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Posted on 02/10/2008 12:26:28 AM PST by bruinbirdman
There is still $300bn of bad debt out there, and Japan could be hiding most of it.
Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.
The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.
The nagging fear is that Japan's lenders - the conduit for the world's greatest stash of savings - have taken on a far bigger chunk of mortgage securities, collateralised loans obligations and other exotica from America's structured credit boom than they have yet revealed.
Americans and Europeans have so far confessed to $130bn of the estimated $400bn to $500bn of wealth that has vanished into the sub-prime hole. Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country's strict new audit codes by the end of the tax year in March.
"We think this is where the next big problem is going to pop up," said Hans Redeker, currency chief at BNP Paribas.
"We know from Bank of Japan's lending survey that the banks are already tightening hard, so something is brewing. Right now, we are in the lull before the second storm in global markets, and Asia is going to be the source of the nasty surprises," he said.
The iTraxx Japan index measuring default risk of 50 Japanese companies saw its biggest one-day jump ever on Thursday to 77.5. Rightly or wrongly, it is flashing a serious distress signal.
What we know is that Japan's economy - still the second biggest in the world by far - has fallen over a cliff since October. It remains joined to America's hip after all. The decoupling theory has failed its first test.
Japan's machine orders dropped 2.8 per cent in November and a further 3.2 per cent in December. January housing starts fell to the lowest in 40 years, down 18 per cent on the year. Tokyo property was off 22 per cent. Can this still be blamed purely on a change in building rules?
"Recession is a clear and present danger in Japan," said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs. "The leading indicators are deteriorating very sharply. Inventory is piling up at a rapid pace. There are clear signs of deceleration in exports of steel and semi-conductors to China," he said.
Yes, China. It turns out that the intra-Asia trade that was supposed to immunise the region against a slump is a disguised supply-chain ending up in the US market. American shoppers still make 30 per cent of global demand, just as it did a decade ago. Nothing has really changed.
"We think the Bank of Japan may have to start easing by the middle of the year," said Yamakawa.
There is not much monetary ammo left. Interest rates are 0.5 per cent. So it's back to zero, and helicopters of central bank cash ("quantitative easing"), those peculiar hallmarks of Japan's past battle with deflation. The brief attempt to "normalise" Japan Inc has already failed.
We tend to forget that Japan remains the world's top creditor nation by far, the shy master of fate. The country's net foreign assets of $3,000bn roughly match the net debts of the US.
The yen "carry trade" - borrowing cheap in Tokyo to chase yields from New Zealand, to Brazil, Iceland, and above all Britain - has juiced the global asset boom this decade by $1,000bn. It is perhaps the biggest liquidity pump of them all, yet it stopped pumping in August. Indeed, it is sucking the money back out again. The yen is soaring.
Where have the Japanese recycled the quarter trillion dollars they earn each year from their surplus? Official data shows that their holdings in US Treasury bonds have not risen.
The Swiss offer us a clue, says Redeker. They are Europe's Japanese, champion savers looking for returns abroad. They devoured US sub-prime debt on a much bigger scale per capita than the Americans. Hence the $24bn in write-downs by UBS.
So far, Japan's biggest three banks have admitted to just $4.7bn in total losses between them. The figure is rising. Mitsubishi, the biggest, has just raised its tally to 12 times the sum admitted in November. This looks like a replay of the early 1990s when fear of losing face delayed the awful news.
Hong Liang, Beijing economist for Goldman Sachs, is not much more hopeful about China's prospects this year. "The combination of a US slowdown and monetary tightening in China is never welcome, but the accumulated problems have to be resolved this year," she said.
Inflation at 6.9 per cent is getting out of hand. The root cause of overheating is the weak yuan. The central bank has piled up $1,500bn of foreign reserves trying to stop it rising. The longer this goes on, the more inflationary it becomes. So Beijing has begun to step up the pace of revaluation, letting the yuan rise at an annual rate of 20 per cent in January. There will be casualties. Large chunks of China's manufacturing export industry have wafer-thin margins. A rising yuan tips them into the red.
China's mercantilist drive for export share is a double-edged strategy. The trade surplus has risen at $80bn a year, increasing tenfold since 2002 while the economy has merely doubled. The result is that China is as dependent on the US economy as Mexico.
