Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., said Greece is heading for default.
The downgrade of European ratings by Standard & Poor's last week shows countries can fail to meet their debt obligations, Gross said in a Twitter posting. Greece will prove to be the latest example, Gross wrote.
Greek officials will meet with lenders on Jan. 18 after discussions stalled last week over the size of investor losses in a proposed debt swap, raising the threat of default. European officials and creditors plan a 50 percent cut in the face value of Greek debt by voluntarily exchanging outstanding bonds for new securities, though the two sides haven't been able to agree on the coupon and maturity of the new debt.
France and Austria lost their top rankings in a series of downgrades Jan. 13 that left Germany with the euro area's only stable AAA grade, as S&P warned that efforts to address Europe's financial problems are falling short. The region's leaders are struggling to tame a crisis now in its third year and convince investors they can restore budget order.
S&P cut Greece's grade to CC in July, meaning the nation's debt is "highly vulnerable" to nonpayment, based on the company's rating definitions.
Pimco's $244 billion Total Return Fund, run by Gross, increased its holdings of U.S. government debt to 30 percent of assets in December, the most in 13 months, according to the company's website.
"The bulk of sovereign-bond holdings should be in the U.S.," Gross wrote Jan. 4 on the Newport Beach, California, company's website. Investors should favor Treasuries, he said, "as long as European credit implosion is possible."
With Fed officials a laughing stock (both inside and outside the realm of FOMC minutes), Bank of Japan officials ever-watching eyes, and ECB officials in both self-congratulatory (Draghi) and worryingly concerned on downgrades (Nowotny), the world's central bankers appear, if nothing else, convinced that all can be solved with the printing of some paper (and perhaps a measure of harsh words for those naughty spendaholic politicians). The dramatic rise in central bank balance sheets and just-as-dramatic fall in asset quality constraints for collateral are just two of the items that UBS's economist Larry Hatheway considers as he asks (and answers) the critical question of just how safe are central banks. As he sees bloated balance sheets relative to capital and the impact when 'stuff happens', he discusses why the Eurozone is different (no central fiscal authority backstopping it) and notes it is less the fear of large losses interfering with liquidity provision directly but the more massive (and explicit) intrusion of politics into the 'independent' heart of central banking that creates the most angst. While he worries for the end of central bank independence (most specifically in Europe), we remind ourselves that the tooth fairy and santa don't have citizen-suppressing printing presses.
UBS Macro Strategy: How safe are central banks?
Central banks have adopted ever-more unconventional policies since the financial crisis erupted in 2007. Chiefly, their extraordinary responses have taken the following forms.
First, the Fed and the Bank of England have purchased government securities, 'quasi' government securities (e.g., eligible mortgage-backed securities in the US) or credit instruments on a scale not seen (outside of Japan) during the post-war era. Even the ECB has dabbled in bond-buying via its securities market program. Second, all three central banks have acted as large-scale lenders of last resort to banks. Since 2008, that designation includes investment banks that have acquired banking licenses, at least in the US. Finally, in their capacity as liquidity providers to the financial sector several central banks— among them the ECB and some of the national central banks within the Eurozone—have significantly lowered eligible collateral standards for banks seeking funding.
All that activity makes some folks nervous. In particular, two questions arise. First, could a central bank go bust and precipitate a liquidity crisis? Second, if a central bank gets into trouble, who stands behind it?
Below, we explore both questions. We conclude that, for the most part, fears of central bank insolvency leading to a collapse of liquidity and failure of the payments system are wide of the mark. But it is possible to imagine a central bank suffering large losses, enough to wipe out its capital and hence warrant recapitalization.
That's where matters get complicated and potentially problematic. Recapitalization by the fiscal authority—where it exists—may require legislation, which introduces politics and potential delays into the picture. So even in the US or the UK, where national governments backstop the central bank, the politics of 'bailing out' the Federal Reserve or the Bank of England could become messy, potentially leading to a period of elevated market uncertainty.
But the greater challenge resides in the Eurozone. No central fiscal authority exists to backstop the ECB. And some of the ECB shareholders—the 27 national central banks of the EU—might also themselves become financially stressed in a scenario where the ECB faces large losses.
