Guess Who Has Made Out Like a Bandit in Japanese Stock Market: Goldman Sachs

The company that never, ever loses any opportunity, being prepared for every contingency. (Well, almost.)

Even when the nuclear reactor buildings in Fukushima started blowing up, Goldman Sachs flew in at least four senior exectives from the US, who told its expats in Tokyo to stay put, or they would not have jobs at Goldman. Probably because there were great trades to make, probably on TEPCO (stock and bonds).

It looks Goldman Sachs started buying even before then-Prime Minister Noda said on November 14 that he would call an election, and ridden the Nikkei all the way, 20% up from the recent bottom.

Goldman Sachs Tokyo says they are bullish on Japan in 2013. (That is likely to mean they are ready to sell what they have to retail investors.)

From Bloomberg News (12/28/2012; emphasis is mine):

Goldman Sachs Buying Japan’s Exporters on Abe Policy Bets

Goldman Sachs Group Inc. (GS) is buying shares of Japanese exporters and banks as Prime Minister Shinzo Abe’s new government promises to do more to end deflation and weaken the yen.

The investment bank’s asset management unit in Japan is buying shares of the nation’s machinery and electronics exporters, financial firms and electricity producers, according to Hiroyuki Ito, Tokyo-based head of equity investment at Goldman Sachs Asset Management Co., which oversees about $716 billion globally. Goldman Sachs started increasing its holdings in October in anticipation that elections would be called, he said. The Liberal Democratic Party took power in a Dec. 16 poll.

...“Japan finally has a catalyst for the stock market to rise,” Ito said in a Dec. 26 interview. “The new government have an understanding of the impending danger and a sense of urgency about boosting the Japanese economy. We’re finally going to see an end to Japan’s deflation and a strong yen.”

Ito declined to discuss individual stocks.

The Goldman Sachs Japan Equity Fund Auto Reinvest Ushiwakamaru fund, managed by Ito and one of firm’s biggest Japan-based equity funds, has returned 11 percent in the past month, beating 86 percent of its peers, according to data compiled by Bloomberg. The fund’s biggest holdings are banks, carmakers, wholesalers and trading companies, the data show.

...“We’re bullish on Japanese stocks next year and the basis for that is the currency,” said Ito. “The yen’s strength has really hurt Japanese industry, but that trend has ended. The government has made its message very clear: they will be rigorous in boosting the economy.”

...Ito is also positive on Japan’s financial sector. Shares of banks and brokerages have surged in the past month on optimism reflation will boost the value of assets, increase loan demand and appetite for risk as people become more confident.

(Full article at the link)

Problem is that what Ito describes - BOJ reflates under Abe's command, assets value rises, people become more confident and want to take on more debt and more risk - hasn't happened in the US. 4 years after the financial collapse in 2008, people are still busy deleveraging, and banks are busy bidding up the stock market instead of making loans. Maybe Japan is unique and different, and may react to the money printing differently. (Never mind that it didn't react in the 1990s and most of the first decade of the 21st century.)

In contrast, Morgan Stanley Asia's chairman and chief economist Stephen Roach calls the so-called "Abenomics" delusional (emphasis is mine):

...Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. But it has also lost sight of the 1990’s – the first of its so-called lost decades – when the authorities did all they could to prolong the life of insolvent banks and many nonfinancial corporations. Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged, that Japan made progress on the long, arduous road of balance-sheet repair and structural transformation.

US authorities have succumbed to the same Japanese-like temptations. From quantitative easing to record-high federal budget deficits to unprecedented bailouts, they have done everything in their power to mask the pain of balance-sheet repair and structural adjustment. As a result, America has created its own generation of zombies – in this case, zombie consumers.

Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections. Household debt stood at 112% of income in the third quarter of 2012 – down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century. Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.

The same is true of Europe. The ECB’s über-aggressive actions have achieved little in the way of bringing about long-awaited structural transformation in the region. Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems. And a fragmented European banking system remains one of the weakest links in the regional daisy chain.

Is this the “cure” that Abe really wants for Japan? The last thing that the Japanese economy needs at this point is backsliding on structural reforms. Yet, by forcing the BOJ to follow in the misdirected footsteps of the Fed and the ECB, that is precisely the risk that Abe and Japan are facing.

Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.

Let's see, strictly on past performance, I would bet with Goldman Sachs over Morgan Stanley, even though I agree with Mr. Roach.

My guess is that most Japanese would understand Goldman Sachs' view (or want to understand), and would not have a clue what Morgan Stanley's Roach is talking about (or do not want to know).

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