Stimulus, at Home & Abroad -- The Capital Note

Japanese Prime Minister Shinzo Abe speaks during a news conference at the prime minister’s official residence in Tokyo, Japan, August 28, 2020. (Franck Robichon/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: Abenomics, the elusive “V,” and a look at Japan’s land bubble.

A Review of Abenomics

Japanese prime minister Shinzo Abe stepped down this weekend. His signature domestic policy, termed Abenomics, comprised three so-called arrows: monetary easing, fiscal stimulus, and structural reform. Abe began his second term as prime minister in 2012, in the wake of two “lost decades” of low inflation and slow growth.

The monetary “arrow” included a new inflation target of 2 percent and unlimited asset purchases. While prices never rose more than 1 percent during his tenure, asset purchases did spur limited reflation — no small feat for an economy that had seen net deflation over the previous 15 years. According to one academic paper, monetary easing contributed as much as 1 percent to GDP in 2013, the year it was enacted, primarily by weakening the yen and raising stock prices.

On fiscal policy, the record is worse. While the Diet passed a 2 percent “supplementary budget” to stimulate the economy, it handicapped its efforts with a consumption-tax increase that dwarfed the expansionary effects of the new spending. That tax was passed prior to Abe’s term, but the departing prime minister bears some responsibility for allowing it to pass.

Perhaps the most significant failure was on the structural front. Japan’s policies of enterprise unionization and lifetime employment have long hindered growth. Abe made marginal progress in deregulating the energy market and reducing cross-share ownership in the corporate sector, but could not muster the political will to pass legislation that would meaningfully increase competition.

Abenomics could be seen as a case study in the shortcomings of Keynesian economics. No amount of monetary or fiscal stimulus could position Japan to overcome supply wedges, especially with an aging population and a tight immigration policy

— D.T. 

In Pursuit of That Elusive “V”


Private payroll growth came in well below expectations for August, according to a report Wednesday from ADP, whose job tallies have differed widely from the government’s during the coronavirus pandemic.

Companies added 428,000 jobs during the month, well below the 1.17 million estimate from economists surveyed by Dow Jones though a leap above the lackluster 212,000 that ADP measured for July.

“Job gains are minimal, and businesses across all sizes and sectors have yet to come close to their pre-COVID-19 employment levels,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute.

Confusingly, however:

ADP’s numbers have lagged the government’s count since the pandemic began in March. July’s total was revised up from the initial estimate of 167,000, but was still well below the Bureau of Labor Statistics nonfarm payroll count of 1.76 million. For June, ADP initially reported growth of 2.4 million, then revised it to nearly 4.5 million, and May’s total initially was a loss of 2.76 million that subsequently was revised all the way up to a gain of 3.34 million.

Mark Zandi, chief economist at Moody’s Analytics, which collaborates with ADP on the report, said after the July release that the revisions were simply to correlate with the BLS count.

Economists expect the government’s nonfarm payrolls report on Friday to show a gain of 1.32 million in August.

I suppose the thing about being in uncharted waters is that they are, well, uncharted.

That said, it seems clear that the expiry of the Paycheck Protection Program will not help matters.

Forbes (from mid-August):

The Paycheck Protection Program (PPP), a federally-funded loan program created as part of the CARES Act as an incentive for small businesses to maintain their payrolls, stopped accepting loan application requests last weekend.

Government-approved lenders made more than five million loans worth over $521 billion as of the end of July, according to the Small Business Administration. with the Trump Administration touting that more than 51 million jobs were saved. This leaves as much as $128 billion remaining in PPP funds, not counting the lending that occurred in the last week of the program.

Treasury Secretary Mnuchin has called for a standalone PPP deal as a way of alleviating some of the damage caused by the current impasse in Washington.

He’s not wrong.

It should not be necessary to say yet again how high the stakes are, but given the situation in Washington, maybe it is. The more the temporary congeals into the permanent, the worst the reckoning is going to be.

From The Washington Post (August 25):

Long-term unemployment helped define the Great Recession. Countless networks, relationships and skills that bound employee to employer were ripped apart in the global financial crisis. It took about eight years for the unemployment rate to recover from that brutal dislocation.

Now economists fear it’s happening all over again. The devastating surge in unemployment in March and April was supposed to be temporary, as businesses shuttered to avert the greatest public health crisis in more than a century. Most workers reported they expected to be called back soon.

But nearly half a year later, many of the jobs that were stuck in purgatory are being lost forever. About 33 percent of the employees put on furlough in March were laid off for good by July, according to Gusto, a payroll and benefits firm whose clients include small businesses in all 50 states and D.C. Only 37 percent have been called back to their previous employer.