In the end, investors might conclude that given the unimaginable alternatives, EU national governments would step in to recapitalize the ECB and, where necessary, their national central banks. But the history of the Eurozone crisis has not offered many reassuring examples about the speed and effectiveness of Eurozone political decision-making. In terms of crisis management, the lesson from Europe thus far has been that, indeed, crisis precedes management. Investors could be forgiven for wondering whether central bank recapitalization might not require a crisis first.
Why disorderly central bank default is unlikely
Central banks can become insolvent. Infrequently they do. But it is unusual for their losses, per se, to impair the functioning of the financial system. Indeed, losses at central banks are not the same things as losses among ordinary banks.
For one, central banks aren't forced to mark-to-market their holdings or to provision against changes in the probability of credit losses. Dodgy assets can be held at par until losses materialize or until maturity.
But the most crucial distinction is that central banks borrow with the money they (and they alone) print. That money is fiat—irredeemable in anything but itself. To fund its Treasury or mortgage-backed securities purchases in recent years, for instance, the Fed merely credited banks' accounts at the Fed with the dollars it printed (electronically, of course).
That makes the central bank unique. Its creditors cannot change the terms on which it borrows. As a result, the capital position of central banks is all-but irrelevant—it neither affects the central bank's cost of funds, nor its ability to fund itself.
The privileged position of issuing fiat money enables central banks to operate with skinny capital. The Fed's capital is $50bn—not much when compared to a balance sheet over $2.5 trillion. Were it a bank, on the other hand, the Fed's capital ratio of less than 2% would have already landed it in bankruptcy court. Moreover, central banks can tolerate write-downs. In part, that is because they don't require capital to borrow. But equally, it is because they are moneymaking machines in a different sense as well—they make fat profits (known as seigniorage). Central banks enjoy unparalleled net interest margin (borrowing at near-zero interest rates [Central banks will incur borrowing costs to the extent they pay interest on reserves, but those 'borrowing rates' are typically very low—much lower than the yield on the assets they hold and much lower than any private sector financial intermediary could hope to attain.], while investing in much higher yielding government or credit securities). Last year, for example, the Fed earned $76.9bn in profit, more than its total capital base.
Typically, central banks return all but a small fraction of their earnings to the government. In bad times, however, those earnings could be used to offset realized losses, bolstering the capital of the central bank.
But the key point is this one—even if the central bank incurred sufficiently large losses to create a negative equity position, that outcome would not change its ability to borrow via securities purchases. In short, even negative equity (technical insolvency) would not prevent a central bank from performing its customary open market operations nor its lender of last resort function.[Some observers have noted that the ECB's low seigniorage revenues do not provide the same 'earnings-based' capital cushion available to other central banks. But the essential point is that capital does not determine the central bank's ability to perform its mandated functions.] So when does a central bank actually go bust? The answer is when it cannot make payments, which would be the case if the central bank borrowed in foreign currency (i.e., money which it cannot 'print'). That is not the case for the Fed, BoE or ECB—the liabilities of all three central banks are almost exclusively in their own currency.[In the event a country exits the Eurozone, its central bank would issue new national fiat currency, effectively re-denominating its liabilities.]
So if central bank capital is all but irrelevant, why have it? Alternatively, why worry if it is eroded by losses?
The answer may be, in part, optics.[The statutes of central banks may also require it.] No one, not even a central banker, wants negative net worth. But more subtly, it is also undesirable to incentivize central banks to maximize seigniorage (i.e., to earn their capital). After all, given a fixed net interest margin, maximizing seigniorage is about boosting assets 'under management'. In turn, that requires creating excess money, which raises the risk of inflation. So the preferred public policy is to endow central banks with capital rather than to compel them, however infrequently, to earn it. Lastly, the source of central bank capital—the national government—acts a subtle yet powerful reminder that the central bank is not utterly independent, but ultimately is answerable to the taxpayer.
The Eurozone is different
That's why recapitalization is probable if a central bank suffers large enough losses to wipe out its capital.
