<<*** I should have elaborated. I consider every dollar I have in stocks, other than gold miners, to be "cash", because I am able to, and prepared to, liquidate in a second. At the moment, I am about 100% "invested", but by the close today I'll be back to around 50%. It's not unusual for me to put very large sums into plays that I know will last a few days but, in order to do that, I have to have the cash handy, rather than in CD's.
for a list of a dozen juniors whose valuation I think would at least double in the next eighteen months or so. <vbg.
<<*** Do you read Adam Hamilton's (zealllc.com) newsletter? He is very much "into" the juniors. Can you, perhaps, tell me where to find your list?>> ===============================================================
That's a lot different than cash. At least the market will give you a chance if you can manage to time it in a decent manner. With cash, in time you'll be a poor man walking. <ng>
That's why I like the PM's from a long term viewpoint. I don't feel I face the need of having to properly time every move to succeed. I still try to do so however and today's buys are acting well as I write this.
G'morning PH, In my view, Auerback is one of essayists who really "gets it." If this is too lengthy for your taste, fast forward to the bolded section at the bottom.
International Perspective, by Marshall Auerback
Japan And The Us: Historical Revisionism Run Amok
Since December 2000, the dollar has depreciated by 56 percent against the euro. For all of the fuss of last week’s “strong dollar rally”, that’s probably the best gauge of the greenback’s true underlying weakness. European Central Bank authorities (most recently, ECB chief economist, Otmar Issing) have made it abundantly clear that, unlike their Asian counterparts, they do not buy into the monetary snake oil currently being peddled by the Greenspan Fed and have accordingly refused to play the currency intervention game. But for the support of the neo-mercantilist Asians, the magnitude of the dollar’s fall against the euro would likely have been replicated against a broader basket of currencies.
Still, over the past year the dollar has slipped some 13 per cent against the yen, notwithstanding the fact that the Bank of Japan spent 187 billion dollars in 2003 buying all the dollars it could. With Japan and China serving as the United States' largest financiers of its current account deficit, now running at an annual rate of over 5 percent of gross domestic product, the U.S. Treasury bills and bonds held by these foreign governments are sinking in value while at the same time American exporters are attempting to reap the benefits of a huge currency-driven advantage in world markets.
And yet the Japanese, at least, remain adamant that they are likely to perpetuate this state of affairs. Merrill Lynch economist Jesper Koll tells us that for this year Prime Minister Junichiro Koizumi's national budget has raised potential intervention firepower by 61 trillion yen or about $580 billion: “Put another way: After spending $15 billion on average every month in 2003, Japan now has the budget to spend $48 billion per month to protect its corporations from a falling dollar, and $48 billion is more than three times Japan's monthly current account surplus.”
Japan has in effect acted as America’s leading sub-underwriter. It seems to have bought into the Ameri-centric view of its past policy failings, to the extent that it did not “do enough” during its own post bubble decline. To wit, Japanese policymakers at that time acted too late and with too little in the way of monetary and fiscal policy to counter the underlying deflationary undertow present once the bubble had definitively burst.
Well, they certainly seem to be doing their bit now, but to what end?
Today’s investors are constantly given the impression that the U.S. monetary and fiscal authorities have acted swiftly to avoid the Japanese disease of deflation (in itself a very misleading characterization of Japan’s true economic condition – slow growth yes, deflation no). Eliminating the “mistakes” of Japanese monetary and fiscal authorities, goes the argument, the U.S. economy has demonstrated a far superior growth trajectory for the past four years than the Japanese economy did in aftermath of its bubble.
Having lived in Japan throughout the tail end of the late 1980s and the early part of the 1990s (the “post-bubble” economy), we have always found this historical revisionism to be self-serving and largely incorrect. Moreover, by constantly reiterating this myth about Japan’s alleged policy failures, the Federal Reserve has perpetrated a huge confidence trick on the markets, getting a free pass on a ruinous monetary policy. In reality, as Morgan Stanley China strategist Andy Xie has noted, the Fed’s “deflation fighting” strategy, “just creates new bubbles to solve the problems of the old bubbles. Its actions continue to borrow growth from the future and increase the debt to GDP ratio, while low interest rates temporarily mask the debt service burden.”
