Blain’s Morning Porridge – March 18th 2019

Blain’s Morning Porridge – March 18th  2019

“It’s the edge of the world and all of western civilization, the Sun may rise in the East at least its settled in a fine location..”

In the headlines this morning:

What a Saturday…Well done Wales on a well-deserved Grand Slam. But, I wonder if there is a hidden message in Scotland’s remarkable comeback being dashed as England clawed back an undeserved draw at Twickenham? The Scots haven’t won on English turf since 1983. They played a blinder second half.. while all the English could provide was a surly Farrell dodging a yellow card.  Perhaps it was a lesson in the tedious inevitability of modern life and a timely reminder it’s not a fairy-tale? (Shame… we wis robbed!) Perhaps Trump, Trade Wars, Income Inequality, the mis-match between asset prices and reality, and all the rest is just stuff that’s stupid, unfair and just the way it is..

Meanwhile, back on Planet Misery… what we got to look forward to?

The Boeing saga rumbles on. It could be a month till we learn what caused the crash a week ago. The focus is not just upon the possibility Boeing has failed to correct and fully inform users of stall-prevention system problems on the B-737 Max, but now on the US FAA for its dithering and lack of clear action. The agency has been rudderless and leaderless for over a year, neglected by the administration after Trump wasn’t able to put his personal pilot at its head!

And it’s another last chance for a Brexit deal with Theresa May going for third time lucky – apparently. The Westminster rumours say she’s still likely to lose with many of the Hard-Brexit crowd still hoping to achieve a No-Deal exit – justifying it as giving the UK a stronger post exit negotiating position with Europe. It could still happen by default – the House of Lords have still to opine, and all it would take is one troublesome EU member to say no to an extension for this game to play out. What happens if we get to March 29th with no extension from Europe, and the matter still unlegislated in Parliament? Just asking….

And after another outbreak of populist trouble in France, I’m again wondering about Europe. In the last few weeks I’ve come across a number of articles suggesting Europe is suffering from a new strain of the dread financial disease – Japanification. I think it’s the wrong diagnosis. Europe is suffering from something worse…..


What are the symptoms of Japanification? As illustrated in its most famous eponymous example, Japanification happens when an economy reaches full pelt and then stalls dramatically leading to years of economic stagnation – pulled down by inefficiencies ignored during the growth phase. (Growth economies can trip over their own shoelaces!) It might be corporate governance, corruption, failure to pay workers enough, income inequality, or in Japan’s case, insularity and a failure to free up and encourage society to consume.

Some say Japanification is classic hubris. Through the 1960s, 70s and 80’s the Japanese economy took off – moving from cheap producer to powerhouse innovator and seeing its global value multiply many times. Economic miracle. The mania was best illustrated by the Japanese belief the small patch of land their emperor’s palace was built upon was worth more than California… Japanification became inevitable. In 1990 the stock market crashed and went into long term decline from 40k to 8k in 2003. It was more than a lost decade. The economy was kept afloat by govt debt. In recent years, the government has embarked on QE cubed – throwing massive amounts of cash at the economy in terms of owning almost the whole of the JGB market and most of the stock market, but still there is little sign of any inflation.

In Japan’s case employment remains high, but the economy has slowed to dismal levels. No one is really spending. The ageing employees of large bureaucratic firms save and watch windows as their pensions grow. Japan’s Corporate innovation has waned, stymied by “mature” company bureaucracy and business practices that reward consensus on stability rather than hunting for the next billion in new product sales.

While the government tries to stimulate the economy and address full employment and aging population demographics by bringing women and even foreigners into the work force. . It has zero effect on inflation or growth. The world watches in horror as a European CEO who turned a failing Japanese car company into a world leader is held in jail on trumped-up charges.  While the US tech giants leading are all new and millennial, the leading Japanese companies are so last century. Sure, they make good cars, and know how to build a nuclear power plant.. but.. it’s a very different society.

Somewhere in the Japan case there are lessons… maybe they are about a balance between growth, society, and culture? Who knows.. I’m just a bond jockey. But it strikes me the risks to other strong, but unbalanced growth economies can be identified from the Japan case. Apply the lessons to China, India and others. Ask yourself will India ever fix itself when the 10 richest families own 56% of the nation’s wealth? And when does China stall out?

Then we come to Europe.

Why is Europe caught in a lost decade – 12 years of minimal growth? There are definitely parallels with Japan, but as many differences – notably that Europe has been experiencing a series of economic slow-downs rather than booms for decades. The current European stagnation has been long-term. For the last 8 years, the ECB has been throwing money at the problems; trying to stimulate growth, boost consumption, raise employment, keep a lid on societal pressures and keep inefficient banks afloat.

The core problem is the structure behind the Euro – ill-conceived but now a “must-preserve-at-all-costs” construct that represents the “key-success” of the European polity. One issue are massive Target 2 account imbalances between Germany and the rest of Europe – illustrating Germany isn’t consuming European goods, and Europe is in hock to Germany. Some economists say that’s a good thing – the trade imbalance is likely to motivate Germany to remain within the construct!

The failure of the Euro structure has magnified one massive difference between Eurofication and Japanificiation. While Japan fell into stagnation at full employment, Europe is substantially below – especially the further you get from Germany. Youth unemployment is massive across the EU and it looks permanent! Japanification occurs when an economy stalls, resulting in sub-optimal lethargic growth and unengaged consumers. Eurofication is a stalled economy, stalled consumption and long-term massive structural unemployment

Long term sub-full employment (20% youth unemployment) at a time when the contradictory policies of closer union and sticking to the rules means the EU is still de-facto enforcing austerity – leads to consumers unable to consume, while social welfare and benefits for the have nots are cut. It’s a classic consumption failure. Spice it up with populism in terms of left wing protests against social inequality and the right-wing complaining of immigration and competition for scarce social benefits.. and it’s pushing Europe towards something far less soft than Japan.

It isn’t helped by the ongoing weakness of European banking – which are entirely dependent on free money from the ECB in the form of ongoing TLTROs, and – as a recent Deutsche Bank report highlighted – far too dominant across corporate lending. When that breaks and all banks do is buy government bonds, you have to look for Plan B… which Brussels isn’t ever going to do.

But, who wants to focus on Europe when we’ve got the antics of May and the UK parliament to entertain us..

Out of time..

Bill Blain

Shard Capital