´´ Who Is The Bug Searching For a Windshield?

Friday, June 12, 2015

Who Is The Bug Searching For a Windshield?

I have to admit to a very serious weakness of mine. Every now and then I scan and skim the Zerohedge page. Ok. Maybe a little more than every know and then. I just love the yellow press and especially the financial yellow press.

Tyler Durdan´s latest penchant is Japan bashing (basically he has been bashing the Japanese stock market all its way up).

Is Japan the Argentina of the 21st Century?

I have not seen an explicit comparison between Argentina's and Japan's past and future economic performance yet. But for Zerohedge one thing is clear; Argentinian style gloom and doom is in the cards for Japan.

On the one hand it is quite embarrassing I have to write this post. For any serious Japan observer it is rather obvious that Japan is not Argentina.

On the other hand I have to concede that a comparative analysis of Japan and Argentina is an interesting take. Not so much in terms of past, present and/ or future economic performance (potential), but rather an analysis of (longer-tem) economic cycles, especially concerning the timing of peak and troughs in boom/bust phases of those two countries.

Two Similar Macro- Economic Cycles With Completely Different Outcome


Argentina went through steady consumer price-inflation between 1975-1991, which ended in a hyperinflation. Annual inflation hit 12,000% in 1989. Argentina ended in tears. Those numbers are comparable to the Weimar Hyperinflation in the "Deutsche Reich" of the 1923's.

Japan, too, ended in tears. It went through steady (high) inflation during the same period. But the really high inflation was not to be found so much in consumer prices, but rather in asset price. The Nikkei went from roughly 3'500 points in 1975 to almost 40'000 points at the end of 1989. The imperial palace in Tokyo was supposedly valued at the same amount as whole California. It was the mother of all bubbles.

We all know what happened then. A massive bust and a huge (asset price) deflation, accompanied by consumer price deflation (albeit mild) lasting for over 20 years now. By 2003 the Nikkei lost roughly 80% of market cap and land prices slumped approximately 90% in nominal terms (2002- 2003 is the time I personally think the Japanese economy has bottomed!).

An unprecedented crash in modern history, only matched by the great depression of the 1920`s and 30's. Japan persistently has run huge fiscal deficits during the slump and still is doing so up to know. Nominal debt/gdp stands at roughly 220% by now (note: Japan financed their deficits internally/ and Japan is one of the biggest creditor nations in the world!). Prime ministers came and left the office in short time spans. Barely one has survived an entire term.


In 1991 Argentina implemented a currency peg, also known as the currency board. Under the presidency of Carlos Menem the Peso was pegged 1:1 to the US- Dollar.  Furthermore, Menem reverted the country's policies according to the ideas of the Chicago School (the therapies are also known as the Washington consensus) to what was later to be called economic neoliberalism. The medicine which is applied by followers of the Chicago School is privatization, liberalization and deregulation, which supposed to encourage FDI.

Actually, one has to admit that those reforms (experiment) yielded fruits immediately. Especially on the price front. In 1994 inflation stood around 3%. Also growth picked up significantly. GDP grew at an annual rate of 8% between 1991 until the Tequila Crisis of 1995. Even after the Mexican Crisis, until 1998, the annual growth rate was 6%.  Unfortunately, Argentina has a habit of living above their means and rampant corruption. They persistently had run a fiscal- and trade deficit (= twin deficits) during that time, which was financed externally on the international capital markets in dollar terms.

Everything ended in tears with Argentina's default 2001-2002.  A very fierce, but short, (asset price) deflation gripped the country, with house prices and the stock market in a free fall. Within two weeks Argentina had several different presidents. The default and "Corralito" (=dollar bank account freeze) wiped-out a huge part of Argentina’s middle class.

The parallels of peak and trough of economic cycles between Argentina and Japan are quite amazing.

An example is the ending of Japan's asset price inflation. The BOJ got ever more restrictive on the monetary policy front during the very end of the 1980`s till finally they succeeded crushing the credit fueled boom 1990-1991 (coincided with the crushing of hyperinflation of Argentina).

The real peak of Japan's depression was 1998-2002, facing a full blown banking crisis. Exactly at the time Argentina was facing an unprecedented boom (peaked in 1998), but which already had seeded the ingredients of an unprecedented bust (2001-2002) and a full-fledged banking crisis. During that time Buenos Aires went from one of the most expensive towns on the planet to live in to one of the cheapest almost overnight. Also Tokyo went from one of the most expensive towns to one that is now in line with other capital cities (certainly not overnight though).

