Japan - Trip Report

Ganbarou Japan

A friend of mine in Tokyo described his experience after the great Touhoku earthquake earlier this year. All trains were out of service, so he decided to walk the roughly 60km back home from Yokohama to Tokyo. He walked for about15km, managed to find a taxi to take him part way, then a train, then another taxi, then walked again. Clogged phone services were useless and he could not call his wife. By the time he arrived at his home a day later at 2:30am, his wife had assumed he was dead.

It’s hard to overestimate the trauma experienced by the average Japanese citizen after the tsunami. In some areas of Tokyo, hundreds of kilometres away from the kill zone, driveways are bent, buildings cracked, and stone lanterns at ancient temples toppled.  Fears of radiation keep many from swimming in the ocean.  Due to the Japanese feeling of belongingness, even people completely outside the quake zone were mentally affected.

In North America, news interest in the tsunami ended months ago.  In Japan, stories of the quake and its cleanup are still on TV every day, with live updates of the progress (or lack thereof).  "Nippon matsuri," a pine tree that is the only living thing to have survived in the tsunami zone, has become a national symbol of strength, though it now is in danger of dying due to an influx of seawater.  “Ganbarou Japan,” an expression roughly translated as “You can do it Japan” and “Go for it, Japan” is plastered on everything from taxis and t-shirts to the quote screen on the Tokyo Stock Exchange.

Virtually everyone says that the biggest change after the earthquake was the shift away from “Americanism;” that is, a shift away from pursuing wealth and career, toward a greater emphasis on spirituality, friends and family. A career advisor, for instance, told me that several of her top female clients had quit their jobs to get married.  Japanese economists worry that this shift away from “Americanism” will result in a decline in Japanese productivity, and a stagnant economy.

Mentality aside, the Japanese economy has several things going for it. A slowdown in China will mean better commodity prices for manufacturing. Personal savings rates are high and debt levels low. And, unlike most of the world, real estate prices are reasonable.

In the short-term, the shift toward family and maternity may slow down the Japanese economy. However, Japanese women appear just as stylish as ever, and Japanese men just as interested in drinking parties and electronics. The economic slowdown has not been enough to create shuttered businesses or foreclosed properties.

In the long-term, I suspect that the large-scale rebuilding of Northern Honshu will actually be a stimulus to the Japanese economy for years to come: and the work has barely begun.

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Big Brother Brings It On

Frivolous lawsuits - as American as baseball and apple pie.

It was announced today that the US government, on behalf of mortgage insuring agencies Fannie Mae and Freddie Mac, is suing a dozen banks for billions of dollars. The lawsuit alleges that these banks were aware of the bad quality of their securitized mortgage products (mortgages lumped together and sold as bonds) of years past, and that the government should therefore be compensated for losses.

Of course the banks knew about the bad quality of the loans within their securitized mortgage products. But then, so did Fannie Mae and Freddie Mac, so did the government – and so did everyone else.

Presently, insurer AIG says it didn't know about the bad quality of the loans it bought from the banks. The government agencies (ex. Fannie and Freddie) reviewing and approving these mortgages say they didn't know about the bad quality of the loans - even though it was the government who encouraged the banks to do more low-quality low-income loans in the first place. The credit ratings agencies (ex. S&P) say they didn't know about the bad quality of the loans, even though it is their job to investigate loans thoroughly before rating them. And of course, the banks say they didn't know about the bad quality of the loans they were buying from the mortgage brokers. How is all this possible?

In truth, everyone knew how bad these loans were. In fact, when securitizing loans (selling them as bonds), the worst quality loans from one part of the country were intentionally mixed in with the best ones from other parts of the country. The theory was that although one area might experience a decline in home values, it was unlikely to happen to the entire country. Therefore, the securitized mortgages were considered “safe and good,” at least, as long as the economy was doing well.

If the economy slowed, low-quality mortgages could default. Few foresaw, however, that entire neighborhoods would sink, and that good quality loans would default almost as often as the bad ones. The collapse of the housing market was considered a “black swan event” that highly-paid quantitative analysts had been saying was next to impossible. Obviously they were both wrong and overpaid.

Interestingly, the only people not being sued are the people who deserve it most - people who knowingly overstated their incomes to buy houses they couldn't afford, as well as the friends, neighbors and brokers who encouraged them to do it.

As a banker, I often see people take stupid risks, and then try to shift blame when it doesn’t work out. They invest in stocks or funds that are highly risky (despite warnings), then blame their investment advisors when values fall. They take out money repeatedly from bank machines at the casino, then try to say it wasn’t them and that their money should be returned. Few people are willing to accept responsibility for their own stupidity. Few people realize that the reason they failed is because they actually wanted to fail (for more on this, see my book, The Intelligent Investor’s Mind).

The homeowners who lied about their incomes and employers, faked employment letters, and made mortgage payments from their credit cards etc. should lose everything and shut up about it. They took a gamble and lost.

Companies will sue and counter-sue, settle out of court, and hopefully that will be the end of this nonsense.

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"Just think of how stupid the average person is, and then realize half of them are even stupider!"

George Carlin

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