Japan

The Fed would do well to look at Japan. Japan’s Nikkei, after rallying over 70% since November, just collapsed 11% in less than two days. Looking at the chart, it’s pretty clear where this thing is heading: the same as the NASDAQ in 2000. This is the problem with economic policy that focuses on pushing stocks higher: eventually the collapsing economy comes home to roost and stocks implode. We saw this in 2000 and 2008. We’re currently seeing it in Japan. And it’s only a matter of time before it his the US. Indeed, Bernanke’s whole life work has been based on the belief that the Fed didn’t do enough during the Great Depression. So he’s opted to expand the Fed’s balance sheet to over $3 trillion and to monetize most of the US’s debt issuance via QE to battle the Financial Crisis. Altogether, the Fed has monetized QE equal to 15% or so of the US’s GDP. Doing this has already put stocks back in a bubble and damaged the economy to no end. Marginal debt is back at record highs, housing has not bottomed, and Bernanke is still talking about a “recovery” FIVE years after the Crash. At this point based on the business cycle alone we should be in a roaring growth spurt. QE doesn’t work. It never has. Look at Japan. Japan has monetized an amount equal to well over 25% of its GDP via QE. And at that point its bond market began to crash. It’s not coincidence that the Fed is beginning to talk about tapering QE now that this is happening. Even a career academic can look at what’s going on in Japan and know that more QE won’t help the US. So the Fed is essentially handcuffed at this point. Increasing QE in any way risks a Japan-bond market style rout. Can you imagine what would happen if the financial system faces another Crisis? The Fed has already thrown everything including the kitchen sink at the system. If the system collapses now the Fed will be powerless to stop it. For some insights on how to prepare for a market collapse, visit us at: http://gainspainscapital.com/protect-your-portfolio Best Regards, Graham Summers

click for ginormous chart Source: Kimble Charting Awesome chart from Chris Kimble showing the Nikkei going back to 1982 — in particular, the downtrend that began in 1989 and still persists to this day. Chris notes that Declines of 32% to 60% taken place at this level for the past 20 years! One would normally expect a pullback and consolidation after a long move up to a major trendline, and under pre-Abenomics stimulus, that would be my highest probability outcome (pre-stimulus, I have no idea!). The key here is if and when the Nikkei breaks through that trendline, it is likely the beginning of a longer term multi-year breakout. This is why we put on Japan exposure for clients much earlier this year. ~~~ Disclosure: Clients are long GAL, DXJ, which have substantial exposure to Japan.

McDonald’s is huge in Japan, and it just got bigger with its Mega Potato Fries. IT Media reports (via Kotaku) that McDonald’s is now offering its largest calorie item in the history of the chain with the Mega Potato. It holds the equivalent of two large fries, but at almost half the price. Unfortunately for you McDonald’s french fry fans, the Mega Potato is only available in Japan. You could hop on a plane to grab some, but you have to be fast. The Mega Potato will only be on sale through the end of June. After that, you’ll have to start forking over $6 for two large fries. This isn’t the first time that a fast food restaurant in Japan has offered ridiculously sized meals. For the release of Windows 7, Microsoft teamed up with Burger King to offer a seven-patty whopper. Earlier this year, Japanese restaurant chain Lotteria outdid everybody with a nine-patty cheeseburger to coincide with the release of Evangelion 3.33.

McDonald’s has unleashed its Mega Potato Fries on the citizens of Japan. The fast food item, which is equivalent to two orders of large fries, has more calories than any other item on the menu. According to Japan Today, it’s actually the most caloric item that the restaurant has ever offered. McDonald’s has released some interesting items on its international menu so let’s not call Mega Potato Fries the all-time calorie king but with 1,142 calories crammed into a comically oversized container let’s just say that you should eat at your own risk. Japan Today writes: “The Mega Potato will set you back 490 yen (about $5) and also cost you a large chunk of your dignity and possibly a few years of your life.” McDonald’s Mega Potato Fries have been available at limited locations for the last week and finally got their nationwide release today. The restaurant doesn’t have any plans of bringing the Mega Potato Fries to the United States and judging by the company’s recent moves in America they probably won’t be bringing the high calorie item stateside anytime soon. McDonald’s has been trying to make its menu healthier in America with items like the egg-white McMuffin and a new chicken McWrap. It’s very unlikely that they’ll start offering people 1,142 calories worth of fries anytime soon. Of course, you could just get two supersized fries. Unfortunately, you’ll have to get them in two separate containers. McDonald’s Japan selling “Mega Potato” French friesshar.es/Z8yCsSupersize my Supersize! #cspnet twitter.com/glcspdn/status… — Greg Lindenberg (@glcspdn) May 24, 2013 McDonald’s Unleashes Mega Potato Fries On Japan is a post from: The Inquisitr

