Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘japanese economy’

Lessons Not Learned from the Japanese (At Least, Not Yet)

By for Profit Confidential

How Money Printing Devastated This CurrencyWhenever I got stuck solving a problem in elementary school, my teacher would say, “go back and see where you went wrong.” This lesson—“learn from your mistakes”—was taught again in high school, and then throughout my life. It’s very simple: you can’t do the same thing over and over again and expect different results. Albert Einstein called it “insanity.”

When I look at the Japanese economy, I see the most basic lesson you learn in business school being ignored. The Bank of Japan, and the government, in an effort to improve the Japanese economy has resorted to money printing (quantitative easing) over and over, failing each time to spur growth. One might call it an act of insanity.

Through quantitative easing, the central bank of Japan wanted to boost the Japanese economy. It hoped that pushing more exports to the global economy from its manufacturers would change the fate of the country. It wanted inflation as well.

The result: after years of quantitative easing, the government and the central bank have outright failed to revive the Japanese economy. In fact, the opposite of their original plan is happening.

In January, the trade deficit in the Japanese economy grew—the country’s imports were more than its exports. Imports amounted to 7.70 trillion yen and exports were only 5.88 trillion yen. The trade deficit was 3.5% greater compared to the previous month. (Source: Japanese Customers web site, last accessed February 20, 2014.) Mind you, January wasn’t the only month when imports were more than exports in the Japanese economy. This is something that has been happening for some time.

Inflation in the … Read More

If Money Printing Failed in Japan, Why Would It Work in the U.S.?

By for Profit Confidential

Why Is the Japanese Economy Starting to Tank AgainWhat the Federal Reserve is doing in the U.S.—its effort to get the economy going via its money printing program—has already been tried by the second-largest economy in the world: Japan.

Unfortunately, the easy monetary policy implemented by the Bank of Japan didn’t spur the Japanese economy. So why would it work for the U.S. economy?

One of the core purposes of easy monetary policy by the Federal Reserve was to improve lending so businesses would borrow money and grow (hopefully creating jobs) and consumers would borrow and spend (creating economic activity). All of this would lead to improved consumer confidence.

The Bank of Japan started a scheme to increase lending in Japan in 2010. It gave funds to its biggest banks to lend to companies. It set aside 21.5 trillion yen for this scheme; but sadly, only 8 trillion yen has been used. (Source: Reuters, October 17, 2013.) Easy money policies, and a program specially designed to give money to banks to lend out to companies, did not work in the Japanese economy.

And consumer confidence in the Japanese economy remains bleak. The index that tracks consumer confidence in the country stood at 41.9 in November. At the beginning of the year, it hovered near 45.0. A subset of consumer confidence, an index tracking consumers’ willingness to buy durable goods, stood at the lowest level of the year in November at 42.4 compared to 44.9 in January. (Source: Japan’s Cabinet Office, December 10, 2013.) The bottom line: after years of easy money policies and with a national debt-to-GDP multiple of 205%, there’s been no improvement in consumer confidence … Read More

What Happens to the Market When Stock Buyback Programs Stop

By for Profit Confidential

Stock Buyback ProgramsThe International Monetary Fund (IMF) expects the global economy to increase by 2.9% this year and 3.6% in 2014—forecasts which I believe are too optimistic. Why?

First of all, we have the Japanese economy, the third-biggest in the global economy, suffering an economic slowdown. Tertiary industry activity (activity in the service businesses) slowed in September from a month ago. (Source: Japan Ministry of Economy, Trade and Industry, November 12, 2013.)

Then there’s Germany, the fourth-biggest economy in the global economy. Once believed to be immune to the economic slowdown in the eurozone, seasonally adjusted manufacturing output in the country declined 0.8% in September from August. As of September, year-to-date manufacturing output in the German economy has increased only 1.2%—a much slower growth rate than in the same period of 2012. (Source: Destatis, November 8, 2013.)

Earlier this month, in a statement about its monetary policy decision, the central bank of Australia said, “In Australia, the economy has been growing a bit below trend over the past year and the unemployment rate has edged higher. This is likely to persist in the near term… Public spending is forecast to be quite weak.” (Source: “Statement by Glenn Stevens, Governor: Monetary Policy Decision,” Reserve Bank of Australia, November 5, 2013.)

