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Japan’s Bloodless Coup: Devolution of the Export/Central Planning Model

August 31, 2009 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS
The ousting of the ruling party in Japan’s election spells not just change in politics but the devolution of its entire model of national wealth-building: the export/central planning model.

The news out of Japan will be reverberating for years to come. Here are three cogent summaries:

Rise of a New Era in Japan (

Japan’s ruling party suffers major election defeat

The Democratic Party of Japan (DPJ) has vowed to shift the government’s focus to boosting domestic demand, rather than the Liberal Democratic Party’s (LDP) traditional emphasis on supporting businesses and industry. The DPJ has promised to pay cash allowances of more than $3,000 per child to families, abolish highway tolls, make public high school tuition-free and provide more social programs — all while postponing a hike in the country’s 5% consumption tax even as Japan is struggling to keep its nascent economic recovery on track.

Analyst Christopher Wood of CLSA Asia-Pacific and author of the Greed & Fearnewsletter, courtesy of correspondent Craig M.:

The reason why this election [in Japan] is significant is because the DPJ is running on a manifesto which appears to be the complete opposite of the established LDP policy in place since the end of the Second World War. This is because the DPJ manifesto, which is in fact quite impressively detailed, is all about promoting domestic demand; whereas the LDP has been all about subordinating the interest of the consumer to Japan’s export driven economy where there was tight nexus of interest between the so-called “iron triangle” of big business, the bureaucracy and the long ruling political party.

“One of the most dramatic for GREED & fear is the [DPJ] proposal to introduce a minimum wage of ¥1,000/hour whereas many people are earning ¥800/hour or less. Another interesting policy proposal is a plan to pay a benefit of ¥26,000 per child per month up to the age of 15; a move obviously designed to improve Japan’s depressed birth rate. A third proposal is to ban manufacturing companies from employing temporary labour in factories.

“It is also the case that political funding in Japan is also provided by the government in proportion to the election results. For such reasons, there is even the risk that the LDP, in an incredible disappearing act, literally implodes as an organization on a four year view given its only raison d’être is to exercise power. correspondent Craig M. added this interpretive note:

The impact on the USD as Japan moves away from an export-driven economy to a domestic-driven economy will be significant. A DJP government would most likely stop accumulating US Treasuries and would likely start selling them to fund domestic programs. This is likely USD negative and gold positive.

There will be consequences, and none larger than the devolution of the export/central planning model which Japan pioneered and which many nations have copied.

The export/central planning model is simple: the national means of production are focused on manufacturing goods for export via a public/private partnership in which corporations, banks and central government planners essentially allocate capital and incentives to suppress domestic consumption in favor of export growth. The goal of course is to generate large trade surpluses.

“Free market capitalism” is left to the domestic economy, while a ruthless partnership of crony capitalism and merchantilist government policy conquers global markets and exploits other nations’ free-trade policies.

The Japanese perfected this model and reaped the rewards–stupendous growth and trade surpluses/profits, until the export/central planning machine over-reached in the late 1980s and created gigantic bubbles in Japanese real estate and stocks.

Once these bubbles burst, the intrinsic limitations of the export/central planning model became visible. Without true domestic demand unfettered by central planning disincentives and the dead-weight of crony capitalism, export profits remained in the hands of global corporations while the central planners squandered trillions of yen attempting to create domestic demand via building bridges to nowhere.

Like all central planners (i.e. the Federal Reserve and the Treasury), the Japanese ministries believed that a few policy tweaks and some face-saving “adjustments” to mountains of bad debt would do the trick.

Alas, two decades of devolution and falling personal incomes have proven them wrong.

Transparency has no place in central planning. The major banks were crippled with massive bad debts, yet the planners moved glacially to force write-offs and renunciation of impaired debt. Even now, no one really knows how much uncollectable debt remains on the books in Japan, Inc.

One reason is cultural. Declaring a bank insolvent is a major loss of face for everyone involved. Thus the preferred solution was to keep “zombie banks” alive as a face-saving measure.

The tricks used were plentiful and clever. Say a commercial real estate loan went south and the borrower stopped paying. Hmm, that looks bad; why not loan the firm more money, as long as they agreed to use part of it to make some token payments which would allow the bank to keep the loan off the “in default” ledger?

