Sunday, March 13, 2011

Impact of Japan `s earthquake on Macro - bonds,stocks,commodities

Japan March 2011 earthquake - just  1 week before the supermoon on 19 th March.
Well looking at all the mess, I can say only one thing- God must have a wicked sense of humour.

Economy already in a 10 year deflation , stock market is still 75% below its 1990 peak and interest rates already at 0%. Now what could get worse than this ?
Been seeing and reading about Japan`s 9 point Richer scale earthquake.In terms of intensity, this one seems to be worse than the 1995 Kobe`s 7 point Richter Scale earthquake. But a big difference is that Kobe was in South and this one`s epicenter was in the north which has lesser population density. 
On the basis of the above fact, some analysts have projected impact to be lesser than Kobe`s but as time goes by, it seems this could be much worse. Here are some reasons..
Historically any dips of ~ 5% to 15% in the stock market ,following such disasters  have proven to be decent trading buying opportunities. But I would like to highlight some differences.
  1. In 1995 , the Japan `s Govt were is much better shape. Post the 1995 quake , the reduced interest rates from 1.8% to 0.3%. The debt level was also less. They dont have these advantages now.Public Debt to GDP is now ~200%. ( highest among the  G7 Countries)
  2. Yen has appreciated after such quakes. In 1995, Yen appreciated 17% over 6 months from 100 Yen per USD to 83. Now Yen is already at 81 and next level to watch out would be its 15 year record high of 79.5. A stronger Yen ( lower then 80 vs USD)  would again affect the "exports" section economy negatively.
  3. Last time in 1995 ,post the quake, Nikkei Index fell 15% and Barings rogue trader Nick Leeson, huge speculative long positions were exposed  that brought down the bank. ( This time the insurance losses are suspected to be higher ( says S&P ) than god knows what other domino`s could fall.
Some facts that should be kept in mind 
  • Japan recently over took China to become the largest foreign holder of US treasuries.Details here . Now What does one do when disaster strikes ? You sell you investments and try to fix the house right ? This should provide more selling pressure for US treasuries.Yes , of course , the other part of the equation is what will other non -Japanese guys do with the US treasury holdings. But the flow is evident by the Yen approaching a new high vs the USD. Yen - USD Chart here
  • Japan GDP of $ 5 Trillion. And Public Debt is ~ 200% of this or $ 10 Trillion. Good thing is that debt owned by foreigners is ~ 10% or $ 500 Bn. unlike US that has 50-60% debt  held by Foreigners.( including Private sector debt, total debt is 300% of GDP). Charts here . A sovereign default would have global ramifications.
  • Japan is the 2nd largest Oil importer after US - Japan imports 5.5 Mn barrels per day. This would impact the oil negatively
  • Japan`s role critical in the Global Supply Chain of Auto and electronics would have an impact.For e.g delay in supply of critical parts.
  • Nuclear power plant should negatively impact Uranium and positively impact substitutes such as Gas,Coal. ( very bad idea of have Nuclear power plans in a region that has largest share of 20% of world`s earthquakes. It only seems possible due to Foreign lobby and Japanese govt. foolishness. )
Some nice charts:-
Japan `s 1995 Kobe earthquake impact on stocks, Bonds, yen. Then and now. Charts here
Japan `s Nikkei Index performance before and after the 1995 Kobe `s quake. Chart here

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