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Wednesday, 27 March 2019

Big in Japan

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I’ve been away for a couple of days and come back to find that absolutely nothing has changed. Well, I suppose bits and bobs have but in the wake of the Brexit bungee jump, most other activity looks a bit minor. Apart from Japan.

Key overnight news is the rally in Japanese markets on the back of developing expectations for Prime Minister Shinzo Abe to announce a ¥28trn economic stimulus package at some point in the coming week. 

I’m reminded of a piece by the great American cartoonist, Ed Fisher, who so beautifully captured the 1950s and 1960s for The New Yorker magazine and who produced a lovely picture of an executive of an anti-stress pill manufacturer sitting in front of a chart of tumbling sales but with a huge grin on his face. I can’t remember how many stimulus packages we have seen come out of Tokyo in the years of Abenomics but suffice to say that the Japanese debt/GDP ratio has, since the end of 2008, risen from 172% to 227% - that’s a rise of 50 percentage points – while real GDP growth over the same period has averaged a breathtaking 0.35 percentage point. What part of “Abe-san, it isn’t working” does he not get? One can’t blame stock markets for going up and professional investors would not be doing their job if they weren’t buying the story even though it is patently clear that raising the tower’s height without strengthening its foundations isn’t great engineering. 

Helicopter money? If giving pretty much every Japanese household its own private highway, suspension bridge, high-speed rail link, deep-water harbour and airport isn’t already tantamount to helicopter money, what is? While on the subject of averages, Japan’s deficit to GDP ratio for the 2008-15 period has averaged a cool 7.00%. 

All that said, the Nikkei 225 hit a low of 7,054 in March 2009, just after the beginning of the period we’re looking at, and touched a high of 20,868 in June last year. Since then it has tumbled some 20% to trade today at 16,664, up 281 points on the day. The end? Not quite. The resurgent yen and falling sterling mean that, for UK investors, the Nikkei has risen by 13% over 12 months whereby, in sterling terms, all but the very worst markets like Italy and Spain are in the black, irrespective of how poorly they’ve performed in domestic currency. 

Time again for the old chestnut that 80% of performance comes from the currency pick, 15% from asset allocation and 5% from stock picking.

Deutsche Bank 

This morning we wake up to another set of miserable numbers from the once bullet-proof Deutsche Bank. Maybe I’m not alone when I have an image of Berlin’s Flak Towers in my head. Perhaps the Ed Fisher cartoon could be of John Cryan who has done his best to put a positive spin on a pretty grim story. He has taken the bank to the woodshed and has done all he can to beat past and residual hubris out of it. Forget the earnings numbers for a moment – and they weren’t exactly inspirational – and look at balance sheet footings of around €1.5trn against a market cap of €17.7bn and ask yourself what this might be telling you. Most investment banks had a sterling second quarter in bond trading, which had been the drift anchor for well over two years but Deutsche’s trading is going nowhere. The excuse that the fall in revenues is due to the bank closing desks is a poor excuse during a quarter when making profits in fixed income, both in rates and credit, was like falling off a log. 

It was interesting to read that Cryan reckons that Postbank is finally in line for de-consolidation. Why the hell Deutsche ever bought that place has remained a mystery to me since the day the acquisition was announced. Deutsche’s past dabbling with Gerling, the Cologne-based reinsurer and then with Deutscher Herold, the life and P&C group, both led to nothing, and did nothing other than distract and dilute. Postbank was, in my humble opinion, another case of hubristically buying a business because one could. 

And yet Paul Achleitner survives as chairman of the supervisory board. It’s remarkable how well Austrians do in Germany. 

Finally, Apple. Analysts are cock-a-hoop that things weren’t half as bad as expected. So far the new low-cost range of iPhones hasn’t cannibalized sales of iPhone 6s to the degree that many had feared and I heard one industry analyst point out that iPad sales were better than expected as the longer replacement cycle for tablets is kicking in. I can confirm that my own trusty iPad died on Sunday and I’ll surely be off to the Apple Store in the next few days to pick up a new one. Build in obsolescence. 

Finally, it’s FOMC today. Markets are expecting nothing and there’s no press conference scheduled. Should come and go without ructions. Oil continues to slide on a daily basis with WTI closing last night at US$42.75 per barrel. I don’t like the look of that. The year-to-date average price is around US$40.50; if it breaks through that it might be time to scream and to run for the hills… The nice thing about oil is that it is one of the few markets that is not being pushed around by power-obsessed central banks and by ZIRP and NIRP. Perhaps we should keep a closer eye on it if only for the purity of the price action. Please accept that this is not intended to be seen as investment advice within the ambit of the recently activated Market Abuse Regulation and screaming and running for the hills are both entirely voluntary and up to the individual. 

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