VIDEO: China, Japan and their Demographic Time Bombs

China made waves with a bad manufacturing report this week, sending world equities–and particularly Japanese equities–sharply lower. But the issues in Asia go beyond just exports and currency rates. It’s about plummeting birth rates and demographics, and what it means for Chinese and Japanese investments. Jeff Reeves of and I talk things over.

As I mentioned on the video, I would run away from Japan screaming right now, or at least I would run away screaming from Japanese equities.  The short yen / long Japanese equity trade has been the most profitable macro trade in recent years, but it is a short-term trade supported with very weak fundamentals. The next fortune to be made in Japan will likely be in shorting its bonds.

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Charles Sizemore Discusses The Election and What It Means for Investors on Straight Talk Money

Listen to Charles Sizemore discuss the re-election of Barack Obama and what it means for investors with Peggy Tuck on Mike Robertson’s Straight Talk Money.

If you cannot view the embedded media play, you can’t listen to the interview here.

Japanese Purchase of Sprint is an Act of Desperation

For those who might have missed the news, a Japanese company is buying American mobile phone operator Sprint Nextel (NYSE:$S).

By buying Sprint, SoftBank will jump from being Japan’s third-largest mobile provider to being one of the largest providers in the world.

But Sprint?

Sprint is a mess.  I recommended the company last year as a deep value play, as the company was priced so cheaply as to be worth more dead than alive.  But I never—at any point—believed that Sprint was a quality company.  It was a cigar butt with a few puffs left in it and nothing more.

What’s more, Sprint is in that unenviable position of being “stuck in the middle.”  With only 16% of the U.S. market, Sprint lacks the scale of an AT&T (NYSE: $T) or Verizon (NYSE: $VZ), and its high debt load makes growth difficult to manage. Yet Sprint is too big and bloated to compete with smaller upstarts like MetroPCS (NYSE: $PCS) that appeal to cost-conscious consumers and pre-paid subscribers.

So why SoftBank’s interest?

The answer to that question is easy.  They’re desperate for mobile subscribers anywhere they can get them, even at an also-ran like Sprint.

You see, Japan is dying.  And I mean that literally.  The Japanese population is actually shrinking, as deaths due to old age outpace new births, and aging.  Roughly a quarter of the Japanese population is already over the age of 65.

How do you grow a mobile phone service when you have fewer consumers to sell to every year—and when the consumers you have are aging and using their phones less?

The answer, of course, is that you don’t.  And the same is true of virtually all Japanese companies.

Readers might think back to the 1980s, when it seemed like Japanese corporations were taking over the world.  They even owned—gasp!—the Pebble Beach golf course and the Rockefeller Center.  A severe stock market and real estate crash put the brakes on Japanese ambition, but demographic necessity suggests that Japanese companies will go on another binge of acquisitions, and soon.

In the 1980s, they bought trophy assets like Rockefeller Center.  Today, they buy burned-out cigar butts like Sprint.  How the mighty have fallen.

They’re buying more than Spint, however.  Ernst & Young reported that  Japanese purchases of foreign assets were up 81% last year

This is a trend that I see having legs.  Investing in it is a little trickier, however.

Anticipating what the Japanese will buy and getting in line before them is tricky; few investors would have seen the SoftBank deal coming unless they had already been intently studying the global telecom sector.

Japan is buying U.S. Treasuries—the country recently retook its place as America’s biggest creditor from China—but it’s hard to see much upside when the 10-year Treasury yields less than 2%.

After being chronically overpriced years into a secular bear market, Japanese blue chips are finally what I would consider cheap, or at least close to it.  By the Financial Times’ estimates, Japanese shares trade for 13.3 times earnings, about on par with the U.S. Dow Industrials.  But Japan’s largest companies tend to be heavily exposed to their slow-growth domestic market, making them a little less than exciting.

It’s hard to find much to like among Japanese large, liquid Japanese stocks.  As I wrote recently, Sony (NYSE:$SNE) has trailed Apple (Nasdaq:$AAPL) as a consumer electronics company and seems to be a company without direction.  Toyota (NYSE:$TM) and Honda (NYSE: $HMC) are fine auto companies with a global reach—and Honda sports an attractive dividend of 3.1 percent—but both are too heavily exposed to Japan’s shrinking market to be worth owning.  The story is much the same among Japan’s other large-cap titans.

