jueves, mayo 01, 2014

VACACIONES MAYO 2014 / GRL

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VACACIONES MAYO 2014
              

Miércoles, 30 de abril del 2014

Queridos amigos,

Escribo estas líneas con motivo de mi próximo viaje, que me tendrá ausente de la oficina y de nuestras lecturas cotidianas, desde el lunes 5 hasta el 19 de mayo próximo. Durante estos días no tendré acceso regular al Internet ni a mis correos.

No hay mucho más que decir, más allá de lo ya dicho en anteriores comentarios, especialmente, en el de Octubre pasado, con excepción quizás de mencionar el inicio del “tapering” por un monto 10 billones de dólares mensuales, cada vez, en las últimas cuatro reuniones de la FED (incluyendo la de hoy) y a pesar del recién anunciado abismal crecimiento de la economía norteamericana en el primer trimestre del 2014, de 0.1% p.a., ahora con la Sra. Janet Yellen a la cabeza. 

Los desequilibrios, las deudas y la crisis de la economía global en general, se han seguido profundizando y desestabilizando en direcciones y con consecuencias conocidas las unas, y otras aún desconocidas e impensadas, como inevitable resultado de la continua e indiscriminada manipulación e intervención de los mercados financieros por parte de los bancos centrales. 


Sin embargo, los efectos del así llamado "tapering" ya habían sido más o menos “digeridos” por los mercados financieros por adelantado a partir de Mayo del 2013, cuando Ben Bernanke hizo el anuncio del inicio de este, sorpresivamente. 

Como ya conocemos, ante el solo anuncio de esta limitada pero creciente corrección de la política monetaria fácil (easy money) o "quantitative easing" puesta en practica por la FED, sin una fecha fija de inicio, fue suficiente para que la tasa de interés del Bono del Tesoro Americano a 10 años, el "benchmark" para los mercados de renta fija, prácticamente se duplicara de los niveles de 1.5% a 3%, y los mercados financieros entraron en pánico, obligando a los reguladores a salir pública y rápidamente, a tranquilizar a los mercados financieros en diferentes y sucesivas ocasiones. 

A pesar de ello, la tasa de interés a 10 años se ha mantenido relativamente elevada, en comparación a su nivel previo, oscilando entre 2.6 y 2.8% en la actualidad. Y los mercados emergentes enfrentaron los problemas típicos de la fuga de capitales, la devaluación intempestiva de sus monedas y caídas importantes en las bolsas de acciones, entre otros efectos. Pero el pánico en los mercados financieros fue superado... hasta ahora.

Esta es la primera etapa o fase del ajuste global.

Cabe mencionar la reciente invasión de Rusia a Ucrania y la unilateral anexión de Crimea, que ha sido comentada "in extremis" y desde distintos puntos de vista, en los artículos del blog y que está influyendo con nuevos e importantes riesgos potenciales, sobre la economía global. 

Este acontecimiento está aun en pleno desarrollo y sus consecuencias en este momento son impredecibles. 

Lo que ya es un hecho, es que el liderazgo norteamericano global se está viendo afectado negativamente. Lo que ya sucede desde algún tiempo atrás y que se hizo obvio con los acontecimientos primero en Libia, y luego con las islas Senkaku, en disputa entre Japón y China, donde la China declaró unilateralmente un límite aéreo, donde los aviones comerciales tienen ahora la obligación de reportar su paso, lo que fue aceptado por los Estados Unidos, pero no así por el Japón, creando así un clima adicional de potencial intranquilidad e inestabilidad para los mercados financieros globales.

Para no hacer más extenso este comentario, especialmente teniendo en cuenta que lamentablemente no mucho ha cambiado fundamentalmente desde nuestro último comentario de Octubre pasado, excepto principalmente por lo mencionado líneas arriba, les dejo algunos pensamientos para meditar, citando algunos extractos del último artículo de John Mauldin, El Costo del Código Rojo, donde el autor se refiere a una entrevista realizada a William White, el respetado ex-jefe de economistas del BIS (Bank for International Settlements), el banco central de los bancos centrales, con sede en Suiza, en la Revista Barron´s. 

