Radio Show Notes: profit-taking ensures bonuses; Japan

Friday, November 17, 2017 // Written by Enzio von Pfeil

Forget the excuses behind this Wednesday's market sell-off: traders want to lock in year-end bonuses, so they have to take profits. Some thoughts on Japan follow. 

GLOBAL STOCK AND COMMODITY SELL-OFF: the excuse and the real reason

  1. Why people take profit. Shares don’t know that you own them
    1. This means that they don’t “care” if they are bought or sold: they are androgynous
    2. What I am driving at is that profits don’t exist until they are realized
  2. China’s base effect. The excuse to “take profits” was triggered by something that most people know: China’s economic data are shrinking
    1. The Economic Time® remains good – there is an excess supply of money and an excess demand for goods. China’s Economic Clock® il continue ticking nicely for many years – because this is what the gov’t wants, esp. after that watershed of the 19th Party Congress.
    2. Nevertheless, the numbers are not swelling as much as they used to.
    3. And that has everything to do with the statistical “base effect”: the larger the base off which you are calculating your growth rates, the small the growth rate has to be.

                                                             i.      If your base is $100 and you  grow by $10, you are growing by 10%

                                                           ii.      But if your base is $1,000 and you grow by $10, you are growing only by 1%

                                                        iii.      This is what is happening: the economy is getting so big that it is impossible to keep growing at earlier rates of 8-10%

  1. The excuse & the real reason for the sell-off.
    1. So, the excuse for the sell-off is that “”China’s growth is slowing”.

                                                             i.       Well, thanks to the base effect, it has been “slowing” for three years or so. Remember all of those agitated debates among junior economists whether growth was going to be 6.5% or 6.7%? These juniors simply fell for false precision.

    1. Other excuses include the old reprobates:

                                                             i.      Stuttering US tax reform

                                                           ii.      Falling oil prices since the first week of November

                                                        iii.      Stretched stock valuations.

    1. But the real reason for the sell of is that year-end is approaching, and people want to start locking in their own profits and thus their own bonuses…

                                                             i.      In a nutshell: greed has been driving this five-day sell-off.

JAPAN’S GDP: longest period of growth in a decade

  1. It’s about time! The nation has stagnated since 1989 – for nearly 30 years.
    1. Over the past seven quarters, it has had the longest run of expansion since 2001
  2. But where is the growth coming from?
    1. NOT from private consumption, which drives 70% of any economy.

                                                             i.      Savings > Consumption.  With the lethal combination of an aging population and negative savings rates, geriatric Japanese are saving more and consuming less. Thus, consumption subtracted a full percentage point from Japan’s 3Q17 annualized growth rate of 1.4%.

                                                           ii.      Bulging inventories Less consumption and steady production mean that another growth engine was bulging inventories due to little private consumption at home: inventory building.  Inventory building contributed 1% to GDP growth this quarter

  1. Why Japan's stock market boom?
    1. first, Japan’s  Economic Clock® suggests that the Japanese are languishing in an excess supply of money and an excess demand for goods.
    2. second, scarcity.  Massive share buybacks and stupendous growth among ETFs has sucked scrip out of the system.

  1. Worry.  Crazily, the government wants to raise consumption tax by 25% - from 8% to 10% - in 2019. That will kill growth yet again.

  1. Growth revision. Japan’s growth revisions are notoriously volatile. The second estimate is due on 8th December.

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