So who recapitalizes the central bank? And why is the Eurozone different?
Insofar as central banks are a part of government [Technically and historically, this is not quite right. Central banks historically may have public-private roots. The Fed is a quasigovernmental organization and, as noted earlier, the ECB shareholders are the 27 national central banks of the EU. But insofar as they deliver public goods (a medium of exchange and, hopefully, price stability) and because they have (near) monopoly issuance of money, they are commonly assumed to be part of government.], the taxpayer ultimately stands behind them, at least where a central (federal) government exists. In the event necessary, it is widely assumed that the Treasury (or a European Finance Ministry) would recapitalize its national central bank.
Yet the act of doing so is a fiscal transfer, making it subject to legislative approval. It isn't far-fetched, therefore, to imagine that if a central bank required a capital infusion, politics would intrude. To be sure, even if recapitalization were held up by politics, the central bank could perform its mandated duties, as previously noted. But political intervention could have other unsettling byproducts, such as de jure or de facto restrictions on the central bank's operational independence (or even its revocation altogether).
The Eurozone is a special case because there is no central (or federal) government that stands ready to recapitalize the ECB. Moreover, some of the ECB shareholders (the national central banks) might find themselves in a pinch at the same time that the ECB needs a capital top-up. That's because some Eurozone national central banks have similar or worse 'risk asset' exposures than the ECB. For example, via the Emergency Liquidity Assistance (ELA) facility, several national central banks have extended considerable collateralized lending to banks in their countries, reportedly accepting even weaker collateral than the ECB has in its own operations. Accordingly, it is possible that a series of Eurozone sovereign or banking defaults could simultaneously erode the capital position of the ECB and those of some of its shareholding national central banks. That outcome would imply that central bank recapitalization would have to be led by a subset of creditor countries (i.e., Germany). That's potentially a problem—recent history reminds us that Europe's creditors have a proclivity for prevarication where asymmetric bailouts are involved.
Summary and conclusions
Central banks have taken on more risk in recent years. That's been necessary and highly desirable during the most severe financial crisis since the 1930s, followed by the 'great recession'. One shudders to think of the consequences of the alternative—'Austrian' central bankers running the show.
Yet the actions of central bankers in recent years may yet have undesired consequences. Central banks have claimed to have exercised prudence in demanding sufficient collateral and adjusting 'haircuts' to the value of collateral. But with central bank balance sheets swollen relative to their capital and a second recession underway in Europe, credit losses could mount. Stuff happens.
To emphasize, the risk is not that large central bank losses would impair the ability of the monetary authorities to provide liquidity, conduct open market operations, target policy rates, or safeguard the payments system. Rather, in the event that losses wipe out too much of their capital, the chief risk becomes the intrusion of politics into central banking. It might even bring about the end of independent central banks.
Food for thought indeed as EFSF structural support is worn away by ratings agency downgrades (requiring perhaps explicit central bank support and lower collateral standards), ESM subordination concerns pressures existing sovereign bond holders to unwind/hedge exposure (requiring non-economical buyers of last resort), and increasingly complex agency relationships as ponzi-bonds are swapped into and out of national and super-national central banks.
Reliance Industries Ltd (RELI.NS) is in talks with several leading cable operators to buy minimum 26 percent stakes, as part of its strategy to reach consumer homes for its fourth-generation broadband services, according to a report in the Business Standard newspaper.
The company, India's biggest by market capitalisation, has approached Den Networks (DENN.NS), Digicable Networks, Hathway Cable and Datacom (HAWY.NS), IndusInd Media and Communications Ltd. and several independent multi-system operators (MSOs), the report said, quoting two unnamed sources.
A Reliance Industries spokesman, told Reuters, that the company was in talks with various operators for partnerships and content deals.
He declined to provide further details, including the names of the firms Reliance was in talks with and the nature of discussions, citing confidential clauses.
The operators could not be immediately contacted by Reuters for comments.
Unlisted Infotel Broadband Services Ltd. is Reliance's vehicle for its telecom space foray.