El Sr. White dice sobre la política monetaria actual:

“La verdad es que nadie ha visto antes nunca algo siquiera parecido a la situación actual. Ni siquiera durante La Gran Depresión en los 30´s la política monetaria ha sido tan holgada. Y si Ud. se fija en los detalles de lo que estos bancos centrales están haciendo, todo es experimental, se improvisa en el camino. Yo estoy muy preocupado de cualquier política que tiene esta naturaleza.

"Después de Lehman", continúa el Sr. White, "muchos mercados se congelaron. Los banqueros centrales hicieron bien en tratar de mantener el sistema básico funcionando. Esto fue una buena gerencia de la crisis. Pero en mi carrera, siempre he distinguido entre tres etapas, prevención de las crisis, gerencia de las crisis y resolución de las crisis. Hoy en día, la FED todavía actúa como si estuviésemos en la etapa de gerencia de la crisis." 

"Pero estamos 6 años después. Y ellos están haciendo aún más de lo que hicieron al inicio. Hay algo fundamentalmente equivocado en todo esto. Y la FED ha evolucionado hacia una motivación completamente diferente. Del esfuerzo por lograr que los mercados operaran nuevamente, de repente y explícitamente, comenzaron a inflar los precios de los activos otra vez. El objetivo es que la gente se sienta más rica, hacer que gasten más y que todo esto, gotee a la economía para hacerla caminar de nuevo. Francamente yo no creo que esto funciona y creo que es extremadamente peligroso.”

El famoso y connotado economista de la escuela austriaca, Ludwig Von Misses, dijo:

“No hay manera de evitar el colapso final de un boom creado por la expansión del crédito. La alternativa solo consiste en si la crisis debería llegar antes, como el resultado del abandono voluntario de la política de expansión del crédito, o más tarde, como una total catástrofe final del sistema monetario involucrado."

Jaime Caruanael gerente general del BIS, recientemente afirmó, o mas bien, advirtió que las instituciones monetarias(bancos centrales) están en “serios riesgos de quedar sin capacidad de maniobra en la política monetaria sobre un horizonte en el tiempo".

Para terminar, citaré al mismo John Mauldin, al final de su última entrega "El costo del Código Rojo":


"Déjenme cerrar esta carta con el punto hecho gráficamente  en el cuadro del Banco de Inglaterra, a la mitad de esta carta (The cost of Code Red). Una vez que las compras de activos por parte de los bancos centrales se terminen, el BOE (Bank of England) espera que los precios reales de los activos caigan....fuertemente. 

Uds., notarán que no hay escala en el eje vertical y no hay línea de tiempo en el eje horizontal del cuadro. Nadie conoce en realidad el “timing”.

 
  
Esperando que estos pensamientos les sean de utilidad, a mi regreso, Dios mediante, retomaremos el análisis de los acontecimientos, su impacto en los mercados y nuestras estrategias de inversión, entre otros temas de interés general.

Un cordial abrazo, 


Gonzalo


Gyver & Guffin

By Grant Williams

April 28, 2014





“When you have eliminated the impossible, whatever remains, however improbable, must be the truth.”






“We all want to believe in impossible things, I suppose, to persuade ourselves that miracles can happen.”





“He possessed the logic of all good intentions and a knowledge of all the tricks of his trade, and yet he never succeeded at anything, because he believed too much in the impossible. Surprising? Why so? He was forever in the act of conceiving it!”


“She shook her head and whispered, “No. No! That can’t be true. Impossible!”

“You think things have to be possible? Things have to be true!”


This week’s TTMYGH revolves around “Macs.” The first is a man-turned-verb who was capable of extricating himself from seemingly hopeless situations, armed with an array of tools seemingly singularly unsuited to the purpose; and the second is an ingenious, though ultimately futile, plot device which has been used by everyone from Welles to Hitchcock to Tarantino.


