Today’s papers are full of inflation talk. In France, La Liberation says food prices have taken off in Europe – up nearly 50% in the last six months. Part of the reason, no doubt, is the high price of energy. We drove out to the country yesterday. Stopping for fuel, we found the price per liter of diesel was 1.30 euros. Let’s see, there are a few less than 4 liters per gallon…4 times 1.30 = 5.20 euros, which converts to, say, about $7.50 for a gallon of diesel fuel. It adds up fast .
Energy prices work their way into everything – notably food, where the land must be tilled, planted and harvested with fuel-consuming tractors…and then, the tomatoes grown in the south of Spain have to be trucked all the way up to Northern Europe…and refrigerated…and sold in energy using stores, whose customers arrive in their energy-consuming cars to buy them.
But from the oil-producing nations comes news that there, too, inflation is hitting hard. In Saudi Arabia, for example, consumer price inflation was about zero for 10 years…but now is over 6% and rising.
“Oil boom shows a dark side,” says the headline in the International Herald Tribune . The dark side is that the oil exporters not only sell oil…they use it too. And while the sheiks and sultans may have the money to keep their harems hot, the average Abdul on the street is feeling left out in the cold.
“Now we have to choose: We either eat or stay warm,” says Abdul Rahman Abdul Raheem.
Back in the U.S.A, inflation is just what the doctor ordered. The old quacks that run U.S. monetary policy prescribe inflation as an antidote to deflation. Better to let the fever rise, than let the patient die, they say.
The death that scares them is the kind suffered by the Japanese economy after 1989. It was as if they had subjected the Japanese economy to waterboarding and forgotten to pull it up out of the water. The economy drowned. Even now, 18 years after the Nikkei Dow went under, the poor thing is still coughing up suds.
Which puts us in a helpful mood again. Last week, we promised some buy-side suggestions. Here’s another one: buy Japan . Did we already give you that advice? We can’t remember.
Here’s the story in a nutshell: While credit and speculation ran wild in Britain and America – from the mid ’90s to 2007 – the Japanese struggled to raise themselves up off the floor. Each time they tried, they just fell down again. The Nikkei Dow, once at 39,000, bounced around at the 12,000 – 15,000 level. Each time it looked like things might be looking up, wham…back down on the floor.
The latest bruises came in 2007. After getting roughed up for 17 years, finally, it looked like Japan, Inc. was back in business. And then, along came subprime and the worldwide credit crunch. Japan didn’t have any subprime debt. Its bankers, investors consumers and businessmen had grown cautious and conservative over the years. In America, a downturn is believed to be temporary. Almost everyone believes it will be over by July. Some think it is over already – after only a modest pullback in GDP growth. But in Japan, people think a downturn is permanent. “It will never get better,” they say to one another. “It will get worse. ”
“In Japan, the opposite psychology [from the USA] has been in effect,” writes Martin Hutchinson. “Japan was in deep recession for 13 years after its bubble burst in 1990, so traders and analysts had grown used to discounting the government’s positive announcements as mere spin. When the subprime mortgage crisis occurred in August 2007, while U.S. analysts ignored the problem, Japanese analysts decided it must be very bad news for Japan, even though no Japanese banks had more than minor exposure to the market.”
In America, investors ignore gloomy circumstance. In Japan, they pay attention to gloomy circumstances that don’t even exist. So when the credit crunch hit world equity markets, it fell upon the Japanese like kamikazes on the U.S. fleet. Japan’s great companies were sunk…with the Nikkei Dow suffering more than twice the losses of its American cousin. The Japanese stock market was the worst performing major market in the world – following the subprime crisis, even though Japan has no subprime mortgage debt.
“The market has discounted bad news that has not happened,” Hutchinson continues, “and has ignored the continuing evidence of Japan’s fairly strong growth and negligible inflation. Even a housing problem, that has led analysts to forecast a huge drag on Japan’s economy similar to that in the United States, turned out to have resulted from new tighter housing permit regulations, which caused a dip in new construction that is already ending. There is no subprime mortgage problem – how could there be? The Japanese housing market had a catastrophic downturn in the early 1990s, when Tokyo house prices dropped in some cases by as much as 70%, so there was no possibility of a price spike or lending bubble against that background.
“With the market sharply down, the economy continuing solid (fourth quarter GDP growth was 3.7% double the forecast) and analysts negative, Japan appears a safe haven in an uncomfortable world. Certainly it is likely to lead the world upwards at the end of the current unpleasantness.”
“My right flank is in retreat. My left flank is giving way. And the center cannot hold. Conditions perfect,” reported French general Foch in WWI. “I will attack!”
Likewise, conditions are perfect for us in Japan. The foreign investors have given up. Domestic investors aren’t interested. And stocks are trading at very low prices, with half the companies listed selling for less than book value.
Markets and Money