In the 1940s, the Fed adopted pegging operations to protect the financial system against rising interest rates and to ensure the smooth financing of the war effort. In effect, the Fed became part of the Treasury’s debt management team; as the budget deficit hit 25% of GDP in WW2, it capped 1Y notes at 87.5bps and 30Y bonds at 2.5%. From the massive bond holdings of its domestic banks to its exploding public debt, Japan today faces a situation very similar to the US in the 1940s. With the market becoming dysfunctional as the BoJ’s massive buying operations drain the pool of available bonds, the BoJ’s overriding presence in the market each day has increasingly made the JGB market seem like a government-made market. But a much bigger problem is Japan’s exploding public debt. With the debt already the largest of the developed nations, it could snowball out of control if an upturn in interest rates causes interest payments to escalate. So, even if 2% inflation is achieved, the BoJ’s zero-rate policy and massive JGB purchases will have to continue until the debt is made more manageable. When the long-term rate climbs above 2%, the BoJ will probably adopt outright measures to underpin JGB prices to prevent turmoil in the financial system and a fiscal crisis - and just as Kyle Bass noted yesterday, they are going to need a bigger boat as direct financial repression in Japan is unavoidable. Via BNP, With the market becoming dysfunctional as the BoJ’s massive buying operations drain the pool of available bonds, the BoJ’s overriding presence in the market each day has increasingly made the JGB market seem like a government-made market. Those well versed in history may recall that the Fed’s policies in the 1940s to stabilise prices and yields on US government securities – the so-called pegging operations – also resulted in a government-made market. The Fed at the time was deeply entangled in the government’s debt management, so, despite the upturn in inflation, it had to keep long-term rates very low and continue to buy massive amounts of government securities as part of financial repression. The Fed started down the road towards pegging operations when it intervened in the bond market in the spring of 1935 to prevent rising interest rates from degrading the capital of US banks (more than 50% of assets had to be “safe” government securities) and thereby destabilising the financial system. With the start of WWII, the Fed’s government bond buying morphed into outright support of bond prices (pegging operations), as the shift to a wartime footing necessitated low-cost financing of the war effort. Even when inflation picked up, the policies supporting government bond prices were not allowed to end, causing the Fed to come into repeated conflict with the Treasury Department over policy independence. Ultimately, the Fed’s bond price-supporting policies enabled banks to reduce their long-term bond holdings substantially, reducing the impact of rising interest rates on the financial system. And after roughly 10 years, the Fed was finally freed from the constraints of this support programme because (a) banks came to favour ending the programme, as they were now in a position to enjoy the merits of widening margins of a steepening yield curve, (b) the US economy and fiscal conditions returned to normal, as public debt was significantly reduced thanks to improved tax receipts from the expanding economy and the “inflation tax” and (c) subsiding concerns about higher interest rates threatening the financial system and state finances allowed inflation to be perceived as the main problem for the economy and society. While the pegging operations may have been inevitable owing to special factors like WWII, the result was the sacrifice of price stability and the destabilisation of the US economy. Japan’s situation today, from the massive bond holdings of its domestic financial institutions to its exploding public debt, has many similarit