I%20Heart%20Japan.psd


Though at first blush it’s hard to see a link between the two, in today’s world there are Angus MacGyvers everywhere, beetling away with duct tape and Swiss army knives, trying to extricate themselves from completely hopeless situations; and if they are to succeed before the credits roll, they must rely upon one very important thing: the suspension of disbelief by their audience.

That’s where the otherMaccomes in.

Man first.

Angus MacGyver was a troubleshooter. He worked for the fictional Phoenix Foundation as a secret agent and also for the US government in the (also fictional) Department of External Services.

Macguyver.psd 

Educated as a scientist and possessing an encyclopedic knowledge of the physical sciences, MacGyver had been a bomb disposal technician during the Vietnam War and possessed a distinctly pacifist outlook on life — he hated guns.

Also, his luck could scarcely be described as merely good.”
Somehow, over the course of seven seasons, MacGyver managed to get himself into some 139 impossible-to-get-out-of situations each of which he managed to navigate successfully by using conventional items in a distinctly unconventional way.

By way of illustration, in the pilot episode alone, MacGyver managed to do the following:

Impressive stuff. It’s no wonder he ended up becoming a verb. But to witness perhaps his greatest-ever escape, afford yourself two minutes to watch THIS little stunt to see how MacGyver escaped from his own coffin.


Coffin.psd


I couldn’t help but think of MacGyver this past week as I sat chatting with a colleague about the situation Japan now finds itself in.

I won’t recap the details of the straitjacket into which the Japanese have been strapped for the past two decades enough ink has been spilled on that subject already, including in a recent Things That Make You Go Hmmm... entitled Avenomics — but my conversation this week stemmed from the following statement, made by me to myself, as I leaned back in my chair after reading an article about proposed changes to the GPIF (Government Pension Investment Fund), Japan’s public pension fund:

Japan really is totally f*****.”

What led me to that well-thought-out and eruditely expressed conclusion? Read on.

In case you are not familiar with the GPIF, it is the largest pool of government-controlled investment capital on the planetoutstripping even the infamous Arab sovereign wealth funds.

The GPIF controls ¥128.6 trillion, or $1.25 trillion, and to say the organization is somewhat risk-averse is akin to calling the Kardashian family somewhat shameless.

The GPIF holds almost 70% of its assets in bonds — and the vast majority of them are of the local variety. The reason for this? Well that would be because the GPIF is (and has always been) run by bureaucrats from the Ministry of Health, Labour & Welfare, as opposed to, say, investment professionals.

But that’s probably no bad thing, because no investment professional worth his salt would have bought so many JGBs; so if GPIF didn’t buy them, THAT would be a big problem for the Japanese government AND the BoJ.


2269.png 
Source: GPIF


How did that allocation to domestic bonds do last year? Well, as it turns out, not so great:




Q1 2013
Q2 2013
Q3 2013
Q4 2013
Total 2013
Domestic Bonds
-1.48
1.18
0.18
-
-0.14
Domestic Stocks
9.70
6.07
9.19
-
27.05
Int’l Bonds
4.01
1.64
8.16
-
14.34
Int’l Stocks
6.14
7.13
16.23
-
32.17

Source: GPIF


Fortunately, over the last twelve years the GPIF has managed to meet its targets — by growing at an annualized rate of 1.54%.

Thankfully for the GPIF, despite their largest allocation throwing off negative returns, the BoJ’s actions in weakening the yen boosted the Nikkei, and the central-bank-inspired strength in equities and bonds elsewhere in the world helped GPIF’s performance to pass the smell test for 2013.

Now, when it comes to bureaucracy, Japan is in a league all of its own. My first up-close experience of this came in 1989 when I went to get a driver’s license after moving to Tokyo. Anybody who has attempted to complete that fairly straightforward objective in Japan knows that it requires the best part of a day traipsing upstairs and down between several counters, getting the same piece of paper stamped by numerous people in a very specific order. Several visits are required to the same person — but only in the correct order.


