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Big Trouble in Tokyo

Posted on the 27 March 2011 by Phil's Stock World @philstockworld

Unfortunately, it seems there is no question that water, which could have been inside the reactor, is leaking,” Yukio Edano, the chief cabinet secretary said. However, the reactor “has probably not been breached,” since the pressure inside the vessel was higher than that in the atmosphere, he added. Mr Edano said “the possibility is low” that the high level of iodine-131 in the seawater would have a negative effect on marine life, since it would be diluted by the vast amount of water in the ocean.

Radiation around the plant is hitting 1,000 millisieverts, enough to cause nausea and vomiting after one hour of exposure while 3,000 to 5,000 milliseverts is considered a fatal dose over the same period.  At this point, plant workers have to be rotates out after 15 minutes of work on the site.  It is likely that radiation was leaking from the pipes or the suppression chamber, and not directly from the pressure vessel, because water levels and pressure in the vessel were relatively stable.  All this weekend drama is enough to put fresh fears into the markets next week as these numbers do, of course sound terrible and that leads to info graphics like this one:

Weekend Reading – Big Trouble in Little Tokyo

Ferguson illustration

What is the real picture of Japan?  Is it, as the Financial times is profiling it, a brave nation pulling together in a time of national emergency or is that the Government spin to try to recapture the spirit that helped rebuild the nation after World War II?  America was also a can do nation after the second World War – no one nuked us but our people came back and built a nation’s worth of infrastructure over the next 3 decades that only now is crumbling all around us.

But what is our current reaction to the problems that plague us?  Certainly the US is in no mood to pull together and soldier on.  Our people have changed – to compare us to the "greatest generation" that laid the foundation that most of us coasted downhill on for 30 years would be a joke.  

What have we built?  What have we accomplished for future generations to enjoy?  We have PC’s (actually began in 1975, so in-between) but those are derived from the work done in the 50s and 60s.  We mapped the human genome – so lawyers could engage in patent disputes over cures for diseases, but even that was merely following up on the groundwork that was laid down by Watson and Crick in 1953 when they first described the structure of DNA.   So there’s one and a half things we’ve accomplished as a species in the second 30 years since the war – did I miss anything?  

Graphic : Nuclear power around the worldView larger picture

I’m sure you can think of a few things but – IT’S 2011 PEOPLE – we are 11 years into the 21st century!  Do you know what was invented in the first part of the 20th century?  How about the light bulb, the telephone, electric motors, flight, relativity, atomic science, psychology…  Just a few of the little things our great-grandparents were coming up with with only 1/3rd the amount of people, NO computer assistance and 1/1,000,000th of the amount of money that is thrown into the development of a typical video game.  WTF happened to you Mankind?  

Modern man, modern society for that matter, is in a stupor.  Maybe it’s the false comfort of Democracy (which has, in many countries degenerated into nothing more than "mob rule") – which has spread to 120 nations around the World since WWII (up from 25 at the time) where we endlessly debate issues that used to be fairly clear cut for leaders of conscience to decide.  Maybe it’s the Corporate brain-washing of our population that has turned us into a planet-full of consumers and working drones with hardly an individualistic thought to be found among 7Bn minds.  How else to you explain the placid reaction to this chart of nuclear reactors – knowing that EACH ONE has the potential to cause damage, not just to the local area but to the entire planet?  

Big Trouble in TokyoBuild 1,000 plants that have even the smallest chance of blowing up (although we’ve now had 5 major catastrophes in 50 years with just 400 plants so that’s 1/4,000 odds each year of a plant melting down so 1,000 plants can be expected to have one major Global incident every 4 years) and, of course some will over time.  What is really amazing is that this hasn’t served to remind people that we still have 25,000 nuclear warheads – each one 2-10 times more dangerous than a total meltdown of a nuclear plant – positioned all around the globe aimed at each other.  And they are NOT aimed at fishing villages!  

It is a tribute to the iron-clad hold that the Military-Industrial Complex has on the MSM that people are not even discussing the Global threat that is still posed by this massive proliferation of weapons (and there are worse ones than nukes that we don’t even like to think about), even as we see in Libya and other place the atrocities that men in power are willing to commit to cling to their positions.  Gaddafi may not have any nukes to play with but Musharraf has 80 – enough to render the planet Earth uninhabitable at the push of a button.  

It’s amazing how the very definite costs of nuclear waste disposal and the occasional nuclear accident are not factored into Government Energy planning (I know, what plan?) debates.  If a Congressman (assuming there was one who wasn’t bought off already) tried to talk about the potential Trillion dollar cost of a nuclear accident near a major US city as a good reason to put money into solar energy – they would be shouted down as alarmists, right?  That’s how the game is played.  Any POTENTIAL damage of pollution, global warming, radiation, cancer, environmental damage of the things we do now to get energy is played down to zero – simply because it hasn’t happened yet while any REAL damage caused by the same things is brushed off as a "black swan" event that is unlikely to happen again.

