Pension

This can’t wait

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John Mauldin has written an informative piece entitled “this can’t wait” which sums up a lot of pieces I’ve written on the sickening state of public pension unfunded liabilities and the debt super cycle that is facing us. While Mauldin is trying to sell his investment services on the back of this, I wasn’t when I wrote mine. Public service announcement? Maybe but the stats of the black holes we face in pensions and central bank QE which has failed to boost money velocity will bite. Hard. There will be no “I told you so” glory because almost everyone will lose big.

Even if people want to criticize me for being a perma-bear there is no harm in being aware of what is likely coming.

Canadian mortgage fraud – Laurentian Abyss(m)al

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Laid up in bed this week with the flu I watched The Hunt for Red October where Sean Connery plays a Russian sub commander with a thick Scottish accent. To rendezvous with the CIA to complete the defection they head to the deep waters of the Laurentian Abyssal, ironically the name of the Canadian bank which has seen the proverbial torpedo hit the propellor.

It seems that Laurentian Bank in Canada has been caught over mortgage fraud, the second lender to do so. Canada’s property prices have trebled since 2000, seeing but a minor blip during GFC. Zerohedge noted,

An audit “identified documentation issues and client misrepresentations” with some mortgages…Laurentian said it will repurchase about C$89 million ($70 million) of those mortgages in the first quarter, or 4.9 percent of such loans sold to the firm….It will buy back an additional C$91 million of mortgages “inadvertently” sold to the firm, also in the first quarter.

The total value of the loans made to the 3rd party was around $1.16bn. Of course the CEO of Laurentian Bank is brushing aside the scale of it.

As we know Home Capital Group, Canada’s largest mortgage lender was busted for mortgage fraud and required a $1.5bn bailout facilitated by the 321,000 Healthcare of Ontario Pension Plan (HOOPP) members. Not to worry those emergency loans are backed by the mortgages!! Naturally “safe as houses”

Perhaps in the immortal words of Red October Captain Ramius, “be careful what you shoot at in here…things inside here don’t react well to bullets

Or perhaps in the words of Canadian born Inspector Frank Drebbin, “nothing to see here!”

Shift your investment from corporates that stick to IR to those that self promote through PR

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Fund managers will find it tougher in the new post MiFID2 world to discover new companies in Japan. The sell-side research houses are likely to focus less and less on the one part of the market that clients are likely to be interested in – smaller medium sized enterprises which have unique business models exploiting the slow to change direction super tanker large caps. As a result many corporations will stick to traditional investor relations (IR) behaviour. Producing quarterly results and annual reports will not be enough. As stockbrokers become disincentivized to promote the same corporations they used to go out of their way to support by hosting IR roadshows, the companies will have to take it upon themselves to fill the gap. To that end IR will become PR.

Instead of buy-side analysts running complex forecasting tools, perhaps they would be better off covering off which corporations are actively promoting themselves relative to others. Surely those companies proactively contacting investors and providing them with up to date and relative updates will gain much more mind-share than those that don’t. Do not think for one second that time poor investors and fund managers won’t make time for those companies that make time for them. It is tough enough trying to fight off the onslaught of ETFs internally so wherever a corporate makes decision making simpler and time efficient it is not unbelievable to think that those stocks (provided they follow through with the earnings) won’t trade at a relative premium to those that stay behind the comfort of their own desks, despite in their eyes providing the minimum requirement of information.

Meeting one successful internet database company in Japan recently, I questioned why a company that had seen its revenues grow 70% in 3 years had seen a share price drift 40% lower. The IR team were worried why they had seen such a drop off in client contact.  It wasn’t that it had poor results. It was that it was sticking to a stale script and a liquidity drifted below crucial levels, the stock was being dumped on that alone. The irony was that the smallest division that was growing the fastest was on the back page even though it was growing 5x faster than any other division and at twice group margins. For a simple tweak in its PR material, the stock would light up. Still the company intends to stick to convention (for now).

Crime in Japan – Breakdown of the Nuclear Family

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CM – Crime in Japan – Breakdown of the Nuclear Family

Following on from pensioner crime in Japan, this eye-opening report on the breakdown of traditional families points to a future unlike what many may not fathom. The link above contains the full report with a short summary can be found below.

Did you know that 25% of all marriages in Japan are couples that marry due to unplanned pregnancies? In Okinawa that rate is 42.4% Did you also know that 25% of all households with children in Japan are single-parent? The perception of the dutiful wife getting up at 4am to make breakfast for her samurai salaryman husband are virtually non-existent and half of divorces happen in age groups 55 years old and above. 25% of divorces occur in the 65yo+ cohort. The government changed the law in 2007 entitling wives to up to half of their ex-husband’s pension. Still the trend was rising sharply even before its introduction. Mrs Watanabe has had enough of her salaryman and wants out.