Jap%20Drivers%20License%20small.jpg


Maybe this process has changed 25 years on, maybe it hasn’t. I’m willing to bet on the latter.
Anyway, amongst themselves, foreigners in Japan have a saying which strikes at the very heart of this little bureaucratic problem:

Everything makes sense once you realize Japan is a communist country.”

Aki Wakabayashi’s book Komuin no Ijona Sekai (The Bizarre World Of The Public Servant) sprang from her 10 years working at a Labour Ministry research institute and lifted the lid on some of the peccadilloes of Japan’s civil service.


The facts unearthed by Wakabayashi are remarkable:

(Japan Times): The national average annual income of a local government employee was ¥7 million in 2006, compared to the ¥4.35 million national average for all company employees and the ¥6.16 million averaged by workers at large companies. Their generosity to even their lowest-level employees may explain why so many local governments are effectively insolvent: Drivers for the Kobe municipal bus system are paid an average of almost ¥9 million (taxi drivers, by comparison, earn about ¥3.9 million).

School crossing guards in Tokyo’s Nerima Ward earned ¥8 million in 2006. (Such generosity to comparatively low-skilled workers may explain why in the summer of 2007 it was discovered that almost 1,000 Osaka city government employees had lied about having college, i.e., they had, but did not put it on their resumes because it might have disqualified them from such jobs!) Furthermore, unlike private sector companies, public employees get their bonuses whether the economy is good or bad or, in the case of the Social Insurance Agency, even after they lose the pension records of 50 million people (2008 year-end bonuses for most public employees were about the same as 2007, global economic crisis notwithstanding).

In addition to their generous salary and bonuses, public servants get a wealth of extra allowances and benefits. Mothers working for the government can take up to three years’ maternity leave (compared to up to one year in the private sector, if you are lucky). Some government workers may also get bonuses when their children reach the age of majority, extra pay for staying single or not getting promoted, or “travel allowances just for going across town. Perhaps the most shocking example Wakabayashi offers is the extra pay given to the workers at Hello Work (Japan’s unemployment agency) to compensate them for the stress of dealing with the unemployed.

Japan’s bureaucracy is extreme but hardly unique, so I won’t dwell on its absurdities; but these examples at least give us some background for understanding the GPIF.

The decision-making chart of the organization is a masterclass in Japanese process. Where else would you have specific departments responsible for “demands for improvements” and “deliberations”?

GPIF%20Process.psd 
Source: GPIF


Back in November 2013, a seven-member panel led by a Tokyo University professor Takatoshi Ito and convened by PM Shinzo Abe published its final recommendations for the future of the GPIF, and those findings set the behemoth on a course into far more turbulent waters:

(Pensions & Investments): The panel’s Nov. 20 final report said the GPIF’s 60% allocation to ultra-low-yielding Japanese government bondsdefensible in the deflationary environment of the past decadeshould not be maintained in the inflationary one Mr. Abe has promised as a centerpiece of his quest to revive Japan’s economy.

The seven-member panel ... urged the GPIF and other big public funds in Japan to diversify into real estate investment trusts, real estate, infrastructure, venture capital, private equity and commodities, while shifting more assets to active strategies from passive and adopting a more dynamic approach to asset allocation.

Governance of those public funds, with combined assets of roughly $2 trillion, should be strengthened by making them more independent of the ministries that oversee them.

Now, it’s extremely hard to fault the logic underpinning the recommendations made by Ito’s panel — though naturally, with this being Japan...

Some observersnoting that previous calls for reform had come to naughturged caution.

The recommendations make sense, but the challenges of revamping investments at a fund controlling such a large chunk of Japanese retirement savings will be considerable, warned Alex Sato, president and CEO of Tokyo-based Invesco (IVZ) Asset Management (Japan) Ltd.

To put the size of the GPIF into perspective, should the decision be made to allocate a mere 5% of its assets to a particular asset class, that would require the deployment of $60 billion.