To fight the economic slowdown in the country, the Reserve Bank of Australia is using easy monetary policy measures. The central bank has reduced its benchmark interest rate in the country by more than 40% since the beginning of 2012. The cash rate, the overnight money market interest rate, sits at 2.50% compared to 4.25% in early 2012. (Source: Reserve Bank of Australia … Read More

To See How It All Turns Out, Here’s What Happened in Japan

By for Profit Confidential

What Happened in JapanIf you want to see how this all turns out in the end, I’m talking about the Federal Reserve’s program of printing over $1.0 trillion a year in new paper money (something that’s never happened in history), we need not look any further than the Japanese economy.

Why? Because the Japanese economy collapsed about 15 years before our credit crisis collapse of 2008. What we are doing now (artificially low interest rates, deep government debt, and money printing), the Japanese did years ago.

But unfortunately, when I compare the “Japanese experiment” to what our government and central bank are doing now, I don’t like what I see. In fact, I question the long-term benefits and effectiveness of quantitative easing.

Did quantitative easing help the Japanese economy? Turns out the answer is, NO. Since 1990, when troubles in the Japanese economy began, until 2011, the average annual growth rate (as measured by GDP) of the third biggest nation in the global economy has been less than 1.1%. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 4, 2013.) In 2012, the Japanese economy didn’t perform so well and fell back into recession.

This year, the Japanese economy grew one percent in the first quarter and then declined to 0.9% in the second. (Source: Trading Economics web site, last accessed October 4, 2013.) Albeit a generalization, if quantitative easing and low interest rates were working, the Japanese economy would not be suffering like it is.

Which investments made money for the investors in the Japanese economy during its post-boom era? To say the very least, just don’t count … Read More

First Government Shutdown in 17 Years. If Only It Will Last?

By for Profit Confidential

U.S. government shut downAt the very core, this U.S. government shutdown means that about one million federal employees will be told to go home without pay. Non-essential services will be stopped until further notice. This will be mainly due to a lack of funds. (Source: Committee for a Responsible Federal Budget, September 24, 2013.) National parks will be closed; museums will be shut along with many other services.

What government services will be available? Social security and the Medicare payments will be sent out to those who already rely on it. For those who are applying for it during the U.S. government shutdown, they will not have their applications processed for the time being.

As bad as all of this may sound, this U.S. government shutdown isn’t the first one we’ve seen. Since 1976, there have been 17 instances when the U.S. government wasn’t able to come to a decision on funding. Mind you, many U.S. government shutdowns only lasted over the weekend, so their effects were minimal. The last two long U.S. government shutdowns were 17 years ago and they lasted a total of 27 days. (Source: Ibid.)

With all this, there are many different opinions. With so many people sent home, the U.S. government shutdown is an immediate money-saver. But on the other hand, those who aren’t getting paid are likely pulling back on spending and that will affect gross domestic product (GDP) growth for the U.S. economy.

As all this happens, I stay far away from making political predictions, as after all, that’s all we are dealing with here—two political parties pitted against each other resulting in a U.S. government … Read More

Why the U.S. Is Following Japan’s Footsteps and What It Means for Small Investors

By for Profit Confidential

I often write about the crisis faced by the municipalities, cities, and states across the U.S. as they continue to register budget deficits year after year. Cities like Detroit and others in California have already filed for bankruptcy. When all of this was happening, I kept asking: when will the U.S. government bail out the troubled cities?

Well, it’s started to happen…

The U.S. government will be giving the city of Detroit $150 million for “demolition and redevelopment purposes.” In addition, it will also provide the city with almost $140 million to better its transit system. Another $25.0 million will be granted to the city to assist in its streetcar project. (Source: Newsmax, September 27, 2013.)

The economic situation for “Motor City” has gone from bad to worse. But I ask one question: if the U.S. government “helps out” Detroit, won’t other cities struggling with a budget deficit feel shortchanged? After all, they are in dire need of money too!

Take San Jose, for example. The city has been posting a budget deficit since the 2002-2003 fiscal year. The cumulative budget deficit since then to now has accumulated to a total $680 million. (Source: San Jose’s Mayor Office web site, last accessed September 30, 2013.) And it just doesn’t end at the city level. States have also been caught in the same budget deficit trap.

Credit rating firm Fitch Ratings, in assigning a revised credit rating to Connecticut, said, “The Negative Outlook reflects the state’s reduced fiscal flexibility at a time of lingering economic and revenue uncertainty. The enacted budget for the new biennium delays repayment of deficit borrowing, adds … Read More

The Corner We Have Been Forced Into

By for Profit Confidential

010813_PC_lombardiBoy, has the Federal Reserve ever created a monster with its monetary policy of creating $85.0 billion a month in new money out of thin air!

