Here's What The Heck Is Happening In Japan

The Japan market crash has finally broken through to the mainstream.

Last night and this morning, several non-finance folks have been asking "What the heck is happening in Japan?"

First, from an obvious market standpoint, it's crashing.

Japan's main stock index, the Nikkei, fell 6.25% last night, to 12,445. Just a few weeks ago it was right around 16,000.

That's a crash.

Of course, Japan had been one of the hottest markets in the world, surging like crazy since last autumn.

Here's a chart, via FinViz, of Nikkei futures going back several months.

The big runup that started in November coincided with the emergence of "Abenomics," the big economic strategy outlined by new Prime Minister Shinzo Abe, who supports eliminating the Japanese slump via a three-arrow combination of ultra-aggressive monetary policy, fiscal policy, and structural reforms.

The monetary policy has been the easiest to implement because all it took was for the BOJ to just declare an aggressive inflation target and a lot of QE. The fiscal and structural parts are much more difficult.

But for the purposes of rising asset prices, the monetary stimulus deserves a lot of the credit for the big Nikkei surge.

So what's gone wrong?

Basically, people are doubting the Bank of Japan's resolve.

Matt Yglesias has a great post at Slate showing that the collapse of the Nikkei also corresponds with a recent decline in inflation expectations, and those declines in inflation expectations associate with hints that the Bank of Japan is not fully committed to stoking more inflation.

One of the arrows refers to comments from the Finance Minister concerning the rise in Japanese Bond Yields, which hinted that maybe the Bank of Japan was getting freaked out. And the other arrow concerns minutes from a Bank of Japan meeting, in which concern was expressed over rising yields, which also caused investors to question the bank's resolve.

The bottom line is this: For a central bank to do its thing it needs to be aggressive and clear in its goals, and not worry about the bumps along the road.

Paul Volcker was willing to crash the U.S. economy (well at least create a recession) in order to beat inflation. Ben Bernanke gets called a traitor by U.S. Presidential candidates, but is committed to his extraordinary monetary policy actions.

The Bank of Japan already looks nervous. And the market is starting to bet against it.

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The Big Money Is Bailing On Argentina, Again, Over Fears Of Fresh Crisis

REUTERS/Marcos Brindicci

Argentina's President Cristina Fernandez de Kirchner gestures to supporters during a rally outside Casa Rosada Presidential Palace in Buenos Aires May 25, 2013.

$('.icon-tooltip').tooltip();BUENOS AIRES (Reuters) - More than a decade after Argentina's epic financial collapse of 2001-02, many investors are rushing for the door once again.

From big Chinese and Brazilian companies like miner Vale do Rio Doce SA, to small-business owners and savers, the fear of a new crisis has led to canceled investments and suitcases of cash leaving the country.

The mass exodus, which has been limited only by leftist President Cristina Fernandez's capital controls, is threatening to undermine Latin America's No. 3 economy even further by leaving it short of hard currency and new jobs.

The underlying problems range from Fernandez's hostile treatment of the private sector, to severe financial distortions such as a parallel exchange rate, to the general feeling that Argentina is due for one of the periodic spasms that have racked the country every 10 years or so going back to the 1930s.

Some say such worries are overblown, arguing that Argentina has defied doomsday predictions for the past decade, which was by some measures its best economic run since World War Two.

Yet for many, the feeling is of a gathering storm.

"The end of this story has already been written, and it ends in crisis," said Roberto Lavagna, who as economy minister from 2002 to 2005 helped create Argentina's current export-driven policy framework, and is still widely respected on Wall Street.

While everyone agrees any crisis won't be as bad as the 2001-02 meltdown - which saw nationwide riots, two presidents quit, and the economy shrink by one-fifth - it could still be enough to severely disrupt lives and business plans.

By relying on short-term fixes such as price controls and bans on Argentines buying dollars, Fernandez may just be delaying the inevitable while piling up even more problems.

"The longer they try to delay things, the worse they will be," said Lavagna, who worked for Fernandez's late husband and predecessor, Nestor Kirchner, before falling out over what he saw as the couple's increasingly anti-business agenda.

"You can't have growth without investment."

Key ministers in Fernandez's government declined to be interviewed for this story.

Following a sharp slowdown in Argentina's economy over the past year, and growing concern in places like Washington and Brasilia, Reuters recently spoke to about two dozen leading figures in industry, finance, academia and politics to try to gauge where the country is headed.

Some declined to speak on the record, citing growing efforts by Fernandez's government to intimidate its critics. Others - including Lavagna, who has become a leading opposition figure - were clearly informed by a political point of view or agenda.