The redeployment of those holdings of JGBs is likely to cause future problems, but that didn’t concern one of the GPIF panel members, Masaaki Kanno, an economist at JP Morgan in Tokyo, who, after the findings were published, made a couple of predictions:

(P&I): In a Nov. 20 research note, Mr. Kanno predicted the GPIF would be permitted enough flexibility to allow allocations to yen bonds to drop to 50% by the summer of 2014.

The Bank of Japan’s recent policy initiative to flood the market with liquidity, meanwhile, could set the stage for a seamless transfer of that huge amount of Japanese government bonds, Mr. Kanno said.

Eventually, Japanese government bonds should drop to between 30% and 40% of the GPIF’s portfoliohigher than the 20% to 30% range typical of leading public pension funds abroad to account for Japan’s rapidly aging demographic profile, Mr. Kanno said. Meanwhile, another ¥30 trillion ($300 billion), or a quarter of the fund’s assets, should eventually shift into “risk assets,” according to the J.P. Morgan report.

The BoJ certainly does have a policy initiative to “flood the market with liquidity,” but that policy initiative is the continuation and expansion of a policy that has been in operation for 20+ years namely, the purchasing of the government’s own debt with freshly printed yen.

In 2001 the Japanese termed it ryōteki kin’yū kanwa, but today everybody knows it as quantitative easing.

In a paper which analyzed Japan’s initial experimentation with QE, published in February 2001, Hiroshi Fujiki, Kunio Okina, and Shigenori Shiratsuka (all three senior BoJ economists) suggested that once a zero interest rate had been reached, if the situation still appeared dire, MacGyvering an alternate solution might not be the greatest idea in the world:

(Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists): Further monetary easing beyond the zero interest rate policy, most typified by the outright purchase of long-term government bonds, should be viewed as a bet which we would only be forced to explore in the event the Japanese economy stands on the brink of serious deflation. Considering the uncertainty and risks surrounding these unconventional measures, it is quite inappropriate to introduce them merely on an experimental basis. Of course, this does not mean that further monetary easing may not be warranted in any circumstances, nor that other easing measures not covered in this paper are infeasible...


2329.png 

What the hell did those guys know, anyway?

Indeed. As if looking into some sort of crystal ball, Messrs. Fujiki, Okina, and Shiratsuka continued:

With regard to monetary policy in Japan, there seems to be some oversimplified idea that the adoption of inflation targeting would be a panacea for current economic difficulties. This should remind central bankers, who must make policy decisions on a real-time basis amid drastic structural transformation, of the unfruitful traditionalrule versus discretiondebate in terms of monetary policy implementation.

Perhaps Abe and Kuroda prefer watching reruns of Friends to perusing BoJ policy recommendations?

The subsequent expansion of the BoJ’s QE policy can be seen clearly in the chart on the previous page. It highlights beautifully the problem with heading down the treacherous QE trail: ever-increasing amounts of money must be printed to keep the wheels turning.

Once you start, to stop is not a decision that is made by you, but rather it eventually gets made for you. In the meantime, your balance sheet just swells and swells. The BoJ’s has increased almost five-fold since 1997 and is up 80% since the beginning of 2012:


2343.png 


... and, if you’re Japan, your monetary base goes vertical:



2358.png 


That’s three very similar charts, but the next one looks nothing like the preceding ones:


2373.png 

And therein, as The Bard (who celebrated his 450th birthday this week) almost once said, lies the rub.

Japan’s population is actually declining fast. And under the crush of that breaking statistical wave, everything gets harder for Japan.

Japan’s populationpyramid looks more like a top-heavy baking dish. There are already more over-65s than under-24s; but it is estimated that by 2060 Japan’s population will have fallen from 128 million to 87 million, and roughly half of those remaining will be over 65.


2387.png 


The ONLY answer for Japan is immigration lots of it — but that, I am afraid, is a total non-starter for the insular Japanese. The depopulation problem already loomed on the horizon like a distant oil tanker in 1989 when I lived in Tokyo. What has changed since then is that the tanker has now docked.