Consumer confidence is anemic in the U.S. economy as Americans are being financially “squeezed.” Consumer confidence, which is missing in this so-called economic recovery, leads to higher consumer spending, which makes up two-thirds of gross domestic product (GDP) in the U.S. economy.

Two days ago, we got news the Conference Board Consumer Confidence Index declined to 80.3 in July, down about 2.2% from June. (Source: The Conference Board, July 30, 2013.) This is nowhere close to the consumer confidence levels we saw prior to the financial crisis in the U.S. economy.

The survey of consumer confidence in July showed 35.5% of respondents are claiming jobs are difficult to get.

But that isn’t all…

We are told the housing market is improving, but few mention that millions of Americans are living in homes they purchased with positive equity that now have negative equity—their home prices are lower than the mortgage they borrowed on them. The number stood at 9.7 million homes with negative equity at the end of the first quarter. (Source: CoreLogic, June 12, 2013.) This phenomenon breeds consumer discouragement, not consumer confidence.

All of this is not a surprise to me; I have been saying it all along. Consumer confidence cannot improve because the Federal Reserve is buying $85.0 billion a month of U.S. Treasuries and mortgage-back securities—none of which helps the “little guy.”

Look at Japan, a country that has become famously known for its monetary policy and quantitative easing. One would … Read More

Why the Indices Are About to Stop Rising

By for Profit Confidential

Key Stock Indices While the key stock indices might be giving the impression that everything is fine with the global economy, the reality is far less optimistic.

The global economy is actually standing on the verge of a severe economic slowdown that could wipe out the wealth of many investors. Now is a great time to be careful.

The four biggest economic hubs in the global economy are going through a period of slow growth or are in an outright economic slowdown. And wise investors know that when the big movers in the global economy witness an economic slowdown, the small nations will follow. That will eventually result in widespread turmoil in the stock markets.

The U.S. economy, the biggest contributor to global output, is in a period of stagnant growth. In fact, I consider it to be on the borderline of an economic slowdown. The unemployment in the country remains very high, the consumer spending numbers are dismal, and the number of people using food stamps continues to increase.

And the Chinese economy, the second-biggest in the global economy and often referred to as a “powerhouse,” is experiencing an economic slowdown like it has never seen before. Exports from the Chinese economy to the global economy witnessed their slowest growth rate in a year, and the factory activity in the nation dropped to a nine-month low. (Source: CNBC, June 26, 2013.)

The Chinese economy is expected to grow at a very slow rate compared to its historical average, and the credit problems there continue to undermine its financial system. I worry that the credit crisis could send even bigger problems to … Read More

Why Gold Bears Will Soon Find out They Are Wrong

By for Profit Confidential

There has been increased volatility in gold bullion prices as investors run from precious metals. According to data compiled by Bloomberg, gold bullion’s 60-day historical volatility reached 28.9% on June 13. This was the highest level since December of 2011. Average volatility over the past five years for gold bullion prices has been around 20%. (Source: Bloomberg, June 14, 2013.)

As the volatility continues in gold bullion prices, the fundamentals remain strong. Actually, demand for gold coins is unprecedented right now.

Aside from individual investors buying gold bullion, central banks continue to diversify their reserves into gold bullion as fiat currencies fail to protect their wealth. In spite of the decline in gold bullion prices, as has been well documented in these pages, central banks form Russia, Turkey, and Kazakhstan continue to add precious metals to their reserves.

Bullish stock advisors are forgetting that we are standing on the cusp of a global economic slowdown—an event that bodes well for gold bullion. It may be difficult for my readers to envision right now, but with the recent exodus by investors out of U.S. bonds, once the stock market starts declining, there will be few other “stores of wealth” for investors to seek aside from gold.

Major economic hubs have been slowing down for some time and now, they are taking with them smaller nations that rely on their demand. China, Japan, India, Australia, Germany, and France—they are all begging for economic growth.

But instead of getting growth, world economies are slowing. The World Bank lowered its forecast for global growth last week. It now expects the global economy to grow … Read More

Truth Behind 1Q 2013 Earnings and What’s Next for Stocks

By for Profit Confidential

Corporate Earnings GrowthThis shouldn’t be a surprise to the readers of Profit Confidential.

According to an analysis done last week by the Wall Street Journal, in the first quarter of 2013, corporate earnings growth of companies in the key stock indices like the S&P 500 wasn’t really due to companies doing better. Rather, “research tax breaks” are what pushed 1Q13 earnings up for many S&P 500 companies. (Source: Wall Street Journal, June 14, 2013.)