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Kudos to Kyle Bass at Hayman Advisers for warning that the Bank of Japan would lose control of its 70 trillion bond buying blitz. The spike in the 10-year yield to 1pc on Thursday was certainly shocking to behold. His point is that the BoJ faces a “rational investor paradox”. The authorities are trying to drive up the inflation to 2pc and therefore to devalue Japanese government bonds (JGBs), so why on earth would you want to own them? “If JGB investors begin to believe that Abenomics will be successful, they will ‘rationally’ sell JGBs to buy foreign bonds or equities,” he told Bloomberg He says the scramble to sell has “overwhelmed” buying by the BoJ. Governor Kuroda will now have double down with a huge increase in the scale of QE. The argument is similar to warnings by Nomura’s Richard Koo, Japan’s most famous economist and an arch-Keynesian. The two men reach the same conclusion coming from diametrically opposed theoretical starting points. As I reported last night, Mr Koo thinks the Abenomics plan of monetary reflation is madness. “Once inflation concerns start to emerge the BoJ will be unable to restrain a rise in yields no matter how many bonds it buys.” This could lead a “loss of faith in the Japanese government” and the “beginning of the end” for Japan’s economy. Mr Koo said the BoJ faces a “time inconsistency problem”, a variant of Mr Bass’s paradox. Markets react more quickly to events than the economy. “The Japanese authorities are trying to generate inflation first and then hope for recovery, which means debt service costs will increase before tax revenues do.” This will worsen the debt trajectory, set to reach 245pc of GDP this year (IMF), roughly where Britain ended the Napoleonic Wars. But then Britain produced half the world’s manufactured goods in the early 19th century, so it may be tougher for Japan. Mr Koo says “long-term rates may rise before the real economy”. If so lenders will respond to these signals more quickly that borrowers, choking credit. He says Kuroda has “altered the market structure of the last two decades” and undermined a fragile equilibrium, inviting a speculative attack on the JGB market by foreign hedge funds. So that then is the critique. I don’t agree that it is game over for Abenomics. My view is that the Keynesian doctrines of endless fiscal stimulus without monetary support advocated by Mr Koo over the years is the cause of Japan’s desperate crisis (though he says the economy could have achieved escape velocity long ago if they had done more of it, which is not as absurd as it sounds). Au contraire. Monetary policy should take the strain, pursuing a nominal GDP target of 3pc and later 4pc to turn the vicious circle of the “denominator effect” (ie a rising debt load on a shrinking nominal base) into a virtuous circle. This is what Takahashi Korekiyo achieved with such brilliance in the early 1930s, setting off a boom and falling debt ratios. Though he also forced the BoJ to finance fiscal spending too to kickstart recovery. I am not against that either if it works. In fact in it is a rather good idea (for Japan, not the UK obviously). Mr Koo’s argument that balance sheet recessions require radical action by governments is correct, but I refute his claims that QE was tried and failed in Japan. It was never tried. The BoJ meddled on the margins with pinprick purchases of short-term debt, buying from the banking system, and merely pushing up the monetary base. Of course it failed. Who cares about the monetary base. It is irrelevant. What they should have done is to conduct old-fashioned open-market operations, la Friedman, Fisher, Hawtrey, Cassel, or Keynes himself, buying long bonds from non-banks to force up the M3 money supply. That works, as Ben Bernanke discovered when he finally alighted up

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It has been reported that Japanese right-hander Masahiro Tanaka could be posted by the Tohoku Rakuten Golden Eagles for the 2014 season. The 24-year-old is said to have a wipeout split-finger fastball, a good slider and velocity to go with it. The main issue is that scouts don't know whether he profiles better as a starter or as a reliever in Major League Baseball, similar to the argument surrounding Aroldis Chapman. In a very superficial comparison he compares well with the numbers Yu Darvish posted in Japan over the same amount of years and at the same age, namely, K/9 (8.6 vs. 8.9), BB/9 (2.0 vs. 2.4), and HR/9 (0.5 vs. 0.4). Where Tanaka is behind is in H/9 (8.3 vs. 6.5) and ERA (2.48 vs. 1.99), and has only reached 200 innings once in his career while Darvish did it four times. It seems he can give some distance (45 complete games), but won't be the workhorse that Darvish has been in America so far. The posting of Darvish was a big deal in baseball and here on this very site, and was the subject of many a debate about whether or not his price tag would be worth his on-field production. The lower profile and his questionable role will make Tanaka less expensive than Darvish and if the Yankees are interested like it is believed, should they bid on him? The 2014 Yankees' rotation could be CC Sabathia, David Phelps, Michael Pineda, Ivan Nova, and Adam Warren since Andy Pettitte, Hiroki Kuroda and Phil Hughes will be free agents. Mariano Rivera's retirement could make bullpen roles up for grabs as well. Should the Yankees bid on Masahiro Tanaka? Would your decision change depending on his determined role? Has Yu Darvish proved that pitchers from Asia can find success in MLB or is he a fluke?

Image of PaaDee courtesy Avila/EPDX · Cocktail Prices Are Reaching New Highs. How Much is Too Much? [WCP] · Gilt Taste Is Done, Shuttered After Two Years [-EN-] · Diners Badly Underestimate Calories in Fast-Food Meals [USAT] · The Road to Becoming a Sushi Chef: Japan Vs. L.A. [LA Mag] · 9-Year-Old Girl Told McDonald's CEO: Stop Tricking Kids [NPR] · Ferran Adrià Casting Bulldogs for elBulliFoundation Logo [-EN-] · TGI Friday's Busted for Selling Cheap Booze as Top Shelf [-EN-]