It is true that compared to the Fed, the Bank of Japan indeed acted very slowly in lowering the discount rate in the 1990s. In contrast to the US, however, Japan’s monetary authorities never sought to deny the existence of an asset bubble ex ante. By the end of 1989, newly appointed Governor Yasushi Mieno began to move aggressively to puncture the bubble, whilst openly acknowledging the central bank’s role in helping to create it in the first place.
The subsequent hesitancy on the part of Japanese monetary authorities must be viewed in the context of what was occurring in the Japanese economy during the early 1990s even after repeated rate hikes, which took the discount rate from a low of 2 per cent to 6 per cent by August 1990.
Even with these repeated hikes, the economy’s momentum persisted well into 1991: in fact, from the first quarter of 1990 to the second quarter of 1993, Japan's GDP expanded 13.8 per cent in nominal terms and 7.3 per cent in real terms (which, incidentally, is still better than the US performed over a comparable timeframe post the bursting of the high tech bubble in March 2000). Of course, by the middle of 1991 it was becoming increasingly apparent that the Bank’s monetary medicine was beginning to bite, at which point the Japanese monetary authorities did begin the process of easing. Likewise, fiscal policy became more accommodative at this time: Japan's budgetary position on a comparable basis with the United States swung from a surplus of 9 trillion yen in 1990 to a deficit of 8 trillion yen by 1993.
Could more have been done? There were sensible economic considerations underlying Japan’s apparent “timidity” in monetary policy in the early years of the post-bubble aftermath. The BOJ’s alleged hesitancy in part reflected a belief that the underlying excesses of the asset bubble had to be purged from the system before any serious attempts to cushion that impact through accommodative monetary policy could be effective.
This is a crucial distinction between the US and Japanese experience. BOJ authorities believed that it would be difficult to deploy monetary policy aggressively to alleviate the deleterious effects of an asset bubble bursting without first allowing some degree of cleansing, reliquefication and balance sheet repair. Consequently, the Japanese central bank was loath to reduce rates too aggressively before being certain that its medicine had begun to do the trick. This helps to explain why it was only in the sixth year of the 1990s, in April 1995, when the discount rate finally fell to 1.00 percent. At the same time, from a fiscal perspective, the total swing of 17 trillion yen in the budgetary position from 1990 to 1993 amounting to only 3.5 per cent of GDP in 1993.
True, Japan today remains mired in slow growth, a rising problem of non-performing loans in the banking system, and deteriorating public finances. And we must also concede that a premature “reform” of the nation’s tax system, the centerpiece of which was a misconceived consumption tax increase in the throes of a recession, exacerbated Japan’s economic plight. But Japan’s tax system does suffer from longstanding structural problems. With over 25 per cent of revenues derived from corporate taxation, the tax take tends to be very pro-cyclical (finances were well in surplus throughout the bubble period), which means that revenues have tended to drop disproportionately during economic downturns, thereby minimizing fiscal flexibility. The consumption tax increase should be seen in the context of an attempt to broaden the tax base as a means of preventing further substantial deterioration of public finances. The timing may have been unfortunate, but the underlying goal was not, particularly when contrasted to the comparative insouciance of American policy makers today in regard to their own public finances (“deficits don’t matter”).
In addition, the subsequent exogenous shock stemming from the Asian financial crisis in 1997/98, which set the economy on its third downward spiral, can hardly be laid at the feet of Tokyo’s policy makers, who did respond with substantial monetary easing in its aftermath. Imagine a comparable shock of that magnitude in Canada, Mexico and Latin America and consider the impact it might have had on American growth.
By contrast, the Fed decided not to tackle the 1990s stock bubble with higher interest rates, instead preferring to mop up the after-effects with a massive jolt of 13 rate cuts -- a strategy Greenspan declared “successful” last month in a burst of self-congratulation that appears premature, to say the least. For one thing, the recession process has remained incomplete in the US. In all of the years post the high tech bubble collapse, for example, consumer cyclical spending growth never fell negative, housing prices never corrected, equity market multiples never fell below long term averages, the trade deficit never returned to balance, and perhaps most important of all, private sector balance sheets never got cleaned up. Debt levels are still exorbitant, as a result of which, the Fed has ended up “with an economy addicted to rock-bottom nominal interest rates,” according to Stephen Roach, chief economist at Morgan Stanley.