Big Trouble in TokyoThis is like playing Russian Roulette with 10 people and person number 5 gets his brains blown out but the other 5 people decide it was a "one-time event", re-load the gun and start again.  You can keep playing the game that way until there are 5 people left and then there is a 15% probability that all 5 will survive the next round.  Maybe that’s the idea – maybe we simply have too many people on this planet and there is a plan to play Russian Roulette with the entire human population. If so – then much of what our leaders do begins to make sense… 

Back to the markets though:  So what can we expect from all this nonsense?  We can expect panic and uncertainty.  If things do get worse in Japan, then Tokyo will grind to a halt as will much of Japan’s production and we will face severe supply disruptions in Q2.  Also, Japan is a major importer of all sorts of things, including 5 Million barrels per day of oil.  At the moment, a good portion of the country is simply doing without as, even if the ports were fully functioning – the roads are not.  The $105 oil we’re still seeing is very much based on expectations that demand in Japan will go up, not down.  

Still, in the longer term (3 months+) we can expect the use of nuclear power to come more into question and, since no governments seem to be in the mood to spend money for new solutions, oil, coal and natural gas should keep getting high expectations going forward.  UNG has been a very long-term hold of ours and is finally getting some respect at $11.04.  I love owning the stock and selling 2013 $11 calls for $3 and $10 puts for $1.45 for net $6.59/8.30 as a buy/write.   You can leverage that with an artificial play by taking the 2013 $8/12 bull call spread for $2.10 and selling the $9 puts for $1 for net $1.10 on the $4 spread that’s 96% in the money to start.  TOS says margin on that trade is less than $1 so a nice 200% gain on cash and margin in two years should keep us ahead of inflation.  

Speaking of inflation – 250,000 Londoners were able to get off their couches and out of the pubs long enough to attend a pro-union rally but, as can be expected when you get 3 soccer stadiums worth of Brits in one place – riots broke out.  Small groups attacked shops and banks with a stand-off in Piccadilly. There have been 214 arrests and 66 people injured, including 13 police.  In the largest public protest since the Iraq war rally in 2003, marchers from across the UK set off from Victoria Embankment to Hyde Park, where TUC general secretary Brendan Barber was first in a line of speakers.  "We are here to send a message to the government that we are strong and united," he said.  "We will fight the savage cuts and we will not let them destroy peoples’ services, jobs and lives."  

Marchers in WhitehallBBC political reporter Brian Wheeler, in central London, said there were lots of families and older people, and the atmosphere was good-natured but the anger was real.  "The noise in Whitehall was deafening as thousands of protesters banged drums, blew whistles and shouted anti-cut slogans, slowly making their way towards Trafalgar Square.  "The crowds were booing as they went past Number 10, but the demonstration was good-natured and friendly.  "There are hundreds of trade union banners, but we have also spoken to public sector workers who have come to make their voices heard."

I don’t know how many signs I can point out before people begin to believe this WILL happen in America.  It’s happening all over the World, it already happened in Wisconsin and the Republicans won that battle but don’t start believing that is the end of it.  The anger I hear from the left is palpable and again I will point out that people are STARVING.  Starving people are not the same as people who merely feel politically disenfranchised – starvation kicks off a series of hardwired survival instincts that not even 20 years of watching Fox news can completely shut down (and the UK has had that crap longer than we have!).   

We discussed the rules for having a proper debate in my last post but I can tell you that you won’t get very far discussing the merits of entitlement spending with a man who has two children and an empty refrigerator.   John Mauldin believes we are merely exporting our inflation to emerging economies who will, in turn skyrocket over the next few years and we are already seeing the results of that but I think there is a dangerous extrapolation going on just because the relatively small (as Mauldin concedes) Emerging Markets are the FIRST to feel the effects of inflation as the vast pools of liquidity sloshing around the Globe runs quickly into their empty buckets.  

Big Trouble in TokyoMauldin is a smart guy who talks about the willingness to borrow and the appetite for risk drive the velocity of money and are heating up emerging market economies but that’s also the flaw in his logic.  As I have noted before, we have, in the US, effectively doubled the money supply to make up for a halving of the velocity of money brought on by the recession so of course those willing to put money to use in small economies are reaping the benefits while local lenders refuse to release their stockpiles here.  But what will happen when (and if) the US economy does kick into gear?  The smallest increase in velocity here will make the US economy seem like a tank that is driving over emerging market mini cars.  

As noted in the chart on the left – it’s a $50Tn global market and Greece, Ireland, Portugal, New Zealand, Pakistan, Vietnam and Pakistan combined are not even 1% of it ($500Bn).  AT&T just offered $36Bn for TMobile – to keep things in perspective and AAPL is a $325Bn company.  In other words, drawing conclusions about the global economy from the short-term actions of emerging markets is about as foolish as drawing a thesis on the entire US economy based on the daily price movement of AAPL – there may be some relationship but you can also miss the mark by miles before you figure out where you went wrong with your theory.  