Yet even among those without an ax to grind, the sense is that Argentina has lapsed into its old habit of scaring away private capital, one of the main reasons why it has steadily declined from its perch as one of the world's richest nations in the 1930s.

"It sure sounds like trouble to me," said David Rock, a professor at the University of California at Santa Barbara and author of several books on Argentina's economic history.

"What they're doing right now, it can't be sustained," Rock said. "It's hard to believe it's happening again."

In truth, Argentina has been something of a financial rogue for years. Since defaulting on $100 billion in debt during the last crisis, the country has been cut off from capital markets and considered a highly risky place to do business.

Fernandez confiscated private pension funds to help pay government debts in 2008, and has nationalized some companies. Her government is widely accused of doctoring economic data, inflation runs at about 25 percent, and foreign firms are forbidden from sending profits abroad.

Until recently, though, the economy continued to grow, often at an annual pace of 8 percent or higher.

So what has changed?

First, the effect from years of high inflation has taken its toll, making Argentine industries uncompetitive at a time when prices for its key commodities like soy are falling.

And second, the major business partners the country hadn't yet alienated - Brazil and China - have also begun to turn away.

Vale's decision in March to cancel a $6 billion investment in a new potash mine was emblematic.

The company, which is privately held but heavily influenced by the Brazilian government, walked away because the growing gap between Argentina's official and black-market exchange rates would have forced it to shoulder costs in dollars at a level as much as 50 percent higher than it would receive profits.

Afterward, Interior Commerce Secretary Guillermo Moreno - Fernandez's point man on contentious economic issues - demanded a meeting with Brazilian officials. He then threatened to have Vale executives in Argentina detained unless the company reversed its decision, according to three Brazilian officials with knowledge of the conversation.

Neither Moreno nor his office responded to repeated requests for comment. Economy Minister Hernan Lorenzinoalso did not respond to interview requests.

The hostile treatment, plus other recent clashes, infuriated Brazilian President Dilma Rousseff and led her government to "downgrade" ties with Argentina, two senior officials said. Shortly thereafter, state-run oil company Petrobras stepped up efforts to sell its assets in Argentina.

Difficulties with the Chinese have been quieter, but also troubling. The Heilongjiang Beidahuang State Farms Business Trade Group, a Chinese investment entity, had agreed to help build a range of large projects from wind farms to port improvements to railroads in Buenos Aires province.

"These have been delayed because of the political situation," said Oscar Gomez, an adviser to the group.

"Today, whatever money they have budgeted, it runs out in two months," Gomez said, citing inflation and the parallel exchange rate, among other factors. "Everything's working against Argentina. There's no investment today because there's nothing in it for anybody."

Chinese companies have also suspended or slowed down huge investments in shale gas and urea, a fertilizer, said Diego Guelar, a former ambassador to the United States and author of a forthcoming book about Argentina and China.

"Brazil and China were our last dynamic partners, so now what?" Guelar said. "Who will create jobs?"

The answer doesn't seem to lie with Argentine companies. A business confidence index produced by the University of Belgrano fell 4.4 percent in the first quarter compared to the year before - putting it near levels last seen during the 2008-09 global financial crisis.

Economists say the private sector likely contributed zero net jobs to the economy last year, with only the government picking up the slack - but that may have run its course, too. Unemployment rose a full percentage point in the first quarter, to 7.9 percent, a three-year high.

Some Fernandez supporters argue that robust consumer spending will be enough to sustain the economy. And it's true that, unlike the last crisis, Buenos Aires' famed steakhouses and cafes continue to bustle with customers well past midnight.

"We do have a severe problem with private investment, but that's always been an issue here," said Artemio Lopez, a political analyst. "You have speculators and unproductive capital that flee the country whenever they can."

Not everybody is running away - U.S. oil major Chevron Corp said last month it would invest up to $1.5 billion in shale in Argentina's south.

There are still some 500 U.S. companies in Argentina, and many are profiting and continuing to invest, according to a source close to the business community. But the same source conceded that many invest because "they have no choice" - Fernandez's capital controls prevent them from sending earnings back home.

Official data, often questionable in Argentina, suggests those controls have helped contain the damage - at least for now.

Capital flight slowed from $21.5 billion in 2011 to $3.4 billion in 2012, with a slight net inflow of $110 million in the first quarter this year, according to the central bank.

Yet other evidence suggests the pressure for money to escape is intensifying. In recent months, Fernandez has passed several new measures such as a limit on cash withdrawals using credit cards abroad, and a surcharge on purchases of airline tickets.