Never mind the additional loans only made matters worse; face was saved and time was bought.

After 20 years of malaise, the citizenry’s patience finally ran out. Things are dire for the Japanese economy and nation: the birth rates have fallen dramatically, social security costs on the exploding elderly population are climbing, and an entire generation of younger workers has been relegated to dead-end part-time jobs at 7-11. Like other global manufacturers, to remain competitive Japan’s firms moved production to China and other parts of Asia; automation in Japanese factories eliminated many of the remaining domestic jobs.

These structural changes would have occurred even if Japan had moved away from the export model, but the reliance on exports and a sclerotic, crony-capitalist/central ministry oligarchy made the problems much worse.

All nations which have relied on the same export model are suffering the same consequences. China has dodged the recession by spending 30% of its GDP in a gargantuan stimulus program; nonetheless the same structural flaws in the crony capitalist/ central planning model are eroding China’s prosperity, too. That devolution is currently being masked by the stimulus but the cracks will start showing by mid-2010 if not sooner.

Export-dependent Germany has also papered over its structural and demographic ills with domestic stimulus, and just as in China the modest “recovery” in global demand as governments spent $5 trillion in borrowed stimulus have boosted the hopes of the exporter/ central planning Plutocracy that exports will climb back to their previous heights and a staggering welfare state will somehow wean itself from enormous deficits.

2010 will see the further devolution of the export/central planning model, in Germany and every other export-dependent economy. Japan, the first exporter to suffer the inevitable consequences of a dependence on exports and trade surpluses, has finally begun the painful process of rebalancing the economy to demographic and financial realities.

There are no easy options. Japan’s demographics are unfavorable, and increasing births over the next few years won’t resolve that. The same can be said of all developed nations and China as well.

The new party claims it wants to stop relying on deficit spending funded by selling bonds–Japan’s national debt is already 185% of GDP, almost three times’ the U.S. rate–but it also refuses to raise taxes. It plans on reducing the deficit by cutting bureaucracy and worthless public-works projects. Unfortunately, both of those sacrifical lambs have large constituencies who have what I term asymmetrical stakes in the game: overwhelming incentives to fight to the last breath to retain government spending as is, regardless of the destruction that will wreak on the nation as a whole.

It’s fun to govern in expansion–there’s more of everything to give away. But governing in devolution and contraction is a lot more difficult and considerably less fun. Let’s wish the DPJ well.

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TrimTabs’ CEO Charles Biderman Discusses Massive Insider Selling

August 31, 2009 by · Leave a Comment 

Zero Hedge

“Insider selling is 30x insider buying, while corporate stock buybacks are non-existent. Companies are saying they don’t want to touch their own stocks.”

“I don’t know where the money is coming from to keep the markets from not plunging.”

One can offer some suggestions.

More articles from Zero Hedge….

August Credit Summary – Early Warnings

August 31, 2009 by · Leave a Comment 

Zero Hedge

Credit markets were notably weak in August with HY underperforming IG, low beta deterioration, more curve inversion, and financials weaker, and all in the face of the continued rally in stocks. In the past we have seen credit anticipate and equity confirm – certainly credit markets are off their Utopian levels while stocks maintain them.

August was a fascinating month for the markets with lots of volatility, investing seemingly a binary decision of risk-on/risk-off, and everything becoming one trade – buy risky stuff or sell risky stuff. The dollar weakness/stock strength story continues to amaze but remember our recent point on how this relationship is becoming more and more asymmetric as the month wore on – this worries us considerably as increasingly aggressive dollar selling is required to jump start stocks.

Most notably, IG12 was over 8bps wider in August and HY12 68bps wider while stocks (S&P) managed to gain around 3%. Perhaps most notably, the USD was only marginally weaker, oil as good as unch (on the rolling front month contract), VIX flat, and gold a tad lower in price. 10Y TSYs were almost 8bps lower in yield (TSY buying and stock buying as corporate debt sold off?).

