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Investing in Japan: Three Choices One Year after the Disaster

BY KEITH FITZ-GERALD, Chief Investment Strategist, Money Morning Like it has been for other Japanese families, this past year has been a tough one in my household, too. Perhaps not surprisingly, Sunday’s one-year anniversary brought long-buried emotions to the surface 12 months to the day after the horrific earthquake and the tsunami it spawned devastated Japan. The tragedy haunts it still. I don’t know a single Japanese who isn’t affected. And I still struggle to process the enormity of what’s happened in a […]

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Like it has been for other Japanese families, this past year has been a tough one in my household, too.

Perhaps not surprisingly, Sunday’s one-year anniversary brought long-buried emotions to the surface 12 months to the day after the horrific earthquake and the tsunami it spawned devastated Japan.

The tragedy haunts it still. I don’t know a single Japanese who isn’t affected.

And I still struggle to process the enormity of what’s happened in a country where I’ve spent much of the last twenty years as a businessman, a husband, and a father.

How do you explain a 9.0 earthquake or a 65-foot high wall of water moving at 80 miles an hour?

Or come to terms with the friends and families who were literally wiped from existence

I couldn’t explain that to my youngest son, Kazuhiko, when we visited Kamigamo Jinja, our ancestral family shrine to pray shortly after the disaster.

He wanted to know how the spirits of those departed would find their way home each August for Obon, a more than 500-year-old annual celebration when ancestral spirits make their way back to family altars.

My wife, Noriko and our boys, Kunihiko and Kazuhiko, return home to Kyoto this Friday so we’ll see if they’ve made peace in their young lives as so many other children have.

It is through their young eyes that the future does indeed live, as is the case in so many cultures.

The Aftermath of the Japan Disaster

To that end, I’m sure you’ve seen the many before and after pictures of Japan making the rounds in recent days.

They’re staggering and impressive.

But at what cost?

So far Japan has scraped millions of tons of debris from disaster-hit areas into monstrous piles. Only 6% has been burned or otherwise disposed of. You don’t hear about that from U.S. news sources.

Nor do you hear about the additional 130 million to 150 million cubic meters of soil that have yet to be scraped, processed or otherwise remediated to eliminate everything from toxic chemicals to radioactive contamination.

That’s enough to fill the Empire State Building floor-to-ceiling 143 times.

In the aftermath, only two of Japan’s 54 nuclear reactors are online and running. The rest are down for “inspections” and disaster preparedness drills.

There is a good probability that many may never be restarted, especially with anti-nuclear protests building not only in Japan but around the world as a result of this mess. Most are decades old and of questionable design given what we know about nuclear power safety today.

While I used to be a staunch advocate of nuclear power, today I am now firmly against it.

Cleaning up Fukushima is especially problematic on a couple of levels and estimates suggest it may be 40-50 years before the plant is completely decommissioned.

Not only does the Japanese government have to figure out how to contain the mess, but things are so badly mangled on the ground that the Tokyo Electric Power Company (TEPCO) isn’t even sure it can locate the melted nuclear fuel rods at the moment!

An estimated 100,000-275,000 people remain in temporary or modified housing according to various sources. The Japanese government is telling people that it may be a decade or more before they can return home — if ever.

To its credit, the government has gone to great lengths to keep neighbors and families together as a means of preserving the cultural groupism that has played such a vital role in Japan’s society for more than 1,000 years.

Separating people would have broken that bond and weakened recovery efforts.

So what now?…

Investing in Japan

Many investors believe that investing in Japan’s recovery is a sure shot to riches.

That’s not true today any more than it was true immediately after the disaster, a point I made in repeated television interviews at the time and in Money Morning.

Its population is literally dying off as the nation struggles to bear the burden of one of the world’s oldest populations. The birth rate is 0%; there is no immigration policy to speak of. Debt is at 259% of GDP, which makes the Greeks look positively organized and miserly. And the economy is basically flat.

Despite optimistic thinking, Japan’s economic machine is unlikely to ever regain the prominence nor the speed or momentum it enjoyed from 1945 to 1991.

But certain Japanese-related investments and Japanese companies will prosper as a function of the role Japan plays in the world around it.

