Japan’s Stock Market Crash

Wed, Mar 16, 2011 - 9:24am

The Japanese quakes are the worst in decades and serious. The Nikkei 225 dropped from 10,500 to a low of 8,200 Tuesday, or by 22% in two days. It crashed over 1,000 points after a recovery from a low point of 1,400 points down. As the world’s third biggest economy with close ties to China and our own economy, we will all suffer the consequences.

Certainly, Japan will need to find other sources of energy than nuclear. In my opinion, that will mean bigger imports of oil. Their refineries are damaged; as a result, their purchases will focus on gasoline and jet fuel rather than crude. And that will increase shipping rates. Natural gas could be an alternative fuel for electricity and might rise if it could be shipped to Japan as Liquefied Natural Gas (LNG).

Across Japan, there are already shortages of gasoline, and store shelves are bare – only partly from panic and hoarding. The shortage of electricity means trains aren't running and many manufacturing plants can't operate. The loss of more power plants besides the Fukushima reactors has required rolling 3-hour power outages across Tokyo.

The Bank of Japan (BoJ) has floated 0 B of new liquidity in two days to stem the panic, but panic has already stricken this low-priced stock market. Japanese government bond 10-year rates are down on BoJ buying and Japanese investors’ flight to safety out of equities. The U.S. stock market is down, and Treasury rates are also lower in sympathy. Japan will not be buying U.S. Treasuries and could become a seller to finance reconstruction.

It is likely that the reactor and unit of Fukushima 1 that experienced a second explosion in the suppression pool below the reactor came from a breach of the containment vessel. The radiation rose to 400 millisieverts per hour, which is a level that is dangerous to health (compared to normal background levels of only 3 millisieverts). The situation is still getting worse, and it will affect attitudes toward nuclear energy for years.

A scan of world stock markets this morning (March 15) shows Europe, Asia and the Americas reeling from the impact. While Japan recovered to only 10% down, Europe is 2% to 3% lower, and the U.S. Dow lost 200 points. Virtually all commodities took a hit, but not at panic levels. However, many commodities have been up as much as 100% since last year; so they could have further to go if world economies implode. The impact on worldwide confidence cannot be underestimated.

Every major commodity has retreated, with gold losing to ,395 and silver losses approaching to . Even oil eased to for West Texas Intermediate, despite the potential demand for replacing the loss of nuclear energy with oil. Natural gas hasn’t participated in last year’s commodity boom and as a result is suffering the least. The simple explanation is that markets tend to move together, but the bigger implication is that world economies may be forced to slow down, decreasing demand for all commodities.

Panic seems justified until the situation stops getting worse. This seems as serious as other events that triggered worldwide economic catastrophes in the past.

Add to this the North Africa/Middle East protests and regime changes, and the situation gets worse. With Saudis moving into Bahrain, Syria sending arms to Qaddafi and the rebels losing to him, the traditional energy source of oil from the Middle East is hanging in the balance. (See more in my article in the latest Casey Report on this topic.) Our political response to the fast-changing events is only being taken one day at time.

And then there is the continuing financial storm: the Fed is signaling that it will stop buying all the government debt by ending QE2. Since QE2 buoyed the market since last summer, its absence could send panic throughout the market. The Fed could have been pre-announcing the end of QE2 to defend the dollar against the yen ($1.22/100 yen) and euro ($1.40/E). Who knows how this will be played out? The Fed may continue QE2 to avoid internal panic. It is remarkable that Fed policy is only third on the list of current disasters.

My conclusion is that we will see more financial aftershocks just as Japan is experiencing geological aftershocks (6.2 this morning, 75 miles east of Tokyo) for months to come. The long-term destruction of paper currencies is likely to be accelerated from government thrashing to fix all the problems. In the short-term, we should ride out these storms more comfortably in physical resource investments than in bank deposits.

The governments will try to paper over problems with more printing as the BoJ did with $180 B in two days, but the real-world limitations on energy supplies compared to population growth mean that long-term energy demand will still be with us and energy and precious metals will be important areas for investment in the long term.

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