ExHVOL (our preferred trade) has performed very well as it widened over 12bps on the month to around 70bps and we note that indices in general underperformed intrinsics (which widened the skews in HY but narrowed in the rest).

IG12’s curve was flatter (more inverted) as we saw intrinsics steepen up quite considerably in 7s10s (or 5s10s) while 5s7s was pretty flat.

Thanks to AIG’s remarkable rally and strength in junk, high beta credits outperformed low beta dramatically but both were considerably wider on the month. Interestingly (at least for us) the widest 5 names (CIT/AIG/ILFC/TXT/HIG) in IG12 at 07/31 were the major outperformers in August as dispersion dropped dramatically in IG and these names alone kept IG intrinsics almost 7bps tighter on the month.

CONSumers were the month’s worst performers as M, JCP, and FO were around 50bps wider. TMT was close behind with CMCSA and TWX worst as ENRG and INDUstrials were about the same but considerably wider. Financials outperformed non-financials on the month but the tails were waht helped the most as GS and MS were considerably weaker in credit (even as their stocks held up). BAC, COF, and WFC were wider while Citi improved modestly. Monolines were mixed with ABK way wider and MBIA tighter as insurers were also mixed. The financial senior-sub differential decompressed 6bps on the month

High spread builders underperformed low spread builders but on average they were all weaker in the face of significant strength in homebuilder stocks. ABX and CMBX prices were generally lower on the month with more recent vintages underperforming in ABX and outperforming in CMBX.

Our Aussie Index was basically unch for the month with banks underperforming and Asia was modestly better on the month again with banks underperforming. Interestingly XOver was modestly tighter on the month with XOver-Main compressing as HY-IG decompressed as we note ExHVOL went from over 7bps rich to LoVOL to 4bps cheap. MCDX and EM11 were both tighter on the month but the majors sovereigns saw mixed signals with USA and Japan significantly tighter as Spain and Italy were dramatically wider. Financial and Sovereign risks (CRI and GRI) were both notably wider with financials underperforming as the risk transfer (post TARP) seems to swing the other way.

Commentary compliments of

Index/Intrinsics Changes for August
CDR LQD 50 NAIG +10.01bps to 101.93 (43 wider – 6 tighter <> 34 steeper – 15 flatter).
CDX12 IG +8.74bps to 119.5 ($-0.29 to $99.19) (FV +6.6bps to 129.58) (111 wider – 12 tighter <> 94 steeper – 30 flatter) – Trend Wider.
CDX12 HVOL -4.66bps to 275 (FV -12.52bps to 324.71) (22 wider – 8 tighter <> 24 steeper – 5 flatter) – Trend Wider.
CDX12 ExHVOL +12.97bps to 70.39 (FV +12.21bps to 74.49) (89 wider – 6 tighter <> 25 steeper – 70 flatter).
CDX11 XO +9.8bps to 311.4 (FV +39.84bps to 360.11) (29 wider – 5 tighter <> 17 steeper – 17 flatter) – Trend Wider.
CDX12 HY (30% recovery) Px $-2.19 to $88 / +68bps to 840 (FV +20.38bps to 754.18) (80 wider – 14 tighter <> 20 steeper – 74 flatter) – Trend Wider.
LCDX12 (65% recovery) Px $-0.46 to $92.94 / +18.22bps to 742.86 – Trend Wider.
MCDX12 -32bps to 125bps. – Trend Tighter.
CDR Counterparty Risk Index rose 11.21bps (10.33%) to 119.71bps (10 wider – 4 tighter).
CDR Government Risk Index rose 2.34bps (5.76%) to 42.96bps.
DXY weakened 0.28% to 78.13.
Oil rose $0.28 to $69.73.
Gold fell $2.85 to $951.15.
VIX increased 0.09pts to 26.01%.
10Y US Treasury yields fell 8bps to 3.4%.
S&P500 Futures gained 3.59% to 1019.7.

