term "investments".
As for all the foreign debts, the Japanese government can choose from a menu of proven strategies. For the weakest borrowers, since they have no chance in collecting anyway, they can afford to be generous and write off the loans entirely in exchange for some future goodwill. Forbearance agreements, term extensions, novations, roll overs and out right purchases of assets in default are all possible. This will immediately stabilize the situation and get the aphides producing again.
The same will apply to all debt to domestic corporations, only at more lenient terms.
As for real estate, just hold them. When the cost of funds for the government is negligible, it is virtually impossible for these assets not to be cash flow positive. Then just do what the Japanese do best, patiently wait it out.
How much does this package cost? I wonder if anyone knows the answer to this question, including the Japanese MOF. The number $500 billion had floated around but I suspect it may be more. In either case, I opine that Japan has enough money no matter what the number turns out to be.
How is Japan going to finance it?
1) they don't need to cut corporate taxes since the package is already a corporate welfare package far above and beyond any tax cut.
2) they don't need to cut individual taxes because there were never any lack of consumption power, just will. A stable economy will bring back the will.
3) they can finance it by tapping into their reserves.
4) they can bring foreign investments home.
5) they can float bonds.
6) they can do all of the above.
When you have the money, no problem is too big. Why hasn't Japan solved the problem if it is so easy? Aside from the standard cronyism, fundamental flaws within the system, etc, I think, Jess, you hit the nail on the head a few weeks ago. The political leadership in Japan lacks seasoned economists who are opened minded enough to confront the issues with the good old boys.
Why is all this potential bad for the US market? In the long run, I think it is going to be excellent. Short term, the market trend is still dictated by the inflow/outflow of funds. The US market has benefited not only from baby boomers but also from Asia's flight to quality during the past 10 months. The only estimate I ever saw was around $700 billion from Asia since the contagion began. This is far in excess of the average contribution of the baby boomers. If these funds start exiting the US markets, the force of supply and demand may exacerbate the fact that earnings are already insufficient to support the current prices.
I can't finish this post without some comments on the semi-eq sector. The Asian flu is over for this sector. This bigger problem is over supply. When I first started investing in this sector back in 1995, I remember reading about new fabs being planned every other day in all corners of the world. I lost count when the number was over 200. Needless to say, a more knowledgeable semi industry expert would have known that is impossible. Most of these projects were eventually pushed out, cancelled or simply never heard from again. At the moment, based on the recent reports, we are not even close to using up the existing capacity. Where is the incentive going to come from to start a new round of fabs?
I assume there will be some news from Japan which will give the global market a bounce within the next few weeks. At the moment, I think I will increase my cash position and wait for better buying opportunities, possibly later this yr.
Comments?
Ramsey |