Moreover, the country’s deepening trade deficit has confounded the ability of fiscal deficit spending to push the private sector back into a net saving position. That means fiscal policy has had to go alarmingly deep into deficit spending to prevent a private income growth collapse. This is inherently unstable: the rate at which foreign debt has been accumulating is such as to generate a further, accelerating, flow of interest payments out of the country, which might necessitate even larger budget deficits in subsequent years.
In spite of these grave threats to future prosperity, the pervasive belief remains that the Fed has been far more “successful” than Japan in terms of dealing with the aftereffects of its own bubble, the existence of which Mr Greenspan steadfastly refused to acknowledge even as it was growing in magnitude (which in itself is a very telling contrast to Tokyo’s monetary authorities). The Fed has led the charge that Japan could have “done more”, as its US counterparts appear to be doing today and there have been a series of Fed working papers, which have continued to peddle this line, most recently a December 2003 paper by economist, Athanasios Orphanides, “Monetary Policy in Deflation: The Liquidity Trap in History and Practice”. This paper in particular implicitly criticized Japanese monetary officials for being inordinately preoccupied with “a pre-emptive strike against the perception of potential inflation”, rather than dealing properly with the ongoing deflationary pressures brought about by the bubble’s collapse.
But the BOJ’s fears on this point have not been totally irrational, as AIG economist Bernard Connolly has noted. For years, the BOJ has used the metaphor of a man in a cold room who hopes to warm the room up. He douses all of the soft furnishings with paraffin. The room is no warmer. So he sloshes around another can. Still no response. Then someone walks into the room and a match. Result: uncontrollable conflagration, particularly in the JGB market. Monetary balances are exceedingly high today, given the massive increases in liquidity created by currency intervention in favour of the dollar. Given a rapid change in velocity, there is a real risk of hyperinflation (as extraordinary as that seems), a danger to which the reflationist camp appears oblivious, particularly in terms of its global knock-on effects. And the impact on Japan’s ageing population of savers could be considerable if a substantial double digit inflation were established.
It is similarly hard to see how much further Japan can push the fiscal lever. To acknowledge this is not to claim that fiscal policy is invariably ineffective: as Adam Posen has emphasized, fiscal expansion has pushed up Japanese growth when tried. But how much fiscal expansion could the Japanese government afford? Current projections already suggest that Japan may be heading for some awesome deficits - say 10 per cent of GDP next fiscal year - with no end to the need for fiscal stimulus in sight. Given that Japan is already in far worse fiscal shape than almost any G-7 country - not just current deficit, but debt to GDP ratio and hidden liabilities arising from an aging population, the need for bank and corporate bailouts, etc., one has to wonder whether the fiscal pump can be primed any further.
As far as “help” from abroad, Washington’s advice to Tokyo has largely been self-serving and highly contradictory. As former Presidential chief economic advisor Lawrence Lindsey noted some 3 years ago (in a rare burst of honesty from American policy makers): “Not only has the American rhetoric been harsh, but the signals being sent are confusing. For example, the U.S. Treasury has been fond of telling Japan that the path to economic growth is in ever expanding fiscal deficits. At the same time, the U.S. Treasury has been claiming here at home that our economic growth has been caused by ever contracting fiscal deficits. Which is it? At the very least, one might suspect that Treasury officials are not expounding some universal economic truth, but rather are applying, ad hoc, a relationship between two variables based on political necessity, not economic logic.” Symptomatic of this inconsistency, when Japan has moved to reflate aggressively on the monetary front, an inevitable by-product has been a weakening yen, warnings from Washington for Tokyo not to export its way out of economic crisis have grown louder in volume.