August’s Biggest Movers
The month’s biggest absolute movers in IG were Constellation Energy Group Inc. (+87.52bps), Masco Corp. (+53.74bps), and Macy’s, Inc. (+53bps) in the wideners, and American International Group, Inc. (-581.36bps), CIT Group Inc (-197.98bps), and Textron Financial Corp (-129.77bps) in the tighteners. The month’s biggest percentage movers in IG were Autozone Inc. (+76.27%), Constellation Energy Group Inc. (+62.74%), and Time Warner Cable Inc. (+56.67%) in the wideners, and American International Group, Inc. (-39.12%), Textron Financial Corp (-21.28%), and XL Capital Limited (-17.07%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 44 wider to 6 tighter, and 34 steeper to 15 flatter as 24 of the 50 credits have inverted curves. The biggest absolute movers were Goldman Sachs Group Inc (+41.5bps), Comcast Corp. (+40.5bps), and Nordstrom Inc. (+35bps) in the wideners, and HSBC Finance Corporation (-102.5bps), Citigroup Inc (-13.75bps), and Allstate Corp (-8.5bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Autozone Inc. (+76.27%), VF Corporation (+50.46%), and Comcast Corp. (+46.29%) in the wideners, and HSBC Finance Corporation (-28.87%), Allstate Corp (-9.44%), and ACE Ltd. (-8.89%) in the tighteners.

In the names of the HY index, this month’s biggest percentage movers were Energy Future Holdings Corp. (+54.58%), Windstream Corporation (+48.7%), and Fairfax Financial Holdings Limited (+33.73%) in the wideners, and American Axle & Manufacturing Inc (-78.84%), Realogy Corporation (-30.71%), and Clear Channel Communications Inc (-28.85%) in the tighteners. The largest absolute movers in HY were AMR Corp (+1968.96bps), Energy Future Holdings Corp. (+603.49bps), and Level 3 Communications Inc. (+328.83bps) in the wideners, and American Axle & Manufacturing Inc (-4245.28bps), Clear Channel Communications Inc (-1201.25bps), and Realogy Corporation (-924.3bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 11.21bps (or 10.33%) to 119.71bps. Goldman Sachs Group Inc (41.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Goldman Sachs Group Inc (41.92%) is the worst (relative) performer. Citigroup Inc (-13.75bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Citigroup Inc (-4.8%) is the best (relative) performer.

The CDR Aussie Index fell -0.2bps (or -0.2%) to 104.63bps. Crown Limited (16.29bps) is the worst (absolute) performer, whilst Crown Limited (15.26%) is the worst (relative) performer. Amcor Limited (-19.49bps) is the best (absolute) performer, and Amcor Limited (-16.31%) is the best (relative) performer.

The CDR Asian Index fell -3.85bps (or -3.39%) to 109.88bps. Bank of China (41.61bps) is the worst (absolute) performer, whilst Bank of China (46.55%) is the worst (relative) performer. Promise Co Ltd (-52.64bps) is the best (absolute) performer, and Kobe Steel Ltd (-39.51%) is the best (relative) performer.

More articles from Zero Hedge….

Chris Dodd Joins Barney Frank In Requesting List Of Banks The Fed Has Lent To

August 31, 2009 by · Leave a Comment 

Zero Hedge

In a May interview with Jane Hamsher and Marcy Wheeler of Firedoglake, The Chairman of the Senate Committee on Banking, Housing and Urban Affairs, Chris Dodd notes that information about who the bank recipients of Fed loans is “concerning”, and that he would make such a request of the Federal Reserve. “I’ll ask” is his summation of the questioning about why nobody besides the Fed is allowed to know where taxpayer capital goes to.

We, in turn, ask Chris Dodd to provide to not only his voters, but to the public in general any and all disclosure he has obtained from the Fed, due to Chairman’s Dodd position as a public figure supervising numerous financial affairs, and we hope that his curiosity translates into support for any and all Fed audit initiatives, most specifically HR 1207 and S 604.

Hopefully, in the meantime the Chariman of the Banking Committee will
learn the difference between AIG’s counterparties and banks that have
daily access to the Fed’s discount window as well as other Maiden Lane,
taxpayer funded conduits.


More articles from Zero Hedge….

SPY Pump And Dump

August 31, 2009 by · Leave a Comment 

Zero Hedge

Repeat after me: There is nothing wrong with buying all day, gunning into close, then dumping insane volume after hours… There is nothing wrong… etc

More articles from Zero Hedge….

