Sunday, January 06, 2013

Abenomics - Take Their Money And Run

Over the past few weeks I have heard from three persons who should know better statements on the order of "despite criticisms of Abe Shinzo's economic stimulus plans, the markets have been sending a strong signal of confidence in the new government."

Really? A massive (and entirely legal) pump-and-dump operation and capital flight are signs of confidence in Abenomics?

If the equities markets were rising due to the buzz around over the adoption of the a new technology, great. If the equities markets were rising on a resolution of the political problems between Japan and its neighbors, great. If the equities markets were rising on a strong signal from the nation's courts that they will protect the rights of shareholders, great.

These are real, structural changes. The equities markets should rise in response.

However, if the equities markets rise in anticipation of the arrival of a titanic wave of cash from the Bank of Japan, cash in desperate need of a place to part itself, then we should call the rise what it is: smart money bidding up the prices of parking places prior to arrival of a lot of dumb money.

The current rise is not, of course, solely due to the monetary side of Abenomics. The proposed increase in public works is plumping up shares in the construction sector -- which is entirely cool, as long as folks in the Abe entourage did not buy into the sector prior to the announcement of the new spending priorities.

Hoping that folks will not take advantage of inside information, however, is self-delusion. One can only hope that the scale of the skim was rather modest.

It takes a blinding pathological obsession with the needs of exporters, however, to consider the fall in the price of the yen to be a vote of confidence in the Abe government. If there were confidence in the Japanese economy under Abe the yen would rise. Folks would be buying yen to get in on the fun.

However, the smart money, seeing the Abe fiscal policies blowing out the budget and the politicization of the Bank of Japan discombobulating prices signals, is getting out while it can sell its yen holdings at a high price. When one considers that these sellers have an inherent interest in getting out as slowly and unobtrusively as possible so as to prevent a run on the yen, the scale and speed of the yen's drop of the last few weeks should be jaw-dropping.

Abenomics is grand larceny. It takes, in the form of the taxes and the value inherent in the yen, money from the people and gives it to the supporters of the Liberal Democratic Party.

That sounds wrong on principle. It would not be if the supporters of the LDP were to take that money, invest it and create profit and/or societal benefits all could share. As we know, however, supporters of the LDP are net consumers of value: the projects they invest in are worth less upon completion than the amount invested. As for the financial profit made on arbitraging the debasing of the currency, I have little faith in it returning to the government in the form of higher tax revenues. If the smart puppies can make money foisting depreciating assets on the unsuspecting, I am fairly sure they can avoid the tax man as well.


Ἀντισθένης said...

I think you have summarized not just the LDP's approach, but all the neo-con governments' financial policy (read larceny). Excellent.

Anonymous said...

I haven't done the math but I reckon that if you look at the Nikkei index in dollar terms it has actually underperformed global equities rather than rallied with Abe's win. That is, the Abe rally is nothing more than an FX adjustment to the Nikkei tagged to rising global equities.

Tony said...

Thanks for being a voice of sanity among the cacophony of nonsense

Anonymous said...

So everyone is an economics expert now. Dude, you should stick to...whatever it is you do well.

MTC said...

Anonymous -

Correct me if I am wrong, but in order for the movements to cancel each other out investors would have to have 1) yen liquid asset holdings that are not hedged for currency fluctuations and 2) global portfolio weightings that have not been adjusted to reflect the outcome of the election.

Anonymous said...

I'm not quite sure I'm clear on your clarification questions.

I'm not a very literate guy, so let me try again:

In general, when INDU rallies, the NKY follows suit. The opposite is also true as is the converse.

Similarly, in general when JPY rallies, the NKY sells off. (This is partly due to multinational Japanese companies being no more valuable globally just because of a JPY rise)

So a NKY rally at the same time as a global equity rally AND a JPY sell off is exactly what one would expect.

Good timing for Mr. Abe more than anything else.

MTC said...

Anonymous -

Looking at the Nikkei versus DJIA I am afraid I see delinkage rather than linkage since April. The rise in the Nikkei since the beginning of December has been straight up, while the DJIA has been meandering upward.

From your explanation, investors take money off the equities table after a currency rises and increase their investment as a currency falls.

Anonymous said...

I'm still not sure you are understanding what I'm trying to say. Again, apologies, i'm a terrible communicator. I'll just do the math:

My point was that in USD terms the Nikkei "Abe Rally" may not even exist. While the Nikkei is up 23% and 10% since November 14th and December 14th (last day before the election) respectively, the INDU is also up: 7% and 2%. My rough guess was that the JPY weakening would more than make up for the raw Nikkei outperformance.

As it turns out, in USD terms the NIkkei is up 11% and 4% since the 14ths of November and December which is an outperformance 4.5% and 1.4%. So there actually is an "Abe Rally" but it's a paltry 1.4% outperformance since he was elected.

MTC said...

Anonymous -

I am confused because you seem to be talking about two different impeti propelling Japanese equities upward. One is linkage between the globe's equity markets. Another is a response to currency movements. Which one is doing what?

Anonymous said...

Yes, global equities and fx are two large influences on the nikkei.

In general,
global equities up --> Nikkei up
USDJPY up --> Nikkei up

JPY is quoted in the markets (and media) as USDJPY so a weakening JPY takes the form of a rising USDJPY. When I referred to a rallying JPY this means a declining USDJPY. Poor wording on my part.

My initial hypothesis was that because both global equities and USDJPY were up quite a bit, that the "Abe Rally" was nothing more than outside effects. As it turns out there is an "Abe Rally", but it's a meager 1.4% (see previous post for the math.)