Here are three choices worth considering:

Currency – Japan’s yen remains wildly overvalued despite the fact that it’s already corrected substantially from its low of 75.7698 to the dollar on October 28, 2011.

But this won’t last much longer.

As riskier assets come into vogue, the yen will decline as traders shuffle their bets into other assets instead of parking their money in yen.

At the same time, it’s highly likely Japan will have to turn to external debt financing no later than 2015 as a means of compensating for an aging population and fewer workers to support the 90%+ of debt purchased by its own citizens.

Consider the ProShares UltraShort Yen (NYSE: YCS). It’s an inverse ETF designed to appreciate as the yen falls. It’s already moved up 17.06% off its 52-week lows and could really be a great trade if you’ve got the perspective necessary to stick with it.

Machinery – Japan’s machinery industry remains largely overlooked at this stage. Still, economists see an increase of about 2% this year, which is widely interpreted as a leading indicator for additional capital investment. The most recent data from Tokyo shows a 3.5% increase to 757.8 billion yen in January, the most recent month for which there is reporting.

Electrical machinery makers are leading the charge with a 31.1% expansion. The carmakers everybody thinks are so crucial turned in only 12.4% growth.

I suggest looking carefully at both Tokyo Electron (Tokyo: 8035 or TOELY.PK) and Fanuc LTD. (Tokyo: 69540 orFANUY.PK).

Both are showing signs of strength as global manufacturing activity accelerates. While three of Tokyo Electron’s plants suffered a near-direct hit in the earthquake and tsunami, its Miyagi-based facilities were built on hills and did not suffer material damage. Fanuc was largely unaffected. This gives both companies a potential head start on competitors who were knocked back a few paces.

If you’re thinking about picking up one of the many ETFs that offer a basket of Japanese stocks as a means of accomplishing the same thing, here’s something to think about.

A falling yen is going to drag on Japan’s stock market and if you’re buying the broader indices as opposed to specific stocks, you’re going to get a lot of trash with the trinkets.

I believe it’s better to concentrate on specific companies, especially if I know the broader markets are not likely to go along for the ride.

Why?

They’re the ones most like Japan’s cherry blossoms – full of hope, bright color and spirit. And, in that sense, are a tremendous metaphor for life itself.

— Money Morning

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6 Things That Can Make or Break The Stock Market In 2018

Credit Suisse is out early with its forecasts for US stocks and the economy next year, and they are bullish. 

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Credit Suisse is out early with its forecasts for US stocks and the economy next year, and they are bullish.

The firm’s equity strategists see the S&P 500 rising to 2,987 by year-end, implying an annualized gain of about 11%. They forecast earnings-per-share growth of 6% to 7% over the next two years, from $130 this year to $147 in 2019.

“Our market views are predicated on a supportive economic backdrop, with benign recessionary risks and a pickup in near-term indicators,” said the US equity strategists led by Jonathan Golub, in a note on Tuesday. “While we expect more muted longer-term growth, this has focused corporations on cost containment and the return of capital to shareholders, extended the business cycle and lowered discount rates.”

Credit Suisse is also betting on the continued outperformance of favored sectors in 2017. The tech sector remains the team’s favorite even though it’s expensive relative to earnings. And, they expect financials to outperform due to deregulation.

“Our forecasts are built upon the most historically important drivers of corporate profits and stock prices,” Golub wrote. “That said, many things can alter the market’s path over the near term.”

Trump policy

Trump policy

Andy Kiersz/Business Insider

The group of stocks that would benefit the most from a corporate-tax cut surged after the election but slid only until recently. This suggests investors were doubtful about President Donald Trump’s plan.

“We expect that the proposed tax plan will be difficult to pass, or will have less of an impact than hoped for,” Golub said.

“While we believe that the market would initially applaud such actions, we anticipate that the investment conversation would quickly shift toward higher potential deficits and wage inflation, both negatives for stocks.”

New Fed leadership

Trump said two weeks ago Friday that he would make an announcement on who will lead the Fed after Chair Janet Yellen’s term ends in February. He is reportedly considering policy hawks including Kevin Warsh and John Taylor.

“We believe that there are two key issues surrounding Yellen’s replacement that could unsettle the market: (1) a change in the perceived independence of the Fed, and (2) an end to the period of uber-dovish policy.”