In 2003, it was estimated by the UN that Japan would need 17 million new immigrants by 2050 to avert a collapse of the very pension system we’re examining this week. Those immigrants would amount to 18% of the population in a country where immigrants currently amount to...wait for it... 1%.

It gets worse.


2414.png

Of that 1%, most are second- or third-generation Koreans and Chinese, descendants of people brought to Japan from former colonies.

As of October 1, 2013, there were all of 1.59 million foreigners in Japan, and that is after net immigration ROSE for the first time in 5 years, with 37,000 new immigrants taking a bit of the sting out of the 253,000 decrease in Japanese citizens in 2013.

So... Japan’s fate is set. In coming years the ageing population will be drawing down its pension funds at an ever-increasing pace, even as the largest pension fund in the world is being forced by the government into allocating more of those funds to riskier assets in order to try to stimulate growth in the moribund economy.

Meanwhile, the Bank of Japan is embarking on an experiment in monetary prestidigitation the likes of which has never before been seen; and in order for it to be successful they will need the GPIF to not only not SELL JGBs but to BUY MORE of them.

In addition, Shinzo Abe is promising the Japanese (and every holder of JGBs, which are yielding a paltry handful of basis points) that he will generate 2% inflation, thus rendering their JGB holdings completely useless.

The whole thing is madness madness built on the promise of the delivery of a dream.

Already the BoJ is buying up to 85% of some JGB issuances, and an estimated 91% of Japanese bonds are held domestically. What do you think happens when the GPIF turns from buyer to seller?

Uh-huh. The BoJ will have its work cut out to maintain order.

How tenuous is the BoJ’s grip on their bond market?

Well, last month the BoJ announced that it would be buyingjust¥170 bn of long-term bonds instead of the ¥180 bn the market expected. The result?

(FT): Traders’ explanations for a sudden surge in yields at about 10:15 am in Tokyo ranged from a “fat fingertrade in JGB futures which saw prices for June delivery drop one whole point from 144.80 to 143.80 — to a simple sell-off exacerbated by algorithmic trading.

But there was no doubt about the trigger: a 10:10 am announcement from the central bank that it was looking to buy Y170bn of long-term bonds, rather than the Y180bn the market had expected.

“I think the BoJ has induced some form of unwarranted volatility, which is not being taken kindly by the market,” said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch in Tokyo. “With rates near zero the only thing the BoJ can do is to contain volatility, and today they’re doing a very poor job.”

Mark my words, this is going to end VERY badly. Very badly indeed.

PAGING MR. KYLE BASS! MR. BASS TO THE FRONT DESK, PLEASE:

(Beacon Reports): KYLE BASS: That plan, one of the three arrows in Abe’s growth strategy (called ‘Abenomics’), has the BOJ buying just over ¥60 trillion of new bonds each year for the next two years. It effectively doubles Japan’s monetary base. Considering the likely fiscal deficit for this year and next is running about ¥50 trillion each year, or close to 11% of GDP, I think the BOJ can only buy another 10 or ¥12 trillion of JGBs. I don’t think that cushion is going to be enough to monetize the entire fiscal deficit if they are going to be the buyer of last resort.

The key question is, will the BOJ be able to hang on to rates? I think they can in the near-term and I think they can’t in the medium to long-term. If investors holding JGBs actually believe that ‘Abenomics’ will work, then it creates a problem — the ‘Rational Investor Paradox’ — where investors rationally sell some of their JGBs because they are being told to expect negative real rates of return if the administration achieves its 2% CPI target.

Whether that means they sell some or all of them is up to the individual sellers. One bank sold more than 20% of its JGB ownership in the first quarter. If 5% of owners sell, that’s another ¥50 trillion. The reason you’re seeing so much bond market volatility, even though the BOJ is actively trying to keep a lid on rates, is that the BOJ is being overwhelmed by selling despite its large purchase program.

Bravo, Kyle.

Kyle brings up the topic of Abenomics and Abe’s fabledthree arrows,” which supposedly, once fired, would magically fix all Japan’s woes.