The Game Changers: Nestor Kirchner vs. Junichiro Koizumi

2003 Nestor Kirchner took over office. He kicked the IMF out of the country and did exactly the opposite the Chicago school advised (e.g. regulation, deliberalization, nationalization). The economy bottomed out and entered into a boom which flabbergasted the economists all over the world. The boom (mainly in consumption and construction) was accompanied by ever increasing price inflation. It abruptly ended in the bust of 2008/2009. The "effecto Jazz", how Christina Fernandez Kirchner labeled it (she took office in 2007), let the economy nosedive. Up to now the economy never really recovered but price inflation is staying sky high (= the worst of all outcomes!).

In Japan Junichiro Koizumi took office (2001). He introduced the "big bang" reforms (in analogy to Thatcher’s reforms in the 1980's) of the Japanese financial markets (in 2002). Good old Chicago school medicine. Also Japan bottomed (2002-2004) and entered an economic boom phase (although very little of those reforms announced by Koizumi were implemented!). Price inflation increased slightly but asset prices (especially stock prices) took off significantly. And again the economists all over the world were flabbergasted. They did not see it coming. Also in Japan the short term boom ended abruptly in 2008/2009, which is labeled "Lehman- shoku" in Japan. A massive asset price deflation set in, but in Japan consumerpriceinflation nosedived significantly too. A classic depression (=second worst of all outcomes).

Argentina vs. Japan 2008/2009 - XXXX. We will see.

And, although we have seen parallels in timing of peak and troughs in economic cycles in Japan and Argentina (at least the last 40 years), the overall economic outcome and situation is totally different.

25 Clues Why Japan is not Argentina

  • Argentina used to be one of the richest countries in the world (my granny used to say, "as rich as an argentine", when she referred to incredible riches) and by now it's rather poor on aggregate
  • Japan was totally destroyed and is by now one of the richest countries in the world
  • The middle class in Argentina is almost wiped-out (those who have survived are being wiped-out right now)
  • Japan still  has got a huge middle-class
  • Argentina has one of the worst (public) medical service I've ever seen
  • Japan's medical service supposed to be one of the best
  • SMC (= small and medium sized companies) very little in Argentina
  • SMC are the backbone of the japanese economy
  • Argentina used to be a creditor nation and is now a debtor nation
  • Japan used to be a debtor nation and is now one of the biggest creditor nations
  • Argentina has one of the highest income equalities in the world
  • Japan fares pretty well when it comes to income equality
  • The crime rate in Argentina is ever increasing
  • Japan has one of the lowest crime rates in the world
  • Argentina has horrible infrastructure
  • Japan has state of the art infrastructure
  • Argentina has an uncompetitive industrial sector (actually it hasn't got one)
  • Japan has an industrial sector that is one of the most competitive
  • Argentina has had several currency reforms and still is having an extremely weak currency
  • Japan hasn't had one currency reform since the end of WWII and the yen has maintained one of the strongest purchasing power in the world
  • Corruption is rampant in Argentina
  • Corruption is modest in Japan
  • (Public) education system is a disaster in Argentina
  • (Public) education system is supposed to be good in Japan
  • Live expectancy is rather low in Argentina ...
  • .. etc., etc., etc


  1. Hi there- thank you very much for sharing your investment ideas. Has been a useful tool for me while looking at thinly covered JP stocks. Out of curiosity, have you ever looked into Funai Electric TYO:6839 as a net-net stock? Any thoughts?

    1. Thanks.

      Haven't heared of the company.
      Just skimmed through businessweek. So not really qualified my opinion!

      Usually I do not buy such companies, because it appears that reall losses were made the last years. But their liquid assets and NCAV kept quite stable. Not bad.

      I have to say it looks interesting. Could be a nice turnaround game.

      Thanks for mentioning.

    2. Still not a qualified opinion as I did not do any indebth reasearch on the company.
      But getting a little bit wary as almost 50% is in the hands of Funai- San!

      Not a lot of action regards getting rid o the undervaluation (e.g. share repurchases!)

    3. Yes. You are right. It is stock where an activist can do wonders. Amazing sit really as Funai-san can easily privatise at premium without being out of pocket given net cash status. As long as TV biz doesn't go back to loss- looks unlikely- & shareholder equity isn't destroyed, risk-reward is heavily skewed to upside. That said net nets are not uncommon in Japan

  2. But no activist is going to invest in the stock giving the ownership structure.

    It would be like fighting city hall.