Thursday, October 11, 2007

Inflationary Teflon?

As a Cassandra, I am in the business of making prognostications that others find unpleasant, but uncannily are proved worthy by the passage time. So straight to business: Should global asset prices and global commodity prices continue their romp as result of uber-easy global liquidty, Japan will finally experience the long-sought after magical tingling of inflation, and feel it they will! A weak Yen, roaring input, material and intermediate goods prices, money-a-plenty, and a weeny-less BoJ. Yes, you have heard the "D"-word for the last time. The result, until trade partners dance unmercifully upon the heads of their Japanese counterparts, may well be that Japan experiences some of the most negative real interest rates in living memory. If ever there was a time to gear-up to buy domestic Japanese assets, it would be prior to the unfolding of such a scenario. Be certain to hedge your currency risk until such time as Mrs Watanabe can resist no longer and trades her short Yen for long Nikkei....

15 comments:

Macro Man said...

I was intrigued to see that Japan's largest bakery (cannot remember name) is riaisng the price of bread for the first time in 17 years....

phaedrus said...

Yamazaki Baking.

But will we get growth with that inflation? Are we trading the D-word for the S-word?

"Cassandra" said...

The analogy I think of is that Mr Neat Japan is living underneath the apartment of uncivic-minded fatbastard who turned on the water to fill his tub and then went to the bar. The tub has, by now, long overflowed and the water has begun to fill fatbastards entire flat. It is deterministic that it will begin to leak below, possibly causing the ceiling and chadelier to fall in rather dramatic fashion.

There is no escaping demand-pull, monetary-induced inflation - especially when you;re proactively sporting a weak currency for parochial advantage.

Phaedrus - How much growth can there be when for lack of anything else to invest in you begin building bridges to nowhere? But that misses the point. Food retailers, as Walmart has shown, will see healthy nominal sales increases from inflation without real growth, and with constant margins, consequential nominal earnings growth. Poor saps owning JGBs at less than 2%, well, ummm errrrr. On any medium-term view, one should be borrowing long and leveraging to buy japanese stocks if only because equities provide a halfway hedge that JGBs don't. The real-estate arb with REIT prices getting smashes since June is as low-hanging as the fruit ever gets, unless one possesses information about international central bankers' resolve to whip inflation that no one else in the amrket seems to have (or believe).

Anonymous said...

MM - bread is not a part of core inflation ;)

Macro Man said...

Ahhhh....I forgot. Like their Chinese compadres, Japanese workers don't need to eat, either! ;)

Richard said...

I understand the feeling that REITs in Japan are attractive because they are down. But, isn't the reduced population in Japan a hindrance to capital gains? Less people = low real estate prices; kind of like the Black death effect on real estate pricing in Siena in the middle ages. If you want real estate bargains, try Michigan and Ohio, and don't forget to turn out the lights before you leave.

Also, you did point out that their ceiling is about to fall in due to thoughtless neighbors!

Mike said...

Cassandra can you recommend a good japanese online trading brokerage with support for english or a stock screening service for TSE.

"Cassandra" said...

Richard,

In the Tug-o-war between asset inflation and demographic destruction, I asset inflation will win - especially in the cities Take Greece where the countryside has become so denuded that the localities will GIVE away land and shack to anyone willing to come back and live, work, & farm (not to urbanites or Oprah looking for countryhome sadly), yet prcies in Athens continue to vault strongly. Moreover, just a desire for lebensraum would soak up exces supply, since the average living room in Nippon is the size of a large American sofa.

Finally, the "feeling" of attractiveness is NOT because they are down, but because the relative value that they offer is WAY up at a time, when this Cassandra sees other asset prices doing moonshots - some even in Japan. It is a veritable no-brainer to borrow at 0.50% and invest in something in the same currency trading 0.8x book, fully occupied at currently undemanding rents, with an unleveraged or lowly leveraged cap rate closer to 6 or 7% - particuarly when global liquidity is on a rampage. Yes mark-to-market capital losses are possible should the world fall headlong into deflation, but it looks at the moment as if the world is going to go the inflation rate with real rates lagging both consumer and asset price rises. What could be better than leveraged spec under such circusmtances?

Mike said...

Many japanese shares are a no brainer buy at the moment based on valuations. j-REITs included. You get a huge yield advantage over money market, rents for commercial and residential properties look cheap from international perspective and are rising for the 1st time in many years. The aging population doesnt need to be a problem. People that have not b een to Japan dont know and can't imagine that the japanese are living in 600-900 foot homes compared to the 2400 sq feet in US. So if the public psychology changes and they suddenly prefer to live on more area prices might rise exponentially. But REITS are just one of the no brainers many Banks have been hit hard 20-30% down in the liquidity crisis despite having little to no exposure to subprime debt or commercial paper markets. Many small industrial companies trade below book and have a divident yield of 1-3% still a nice margin over the ridiculous 0.5%.

Also to me Japan looks like a contrarian play no one seems to be interested in buying japanese shares. There is no huge public interest interest no swarms of foreign investors like in Emerging Markets and Central Europe. So you get both the fundamentals and the sentiment indicators in your favor.

"Cassandra" said...

Bravo, Mike.

And do YOU think you should hedge your currency exposure or that when flows return and it is contrarian no more, the demand will overwhelm the carry trade and outflow....?

conehead said...

"Yes, you have heard the "D"-word for the last time."

I wouldn't be so sure about that. Mrs Watanabe shorting the yen restrains Japanese money supply growth (and by the reverse process boosts global money supply). It's when Mrs W. decides home is the place to be that the both the currency and inflation will soar.

"Cassandra" said...

since this is [going to be] imported commodity-based, seeping into broader cost-push inflation, the money supply itself should have little effect.

there initially will be tug-o-war, yielding to appreciation as Mrs W bangs heads with round-eye specs, but as the chinese will find out, a soaring currency to an inveterate mercantilist is a winner's curse, that may well be delfationary in the end

conehead said...

Twaddle! If import prices rise while the money supply stays constant, there will be reduced consumption of imports and/or domestic goods: the overall price level remains constant.

elvis said...

Cassandra,
Been checking your blog once in a blue moon since I saw a link to it over at EconomistView.
This post has peaked my interest--living in Nippon as I do.
I've got a former Miss Watanabe as my better half. Where should I direct her financial interests? When I say land, she laughs. When I say stocks, she rolls her eyes. Our yen is languishing in uninteresting banks..... Arghhh.

"Cassandra" said...

Heck, IF I were swimming in YEN and Japan-based, I would be looking for a nice farm someplace rural where I can let the land to a local farmer and use the house for get-away, and some REITs, (JointReit 8971 7% yield 8% cap rate 0.6 book), Keihanshin Real Estate (8818) , for stable income and I like Itochu and Sumi Corp and Iwatani as leveraged plays on assets and intra-Asian trade.
There are Regional Banks will also at 0.6x book that even with no growth have potential catalysts are cheap enough to buy and reasonable stores of value.

And small cap gro fund - Ed Merners' Atlantis or small cap value like Bob Macrae's Arcus would be nice.