Archive for March, 2011

Time to Buy Japan?

Wednesday, March 23rd, 2011

The horrendous earthquake and tsunami that struck Japan last weekend March 11th) represent a terrible human tragedy. With the death toll still climbing, it already appears that the number of people killed is at least three times as high as the the 6,400 casualties of the last big quake to strike Japan, the January 1995 Kobe earthquake. The largest ever quake to hit Japan (9.0 on the Richter scale) was far greater than the 6.4 quake that hit 16 years ago, but it seems the tsunami that it generated is responsible for most of the 19,000 lives lost.

When assessing the impact of such human tragedies, it is always difficult to avoid sounding heartless when discussing the investmnet implications. The front cover of Barron’s magazine last weekend (March19th) proclaimed “Buy Japan”, which may or may not be correct advice, but risks sounding as if the only aspect of the tragedy that concerns readers is the chance to make money. Nonetheless, while admitting the human toll and admiring the extraordinary resilience and steadfastness of the Japanese population in the face of such enormous devastation, it is worth considering what investors’ response to these events should be.

 Japan is still the third largest economy in the world on a purchasing power basis, only just overtaken by China last year, and consumes between 5% and 25% of such important commodities as iron ore, thermal and metallic coal, copper, many foodstuffs and oil and gas. Japan is China’s largest trading partner, with its trade with China surapssing its trade with the US almost a decade ago, as many Japanese companies outsourced their lower end manufacturing to benefit from China’s lower costs. China’s massive infractructure projects and rising consumption of consumer durabes such as autos and electronics have led to increasing demand for Japanese products, including, ironically, lots of nuclear generating equipment for the many new nuclear plants that China is building.

With the damage to the nuclear facilities at Fukushima and other plants in the Sendai region, it is estimated that 20% of Japan’s electricity will need to be sourced from other forms of power and numerous observers have suggested that demand for Liquified Natural Gas (LNG) will climb sharply, especially as other countries such as Soth Korea and China are also building LNG import facilities to increase their use of this fuel. In the meantime, the disruption to manufacturing at Japanese factories due to either physical destruction or power shortages will interrupt supply chains and lead to shortages of components for autos, electronics and capital equipment makers. Demand for food, with supplies from Japanese farms being reduced both due to the earthquake and fears of radiation, will lead to increased food imports and all of these factors will copntribute to inflationary pressures, already rising in emerging markets and elsewhere (UK March CPI 4.4%).

Lastly, as occurred after the 1995 Kobe earthquake, Japanese investors will need to sell non-Japanese holdings to repatriate their assets to help rebuild their country. It is estimated that costs could range between U$200 billion and U$700 billion, depending upon how serious the damage to nuclear plants is, accounting for 1-3% of GDP this year. While there is a stimulus to GDP growth from the rebuilding, this removes resources from other investments, as what has been destroyed needs to be replaced. If breaking windows really contributed to GDP growth, as some of the commentaries have suggested, then the old Depression=era argument that one group of workers should dig holes, and another set fill them in, so that employment and incomes would increase, would not be the fallacy that it actually is. The only way digging holes creates wealth is if something useful is put in the hole, such as a bridge or gas pipeline.

After the Kobe earthqualke, the market initially sold off from 19,500 on the Nikkei, stabilized for a couple of weeks, and then plummeted by 30% to bottom near 12,500 5 months later in June 1995. At the same time, the yen, which had been trading around Y90=U$1, shot up to a then record Y79=U$1, as the Japanese sold foreign holdings and repatriated their cash.This was one of the reasons why the Nikkei sold off so sharply, as the stronger yen was very bad for Japanese exports, already the major contributor to Japan’s growth in that decade. Therefore, although the Nikkei endured a crash in the 3 days after the earthquake, falling 22% from 10,549 to an intraday low of 8,227, it may not necessarily yet be a buying opportunity, as the Nikkei has already rebounded to 9,449.

While the yen has weakened from its all time high of Y76.5=U$1 that it hit on Thursday, March 17th to Y80=U$1 at time of writing, it took the concerted intervention of all G-7 countries to counterbalance the underlying strength of the yen, and there may yet be further trials of strength unless the Bank of Japan (BoJ) continues to print yen at a rapid pace. In the end, the BoJ will achieve its aim of weakening the currency enough to encourage stronger exports as a counterbalance to weaker domestic demand, the Japanese will finish repatriating the funds they need for rebuilding and perhaps the traumatic effect of the crisis will lead to a change of policy by the Japanese government. Until the yen begins to weaken sharply towards Y90=U$1, overseas investors may want to wait to see hwether the Japanese stock market can avoid repeating its dismal performance after the last great earthquake.

The Secret Garden, Billy Elliot and the Miners’ Strike

Saturday, March 5th, 2011

My wife and I belong to the Mirvish theatre subscription programme in Toronto, which entitles members to see the 6 or 7 new shows that the Mirvish family (one time owners of the Old Vic Theatre in London) brings to Toronto each year. As with any such programme, members take the good with the not-so-good, and to their credit, David Mirvish and his team do try to mix obvious commercial hits from Broadway and London with more experimental and off-beat Canadian works.