Trading Is Now Exclusively An After Hours Affair

August 31, 2009 by · Leave a Comment 

Zero Hedge

After an ~20 million cumulative volume shortfall from average until 4:00pm, volume went green for the day in the first two minutes of After Hours traing. In the meantime the SEC continues to do absolutely nothing.

More articles from Zero Hedge….

ROFL! China Tells IBs: Stuff It!

August 31, 2009 by · Leave a Comment 

By Karl Denninger, The Market Ticker

This is hilarious!

The State-owned Assets Supervision and Administration Commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying in an article published on Saturday.

See what lawless behavior gets you folks?

You start this crap – selling worthless paper, intentionally turning a blind eye to fraud, profiting from fraud, screwing consumers and foreigners alike and guess what?

BINGO!  A foreign government that runs a command economy says "Ok, you think that was cute?  Try this!"

For banks that are hoping to sell more derivatives hedges in China, the world’s fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like.

Oh, so our wonderful banks have been over there peddling their junk in Beijing too eh?  Derivatives you say? 

I love it.

We reap what we sow, and may the "foreign banks" (you know this includes some nice juicy ones over here in the US) get stiffed and stuffed.

I have no sympathy – zero - for the IBs who get burned by this.

Now let’s see China grow a pair of brass church bells and tell Geithner and company to stick it on their debt sales – or even better, why not sell?

If our government refuses to do the right thing and acts like Tony Soprano, then perhaps we need a bigger, badder, more powerful gang to come smack our government around a bit.

More articles from the Market Ticker….

South Korean Sustainable Master Plan Islands Revealed

August 31, 2009 by · Leave a Comment 

Just north and west of Seoul, South Korea, a company called Foster and Partners has won the right to develop a green master plan community on the islands of KangHwa and OnJin-gun. The sustainable master plan is supposed to be an extension of the Incheon Free Economic Zone.

One of the islands, KangHwa, will be used as a developmental center creating solar panels and wind turbines. The buildings in this center will use biomass energy, hydrogen fuel cells and even have hydroponic roofs.

The other island, OnJin-gun, will become a sustainable resort surrounded by agricultural landscape. Light rail will be used along with smaller roads and pedestrian avenues. The two islands are to be connected with the world’s longest bridge.

Now, within the past 2 years South Korean companies have unveiled their newest hydrogen cars, the Hyundai i-Blue and the Kia Borrego FCEV which one can imagine providing transportation to and from this green master plan community along with the light rail.

The 180 square mile community is expected to balloon in population from 35,000 now to 320,000 residents in the next 10 to 15 years as this master plan is phased in. By that time, there may be many more hydrogen cars on the roads not only around the master community and Seoul but through the entire country as well.

Read more….

How to Shift to a Bio-Based Economy

August 31, 2009 by · Leave a Comment 

Interested in getting a little insight into how the country will shift from a petroleum-based economy to a bio-based economy? Then look no further than DomesticFuel, or to be more exact, Dyadic International CEO, Mark Emalfarb. Emalfarb was interviewed during the Sixth Annual World Congress on Industrial Biotechnology and Bioprocessing which took place in Canada this past July.

The interview was conducted as part of the Biotechnology Industry Organization’s (BIO) I am Biotech campaign. Emalfarb was asked several questions including the importance of biotechnology and biofuels, how biotechnology is helping to heal, fuel and feed the world, how do you demonstrate biotech is the way of the future, and more.

You can watch the first part of  Mark Emalfarb’s interview here and the second part by clicking here.

Read more….

The Lasting Legacy of the Bush Tax Cuts

August 31, 2009 by · Leave a Comment 

From The 2009 Budget Deficit: How did we get here? by John Irons, Kathryn Edwards, and Anna Turner:

This Issue Brief examines the details and causes of the current budget deficit and the role the current recession has played. The years between 2001 and 2007 saw a large deterioration in the budget balance, which was driven chiefly by legislated policy changes. The Bush-era tax cuts are the largest contributors to this period of policy-induced increases to the federal budget deficit. . . .


Chart C: from Irons, Edwards and Turner (2009).

Read more….

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