Domestic violence (DV) is seeing a very sharp upturn in Japan. Between 2010 and 2014, victims of DV have soared 60.6% against women and 650.1% against men. Most cases (over 60%) of DV were marital related. Recognizing the growing problem, The police have even developed a new category of DV which defines a divorced couple who are living under the same roof. Economic conditions for some families has become so tight that the stress of living with someone they do not want to be with now gets its own category, scoring over 6,000 cases alone in 2014.

Between 2010 and 2014, total reported stalking cases surged 36.6% to 24,837. 50% of stalking incidents recorded were related to partners (including former partners).

The Ministry for Health, Labor & Welfare (MHLW) has 208 child consultation centres which fielded over 88,000 cases in 2014, a 20.5%YoY increase or 22x the level of 20 years ago. Despite a 2.4x jump in social workers inside these child consultation centres over the last two decades they can’t keep up with the demand. The Japan National Police Agency (JNPA) statistics show a sharp jump in arrests for child abuse, 80% being due to physical violence causing injury. In 2013, 36 abused children died with 16 of them under 1 year old. Police note that child abuse is being driven by the breakdown in traditional family, unemployment and poverty, stats which we showed earlier to be rising steadily.

Crime in Japan is a problem that will not simply disappear with the evolving mix of aging demographics, poverty, unemployment, underemployment and economic stagnation. We note that the previous jump in Japanese crime started in 1997 and ran to a peak in 2003. Unemployment was a factor. In the crime boom of 2010-2016, we note that the unemployment rate has fallen but it masks disturbing trends in lower paid part-time work which is putting families under financial stress.

There is the smell of fear in the workplace. In the period 2002 to 2013, labour disputes almost trebled. Bullying and harassment (which are obviously less palatable for companies to have floating in the public domain) as a percent of total disputes has ballooned from 5.8% to almost 20% over the same period.

Another dilemma in the data is the employment referrals by government unemployment agencies for middle or advanced aged staff (45yo+) which shows that around 25% of them end up with work in a fixed term capacity of more than 4 months.

Ironically active retraining of inmates to help them find new careers after release occurs in prison. Why isn’t more being spent on finding ways to redeploy those out of prison? The idea that any job will do is a recipe for failure and cannot be relied upon as a sustainable program. Most vocational training by Hello Work, the government unemployment insurance agency, is broad and non-specific. Any specific job training will be ‘paid for’ which ultimately is limited to an unemployed person’s financial status and confidence a job will be attainable at the end of it.

Crime in Japan – Geriatric Jailbirds

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CM – Crime in Japan – Geriatric Jailbirds

I have been asked by several people to rehash a report I wrote on elderly crime in Japan back in Feb 2016. The above link contains the entire report. Below is a brief summary.

While retirement for many of us is some way into the future, common sense would dictate that once we reach it, committing crime is probably furthest from our minds. Hugging one’s grandchildren is surely a better option than talking to them through a glass window. If you are in prison you are supposed to be old when you leave not when you enter it. Not so in Japan.

The incidence of crime committed by the elderly is soaring. 35% of all arrests for shop-lifting involve the retiree demographic, up from 20% (2001). Since 2001, their representative percentage of the prison population has doubled and 40% of repeat offenders among the elderly have committed crimes six times or more in order to return as a guest of His Excellency. While much of it is petty crime, there seems a deliberate attempt to ‘break into prison’ as a way to survive. A roof over their head, three square meals a day, no utility bills and unlimited free health care. The only real negative being the harsh prison rules about when one can talk to fellow inmates. To the state, one inmate costs ¥3.8mn to incarcerate and we estimate around ¥300,000 in court and administration fees per incarceration. Furthermore supplemental healthcare to the prison system has doubled in the last 7 years. We study the economics of what might drive someone to make the choice to commit crime and look at the government’s current funding for income support. Is it being spent wisely?

Such has been the overpopulation in prisons, the government has had to increase capacity by 50% in the last decade and boost the incidence of early release and parole to create space for what one can only guess is a way of developing state sponsored retirement villages. Female prisons are already full but the MoJ wants to increase the number of female prison guards to prepare for the anticipated increase in elderly crime.

At the last (average) count in 2010, there were 4,069 elderly inmates. While that is only 14 people per 100,000 aged over 65 that rate has been climbing from 12 in 2004 and around 8 in 2000. We estimate at the 5.4% compound growth rates experienced to date, that 31 people per 100,000 is possible by 2036. At that rate, 11,636 elderly citizens would be in jail at a cost to the government of ¥42bn per annum as health cost related budgets have been appropriated at around ¥120,000 per elderly inmate.

‘Supplemental welfare’ or income support paid by the Japanese government is approximately ¥3.6 trillion per annum and spread across 5.9mn people (an average of ¥605,000 per person). ¥1.7 trillion of that total is for medical and nursing care (c.¥1.2mn per person). Note this portion of healthcare is separate from the ¥36 trillion annual healthcare budget.