The demand for hard currency is such that Argentines pay a premium of 60 percent over the official exchange rate to buy dollars on the black market. Many believe that Fernandez is just trying to hold the economy together until legislative elections in October, causing many to take refuge now.

Argentines frequently tell stories in private of dollars they've stashed in safe-deposit boxes, under their mattresses, and in suitcases on trips to banking havens like Miami or neighboring Uruguay.

"Nobody wants to be the last one left," said Marcos Aguinis, an author of several bestselling political books and novels. "It's tragic, the predictability, but this is clearly falling apart once again."

Indeed, one of the most commonly heard phrases in Buenos Aires at the moment is "fin del ciclo" - the end of the cycle, a uniquely Argentine notion that the economy and often the government must regularly implode to make way for something new.

So why does that keep happening?

"I've been trying to answer that question for 50 years," said Rock, the historian. "To be honest, I still don't know."

(Additional reporting by Guido Nejamkis and Nicolas Misculin; Editing by Kieran Murray and Claudia Parsons)

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Drill Into Oil States’ Looming REIT Play

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The Federal Reserve May Have Killed Two Birds With One Stone

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Lululemon Is Getting Destroyed Today (LULU)

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Lululemon Athletica's stock is down over 16% today to $68.50.

This comes after the company announced yesterday that CEO Christine Day is stepping down. The board has hired an executive search committee, and Day will stay on as CEO until her replacement is chosen.

The stock also saw a few downgrades. UBS cut it to 'neutral' from buy and lowered its price target to $72. 

Meanwhile, Canaccord Genuity's Camilo Lyon wrote: 

"Despite good Q1 results that beat our estimates (32c vs. our 30c), the surprising announcement of CEO Christine Day’s departure is the relevant development that will weigh on the stock in the near term.

"...In our opinion, LULU remains a strong retail growth concept, but we are lowering our P/E multiple to 30x (~1x PEG) from 35x, resulting in our price target reduction to $87 from $92."

Here's a look at that stunning decline:

Bloomberg

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There's At Least One Thing You Can't Say About This Morning's Bond Routing

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Decoupling might be my least favorite word to describe financial markets.  Almost every time I’ve ever heard any thesis about decoupling, it has turned out to be a sham in retrospect.  Decoupling is a comfortable intellectual crutch, but rarely an apt description of today’s financial world.  Money flows too quickly, too easily across borders.  Severe distress in large swathes of the world economy quickly lead to at least some distress in practically all parts of the global economy.

That’s the main reason I’ve been focused so intently on the emerging market meltdown over the past month.  I mentioned the large moves lower in emerging market currencies a couple weeks ago, and those routs have only gotten worse since then.  Meanwhile, overnight, some of the equity market leaders of the emerging market rally over the past few years were slammed.  Here are the 4 year daily charts of the Southeast Asian equity markets that got hit last night by 3-5%:

Indonesia:

MorningWord 6/11/13: WWDC- “Glamorous” This, “Magnificent” That, We’ll Be The Judge of That, Thank You. $AAPL Macro Wrap – Decouple This, America $SPY, $EEM, $FXY Too Many Options – $AAPL, $BAC, $FB, $SPLS, $VOD 4 year daily chart of Jakarta Composite Index, Courtesy of Bloomberg

Philippines:

Philippine Stock Exchange Index 4 year daily, Courtesy of Bloomberg

Thailand:

Bangkok Stock Exchange of Thailand Index 4 year daily chart, Courtesy of Bloomberg

 

All three markets are still above their 200 day moving averages (black), though all are now trading below their 50 day moving averages (pink).  The long-term charts are very similar, showing the strength of the equity market rally in Southeast Asia (one of the better long-term economic and demographic stories for the next decade).  However, the short-term weakness is one more sign of the cracks building in global financial markets.

The warnings signs have been building in the last few weeks, kicked off by Japan’s 7% down move on May 23rd.  I discussed the importance of Abenomics to the desire for risk appetite in all assets in my Macro Wrap that day, which turned out to be my most read post of the year.  Since then, we have continued to see a strong correlation between movements in the Yen and risk appetite in general.  We are greeted this morning by a Yen stronger by 2% against the dollar, and lo and behold, SPX futures are down 1%, European equity markets are down 2%, and commodities are down 1-2%.

That is not a picture of a global investor base moving its assets based on the attractiveness of individual investments.  It is the definition of a COUPLED world, not a decoupled one.  So manage your risks accordingly.  And please, please, please, don’t mention decoupling to me. 

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"Decoupling", don't even try it.

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