Volatility

Stocks have historically rallied when the CBOE Volatility Index is very low.

“Market volatility has been extremely low throughout the recovery, with the VIX currently reading 9.7,” Golub said. “This has led many pundits to characterize investors as complacent and the market vulnerable to a pullback. We disagree with these assertions.”

Currency

Currency

Credit Suisse

The trade-weighted dollar has slumped 9% this year.

“Our work indicates a 10:1 ratio between currency moves and corporate profits (in the opposite direction). Unfortunately, the dollar’s move is much more muted when measured on a year-over-year basis [-3.3%], and is therefore a much smaller consideration in our forecasts.”

North Korea

North Korea

Credit Suisse

The concern is not a North Korean attack — which investors aren’t expecting — but what happens if the US government punishes one of its major trading partners: China.

“While such actions would likely be targeted, with little economic impact, they have the potential to escalate, disrupting global growth.”

The chart shows that the recent improvement in China’s economy has benefitted US companies.

Hurricanes

The impact of Hurricanes Irma and Harvey, and the recovery efforts, will skew many economic indicators over the next few months.

“Separately, we would not be surprised to see some companies using these natural disasters as an opportunity to conveniently take write-downs,” Golub said.

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Is White-Collar Crime a Threat to Wall Street?

The stock market has had nightmares in the past and we cannot rule that out from happening again in the future, not even with the introduction of new financial regulation policies designed to prevent a financial crisis like the one witnessed in 2008-09.

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The stock market has had nightmares in the past and we cannot rule that out from happening again in the future, not even with the introduction of new financial regulation policies designed to prevent a financial crisis like the one witnessed in 2008-09.

While only one person, Credit Suisse (NYSE:CS) executive Kareem Serageldin, was convicted in relation to the global financial crisis of 2008, investigations over the years have revealed  there probably should have been more. According to findings, the financial crisis of 2008 had more to do with white-collar crime than a natural market meltdown.

The biggest issue when it comes to white-collar crime however, especially in securities fraud, is there are a lot of gray areas. Since markets are unpredictable, it has often proven difficult to pin these malpractices on individuals.

In most cases, the company, its shareholders and even employees are the ones who suffer the consequences.

For instance, in a Financial Times feature on Eric Ben-Artzi, the Deutsche Bank (NYSE:DB) whistleblower who exposed the bank’s improper accounting practices, the bank’s former risk management officer accused the SEC of performing a disappointing investigation. Ben-Artzi actually turned down the $8.25 million offered to him by the SEC for his role in exposing the company.

In the article, Ben-Artzi argues that by forcing the bank to pay $55 million rather than prosecuting the individuals involved in the crime, the SEC had allowed top executives at the bank to retire with “multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet.” On the flipside, the bank’s shareholders and general employees ended up suffering the consequences as they were forced to bear the burden of their managers’ accounting treachery.

This is a clear example of what happens when things go wrong in these so-called “too big to fail” companies. Top executives who are often at fault for planning and executing such malpractices are also deemed “too big to jail,” thereby transferring the burden to the company, the shareholders and rank-and-file employees. This happens on Wall Street, in multinational institutions and even within the confines of government parastatals.

According to Vikas Bajaj, a criminal defense attorney who regularly defends people accused of white-collar crimes, corporate fraud is often pinned on the wrong victims and at times can “devastate personal and professional life for a very long time, making it difficult to secure employment, rent a home, secure a government student loan or obtain a professional license.” However, gathering the right evidence and speaking to the right people can help to strengthen the defense, while getting a white-collar crime defense attorney can ensure the true story emerges, thereby protecting the rights and the future of the accused, notes Bajaj.

But as we have seen, investigators do tend to go for the least protected individuals when it comes to white-collar crime. This does not rectify the long-term impact on the company in question and we have witnessed many companies go down the drain due to major financial malpractices.

While most people view corporate fraud as any practice that wrongly represents the financial position of a company or anything that results in money being lost without a trace, sometimes ignorance and negligence can amount to white-collar crime. For instance, banks are mandated to perform thorough credit checks before issuing loans to individuals and businesses. Yet, defaults from loans and mortgages are what fueled the magnitude of the 2008 global financial crisis.