Earlier in January, Reliance said it would invest in media group TV18's two main companies, marking a major foray into the media sector by the energy-focused conglomerate and giving a boost to its plans to launch 4G services.
There are more than 6,000 cable operators in the country, Business Standard said in its report.
In 2010, Reliance Industries, controlled by billionaire Mukesh Ambani had agreed to buy Infotel Broadband, making his return to telecom after the business was handed over to younger sibling Anil following a family spilt.
Reliance Industries had paid about 48 billion rupees for fresh equity in Infotel to get a 95 percent stake.
* Interested buying is seen in Vedanta counters. Keep a tab on Sterlite, Sterlite Tech, Sesa Goa and Hindustan Zinc.
Consider the current rates as the ensuing 52-week's low says a marketman.
* The broad market upmoves was sharper than the benchmark scrips last week. This week, it may be the turn of the benchmarks to dance to the bull tune.
* Bank Nifty has not yet taken off. It is just warming up. That's the feeling of punter pundits.
* An eminent fund manager who was bearish and disappointed with the government's inaction is changing his perspective and was heard talking of buying into select FMCGs, infrastructure stocks, banking stocks and IT. His mantra is simple.....a sector can't give you money….it is the right stock in that sector which rewards you.
* Metals already show signs of recovery. The heat shall continue next week too. That means a rise of at least 50% by
December 2012!
* Himachal Futuristic was locked in upper circuit. Is it Mukesh Ambani's telecom connection at work?
* Genus Power Infrastructure has chalked out a restructuring plan to merge its 40% unlisted associate paper company with itself and then demerging it into a separate listed entity. Buy and hold for 6-9 months.
* Pratibha Industries has decided to sell off its SAW Pipes business to focus only on the water EPC segment. Scrip may shoot up once the deal is done.
* PSL has bagged fresh orders worth Rs.924 crore in Q3FY12 and hopes to get more in Q4FY12. A relatively safe bet at current levels.
* To enhance shareholder value, Ansal Housing has decided to buy back shares at a maximum of Rs.45 per share utilizing upto Rs.11.25 crore. Keep a watch.
* With a likely EPS of Rs.5 on FV of Re.1, Surya Pharma is the cheapest fastest growing pharma company.
* Some low-and-moderately priced banking stocks such as Dena Bank, UCO Bank, Punjab & Sind Bank, Syndicate Bank, IDBI Bank and Indian Overseas Bank are excellent buys for decent gains in the medium-to-long-term, says a banking analyst with a reputed brokerage house.
* Liberty Phosphate is likely to post an EPS of Rs.30 in FY12. The share is going cheap in the fertilizer space.
* Operators shown a keen interest in Manugraph India, which is set to post an EPS of Rs.12 on its small equity of Rs.6 crore. The share can gain 50% in the medium-term from the current level.
* KPIT Cummins are being eyed by some HNIs in anticipation of its FY12 EPS of about Rs.14-15. The share is poised to advance by 20% in the near future.
* Phillips Carbon Black, which recently completed its expansion and a captive power plant, is likely to register an EPS of above Rs.33 in FY12. The shares can be bought for a decent rise.
* Globus Spirits can be bought on its strong fundamentals and improving results. It may record an EPS of Rs.18 in FY12 and further expansion is underway.
* Zensar Technologies is doing well and is expected to notch an EPS of Rs.35 in FY12. This is the cheapest blue chip in the IT space.
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Global - Economy and Market
Mass S&P downgrade, Greek debt impasse hit euro zone
BERLIN/ATHENS - Standard & Poor's downgraded the credit ratings of nine euro- zone countries, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday the 13th for the troubled single currency area.
S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.
The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.
Very part of U.S. economy is improving except housing, Fed says
Economic activity is accelerating in every region of the U.S. and in every sector of the economy except housing, the Federal Reserve said in its anecdotal Beige Book report. The central bank said retail sales, manufacturing and the services sector are doing especially well.
It's earnings versus Europe for stocks
NEW YORK - Stock investors will return to a tug of war between signs of domestic strength and overseas concerns next week as a batch of critical earnings reports look to add credence to the idea the economy is improving, while credit rating downgrades in Europe will keep that region's difficulties in view.