Consider Intel Corporation (NASDAQ/INTC). The company spent $10.1 billion on research and development, which essentially lowered its effective tax rate from 28.2% in the first quarter of 2012 to 16.3% in the first quarter of 2013! This bolstered Intel’s corporate earnings.

Other big names in the S&P 500 like Google Inc. (NASDAQ/GOOG), Abbott Laboratories (NYSE/ABT), The Boeing Company (NYSE/BA), Yahoo! Inc. (NASDAQ/YHOO), and Xerox Corporation (NYSE/XRX) were able to use “research tax breaks” to also boost their corporate earnings.

While this technique helped companies boost 1Q13 earnings, profit expectations aren’t so rosy going forward.

Expectations for corporate earnings for the S&P 500 companies continue to drop. At the end of the first quarter (March 31), second-quarter corporate earnings were forecasted to grow at 4.5%. Now, corporate earnings growth for the second quarter is estimated to be only 1.3%. (Source: FactSet, June 7, 2013.)

Only four out of 10 industry sectors in the S&P 500 are expected to show corporate earnings growth in 2Q13. The information technology sector of the S&P 500 is expected to report a decline of 6.3% in corporate earnings this quarter and the health care sector could see its profits slide four percent!… Read More

Number of S&P 500 Companies Reporting Negative Guidance a Red Flag

By for Profit Confidential

 Food Stamp Usage RisingStandard & Poor’s, the credit rating agency, believes the likelihood of the U.S. credit rating being downgraded in the near term is less than 33% (one in three) and it has decided to keep its credit rating on the U.S. economy at AA+, slightly lower than the best investment grade. (Source: Standards & Poor’s, June 10, 2013.)

This may be good news to the politicians who continue to believe there is an economic recovery in the U.S. economy, but it’s not enough to convince me.

In March, 47.7 million Americans, or 23.1 million households, were on some form of food stamps in the U.S. economy. (Source: United States Department of Agriculture, June 7, 2013.) This is more than 15% of the U.S. population.

And instead of people moving away from the government’s help, as would be the case during economic growth and a recovery, dependence on the government is actually increasing. Food stamp use in the U.S. economy was lower at 44.5 million in March of 2011.

Economic growth in the U.S. economy means job creation and consumers increasing spending—we have the exact opposite today.

After 2009, we had a sense of economic growth in the U.S. economy as demand in the global economy meant many multinational American companies were able to sell their goods for a profit outside the U.S. But as the global economy struggles now, it’s a different story.

For the second quarter of 2013, 116 companies in the S&P 500 have provided corporate earnings guidance; 93 of them have provided negative guidance. The ratio of companies providing negative guidance compared to companies providing positive guidance has … Read More

Indian Government to Banks: Stop Telling People to Buy Gold

By for Profit Confidential

Stop Telling People to Buy GoldIndia, the biggest consumer of gold bullion, is witnessing over-the-top demand—to the point where the government is trying to curb demand.

The Finance Minister of India said last week, “Banks have a role to play in dampening the enthusiasm for gold. I think the RBI [Reserve Bank of India] has advised banks that they should not sell gold coins.” He added, “I would urge all banks to please advise their branches that they should not encourage their customers to invest in or buy gold.” (Source: “P. Chidambaram hints banks likely to stop gold coin sales to curb demand,” The Indian Express, June 7, 2013.)

The appetite for gold bullion by Indian consumers has forced its government to increase the import tax on the yellow metal to eight percent—it has increased this tax rate twice in the past six months!

But the Indian economy isn’t the only one experiencing a surge in gold demand.

The acting director of the U.S. Mint, Richard Peterson, was quoted last week saying, “Demand [for gold bullion] right now is unprecedented…” (Source: “US bullion coin demand still at unprecedented levels-US Mint Chief,” Reuters, June 5, 2013.)

Looking at the sales of gold bullion coins from the U.S. Mint, demand has more than doubled. In the first five months of this year ending in May, the U.S. Mint sold 572,000 ounces of gold bullion in coins. In the same period a year ago, the Mint sold only 283,500 ounces of gold bullion. (Source: The United States Mint web site, last accessed June 7, 2013.)

Dear reader, the numbers are speaking louder than the words. Even … Read More

Japan Resorts to Buying ETFs and REITs to Prop Up Stock Market; Will Fed Eventually Do the Same?

By for Profit Confidential

The Japanese economy is a prime example of what happens when central bank–infused “economic growth” crumbles.