In short, lenders did not do their homework before issuing loans. It was high-risk lending fueled by the then-booming housing market, which was shortly followed by several credit defaults and then the global financial crisis. While various financial regulations like the Dodd-Frank Act and Basel III Rules have since been introduced to avert the possibility of another financial crisis triggered by the banking sector, accounting misrepresentation like in the case of Deutsche Bank could end up taking the market back to those dark times.

Had it not for Ben-Artzi, who knows whether the malpractice at Deutsche Bank would ever have been uncovered? Who knows how many more companies are doing the same thing on Wall Street? According to World Finance‘s Emily Cashen, “the same reckless behavior behind the 2008 global crash continues to run rampant on Wall Street and unless this vicious cycle can somehow be broken, the global banking system may spiral into fresh disaster.”

Conclusion

White-collar crime on Wall Street is real and could be one of the biggest undetected threats the financial markets could be facing. The various regulatory bodies tasked with the responsibility of investigating and prosecuting the individuals responsible seem to be reluctant to do so on the belief of some being “too big to jail.” Often, the innocent and defenseless end up bearing the burden of their managers’ crimes, losing their jobs and even being put behind bars.

Disclosure: I have no positions in any stocks mentioned in this article.

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Is It Wrong To Question The Official Story When Tragedy Strikes?

Of course, when there is news, it should be reported. Today it is reported sensationally, as entertainment. Is it meant to inform, or induce?

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via The Daily Bell

The media says, “Jump.” And the public responds in unison, “How high?”

“As high as you ever have jumped before, except maybe after 9/11, or the Kennedy assassination.”

Of course, when there is news, it should be reported. Today it is reported sensationally, as entertainment. Is it meant to inform, or induce?

Which came first, the media’s obsession with violence, or the public demand for violence? In the 1990’s as violent crime in America dropped, the media filled more and more time slots with stories about violence.

By the end of the 90’s the public was clamoring for the government to do somethingabout what they assumed was a rising trend in violent crime.

Was that orchestrated? The government certainly benefits from a hysterical public begging them to help. It certainly gives the government an important role in the daily life of an average citizen. But this alone doesn’t mean that it was a conspiracy. Acknowledging that the government benefitted from the media’s overreporting of crime is not the same as suggesting the government actively pushed the media to do so.

But why not wonder? Exercise those thought processes.

It is a known fact that thousands of journalists were at one time on the payroll of the CIA. It was called Operation Mockingbird, and agents would place false stories in publications like the New York Times, and Time.

So when it comes to the case of the fake 90’s crime wave, it makes sense to wonder if a similar program still exists. The courts have ruled that FBI agents can legally impersonate journalists in the course of an investigation.

Do we need to discover the actual program in order to speculate? Well, I certainly wouldn’t say that it is happening without knowing for sure. But we can acknowledge a historical fact and draw a parallel between that and a similar contemporary trend. In such circumstances, it makes sense to be skeptical.

Either way, we shouldn’t fall prey to the media’s manipulations about such things, regardless of the catalyst. So why not remind people that in the past, lies from the government shaped public opinion?

But there are some cases when questioning, wondering, and speculating is considered downright wrong.

When it is most important to speak freely, you can’t.

How do I walk the line between my inherent mistrust of the government media complex and sincere compassion and empathy for victims of tragedy?

Is it wrong to question official narratives after a tragic event? Is it disrespectful to wonder if there isn’t more to the story? Should I censor myself to avoid appearing insensitive, when I want to talk about inconsistencies in the media tale, or the motives that various groups could have to lie about such events?

I think it is especially important to be able to talk freely when it comes to tragedy. The more potential an event has for exploitation, the more possibilities should be explored.

If we are conditioned to hold our tongues, to suppress our curiosity and skepticism when it comes to tragedy, then the worst actors in any given situation win. Those in power need only create a tragedy, and it becomes impossible to question the official narrative. Otherwise, you are disrespectful and uncaring.

When someone is gravely wounded, you don’t slap a band-aid over it. You’ve got to clean out the wound. And that hurts in the moment. But in the long run, it is necessary to prevent infection.

We should wonder if 9/11 was a false flag attack. I don’t think it is disrespectful to the victims to do so. I think it would be more disrespectful to unquestioningly believe the official story. The official story comes from the people who have the most to gain.