U.S. corporate dividends are on track to set a record in 2012 U.S. companies are likely to raise dividends to a record of more than $252 billion this year, according to Standard & Poor's. Firms included in the S&P 500 index paid $240.6 billion in dividends in 2011, the most since 2008.
Bank of England keeps benchmark rate at record low
The Bank of England maintained its record-low interest rate of 0.5% and did not announce further stimulus. However, the central bank is expected to take steps in February to stimulate the economy. "Overall, £50 billion more [quantitative easing] next month seems to us to be virtually 'baked in the cake,' " said Philip Shaw, an economist at Investec.
Italy bond auction fails to match Spanish success
MILAN - Italy's three-year debt costs fell below 5 percent but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.
Dip in China's FX reserves may hasten policy shift
BEIJING - China's official reserves slipped to $3.18 trillion in the final quarter of 2011, signalling that the days of rampant export-led accumulation of foreign currency are numbered and that new monetary policy steps may be needed to counter capital outflows.
China's home prices will keep falling, analysts say
Real estate investment will plummet and home prices will continue to fall in China through the first half of the year, analysts said.
China's property market will undergo a fundamental change this year as government-subsidized homes force prices down, according to the State Council's Development Research Center.
China rejects ban on Iranian oil;
Japan signals support China rejected U.S. Treasury Secretary Timothy Geithner's request that it support tightened economic sanctions on Iran, including cutting off oil imports from the nation. Japan promised to try scaling back oil imports from Iran but stopped short of agreeing to a ban.
Analysis: Economic downturns create opportunities for startups Recessions and other economic downturns lead to more business startups.
More than half of the Fortune 500 companies were launched during such conditions. "When people suddenly have less money to spend, clever entrepreneurs may see an opportunity to set up businesses that give them what they want more cheaply or efficiently," according to The Economist.
India - Economy and Market
Indian economy likely to grow between 7-7.5 pc in FY'12: Kaushik Basu
Chief Economic Adviser Kaushik Basu today said economic growth in the current fiscal could be around 7-7.5 per cent, down from 8.5 per cent a year ago.
Caps set for foreign retail investment in India shares
MUMBAI - Individual foreign investors will be allowed to directly buy up to 5 percent of an Indian company, or 10 percent in aggregate, the Reserve Bank of India said on Friday, adding details to an announcement the government made in early January.
Manufacturing sparks big revival in Industry growth after hitting 28-month low NEW DELHI: A strong pullback in manufacturing helped industrial performance stage a smart recovery in November after falling to a 28-month low in the previous month, to the relief of harried policymakers who had begun to worry whether their battle with inflation and an adverse environment had choked off growth.
The Index of Industrial Production (IIP) grew by a better-than-expected 5.9% in November, rebounding from October's 4.7% contraction (restated from -5.1%) and boosting hopes that a broadbased industrial revival could follow sooner rather than later.
RBI's Basel-III norms may negatively affect loan growth: S&P
REUTERS - The Reserve Bank of India's proposed guidelines for implementing Basel-III norms may "negatively affect" credit growth of a few Indian banks though it will strengthen their capitalisation and credit profiles, Standard and Poor's said.
India forex reserves fall to $293.541 bln
MUMBAI - India's foreign exchange reserves stood at $293.541 billion as of January 6, down from $296.688 billion in the previous week, the Reserve Bank of India said.
Inflation seen falling to 7.5 pct in December
REUTERS FORECAST - India's headline inflation probably fell sharply to
7.5 percent year-on-year in December from 9.11 percent in the previous month, helped by easing food prices, a Reuters poll showed.
West Bengal receives Rs 3000 crore worth investment proposals
West Bengal's effort to woo investors received a boost with Rs 3,000 crore worth of investment proposals which trickled in on Thursday.
Bihar to construct road on Indo-Nepal border
To be completed by 2016, the estimated cost of Rs 1782 crore will be borne by the Centre, state road construction minister Nand Kishore Yadav told reporters here.