By contrast, Washington has shown no compunction about using currency depreciation as a means of boosting growth. Similarly, Fed has wasted no time in firing off its monetary silver bullets. In January 2001, only a year after the stock market began its steep slide, the Fed started cutting the federal funds rate from a high of 6.50 percent down to 1.00 percent by June 2003. In two and a half years, the federal funds rate fell by 5.50 percent to 1.00 percent, where it has remained.
A dollar decline may very well be necessary to restore some sense of equilibrium to the American economy. But if Japan needs further monetary loosening, as Washington has persistently advocated, does that not mean that the yen too should depreciate, not appreciate? How does one get out of this stalemate? (Indeed, as Bernard Connolly wryly observes, “there is a risk of a housing collapse not only in the US but also in Britain and Australia – and if that happens, sterling and AUD are likely to depreciate, too.”) The dollar still needs to depreciate a lot, but is going to find counterparts hard to come by.
Similarly, the U.S. fiscal authorities appear to have acted more swiftly and forcefully than their Japanese counterparts in the comparable period after the bursting of the stock bubbles. The American budget balance (federal, state and local) has swung from a surplus of $268.7 billion in the first quarter of 2000 to a deficit of about $500 billion in the fourth quarter of 2003. For the past four years, the total swing in the budgetary position has amounted to more than $760 billion, or 6.8 percent of gross domestic product in the final quarter of 2003. One certainly never hears Washington celebrating the virtues of ever contracting fiscal deficits any longer.
And yet, despite the massive doses of monetary and fiscal medicine, US growth has not been as impressive as the U.S. policymakers would have us believe. During the first quarter of 2000 to the second quarter of 2003, America's GDP grew only 12.6 percent in nominal terms and 6.1 percent in real terms. In the early part of this period, the U.S. economy indeed lagged far behind the Japanese economy. Only in the second half of the fourth year after the stock market rebound did the U.S. economy begin-and then only marginally-to outperform the Japanese economy.
Defenders of the Greenspan Fed would probably argue that last year’s recovery has vindicated their approach. The problem is that the U.S. economy has already used up an even larger dose of monetary and fiscal medicine over the past four years than the Japanese economy did during the first seven years of the 1990s, and growth appears to be slowing again. Yet ever greater quantities of debt injection are required to sustain it.
In contrast to Japan, the U.S. economy cannot finance its economic expansion with its own internal resources, as has been exemplified by the ballooning current account deficit. The cumulative surpluses in Japan help to explain why there is persistent upward bias in the yen/dollar exchange rate, only alleviated to a limited extent by Japan’s extraordinary currency interventions, which the markets continue to perversely applaud even as it becomes more and more destabilizing.
And now that Tokyo appears to be playing ball with Washington, both seem to be locked into some mutual economic suicide pact (whilst the ECB stands on the sidelines, watching the whole scenario unfold with growing unease). Tokyo’s finances are beginning to resemble that of a Latin American country, with Washington rapidly catching up.
In the interim, the trans-Pacific trade imbalance has tipped further, resulting in the buildup of massive countervailing forces which will likely be unleashed later in the form of a further precipitous fall in the dollar. Furthermore, counting on the seemingly insatiable appetite of the American customer, the allocation of economic resources in the Japanese and other Asian economies appears to have been distorted to a larger extent than before.
By playing along like an American colony, Japan and the other Asian nations appear to be behaving like innocent merchants willing to sell on credit as much as their customers want. But at some point, either the creditors insist on proper payment for their large and growing I.O.U.’s, or the debtor simply declares, “No mas”, as Argentina has done, and the creditors are left with the prospect of huge write-downs. In such circumstances, credit will be harder to come by in the future, which bodes ominously for dollar assets.
At that point, the real consequences of this unhealthy symbiotic relationship will come home to roost. After all, when market commentators discuss the problems of the American twin deficits, what they really mean is that the sheer size of these deficits prevents any future short run policy stimulus-induced strength in US domestic demand from being sustainable over the medium to longer term. But if that is the case, logically it follows that one cannot be optimistic about the prospects for economies, like Japan, which remain dependent on exports to sustain growth, notably to the US. Which means less credit for the world’s largest debtor. How, then, does one resolve these awkward questions about exit strategies? Persisting in self-serving historical revisionism is clearly not an answer.
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