The Stakes In Japan Are So High For Nomura's Richard Koo

Throughout the years, we've been citing the work of Nomura economist Richard Koo quite a bit.

Koo is the author of "The Holy Grail Of Economics" which uses the great multi-decade Japanese malaise to flesh out his concept of a balance sheet recession, wherein monetary policy is largely impotent due to the fact that the private sector is seeking to reduce debt, and thus not response to lowering the cost of money.

In such a situation, he's a big advocate of fiscal stimulus, so as to replenish private sector balance sheets.

As such, he's become one of Japan's foremost economists, and his ideas have relevance in the Europe and the US, which also have balance sheet issues.

But the "Abenomics" experiment is putting his theory to the test, and would seem to put a lot at stake for him professionally. While there is a fiscal aspect of Abenomics, the big mechanism is aggressive easing by the Bank of Japan, something that should theoretically be ineffective with rates near 0%.

Nick Rowe, who blogs at Worthwhile Canadian Initiative, writes:

This is not the "beginning of the end" of the Japanese economy. But it might be, and I hope it is, the beginning of the end of Japan's long recession.

And if this is indeed the beginning of the end of Japan's long recession, it will also be the beginning of the end of Richard Koo's thesis that monetary policy is powerless in a balance sheet recession, and that only fiscal policy can offset private sector deleveraging.

And we can only regret that Japan did not do this many years earlier, instead of wasting all those years and letting Japan's government debt/GDP ratio climb. Because that high debt/GDP ratio is the only reason why someone might want Japan's economic recovery but not want the higher interest rates that will accompany that recovery. Which is no reason to try to stop the recovery. Though it is one additional reason to regret not having done something like Abenomics a lot earlier.

Meanwhile, Japan's market has gotten tremendously volatile lately, and we're still in the early moments of any real world recovery, so the question remains far from settled.

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21 Stock Market Warning Signs Giving Global Investors Cold Sweats

Sam Ro | May 26, 2013, 10:48 AM | 67,557 | REUTERS / Tim Shaffer

This past week saw the stock market sell-off a bit.

With markets near all-time highs, is it possible we've seen the top?

"They come and go," said Jack Bogle, warning that the market is probably due for a 25-50% sell-off. "I went through one in 1973-1974, I went through one in 2001, 2002, 2003; I went through another one 2008-2009. They're kind of scary — often terrifying — but it's typical."

Indeed, the bears seem to have an overwhelming number of reasons to be worried.

We've compiled 21 big warning signals that are keeping the stock market's bulls on edge and its bears on the sidelines.

First, there are signs that the latest buyers are buying recklessly.

Also, there is a lot of proof that the outlook for demand is deteriorating, profits are falling, and profit margins are too optimistic.

And it's not just a single company or industry sending warning signals. The breadth of warnings is both historic and startling.

If you're an investor thinking about making a move in the stock market, then you should probably consider these warning signals.

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Japan Is Getting Crushed Even More

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Anyone Into Bitcoin Has To Be Really Happy This Month

Regardless of what you think about Bitcoin's viability as a currency that people actually use, it should be clear that one pre-requisite is price stability.

Plunging exchange rates means nobody will want to hold the currency for any length of time. Surging prices means nobody will want to actually use Bitcoin for purchases, and instead just horde it for speculative purposes.

And stability is exactly what Bitcoin has been displaying of late.

After some major instability back in April, the month of May has been very quiet, with the price rising quietly and modestly throughout the month.

Via Bitcoincharts, you must admit the month of May has been nice.

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Chinese Prime Minister Gives A 'Remarkable' Speech About Turning The Economy Over To Market Forces

Rob Wile | May 26, 2013, 7:38 PM | 3,211 | In a major speech reported by The New York Times' David Barboza and Chris Buckley, Chinese Prime Minister Li Keqiang says the Party will now more actively embrace market forces and encourage private, foreign investment into Chinese industry.

"The market is the creator of social wealth and the wellspring of self-sustaining economic development,” Li says.

The speech is being hailed as unprecedented in its embrace of capitalism. Writing on his blog, Nobel economist Gary Becker called the above line a "remarkable admission."

The exact wording for the key policy proposal in Li's speech, according to a directive Barboza and Buckley cite, is, “promote the effective entry of private capital into finance, energy, railways, telecommunications and other spheres.”  

The Party also wants to begin taking steps to allow market forces to determine bank interest rates, it says.

Analysts say the speech is in response to concern that sluggishness in the Chinese economy is lasting longer than leaders desire. China's manufacturing index contracted for the first time in seven months this past week.

Becker points out that the Party will face extreme opposition from state-owned enterprises, which have been the principal beneficiaries of China's protectionism. He writes:

China’s new leaders have now made clear that the country needs to rely much more on the creativity and resourcefulness of the private sector if it is to move beyond middle income status, and become a major economic power as measured not only by aggregate GDP, but also by per capita GDP. It remains to be seen whether even the new leaders can overcome the strong opposition of SOEs and other special interest groups to the implementation of a major shift toward the private sector.

Barboza and Buckley say foreign investors will now also have opportunities to invest in logistics and health care in addition to the above-mentioned sectors, but note the directive does not provide exact details.

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Here's A Classic Example Of Investors All Turning Bullish At Exactly The Wrong Time

AP

Here's a classic anecdote form Nomura's Hiromichi Tamura, who was just on a swing of European investors discussing Japanese equities.

Whereas in January, when Tamura went out there, there was widespread bearishness towards Japan, this time (right as markets began to falter) everyone was bullish.

Many investors have a bullish outlook for Japanese equities

One of the main takeaways from our latest trip was that more investors were bullish about the outlook for Japanese equities than when we made our last visit to institutional investors in London, Boston and New York back in January this year. Most of the investors we met in January were bearish on the outlook. This time, several investors we met thought our forecast for the Nikkei Average to reach 16,000 by end-2013 was overly conservative. In the past, investors with the longest experience of investing in Japanese equities had been the most cautious on the outlook, but we now get the impression that nonresident institutional investors welcome the speed of government policy implementation under Abenomics.

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