Government approves road projects of Rs 5,388 crore in three states
Govt approved three road projects in the states of Himachal Pradesh, Haryana and Andhra Pradesh entailing a total investment of Rs 5,388.36 crore.
India to launch spoken web service for farmers
The Indian government is planning to launch a spoken web service that will provide an interactive medium for the farming community.
Punjab Agriculture University experts motivate farmers to adopt resource conservation technologies PAU experts have laid emphasis on the judicious use of fertilisers, harmful effects of paddy straw burning, saving environment and use of 'Leaf Colour Chart LCC for maize, rice and wheat crops.
Technology News –
CSC, a $16 billion IT services giant expands in India
On the back of two strategic acquisitions, the $16.2 billion technology services firm CSC has now announced the opening of its 18th delivery centre in India.
BMC Software to integrate Future Group stores
Future Group today said it has roped in BMC Software to standardise and automate its infotech and delivery processes on a single platform.
Mobile phone cameras: Softwares to enhance utility of the camera
The next time you buy a phone, pay careful attention to its camera. With the right software, you will be able to do a lot more than just take pictures and videos.
Worldwide PC shipments to suffer in 2012 thanks to Thailand floods, says Gartner
Worldwide PC shipments, which suffered a 1.4% decline in December quarter after two quarters of positive growth, are set to suffer significantly during the coming quarters.
Samsung plans hybrid cameras, seeks big sales rise
Samsung aims to more than quadruple sales of small, interchangeable lens cameras this year, as it seeks to move up-market to compete with stronger Japanese rivals.
Samsung aims to more than quadruple sales of small, interchangeable lens cameras this year, as it seeks to move up-market to compete with stronger Japanese rivals.
Apple buys Israeli technology firm Anobit for $500 mn
Apple said it had bought Israel's Anobit, a maker of flash storage technology whose chips it already uses in gadgets such as the iPad.
Apple said it had bought Israel's Anobit, a maker of flash storage technology whose chips it already uses in gadgets such as the iPad.
Info Edge launches common online MBA application platform
Info Edge today launched a common online application form 'The Common App' on its education portal Shiksha.com.
Google wins biggest ever enterprise deal from Spanish bank BBVA
Google won its largest enterprise contract ever from Spanish bank BBVA as the owner of the world’s most popular Web search engine.
In an effort to halt expansion of Japan's massive public debt, Japan's Prime Minister Seeks Doubling National Sales Tax.
Prime Minister Yoshihiko Noda said containing Japan's public debt load, the world's largest, is critical after Standard & Poor's downgraded credit ratings on France, Austria and seven other European nations.
Europe's fiscal situation "isn't a house burning on the other side of the river," Noda said on TV Tokyo Holdings Corp.'s program on Jan. 14. "We must have a great sense of crisis."
Noda reshuffled his cabinet last week, aiming to win support for doubling Japan's 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda's administration hadn't made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation's sovereign grade.
Japan's government, which has enjoyed borrowing costs that are around 1 percent, wouldn't be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.
'Worse and Worse'
Japan's finances are "getting worse and worse every day, every second," Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he's closer to lowering Japan's credit rating, he said it "may be right in saying that we're closer to a downgrade."
S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a "comprehensive approach" to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March's record earthquake.
The International Monetary Fund has said a gradual increase of Japan's sales tax to 15 percent "could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path."
No Winning Play for Japan
If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.
Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.
On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.
Massive Debt Rollover Problem
There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.
The prevailing popular opinion on Japan is that it has suffered two "lost decades" – implying minimal economic growth and falling asset prices , and is typically held as an example of a dire economic condition to try and avoid. While Japan has indeed suffered economically from the bursting of its bubble in 1990, and it faces some serious structural issues today, the popular perception does not quite hold up to closer scrutiny. Richard Koo (Nomura Research Institute) and Daniel Gross (Director of the Centre for European studies) have written on this topic and I summarise below their key arguments:
Daniel Gross:
-Japan has indeed had a low economic growth of 0.6% over the last decade when compared to a growth rate of 1.7% experienced by the US. However, a large part of Europe had similar growth rates over the last decade – notably Germany at 0.6%, Italy's at 0.2% - with only France and Spain performing a bit better.
