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Friday, January 20, 2006

Irrational Lack Of Exuberance?

At first sight this news appears to be unimportant, trivial even:

Fund companies and financial advisers on Thursday warned of an atmosphere of panic and hysteria as a third German open-ended property fund was closed following a run of withdrawals. KanAm, a Munich-based asset manager which on Tuesday froze its US fund after heavy outflows, said on Thursday it had been forced to close its core €3.2bn global Grundinvest fund after €700m of withdrawals in 24 hours.

Of course our financial markets are deep enough, and sophistocated enough to handle this sort of thing without blinking. But then go back to this news earlier in the week:

Japanese stocks plunged on Wednesday after the Tokyo Stock Exchange announced that it would suspend trading of all stocks because volumes were too high.

People do seem to be nervous all of a sudden. Add to this the fact that in Japan and Germany the 'rosy sustained recovery story' has meant that funds and share prices are considerably over extended, and of course, we all should at the very least be attentively taking note.

Which is why I found this article from the FTs David Turner in Tokyo so interesting:

Japan's irrational pessimism suggests need for reflection

Many observers see this week's plunge in Japanese stocks as a case of irrational exuberance brought to a halt by irrational pessimism.

The fall appeared to most people to have little to do with fundamentals, but rather started to feed upon itself, as retail investors in particular raced to sell before their comrades could send prices down even further.

Most analysts still find many reasons to be cheerful about the Japanese market when they look at fundamentals.....

Most analysts agree with this benign assessment - up to a point....

Many analysts think the market fell for an irrational reason, but that there was a high risk of correction given the recent gains......

If such meteoric rises are built on thin air, then there is not much to stop a fall back down to earth. Mr Mohr says: "In an environment where there's not a balanced discussion of return and risk, a small problem can sometimes have a larger impact."

There are other reasons for concern. Mr Mohr (Patrick Mohr, strategist at Nikko Citigroup) thinks the "beautiful environment" which Japan has enjoyed lately, with a weak yen and continuing signs of Japan's economic recovery, is being sullied by a combination of clouds. These include recent yen strength and worries over the disruption of oil supplies from Iran and Nigeria.

So it's eyes wide open everyone, and caveat emptor I think.

Wednesday, January 18, 2006

Assetts And The Real Economy

This FT article is fascinating. A new survey from McKinsey Global Institute concludes that by the end of 2004 the stock of the world's financial assets totalled $136,000bn, and will exceed $228,000bn by 2010 if current trends persist. Apparently:

"The figures suggest the stock of financial assets grew by a remarkable 15 per cent in 2004, and compares with $53,000bn in 1993 and $12,000bn in 1980......But whereas 45 per cent of global financial assets were held in bank deposits in 1980, that percentage fell to 29 per cent in 2004.....Growth in financial assets has outstripped that of the world economy. Since 1993, assets have expanded by 8.8 per cent a year in the US, 10.4 per cent in the UK,10.9 per cent in the eurozone, 4.7 per cent in Japan and 14.2 per cent in China. About 63 per cent of China's financial assets in 2004 were in the form of bank deposits and "the country continues to amass a sizeable portion of the world's bank deposits", the report says."

Tokyo Stock Exchange Temprarily Closed

Gosh, I certainly hope this isn't anything too serious:

Japanese stocks plunged on Wednesday after the Tokyo Stock Exchange announced that it would suspend trading of all stocks because volumes were too high. The news panicked investors, who had already sent the Nikkei down heavily in the wake of Monday evening’s government raid on Livedoor, the internet services company, over possible violation of security laws.

As Bloomberg points out, this has been a bad week for Japanese shares:

A rout in Japanese stocks deepened before trading was halted prematurely for the second time in the Tokyo Stock Exchange's history, helping to wipe away more than $300 billion in value from the world's second-largest equity market this week.

I certainly hope that all this will stop where it is.

But it does highlight the way in which people have been irresponsible (Economist please note!) with the Japan sustained-recovery story. Much of the investment in Japan stocks has been from overseas investors of late (the Jpanese have rather been buying US assets), people (especially it seems Middle East oil producers) are over-extended and if there isn't a sustained recovery soon then there will be a correction. I just hope the correction won't be too sharp, but after Italy this is clearly the number 2 global danger-spot where we could anticipate trouble at some stage.

OTOH it is hard to blame this particular one on central bankers and their "excessively low interest rates", indeed my argument would be quite the contrary: all the BoJ spin on 'the imminent end to deflation' and the 'ending of monetary easing' is part of what has been fueling the excessive optimism, an excessive optimism which is reflected in over-priced share values.

Meantime the latest European news from the FT reads: European stocks set for sharp sell-off.

Monday, January 16, 2006

Japan: The Third Way?

As its population ages, Japan should carve out a middle way between the social security systems of Scandinavia and that of the US, this at least is the opinion of finance minister Sadakazu Tanigaki, one of several contenders to replace Junichiro Koizumi as prime minister.

At the moment, benefits and tax payments were out of kilter ..“Japanese people are enjoying excessive benefits with a low [tax] burden, and passing on their debts to their children and grandchildren.” If Japan wanted to maintain mid-level benefits, its people would have to shoulder a mid-level burden, he said, referring to the fact that the population began to decline last year. “We need to engage in a nationwide debate on reform of the tax system as a whole, including consumption tax.”

In fact none of this will constitute a 'free lunch', and Japan now faces some hard. even stark, choices. One little commented point is that as interest rates were raised if deflation were to end (which I don't actually think it is about to) the Japanese governement would begin to incur ever larger service charges on that enormous debt it has. Which is one more reason the politicians are in no hurry to see the BoJ end the 'easing policy'.