Will America's Sub Prime Woes Hurt Asia?

Therefore, the recent shakeout in America is of no surprise to us. As an American squawk box commentator magnanimously observed about himself, he has called six of the last two US market crashes. So have I. Let's hope that I am right this time around.

What is different this time is how deeply the sub-prime news has embedded itself into investors’ consciousness. A lemming-like effect is taking place. Sadly, once the lemmings are shaken and turn, and the longer they turn, the more momentum picks up in that direction. Thus, a bear market in America has just begun.

Prof.Charles Kindleberger wrote a marvelous anatomy of a crisis in 1978. We have linked this to The Economic Clock™.

America has gone through the displacement and boom phases and now has entered its Distress phase (contrary to the false alarm this February, when people panicked – but loaded back up!) Having been in broking for over 20 years, I would not be so naïve as to say that “this time it’s different”: America still dictates the world, whether it be politically (witness the Muddle East), economically, or indeed via its stock markets.

However, I would say that increasingly, investors worldwide are being given greater choices. As I note in my forthcoming book,

  • America’s stock market capitalisation of $16 trillion in 2005 is still bigger than that of Europe’s, Japan’s, the UK’s and China’s combined. In August 2007, America’s market cap of $18 trillion was 6.4 times bigger than China’s total market cap of $2.8 trillion, and

  • America’s domestic bond market cap of $22 trillion also is bigger than Europe’s, Japan’s, the UK’s and Switzerland’s combined!

Especially, however. Asia and Latin America are becoming investment alternatives -- particularly China, which is undergoing its first industrial revolution, whereby people are leaving the farm for the factory. This prompted the fund manager Jim Rogers recently to assert that “’fantastic fortunes will be made in the country.” So what I mean is that The Economic Time is great particularly in Greater China and other parts of Asia.

My guess is that Asian markets will flourish once the US dust settles and the American market is properly lodged in the fourth Kindleberger phase, “Panic”. Jim Rogers also cautions on the US, stating that “this is one of the biggest bubbles we’ve had in credit”.

How justified is the fear of buying into debt with the sub-prime mess and the exposure of Asian institutions? Totally justified.

Last week alone the sub-prime news wiped $2.1 trillion, or 12% off America’s market cap of $17.99 trillion. If you annualise 12% per week over one year, or 52 weeks, that would have translated into an annualised loss of 300%: America’s market cap would have been decimated threefold.

Last week we also read that America’s 10th biggest home lender, American Home Mortgage, is planning to close.

Many big name hedge funds are closing, e.g. two at Bear Stearns. Others have suspended redemptions. Redemption pressure means that the hedge funds operating in this loosely-regulated $1.75 trillion industry have to double-check their performance data more carefully, possibly delaying their release

So I am with Jim Rogers: this time around, the sub-prime news is the beginning of the end concerning America’s stock markets and thus credit will keep tightening creating a terrible Economic Time for America, namely an

  • Excess demand for money (tighter credit: banks don’t want to lend even to healthy borrowers), and an

  • Excess supply of goods

Concerning the exposure of Asian institutions to America’s SP mess, on Aug. 4 the top ratings agencies Moody’s and Standard & Poor’s stated that Asian banks have learned from the 1997 crises out here, so

  • The impact of the sub-prime meltdown on Asian banks & insurers is likely to be limited

  • Japanese banks have sub-prime exposure of US$8 billion, and Taiwanese banks have even less exposure.

Japan: Prime Minister Shinzo Abe’s Kamikaze Politics

According to freelance author Kevin Rafferty, the defeat in this Sunday’s Upper House elections has not humbled Shinzo Abe. However, on the contrary: he has become even more contrite even though, for the first time, the Democrat Party now has a majority in the Upper House..

Each time that he was asked about the defeat, he stated that he did not think that his policies were wrong, and that he would pursue his dream of creating a ‘beautiful Japan’

Here are his specific weak spots as Japan’ Prime Minister:

Although the weak yen is reaping huge profits for exporters, these are not being passed on in the form of wage increases. In June, wage earners’ cash earnings actually fell by an annual 1.1%, dipping for the seventh consecutive month. Unsurprisingly then, this June’s household spending rose a stunning 0.1% year on year! The local tax rise in June is another blow to consumer sentiment.

Japanese people are thus concerned – as are those in America who are not gaining from globalisation – about their losses of incomes and jobs. Moreover, his government’s competence is questioned as its handling of the last earthquake was below standard. His thinking is vestigial: he is relentless pursuing his dream of a “beautiful Japan.”

However, his model is pre-WWII Japan and is based on people knowing their places in life.

One measure is to scrap the current constitution that pledges Japan to be a “peaceful” nation, and insisting that “patriotism” be taught in schools – and, that teachers come under closer government scrutiny.

He has used the tyranny of the majority 20 times to bulldoze through unpopular measures in Parliament He has not disciplined ministers – one called women “baby-making machines” but seemingly nothing has been done.

Beyond that, Mr. Abe has two fundamental issues that he must deal with:

  • How to reform the inefficient parts of the economy so that the little guy benefits from globalisation (this is exactly the same issue in America, where the disaffected are clamoring for more protectionism), and

  • How to create a 21st Century Japan that knows its opportunities, obligations and limitations, also in the military arena. He apparently has antagonized South Korea as well as China in relation to North Korea. If he revises the pacifist constitution, he is going to antagonise many more people at home and abroad.

Abe’s mindset is that of his grandfather’s pre-war politics. His grandfather, Nobusuke Kishi, was the right hand to General Hideki Tojo. Tojo was never imprisoned despite being a Class-A war criminal, was one of the founders of the LDP, an is deemed to be largely responsible for Japan’s murky money politics that finance the ruling LDP.