Perhaps the best course of action would be to simply avoid Japanese equities and focus instead American and European firms with a more global reach.

Sizemore Capital has no position in any security mentioned.

Japan’s Endgame Nears

I read a fact this week that I never expected to read in my lifetime: “The Japanese government is expected to announce Wednesday that the country recorded its first annual trade deficit since 1980″ (see ” End of Era for Japan’s Exports “).

Trade deficit? Japan?

Japan’s economy has been a slow-motion train wreck for the past 20 years. The bursting of the country’s 1980s credit, stock market and real estate bubble would have wreaked more than enough havoc on any economy. But on top of the normal debt deflation that would follow the bursting of a financial bubble, Japan adds the worst demographics of any developed country. Japan is aging rapidly, and its population is shrinking.

Most of the research on the effects of Japan’s demographics have focused on skilled labor shortages and pension funding. These are legitimate concerns, to be sure. But you don’t have to be an Ivy League economist to see that there is a much larger problem. The only business not affected by this downfall is the Japan’s オンラインカジノのおすすめランキング online casino which continues to provide players with the best casino experience.

If you own a business—anything from a world-class automaker like Toyota (NYSE: $TM) to a neighborhood corner café—you have a smaller pool of potential customers every year, and within that smaller pool a larger percentage are elderly consumers who buy less. Some companies grow at the expense of others, but it becomes a zero-sum game. Growth in the aggregate becomes impossible. The math simply doesn’t add up.

Unless, of course, you export. And this is what Japan has been quite adept at doing for the past 20 years. Until now.

In his 2011 book Endgame , New York Times best-selling author John Mauldin calls Japan a “bug in search of a windshield,” and it’s a great metaphor. Like a bug buzzing along a highway, Japan’s economy has bumbled along for the past two decades, not really growing but not imploding either. In the not-too-distant future, Japan may be in for a good “splat.”

Two things have kept Japan’s economy afloat all these years: its healthy trade surpluses and its government’s ability to borrow large sums of money at ridiculously low interest rates to fund enormous budget deficits. The high price of the yen and prolonged weakness in the United States and Europe are doing a fine job of denting exports. And soon, the low interest rates may be under attack.

Anyone reading this article is well aware of Europe’s debt woes. But Japan’s debts make Europe’s look like pocket change. Italy, the most indebted of the major Eurozone countries, started to see its market bond yields reach punitive levels when its debt-to-GDP ratio reached 120 . As a comparison, Japan’s debt-to-GDP ratio is an almost unbelievable 220 percent (IMF).

The only reason that Japan hasn’t had a run on its bonds is that they are all by and large purchased by domestic buyers. As Mauldin explains it in Endgame, “94 percent of all JGBs have been bought by the Japanese.” But demographically, Japan is fast shifting from a nation of middle-aged workers saving for retirement to a nation of elderly retirees liquidating their savings to pay their bills. The savings rate has been in stark decline.

The domestic demand for Japanese bonds cannot last forever, and when it dries up, Japan will find itself at the mercy of international banks and investors. Ask Greece and Italy how that worked out for them.

Japan can look forward to a currency and debt crisis that makes Europe’s look mild by comparison. Yet betting on Japan’s collapse is a little like fraternity hazing for macro hedge fund managers. It’s just a rite of passage that they have to go through. They short Japan’s bonds, lose a fortune, and learn a few painful lessons.

Knowing this, I’m not going to recommend you short the yen or Japanese stocks or bonds — yet. Wait until you see Japanese yields starting to creep up. And when they do, position your portfolio for the potential short of a lifetime.

Book Review: The Pinch

Pinch“We all know the story,” starts David Willetts in his book The Pinch.

“The parents return home from a night away to find a teenage party has got out of hand and the house has been trashed… It plays to a deep-seated fear that younger people will not appreciate and protect what has been achieved by the older generation. This is the eternal anxiety of each generation about what comes after. But what if, when it comes to many of the big things that matter for our futures, it is the other way around? What if it’s actually the older generation, the baby boomers, who have been throwing the party and leaving behind a mess for the next generation to sort out?”
Continue reading “Book Review: The Pinch”