It is hard to be optimistic at the moment. And just as I wrote those words, I read that United Airlines is planning to cut 16,000 jobs “as early as next month, after federal coronavirus aid that protects aviation jobs runs out.”

— A.S.

Around the Web
The market flywheel….


Analysts are tripping over each other in raising their targets on companies that are hitting all time highs. This mass reaction to the bull market has long been one of the more perplexing phenomena on Wall Street. Under normal conditions, once a formerly set target has been reached, a company would be considered fairly valued and the rating would be downgraded. By simple math and logic, there is less upside than there was a month or six months ago.

But a market bubble is more like a flywheel. When prices go up, analysts take their cues from those prices and from their peers and raise their targets to levels that they would have considered crazy or implausible only a few weeks earlier. This in turn pushes prices higher, leading other analysts to follow suit and to feed the frenzy.

The signs that we are now in a bubble for many names are unmistakable, with for example Tesla and Zoom Communications each adding $50 billion to its market cap in a single day. The speed of these increases is at least as significant as their magnitude, revealing a buying frenzy among investors. Tesla is now pricing $100 billion revenues and 30% gross margins, levels that will not be reached for several years if at all. And Zoom is now valued higher than IBM, notwithstanding that the end of lockdowns and the re-opening of the economy may not create a follow through in its revenue and earnings surge.

There is (so to speak) no V in Vacancies.

From the American Hotel & Lodging Association (AHLA):

Almost 2/3 (65%) of Hotels Remain at or Below 50% Occupancy. That’s Below the Threshold at Which Most Hotels Can Break-Even and Pay Debt: While leisure travelers have increased average hotel occupancy since the historic low of 24.5% in April, thousands of hotels are at risk of closure or are unable to hire back staff due to continuing, drastically low hotel occupancy rates.

Industry’s Leading Employers – Urban Hotels– Face Collapse with Cripplingly Low Occupancies: Urban hotels are major employers due to their size. But these properties are faring significantly worse than the national average, with an occupancy rate of just 38%.

Another EU drama?

In late July, the EU’s member states (acting through the EU Council) agreed two deals — one relating to the EU’s budget, the other to a COVID-19 relief package — after a fraught few days in Brussels. I wrote a bit about it here.  The deal has longer-term implications for the evolution of the union, but the passing of the coronavirus package ought to greatly reduce the chances of a crisis of confidence in the southern tier of the euro zone this fall — in particular with regard to Italian sovereign debt — even if the money is not due to start flowing until 2021.

However, as always, where the EU is concerned, there is a hitch. The EUObserver has an update:

“Significant gaps” remain between the European Parliament and member states in their negotiations on the long-term EU budget and the coronavirus recovery fund, a top MEP on the matter said on Tuesday (1 September).

Negotiations between member states, represented by the German EU presidency, started last week in order to transform the hard-won deal between EU leaders at July’s summit on the budget and the recovery package into legislation as soon as possible.

MEP Johan Van Overtveldt, the chair of the budget committee and also part of the negotiating team, said the parliament expects changes to the deal.

“From the first trilateral meeting it is an understatement to say that there is significant gap to be bridged between EP [parliament] and position taken by the council,” the Belgian politician told fellow MEPs.

“The parliament expects tangible improvements to the package, not just declarations to make us ‘swallow the bitter pill’, to quote commission president Ursula von der Leyen,” Van Overtveldt added.

In the end, I would expect the parliament to be bought off with a few scraps, but, not possibly without some turbulence along the way. It’ll be worth keeping an eye on the spread between German and Italian 10-years to see how concerned investors are becoming (or not).

Random Walk

Japan’s lost decades began when a spectacular bubble in land and stocks popped. At its peak, the Japanese equity market traded at four times the price-earnings ratio of the American market. Tokyo’s imperial palace alone was worth as much as all the real estate in California.

This excerpt from a 1990 Harvard Business Review piece gives a good idea of the craze that overtook Tokyo:

News reports indicate that in 1988, Japan’s theoretical land value surpassed by four times that of all land in the United States, a country nearly 25 times larger than Japan. Another real estate bulletin: the calculated cash value of a single ward in downtown Tokyo—Chiyoda-ku—could purchase all of Canada. And another: land in Tokyo’s Ginza shopping district is selling for $250,000 a square meter. Closer to home, the commercial real estate industry in the United States has felt some of the impact of these tremors in the rapid acquisition of “showpiece” purchases and properties in cities across the country by Japanese investors and corporations. The Rockefeller Center purchase captured the public’s imagination but was actually a relatively small transaction in view of the estimated $53 billion in United States real estate acquisitions made by Japanese investors. Nearly all of these purchases have been made since 1985; the total has been projected to reach $100 billion in 1992.

— D.T.

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