Japan in recession …again

Assuming we take the simple, but commonly accepted, definition of recession as two consecutive quarters of negative real GDP growth as our measure–and there’s no real reason not to, I think–Japan slipped back into recession during its last fiscal quarter.  The reason:  in Groundhog Day-like fashion, the Tokyo government tightened fiscal policy prematurely earlier in the year, producing the same negative result for the third time in recent memory.

Three observations:

–the Japan experience is the reason Janet Yellen is so wishy-washy about raising interest rates in the US

–in a certain sense, technical recession isn’t as bad a thing for Japan as it wold be for, say, the US or China.

How so?

GDP growth comes from two sources:  having more people working, or having existing workers perform their jobs more efficiently.  Unlike the view (often) expressed by one of my Depression-era former bosses, productivity increases don’t come from imposing sweat shop working conditions.  They come from investment in education, training and productivity-enhancing equipment.

In Japan’s case, the domestic working population peaked around 1995 and has been falling by about 0.5% per year since.  One obvious solution to this problem would be to allow foreign workers to immigrate.  But, although there has been some slight movement lately, Japan’s borders remain rigidly closed to outsiders.

Productivity?   From 1950 – 19980, Japan was a productivity wonder.  However, Japan has struggled to keep up with the more intensive pace of change since then.  Why?  I think the rigidly hierarchical nature of company social interaction in traditional Japanese companies stifles the voice of innovation from younger employees.

Let’s say, though, that somehow Japan achieves productivity increases of +1% annually despite the “no comments; just follow orders” attitude of top managements.  I think that’s too much, but let’s go with it.  If so, the overall economy needs half that figure to overcome the decline in the workforce.  Real GDP growth has a trend ceiling of +0.5%.

So, the maximum sustainable rate of GDP expansion in Japan is barely north of zero.  It shouldn’t be surprising, then, if that figure spends considerable time south of breakeven.  As long as the numbers don’t get too negative, Japan will continue to stumble along on its journey to economic insignificance.

–what makes Japan important, interesting …and scary for the US and the EU is that we’re seeing a possible future for us in the Japan of today.

More on this tomorrow.

Square, venture capital and the late-1990s Internet bubble

a bubble deflating

Internet payments company Square came to market yesterday.  It has a two-letter symbol, SQ, and trades on the NYSE, not NASDAQ.  But the most salient fact about the offering is that the IPO price was a lot below the private market value that venture capital investors had placed on SQas little as a year ago.

At the same time, the small number of mutual funds which have been aggressive venture capital buyers in Silicon Valley have been, more or less quietly, writing down the carrying value of their non-public company holdings.

What we’re seeing is, I think, a smaller and much more benign–both for the economy and for us as stock market investors–analogue of the deflation of the Internet mania of the late 1990s that started in early 2000.

the late 1990s and the internet

I remember noticing in 1998, that earlier- and earlier-stage companies were coming to market successfully.  Some were little more than concepts.  Take Amazon (AMZN), for example, which IPOed in mid-1997.  The pre-offering roadshow that I saw emphasized that investors had made gigantic fortunes on buying unknown companies like Microsoft during the personal computer era and that AMZN was a lottery ticket to a similar outcome in the Internet Age.  Of course, even a success like AMZN didn’t turn profit for its first eight years as a public company, surviving on the proceed from the IPO and follow-on debt offerings.

I thought at the time, and unfortunately committed my theory to writing, that we were seeing a fundamental change in the role of the stock market in capital formation.  Portfolio managers were gradually taking on the role previously played by venture capital.  So, I mused, managers of mutual funds like me might have to think about reserving a small place–no more than, say, 5%–of their portfolios for developing companies that they normally wouldn’t have touched with a ten-foot pole.

