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Friday, June 14, 2013

Marc Faber Blog: JAPAN Another Nauru? -The Japanese Stocks made a generational low in 2012 and won't go below that

Marc Faber Blog: JAPAN Another Nauru? -The Japanese Stocks made a generational low in 2012 and won't go below that

  • To begin with, no one can predict when markets will make their generational lows or highs. However, when you hide behind the adjectival nown "generational"  you sort of get away with it. Clever linguistics? In reality, in the next 20 to 30 years the writing is still on the wall for the Japanese economy, currency and markets. Indeed, one should also expect downward pressures and much lower stock prices in the next five to ten years. 

  • Here are a few reasons why we assign a strong probability to this statement. 

  • First, how soon we forget that one of the major factors contributing to Japan's WWII aggressions - was a shortage of resources needed to expand its empire. Triggering a foolhardy conflict with the United States and its allies, as it sought more oil to sustain and expand its imperial ambitions. That's a short story pointing directly at Japan's fundamental problem of having limited natural resources geographically, forcing it to import its needs under ever higher world prices and constraints.

  • After WWII, Japan's post-war miracle economy may be  attributed to a "national business strategy" of reverse-engineering major consumer products, adding technological value, exploiting a tireless workforce, and then swamping foreign markets with products at any price to entrench market share. In thirty years it became a business, financial and manufacturing giant, bringing extraordinary foreign capital flows to its shores during this prosperous time.

  • A bubble mentality, however, gripped both foreign and domestic investors, businesses and bankers;sending both stock markets and real property prices to intergalactic levels. Everyone expects things to go on and up forever - they never do! So with the ultimate collapse in asset values, Japan's global economic rank has slipped to third; while more or less, living under recessionary conditions for the past two decades. Over this period, international competition from China strengthened using a similar "national business strategy," but with the clear advantage of more and even cheaper labour supplies to exploit. Making any extended direct price competition with China today, a deadly economic battle for Japan.

  • During these decades, the country moreover experienced deep asset value deflation, while bank rates hovered at or near zero. Low interest rates for too long a period put the country into a "valuation trap," similar to what  today's global economy is experiencing, - whereby even the slightest upward move in rates should trigger unprecedented hyper-asset-deflation, spreading to depressed economic activity for an unknown extended period. Japan is now handcuffed by the consequences of earlier financial and market bubbles, with added stiffer international competition throwing more gas on the fire.
  • To compete globally, it must now look to devalue its currency  to maintain foreign capital flows and markets with competitively priced products from its domestic production . On the other hand, by devaluing its currency, foreign commodities become much more expensive, thereby restricting any strategy to be the "low cost global;producer." Because this strategy becomes harder and harder to execute, Japan's end products must now rely more on the value of subjective product innovations, in order to retain or grow market shares.
  • In all, the world has become a much tougher place for "Japan Inc," as it was once coined when it was the  post-war global darling of the business world. It is highly unlikely that Japan will ever be able to overcome its fundamental economic weakness no matter how innovative, hard-working or financially clever they become; for you cannot convince the laws and constraints of physics to change - they are simply non-negotiable. Meaning that with diminishing domestic resources, as the planet's finite resources also contract, Japan's ability to survive will be seriously tested as  it moves along the  "Nauru Paradigm" path - a road also being crowded by many other nations around the globe. A road where scarce natural resources are exhausted,while populations still continue growing. And this  mathematics can never turn  towards  positive destinations. Absolutely Impossible!.     

  • For these reasons, one can only see a setting sun on a road being well-travelled by many others. Surely, amoung many other concerns, it can only lead to much lower stock prices in the months, years and decades  ahead. Generational indeed...

  • Dr Peter G Kinesa
  • June 14, 2013

  • Finite constraints impose harsh realities-

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