The first arrow, massive monetary easing, has been launched; and, depending on how you measure these things, it has either been a magnificent success or has put the final nail in Japan’s coffin. Optically, it has done what was intended (weaken the yen, pump up the Nikkei, and pull JGB yields even lower), so the Japanese government is counting that one in the win column. Me? I think, once hindsight can take a look at Japan properly, Abe’s QE will be seen as an arrow shot right through the faintly beating heart of the country, finally killing it. But we’ll have to wait and see.

The second arrow is the targeted ¥10.3 trillion ($116 billion) of fiscal support that includes investment in ageing infrastructure and tax breaks to encourage R&D, the hiring of new employees, the raising of wages, and the buying of capital equipment. That arrow too has been fired, and the jury is once again decidedly out on whether any long-term success will result.


Mori%20san.psd


That leaves Abe’s third arrow.

Before we get to that one, a little story of how the policy got its name.

In 16th-century Japan, according to legend, a daimyo (feudal lord) named Motonari Mōri told each of his three sons to break an arrow in half. Each of them duly did as their father bade them. Mōri then told his sons to tie three arrows together in a bundle and try to break all three at once.

None of them were successful.

Do you see what Abe and his advisors were doing here? Isn’t it brilliant? Such a wonderful allegory. Who wouldn’t buy into that idea? Well, the Japanese certainly did (up to a point); and foreign investors, guaranteed a sinking yen and a rising Nikkei, also came to the partythough one can’t help but think they have a taxi waiting outside and won’t be sticking around for the slow dancing.

But there’s still that damned third arrow.

That is the one that involves real, structural change; and I’m sorry to have to be the one to mention it, but the Japanese don’t do real structural change.

This brings me to our otherMac” for today.

Abe’s third arrow is little more than an ingenious device designed to keep the watching world focused on something that will ultimately prove irrelevant to the plot.

In movie parlance, it’s a “MacGuffin”:

(Wikipedia): [A] MacGuffin is a plot device in the form of some goal, desired object, or other motivator that the protagonist pursues, often with little or no narrative explanation. The specific nature of a MacGuffin is typically unimportant to the overall plot. The most common type of MacGuffin is an object, place or person; other types include money, victory, glory, survival, power, love, or other things unexplained.

The MacGuffin technique is common in films, especially thrillers. Usually the MacGuffin is the central focus of the film in the first act, and thereafter declines in importance. It may re-appear at the climax of the story, but sometimes is actually forgotten by the end of the story.

Sound familiar?


We%20Happy.psd


Think of Abe’s third arrow as Citizen Kane’s sled or Pulp Fiction’s briefcase — a plot point that initially assumes tremendous importance but fades into irrelevance by the end of the movie.

Abe has done a masterful job at getting the world to buy into his reform program, but the world was only too ready to do so after two decades of false dawns in Japan.

The Japanese public were ready for their country to cast off the shackles of deflation (although, to a population ageing as fast as the Japanese are, a little deflation is a wonderful thing), and investors around the world were happy to believe that this was finally going to be the time when buying the Nikkei would lead to outperformance (providing your currency was hedged, of course). FX traders just wanted a central bank-backed trade to put on.

But as with all central bank-inspired moves, the reality here is not all about reform and structural change, but rather about a group of investors simply front-running the BoJ’s largesse.

The investment community will play ball until the moment juuuuuuust before the crashing realization dawns that Abe can’t fire his third arrow — and then they’ll say thank you for the free ride and exit stage left.

Preliminary committee findings which suggested that radical overhaul of Japanese employment law, healthcare, and agricultural policy be part of the third arrow were watered down, and a vague compromise was wafted in front of the world — with the promise of so much more to follow.

In an interview with CNN’s Fareed Zakaria earlier this year, Abe explained the true significance of the third arrow:

What is important about the third arrow, structural reform, is to convince those who resist the steps I am taking and to make them realize that what I have been doing is correct, and by so doing, to engage in structural reform.”

Read that again.

Yes folks, the important part of structural reform in Japan is to convince people that Abe is correct. If he can convince them he is right, they will have engaged in structural reform.