Not my finest intellectual hour.

today’s bubble deflation

The slow escape of air from the venture capital bubble that is now going on will not have much effect on publicly traded companies, I think, for several reasons:

–the amount of money involved in this speculation is much smaller

–investors of all stripes still wear the scars of 2000-2001, so they haven’t been anywhere near as crazy this time around

–the people who are losing money now are, or represent, wealthy, seasoned speculators, not retail investors

–maybe most important, much of the original internet froth surrounded highly capital-intensive efforts to build a global physical internet transport infrastructure.  Names like Global Crossing and Worldcom come to mind.

Yes, too much physical capacity did get built back then, and some builders were highly financially leveraged.  But also dense wave division multiplexing, a technological breakthrough in technique (basically, putting glorified prisms on each end of a cable), made it possible for each fiber optic strand to carry 2x, 4x, 8x, 16x ( in 2015 the number is 240x)…  more traffic than initially anticipated.  Thanks to DWDM, suddenly, despite the rapid growth of internet traffic, an acute shortage of signal transport capacity turned to mind-boggling glut.  The transport industry was facing collapse as customers played a ton of potential suppliers against each other for lower prices.  Naturally, new construction–and related orders for all sorts of high-and low-tech components, dried up completely.   So did investment, employment in civil engineering   …and the stocks.

In today’s software world, there’s no equivalent, other than perhaps the market for software engineers.  And there are no signs I can see of recession in this arena.  Quite the opposite.


am I reviving my Odds and Ends page?

I once thought that Odds and Ends would be a regular feature of my blog–a place to record information that might be useful but which had no immediate stock market urgency.  It hasn’t turned out that way.  I’m not sure why.

Fir the first time in a long while, however, I”m writing about two items that really belong there:  Activision and King Digital, and Urban Outfitters’ acquisition of a small upscale pizza business.  Here they are.

the holiday retail season: Millennials vs. Boomers

Conventional wisdom in the US has long been that 30-somethings want a house, a car and clothing suitable for work.  Fifty-somethings want a vacation home, jewelry and a cruise.

As the Baby Boom generation became more important, therefore, an investor wanting exposure to consumer spending should have shifted away from homebuilders and carmakers and toward high-end specialty retail, luxury goods and hotels and cruise lines.

Of course, there were other secular forces at work, as well–the move from the cities to the suburbs and the dismembering of the traditional department store by specialty retail, just to name two.

Today we’re in the early days of another significant demographic change.  Millennials now outnumber Boomers in the US.  Millennials only earn about half what Boomers do.  And they were hurt much more severely than the older generation by the recession.  But they’re on the up escalator, while Boomers as a group will see their economic power wane as they retire.

Playing the aging of the Boomer generation had two aspects to it, one positive and one negative.  The positive side was hard–finding the small, relatively obscure companies like the Limited or Toys R Us or Home Depot/Lowes or Target or (later on) Coach that would catch the fancy of the Baby Boom.  The negative side was easier–avoiding the losers who didn’t “get” what was going on.  These included American carmakers and the department stores.

In 3Q15 corporate results, we’re already beginning to see the new generational change begin to play out.  Home improvement stores are doing surprisingly well.  Large retail chains are reporting relatively weak results.  What strikes me about the latter is that the worst-affected seem to be the most heavily style-dependent and the firms that have put the least effort into their online presence.  In contrast, I’m struck by how many small online, even crowdsourcing, alternatives to bricks and mortar there now are to buy apparel.

How to play this emerging trend?

The negative side is easy– avoid the potential losers, that is, firms whose main appeal is to Boomers and companies with a weak online presence.

The positive side is, as usual, harder.  Arguably, many of the winners–Uber, and the sharing economy in general being an example–aren’t yet publicly traded.  Absent a pure play, my best idea is to invest in the winners’ onlineness.  The easiest, and safest, way to do so is through an internet or e-commerce ETF.


One other point:  for many years, economists have tracked the activity of Boomers as a way to estimate the health of the economy.  To the degree that they, too, fail to adjust quickly enough, their assessments, like department store sales, may understate growth momentum.