So the storm spreads East. Haruhiko Kuroda, head of the Asian Development Bank, warned that the region would catch a cold after all as the US sniffles and sneezes. "Asian economies are not totally immune. A significant slowdown in the US economy will most certainly affect the region's growth," he said.
The global watchdogs are scrambling to rewrite the script. The World Bank has cut its China growth forecast from 10.8 per cent to 9.6 per cent in 2008. Private banks are slashing deeper.
Once the striptease starts on the onset of a global downturn, it usually has a long way to run.
The problem with this issue -- maybe the biggest problem -- is the willingness of all players to overdramatize. If cool heads prevailed, it could be managed.
But cool heads seem to be a thing of the past in a reality-tv world.
pity.
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Some is undoubtedly "poison." The Journal carried a story a while back about some Citadel deals that were crafted with, shall we say, dubious quality.
But the problem is that no one cares to price the nuts and bolts; the market for cdo's lacks the very basic requirement of transparency (at the moment) and so it's fraught with superstition. It's an evironment made for hucksters of every stripe.
Well not all of the players are overdramatizing the issue:
"We have had a significant housing correction in the U.S...It's too early to tell whether it's bottomed. I believe it has."
"There's some fallout in the subprime mortgage market. It's painful to some mortgage holders, it's going to be painful to some lenders, but it's largely contained."
-- Treasury Secretary Henry Paulson, March 13, 2007
"Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear...At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
They should start lowering now.
Now if you take the case of a house that a couple bought three years ago for 450,000 from those same owners, or from a new home builder, someone got that $450,000. The owners or builder may have paid off loans, paid the realtor, paid the construction workers, etc., but they received that cash at settlement. Again, no wealth disappeared.
The only money that simply disappeared was the wealth on paper that existed from inflated assessments/appraisals for homes that could have been sold, but were not sold, at the height of the market.
I feel bad for the people who had to buy at the top of the market because of a transfer. But as for all the paper gains that evaporated, it's a case of easy come easy go. And anyone who bought Lincoln Navigators and Corvettes and fancy dinners out with home equity loans, well, it is hard to fell much sympathy beyond a certain level I would give anyone in a bad spot.
Well therein lies the problem. The Bank of Japan already has the rate at .50%. Lowering it 0.00% is all they can do and it may not correct the situation. After they take it to 0.00% then what?
This is great for liquidity but the margin is pretty thin. Maybe they can make up for it on volume?
There are ways to expand the money supply at 0%, so they should go ahead and lower them.
Your cool analysis is no match for panic and fearmongering.
If the banks loaned someone $100,000 to buy a house and the buyers defaulted, the bank gets the house. If the house is now only worth $50,000, the bank takes a $50,000 loss. That's compounded by the fact that banks can loan out certain multiples of their actual assets. They do this by borrowing from other banks or the Fed. If too many loans default, they soon owe more money on their loans than they have in assets. That's why bank failures are predicted to rise even more this year than last, and also why the US government has an interest in keeping housing prices high. They don't want to have to spend half a trillion dollars of your money to prop up the banks that made these bad loans.
subsidies.
America catches cold, Asia gets pneumonia.
Money disappears. It’s gone and nobody has it stashed away somewhere.
The paper wealth that disappeared is not causing the problem. The problem is the securities based on the income streams from mortgages. Despite the name "Asset Backed Security", there is no asset backing, just a promise to pay income from the mortgages. Those securities are now worth 10 or 20 cents on the dollar. The other 80 or 90 cents has disappeared. You might wonder how such a devaluation take place when default rates are only about 10% on subprime loans and the underlying real estate has dropped less than 10% on average. The answer is, basically, fraud. See http://www.freerepublic.com/focus/f-news/1967845/posts
"What we know is that Japan's economy - still the second biggest in the world by far - has fallen over a cliff since October. It remains joined to America's hip after all. The decoupling theory has failed its first test."
And we still haven't heard the end of Europe's woes because those governments own such large interests in so many companies. They are not interested in letting the world know the extent to which governments bought U.S. debt instruments expecting a larger return than their own companies could realize.
yitbos
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