Friday, March 18, 2011

Profiting from Crisis; Japan's Woes a Boon for Global Economy

The massive crisis in Japan — sparked by an earthquake, worsened by a tsunami, and compounded by radiation leaks at nuclear power plants — isn’t just a disaster for the people of Japan. It also panicked investors around the globe.

And now I’m seeing stories about how Japan’s disaster could weigh on the global economy. And that may be true. But let me offer an alternative point of view … that Japan’s crisis could be a boost for the global economy.

First, some facts. According to the IMF, the global economy grew 5% in 2010, and is expected to grow 4.4% in 2011 and 4.5% in 2012.

Very few analysts are of the opinion that the disaster will undo the 4+% rate of global growth expected this year, or that the setback that the Japanese economy may suffer will be anything but a temporary one.

Japan is one of the world’s economic engines … but its importance is dropping. It’s the world’s #4 economy after the European Union, the United States and China.

The Bad News IS Bad

The earthquake and tsunami damaged roads, ports, airports and factories, disrupting the shipment of goods in and out of the country. Four medium-sized container ports on Japan’s northeast coast were so severely damaged that they are not expected to resume operations for months or even years.

Certain commodities are particularly vulnerable. Japan used up half a million ounces of platinum and 750,000 ounces of palladium in the new cars it built last year. Exports of new Japanese cars could be delayed while the ports are straightened out, and Japan has lost 23% of its electrical power as its nuclear power plants have shut down. Demand for base metals, particularly zinc and nickel, could also take a hit.

And the manufactured components that Japan ships to the United States, Europe and elsewhere are sold alone and also used in other manufacturing. For example, Japan is a major supplier of flash memory chips, commonly used in portable electronics. Delays in shipping could impact big buyers such as Intel, the world’s biggest semiconductor company, and Texas Instruments.

So you can see how this could disrupt manufacturing around the world.

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Now for the Bullish Side

•Japan is the world’s third-largest consumer of oil (4.4 million barrels of oil per day). In the short-term, Japan could use less oil, sending prices lower. Lower oil prices should help the economies of the rest of the world accelerate, or at least put off the risk of a global recession caused by an oil shock.

•Japan will have to rebuild. That means it’s going to be importing like mad. I’m talking about aluminum, copper, steel and nickel … not to mention wood, paper, and food.

•Japan is the #1 market for exports of U.S. corn (Japan bought nearly 15 million tons of U.S. corn in 2009-2010). In the short-term, livestock operations in Japan are going to suffer, and that will lower Japan’s corn demand. But in the intermediate-term, not only will those livestock producers come back online, but Japan is probably going to have to import more corn and other grains as it rehabilitates its swamped farmland and broken infrastructure.

•Good news for natural gas: Japan has shut down 11 nuclear reactors with a total capacity of 9.7 gigawatts — the equivalent of 200,000 barrels of oil a day, or 4.5% of Japan’s consumption. Even if some of those reactors come online, I think nuclear power is dead in Japan for years to come. This should be a boost for natural gas, a commodity that has suffered from oversupply recently.

•A flood of easy money. Japan’s central bank injected a whopping 26.5 trillion yen (about $324 billion) into its financial system in the first three days of this week, in a bid to provide stimulus and prop up the economy and financial system. And they’re probably not done yet! All that cash has to go somewhere — my guess is we’re going to see commodity prices float higher on that flood of money.

The Best Investment May Be Japan Itself

We already saw bargain-hunting investors dive into Japanese stocks Wednesday, scooping up shares of beaten-down companies. I think they’re premature — the selling in Japan may not be over yet. Give me a few days when we don’t have more bad news on one of Japan’s nuclear power plants. Then maybe I’ll be ready to buy.

But consider: In 1995, Japan was hit by a devastating quake that killed more than 6,400 people, about 4,600 of them in the city of Kobe. Within 15 months of the quake, manufacturing in Japan returned to normal levels.

The Japanese are a tough, resilient, industrious people. I am sure that not only can they bounce back from this, but they can rebound strongly.

To be sure, one fly in the ointment is how Japan is going to finance all this reconstruction. The government is expected to spend at least $200 billion, and the Japanese government’s debt is already an alarming 225% of the country’s economic output.

But as long as governments can create paper and pass it off as money — and there’s no sign that’s going to end any time soon — Japan should be okay.