Confused?

You should be.

This is how Japan works — or doesn’t.


Falling%20Wages.psd


Immigration reform has been widely recognized as the only answer to Japan’s crippling demographic problem for well over three decades. Nothing has been done about it.

How about the “Wage Surprise” — increasing wages on a national basishailed by Abe as the key to lifting Japan out of the doldrums, and a key feature of Abenomics?

(Bloomberg, March 4, 2014): Japan’s salaries increased for the first time in almost two years in January as companies boosted pay for part-timers, aiding Prime Minister Shinzo Abe’s effort to end 15 years of deflation.

Base pay excluding bonuses and overtime rose 0.1 percent from a year earlier, the first gain in 22 months, the labor ministry said in Tokyo today.

Yep, a 0.1% increase in base pay. 

However...

Overall pay fell 0.2 percent, the first drop in three months.

Doh!

Subsequently, Japan’s wages have seen modest increases, with base pay increases hitting 16-year highs. Good,” I hear you cry. Well yes, only, that 16-year high equates to a 2.39% risenot QUITE enough to make up for the 3% consumption tax increase which kicked in on April 1.

If Keynesian loon former BoE policymaker Adam Posen is to have his way, those wages had better start spiraling up fast:

(WSJ): The goal of Abenomics, Mr. Posen said, is not to make Japan richer or improve its fiscal position. Rather, it’s to establish a strong base from which Japan can help remake the Asian order in coming years — “a nice way of saying” that the ultimate purpose is to enableJapan and its neighbors not to be dominated by China.”

There’s a window of about a decade to remake Japan’s economy toward that goal, Mr. Posen said, but over that time it needs to average economic growth of about 1.75% a year and raise its consumption tax to 20%.

Markets will eventually tire of Abe’s continual promises that more is coming, so he desperately needs to somehow break the entrenched deflationary attitude in Japan.

(WSJ): In a survey of 1,000 consumers on March 29-30 by broadcaster Fuji News Network, 69% said they had not made any special purchases ahead of the sales tax rise, and 77.4% said they didn’t feel an economic recovery was under way.

Good luck with that attitude problem, Shinzo.

This week we got a look at how Abe is faring with one of his promises, that of guaranteed 2% inflation.

Core CPI (excluding food and energy) rose 1.3% in Marchunchanged from the previous month and lower than analyst forecasts.

Of course, that was taken as a sign that further easing by the BoJ would be forthcoming...

And round and round it goes... until it stops.

The briefcase in Pulp Fiction ONLY works because we DON’T find out what is in it.

Abe’s third arrow can be loaded into the bow, but it can’t be fired once and for all, because if it IS fired, the game is up. There will still be continual promises of more to come, and markets may buy into that for a while; but, like all central bank-inducedboom times,” Abenomics has a shelf life, and that is nearing an end.


Abenomics%20More%20Flat.psd


The changes at the GPIF are potentially disastrous, and Kuroda’s BoJ and Abe’s government are desperately trying to MacGyver their way out of an impossible situation, armed only with hollow promises and faith, when what they really need is duct tape and a Swiss army knife.

When asked by François Truffaut in a 1966 interview how he would describe a MacGuffin, Alfred Hitchcock illustrated it perfectly with this story:

It might be a Scottish name, taken from a story about two men on a train. One man says, “What’s that package up there in the baggage rack?” And the other answers, “Oh, that’s a MacGuffin”. The first one asks, “What’s a MacGuffin?” “Well,” the other man says, “it’s an apparatus for trapping lions in the Scottish Highlands.” The first man says, “But there are no lions in the Scottish Highlands,” and the other one answers, “Well then, that’s no MacGuffin!” So you see that a MacGuffin is actually nothing at all.

Abenomics is a plan by which to change Japanese behaviour; but as anyone who has spent any time in that wonderful, perplexing country will tell you, the Japanese do NOT change their behavioureven when facing a demographic disaster.

Sorry, but Abenomics is actually nothing at all.