-Additionally, comparing GDP growth rates can be misleading as they do not take demographics into account. The best method to compare growth rates of developed countries is the GDP per working-age population (WAP-defined as population aged 20-60) which measures the true productive potential of a country and how efficiently it has utilised that potential.
-On the basis of this measure, Japan's GDP/WAP growth rate has exceeded that of the US by about 0.5% per annum, and that of most of Europe. This is because Japan's working-age population has been declining by 0.8% while that of the US has be increasing by about the same rate.
-Japan should be held, not as example of stagnation, but rather of how to squeeze maximum growth from limited potential.
-Another indication that Japan has efficiently utilised its potential is its unemployment rate which has remained constant over the last decade (and never exceeded 5.5%) , while the unemployment rate in the US has approached 10%.
-A good rule of the thumb to estimate average long term GDP growth rates of the G-7 countries is to add 1% of productivity gains to the growth rate of the working-age population. As German and Italian working-age populations start to decline rapidly after 2015, they can be expected to face a Japan like scenario. By contrast, the US, UK and France should continue to experience growing (albeit slowly) working-age populations and there relatively higher GDP growth rates.
Richard Koo:
-Japan faced a severe balance sheet recession in 1990 with the bursting of its real estate and stock bubbles – the loss of wealth due to steep falls in real estate prices (down 87%) and stocks, was equivalent to 3 years of its 1989 GDP – by contrast, the US only lost one year of its 1929 GDP, in terms of wealth, during the Great Depression.
-With the ensuing massive deleveraging by the corporate sector by repayment of debt – equivalent to 6% of GDP - and household savings of 4% , Japan could have lost 10% of GDP every year like the US did during the Great Depression.
-However, Japan managed to avoid a depression due to its aggressive fiscal spending which managed to keep GDP above its 1990 peak and unemployment below 5.5% (see chart below) . The government spending maintained incomes in the private sector and allowed businesses and households to pay down debt .
- The government cumulatively borrowed about 460 trillion yen (92% of its GDP) from 1990-2005 to save a potential loss of GDP of about 2,000 trillion yen (assuming GDP would have gone back to its pre-bubble 1985 peak without government action). This happened without crowding out of the private sector, inflation or high interest rates as the private sector continued to deleverage until 2005.
I above analysis is compelling- Japan has managed to do quite well despite some serious headwinds-foremost among them being their declining working-age population and a lack of natural resources. They are an extremely egalitarian society, with a rich cultural history, and continue to enjoy comfortable living standards and a high life expectancy – perhaps something for all developed nations to aspire towards rather than decry!
Year in Review and Predictions for 2012 :
Have provided below charts (via Macromon) which illustrate 2011 performances for a range of major equity markets as well as some bonds, currencies and commodities. Following a simplistic (yet surprisingly accurate) method of predicting performance for the year ahead based on the "reversal of fortunes" principle, it would suggest out-performances by the following asset classes in 2012:
India, China, Japan, Brazil, Hong Kong, France, Germany and Commodities.
On gold:
In the words of the 85 year old market veteran and doyen of newsletter writers – Richard Russell:
"Below are the last day of the year quotes for gold.
2000-$273.60
2001-$279.00
2002-$348.20
2003-$416.10
2004-$438.40
2005-$518.90
2006-$638.00
2007-$838.00
2008-$889.00
2009-$1,096.50
2010-$1,421.40
2011 -$1,566.80
2001-$279.00
2002-$348.20
2003-$416.10
2004-$438.40
2005-$518.90
2006-$638.00
2007-$838.00
2008-$889.00
2009-$1,096.50
2010-$1,421.40
2011 -$1,566.80
"This year's close for gold marks the 11th year for a higher year-end gold closing. To my knowledge this is the longest bull market of any kind in history in which each year's close was above the previous year. This fabulous bull market will not end with a whisper and a fizzle. I continue to believe that the upside gold crescendo of this bull market lies ahead. We are watching market history.