Did the terrorists who carried out the attack on the twin towers have anything to gain? Well maybe if they believed the whole 72 virgins thing. But in real life, they died. Suiciding bombing is a thing that people do, however, so it certainly can’t be ruled out.

Did Osama Bin Laden have a lot to gain? Well again, it is tough to understand the motivation of terrorists. Apparently, they think killing innocent people accomplishes something. But now he is dead.

And what about the official storytellers, the ones who investigated, and revealed the true culprits behind 9/11?

Their gains remain. They gained the power to easily declare wars and conduct military operations. Money was poured into the defense budget. Agencies like Homeland Security and the TSA sprang into existence.

Attention was diverted from missing money at the Pentagon. The PATRIOT Act was passed. Due process was no longer a concern.

“Mission Accomplished” in Iraq; the glory of killing Bin Laden. The public became desensitized to war. America helped toppled regimes in Libya and Egypt, and support a civil war in Syria.

These things alone don’t prove anything. But it looks awfully suspicious. The ones who we rely on for information about what happened had the most to gain from the attack. They are the ones who will “solve” the problems.

It is a conflict of interest even if the official story is true. It just so happens that their recommendations on the best course of action were the very things that would grow their power, expand their budget, and swell their ranks.

Again we have a historical fact to turn to for comparison. The Joint Chiefs of Staff under Kennedy floated the idea of carrying out a false flag against American citizens to get them involved in a war with Cuba. It was called Operation Northwoods. Kennedy told them if they ever mentioned the idea of murdering innocent Americans again, he would have them tried for treason.

Well, we all know what happened to Kennedy, but that is a whole rabbit hole of its own. What we know for sure, is that as early as the 1960’s people in the U.S. government wanted to commit false flag attacks against Americans to provoke war. And the leader most vehemently opposed was assassinated.

Incidentally, the Kennedy Administration approved of Operation Mockingbird.

May I Speak Freely?

I want to wonder, and I want to speculate. I get as angry and sad as anyone else with a properly developed conscience when horrible things happen. I want those responsible held accountable. And it is against my skeptical nature to accept an official story without digging for more evidence. Horror does not paralyze my desire to question the official narrative and wonder about inconsistencies.

One thing that strikes me about all of the mass shootings of the past few years, is the great diversity in location and venue.

A college in Virginia. An elementary school in Connecticut. A mall in Washington. A nightclub in Florida. A church in North Carolina. A movie theater in Colorado. A political meet and greet in Arizona. The streets of California. A concert on the Vegas strip.

If someone wanted to strike fear into the hearts of Americans, they could not have chosen a better range of targets. The message would be whatever place you live, wherever you go in public, whatever your age, job, or social status, you are not safe.

Maybe that is the truth. And maybe it is random.

We are told these were all carried out by lone a lone gunman–or a married couple in one case.

But why are there so often witness reports of a second gunman? Could it be chalked up to confusion?

The victims tragically lost their lives. Their families lost loved ones, which will impact them for the rest of their lives. The American people lose their sense of security and their rights. Relationships deteriorate as bitter disagreements turn personal, blame abounds, fingers point, defenses go up.

And after so many tragedies, the culprit is left dead. Is that justice?

Who benefits? The dead guy on the 32nd floor?

The Democrats who want gun control? The Republicans who want militarized police? The media who get a bump in ratings? The Generals who want war? A government that “never let(s) a good crisis go to waste”?

I want this madness to stop. We know how the media wants it to play out. They will get their ratings with division and bitter disagreement. The government always gets more power, more relevance, more opportunity to insert itself into the everyday lives of Americans.

That is why it is so necessary to look deeper, to ask those tough questions that we don’t even want to consider as a possibility. We can’t sit by silently wondering if we are being told the truth or fed lies. It is not disrespectful to question the official story. It would be a miscarriage of justice to accept it without protest, as we are told is what should be done in times of crisis.

The only other option is to play into the hands of the media and government, whether they be orchestrators or opportunists. When we replay the same old arguments and put forth the same stale solutions, when we look to them for information and solutions, they win.

Question everything. Clean out the wounds. It may hurt to get in there deep. But if we don’t, the infection will grow and fester, as it always has before.

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