Quantitative easing may have been needed in the U.S. economy when the financial system was on the verge of collapse, but artificially low interest rates and vast amounts of paper money printing could be creating major troubles for our future, just like it did in the Japanese economy.

The Bank of Japan and the Japanese government have taken a strong stance on bringing economic growth to the Japanese economy. The Bank of Japan has taken the concept of quantitative easing to a new level, and it plans to continue increasing the country’s money supply. Similar to what’s happening here in America, the Bank of Japan is printing new money to buy government bonds. Japan’s central bank has become heavily involved in the stock market of the Japanese economy by buying units in exchange-traded funds (ETFs) and real estate investment trusts (REITs).

Sadly, the outcomes of this rigorous quantitative easing are dismal. The Japanese economy isn’t improving. Rather, the currency of the country has become a major victim, and the stock market in the Japanese economy is bursting.

Take a look at the chart below, which shows the value of the Japanese yen (black line) declining continuously, while the stock market is rising and bursting (red/black line).

 NIKK Tokyo Nikkei Average Chart

Chart courtesy of www.StockCharts.com

On May 23, the stock market in the Japanese economy took a turn downward; since then, it has been declining quickly.

When I look at this, it makes me question the stability of the key stock indices here in the U.S. economy. The Federal … Read More

Japan Stock Bubble Built on Money Printing Bursts; And Our Turn Is…

By for Profit Confidential

Japan Stock Bubble Built on Money Printing Bursts It’s not a surprise the Bank of Japan is failing at quantitative easing. Is America really so different that it will succeed here? My decisive answer: NO!

The central bank of Japan took to repeated rounds of quantitative easing to spur growth in the Japanese economy. Its main goal: improve exports. By selling more to the global economy, the country thought it could witness economic growth.

But the Japanese economy is experiencing the opposite. In April, the Japanese economy’s trade deficit increased to $8.6 billion. This was the widest gap in April trade since 1979. (Source: Bloomberg, May 21, 2013.) Instead of exporting more, Japan is importing at a record pace!

And retail sales in the Japanese economy declined 0.1% in April, continuing their decline from March, when they declined 0.3%. (Source: RTT News, May 28, 2013.)

Simply put, the Japanese yen has become a victim of quantitative easing—but it hasn’t helped the Japanese economy export more as was initially hoped. Since the beginning of the year, the yen is down 16% compared to other major currencies, as depicted in the chart below.

XJY Japenese Yen Philadelphia INDX Chart

Chart courtesy of www.StockCharts.com

Just as it is here in the good old U.S., the only economic indicator that seemed to be benefiting from the Japanese money printing was the Japanese stock market. Since the beginning of 2013, the Nikkei 225 index has gone up more than 30%…but now it’s dropping like a rock, as corporate profits have failed to materialize to sustain the rally.

Returning to the U.S. economy, the quantitative easing by the Federal Reserve here could have the same effect that quantitative … Read More

Why Nikkei Sell-Off May Foreshadow Things to Come

By for Profit Confidential

Why Nikkei Sell-Off May Foreshadow Things to ComeThe one-day sell-off last week in Japan’s equities market with the benchmark Nikkei 225 plummeting more than seven percent in one day should not be ignored; in fact, the drop may be a harbinger of things to come. I don’t have a crystal ball, but my market sense is tingling.

The reality is that the sell-off in the equities market was not a surprise, given that the Nikkei has advanced 70% over the past six months. And this advance was driven largely by Prime Minister Shinzo Abe’s aggressive 10-year stimulus strategy to jumpstart the dormant Japanese economy.

Yet what was more concerning was the lack of a follow-through by the Nikkei equities market after the sell-off, as the index rallied a mere 0.9% the following day.

Nikkei equities market

Chart courtesy of www.StockCharts.com

The market’s fear is that if the selling continues on the Nikkei, this could drive down confidence in the equities market and trigger deeper losses on the horizon, including declines in domestic trading.

The Japanese equities market could easily go lower, given the advance so far.

For Prime Minister Abe, should the Japanese equities market reverse course and decline, the move would likely erode confidence in Japan and test Abe and the country’s resolve.

In my view, as I have discussed in these pages in my previous commentary on Japan (read “Japan Not Home-Free Despite Strong GDP”), the country’s aggressive fiscal and monetary policy is not a sure bet to get Japan out of its economic abyss.

In fact, the aggressive printing of money in Japan will create a bloated national debt level on the country’s balance sheet, … Read More

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