Big Trouble in TokyoMoney is liquid and now moves around the globe as fast as information – something a lot of old-time investors (and Central Bankers) still can’t get their heads around.  It will quickly flow to the path of least resistance and cause bubbles and distortions when a major pipe, like the US economy is shut – putting tremendous pressure on any smaller pipes, like commodities, that are open to receive capital.  But the commodities drive the demand for wages – in the US as well as in emerging markets and once the dam bursts on wage increases (as the Fed fears) then suddenly there is demand for capital in the US again and higher wages lead to more spending an more borrowing and, as I noted above, the tank begins to move – crushing anything foolish enough to stand in it’s way.  

One place commodities are not flowing this week is Japan.  The run-up into commodities is leap-frogging ahead of reality as the fact of the matter is, as I noted above, not only is Japan’s infrastructure unable to deliver supplies to quake-damaged regions but cargo ships are refusing to call on ports from Tokyo Bay and north on radiation concerns – concerns that are NOT fading this weekend.  

Meantime, ports in China are starting to require strict radiation checks on ships arriving from Japan. And in California on Friday, the first ship to reach the Port of Long Beach since Japan’s earthquake was boarded and scanned for radiation by Coast Guard and federal customs officials before being allowed to dock.  Big Japanese ports much farther south of Tokyo, like Osaka and Kobe, are still loading and unloading cargo. But the Tokyo Bay ports of Tokyo and Yokohama are normally Japan’s two busiest, representing as much as 40 percent of the nation’s foreign container cargo. If other shipping companies join those already avoiding the Tokyo area, as radiation contamination spreads from Fukushima Daiichi 140 miles north, the delays in getting goods in and out of Japan would only grow worse.

Big Trouble in TokyoThe shipping industry’s fears have escalated since port officials in Xiamen, China, earlier this week detected radiation on a large container ship belonging to Mitsui O.S.K. Lines and quarantined the ship. The vessel had sailed down Japan’s northeast coast and reportedly came no closer than 80 miles to the damaged nuclear power plant; the official Xinhua news agency said on Saturday afternoon that the vessel had left a berth at the port on Wednesday afternoon and then anchored briefly at sea.  Merchant vessels may have to be scrapped if quarantined even temporarily for radioactivity, because they would face extra coast guard checks for years at subsequent destinations, said Basil M. Karatzas, the managing director for projects and finance at Compass Maritime Services, a ship brokerage in Teaneck, N.J.  Do you see how quickly things get more complicated?  

Also complicated and scary is a very excellent article in the Financial Times this weekend that does an excellent job of deconstructing the $700Bn European Stability Mechanism, comparing it to the Phantom Giant in Michael Ende’s "Jim Knopf," which seen from afar, appears to be a giant but gets smaller and smaller the closer you get.  The FT makes the point that the headline number is meaningless when the fund itself is operationally constrained, much as the US monetary supply is currently functionally constrained by tightened lending requirements and poor credit quality of potential borrowers.  

In Barron’s this week, Alan Abelson points out that "the bulls seemingly have developed an immunity to bad news," saying:

Our concerns about Wall Street’s pervasive bullishness go beyond the market’s lack of interest in, much less reaction to, unfavorable events, large and small. It’s also the not-unimportant matter of sentiment: pure and simple optimism among investment pros reigns supreme (apart from the usual scattering of cranky pessimists)—usually an early warning signal. In the latest Investors Intelligence survey, 50.6% of the advisors were bullish, a meager 22.4% bearish.

Historical sentiment 032111

And we’re grateful to our old friend and ace technician Alan Newman, editor of the excellent CrossCurrents investment letter, for pointing out that according to the latest numbers compiled by the Financial Industry Regulatory Authority, margin debt is ballooning and at last count weighed in at $350 billion, equivalent to 2.2% of total market cap, one of the highest percentages ever.

When investors go whole hog into hock to buy stocks, it’s probably a good time to at least check out the exits. This last happened back in 2007 and 2008, not, as we recall, the best time to load up on equities.

Big Trouble in Tokyo

So let’s be careful out there this week!

One last note to all parents out there (or grandparents, for that matter) – There is a shocking article in the NYTimes this weekend about how an 8th-grade girl (14) took a nude picture of herself for her boyfriend with her phone and texted ("sexting") it to him and, before she knew it, every student in her county had copies of the picture on their phones and PCs.  Bad enough you may think she is simply stupid or worse but the police came in and arrested students who forwarded the pictures on child pornography charges and were seeking to prosecute them as sex offenders.  

The greater a man’s talents, the greater his power to lead astray. It is better that one should suffer than that many should be corrupted. – Brave New World


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