One of the advantages of the subscription programme is that seats are reasonably priced at around C$40-45 per seat, as we see shows mid-week from the front balcony of whichever one of Toronto’s 3 0r 4 theatres they appear in. This allows us the wonderful freedom of leaving at the first interval if we don’t like the show, something which would have filled me with horror as a teenager eagerly viewing plays in the 1970s. By now, however, we have learned that first impressions are almost always correct, at least where theatre is concerned. Amongst disasters escaped were several worthy and well-acted transfers from other Canadian theatres such as Tennessee Williams and Greek tragedy, as well as the enormous white elephant of the stage version of  “The Lord of the Rings”.

Probably the high point was seeing Mamma Mia in 2000 in its first North American performance, but both Priscilla, Queen of the Desert and Billy Elliot this season were excellent. Priscilla was once again a North American premiere, as Toronto’s large gay community makes it a sympathetic and enthusiastic venue to launch gay themed or influenced musicals, while Billy Elliot was produced by Elton John’s significant other, Canadian David Furnish, and its opening night this week was favoured by Sir Elton’s presence, taking a curtain call in a tutu with the rest of the wonderful cast. The role of Billy is so demanding that no fewer than 4 different 12 & 14 year old child actors play the part, understandably given that Billy is on stage for almost every scene, and performs several extremely demanding dance routines as well as singing half a dozen songs and maintaining a near perfect Geordie (Newcastle) accent.

The contrast with the musical I had seen the previous week, this time with my 10 year old daughter, the adaptation of Frances Hogson Burnett`s childrens`classic, The Secret Garden, was very noticeable, and not merely because one was seen from the comfortable modern seats in the Canon Theatre and the other in the very tight thinly-padded seats in the balcony of the 100 year old Royal Alexandra. While Billy Elliot is the adaptation of the 1999 film of the same name about the miner`s son who deserts his boxing class during the Miners`Strike of 1984-85 to take up ballet,  The Secret Garden was adapted from a Victorian childrens` story of the orphaned girl from India who discovers a locked garden in uncle`s Yorkshire estate. Perhaps adaptations from movies are inherently more dramatic, with a visual approach and plenty of physical action that allows the easy insertion of song and dance numbers, while novels, especially ones like The Secret Garden that deal with the growth and development of character, are much more internal, and allow the author to reveal the character`s thoughts to the reader, something that is lost or at least much more difficult on stage, unless one relies on the actor addressing the audience directly, which grows tiresome if used too much.

At all events, The Secret Garden was another worthy and well staged, but rather dull evening in the theatre, although my daughter liked the story enough to want to read the book, which counts as a success. Its two and a quarter hours felt a lot longer than the three hours at Billy Elliot, and the latter`s success confimed that live theatre has no equal amongst entertainment when it works.

The other point that struck me watching the play was the way the mythology of the 1980s has firmly set in place, regardless of the way it ignores a number of vital facts. The programme notes told the story of how the miners `went on strike to save the coal industry from the threatened closures of Prime Minister Margaret Thatcher, who was politically opposed to state-owned industry and determined to crush the unions.` After noting that the strike went on for one year, the programme notes that ` by employing riot police to intimidate their communities and importing coal from Eastern Europe, the Conservative government broke the unions`and that over the subsequent decade the entire industry was dismantled.

That`s certainly one way to look at the Miners`Strike, and the great thing about the play is that, while using the strike and its incidents as a background to Billy`s story, it never lets the political message intrude too much upon the personal story. In fact, it makes it apparent that the solidarity of the miners and their attachment to their culture is in some ways a bigger obstacle to Billy`s attempts to realize his dream than the assumed snobbery of the Royal Ballet School staff auditioning him.

It was all a long time ago, after all (25 years ago amazingly) and there`s no reason for US audiences to be aware that the Miners`union had twice brought the UK to its knees via power cuts in 1972 and 1974, and the second time brought down Maggie Thatcher`s Conservative predecessor, Edward Heath, who called an election on the question of `Who Rules Britain`, to which the answer was Ànyone But You`. Nor would they know that Arthur Scargill, the leader of the miners, who appears for 10 seconds in a news clip at the beginning of the play, refused to hold a strike ballot when he called out his members, allowing one third of the miners to continue working as they claimed the strike was not official. In fact, the vast majority of the clashes between the miners and the police, some of which form a very effective backdrop to Billy and his ballet class of young girls dancing between the struggling forces, occurred when the police prevented the miners from using their `flying pickets`to stop the Nottingham miners from continuing to work and produce coal, not when they were `intimidatìng local communities`. It would probably have helped the success of the strike if Arthur Scargill hadn`t called it in the spring of 1984,  allowing the goverment to let hunger and deprivation to grind down the miners well before winter arrived.

All of this only goes to show that good plays and great art don`t need to be historically accurate to be effective. It would be nice though, if authors and directors didn`t paint the background in bright primary colours that make difficult issues into simplistic morality plays. The evil Maggie Thatcher and her callous desire to grind the faces of the poor is now too well-established in popular mythology for any amount of evidence to make a difference. The opening number of the second act has the miner`s village putting on a Christmas show, with the children singing `Merry Christmas, Maggie Thatcher`and expressing happiness because each new day means ` Ìt`s one day closer to your death`. So there.