What are the economic sums that drive a pensioner to consider committing crime? We surmise that a measly base pension of ¥780,000 (US$7,000) per annum won’t get one very far. When throwing on top of that healthcare, rent, utilities and food it is not hard to get someone into net-negative income territory. Sure, supplemental income through part time work may close the gap but perhaps that some are resigned to their fate to consider jail as an option.

There is another elephant in the room. Suicides among pensioners are now 40% of the total, up from 27% in 1983. One gets the feeling that all of the things that retirees had come to expect from a society is in reality against their long-entrenched cultural thinking. Wives of retirees now make up 6% of all reported suicides. They are obviously not adjusting to having the bread winner at home every day. We break down suicides by prefecture and show the clear link to elderly populations, low population growth and relatively smaller GDP compared to national averages. The economic malaise in the regions contradicts a vibrant Tokyo and much of what is going on does not get reported. Domestic violence committed by the elderly has surged 2.4x in the last 5 years. The number of murders committed are even higher.

Solutions are hard to fathom. By 2060, 40% of the population will be above 65 years of age. Would Japan be better off building large scale dormitories that would include medical facilities in return for pension sacrifice? This way these pensioners could trade off prison life for state sponsored shelters at one would expect a fraction of the cost of adding to prison population. Surely if the government met potential pickpocketing pensioners half way then it would be preferable to both parties on cost and shame grounds. Would a Benesse (9783) be interested in running a public-private initiative (PPI) to help the government build such centres given they are already investing in old age care facilities? Benesse wants to expand its elderly care business to 20% of the group total by 2020. The government has taken this approach of PPI with building day-care centres as JP Holdings (2749) has benefitted greatly from. The government needs to think of how to revitalise the regional areas. With slowing economic growth, working age employees flock to the cities where jobs are more likely. It exacerbates the pressure on the regions to survive and poses longer term risks for the companies in the region to sustain employment. PPI projects in the regions makes sense from a variety of perspectives which we discuss might alleviate the pressure

Tesla – 30 reasons it will likely end up a bug on a windshield

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Contrarian Marketplace ー Tesla – 30 Reasons it will likely be a bug on a windshield

Contrarian Marketplace Research (CMR) provides 30 valid reasons to show Tesla (TSLA) is richly valued. Institutional investors have heard many of the financial arguments of its debt position, subsidies, cash burn and other conventional metrics. What CMR does is give Tesla all the benefits of the doubt. Even when extended every courtesy based on Tesla’s own 2020 production target of 1,000,000 vehicles and ascribing the margins of luxury makers BMW Group (BMW GR) & Daimler (DAI GR) the shares are worth 42% less than they are today. When stacked up against the lower margin volume manufacturers, the shares are worth 83% less. There is no fuzzy math involved. It is merely looking through a different lens. We do not deny Tesla’s projected growth rates are superior to BMW or DAI but the risks appear to be amplifying in a way that exposes the weak flank of the cult that defines the EV maker- ‘production hell’.

Follow social media feeds and Tesla’s fans bathe in the cognitive dissonance of ownership and their charismatic visionary, CEO Elon Musk. No-one can fault Musk’s entrepreneurial sales skills yet his business is at the pointy end of playing in the major leagues of mass production, which he himself admitted 18 months ago was a ‘new’ challenge. Let us not kid ourselves. This is a skill that even Toyota, the undisputed king of manufacturing, a company that has coined pretty much every industrial efficiency jargon (JIT, Kanban, Kaizen) has taken 70 years to hone. It might have escaped most investors’ attention but Lockheed Martin called on Toyota to help refine the manufacturing processes of the over budget F-35 Joint Strike Fighter. If that is not a testament to the Japanese manufacturer’s brilliance Tesla is effectively Conor McGregor taking on Aichi’s version of Floyd Mayweather.

Yet Tesla’s stock has all the hallmarks of the pattern we have seen so many times – the hype and promise of disruptors like Ballard Power, GoPro and Blackberry which sadly ended up in the dustbin of history as reality dawned. Can investors honestly convince themselves that Tesla is worth 25x more than Fiat Chrysler (a company transformed) on a price to sales ratio? 10x Mercedes, which is in the sweet spot of its model cycle?

Conventional wisdom tells us this time is different for Tesla. Investors have been blinded by virtue signalling governments who are making bold claims about hard targets for EVs even though those making the promises are highly unlikely to even be in office by 2040. What has not dawned on many governments is that 4-5% of the tax revenue in most major economies comes from fuel excise. Fiscal budgets around the world make for far from pleasant viewing. Are they about to burn (no pun intended) such a constant tax source? Do investors forget how overly eager governments made such recklessly uncosted subsidies causing the private sector to over invest in renewable energy sending countless companies to the wall?

Let us not forget the subsidies directed at EVs. The irony of Tesla is that it is the EV of the well-heeled. So the taxes of the lawnmower man with a pick-up truck are going to pay for the Tesla owned by the client who pays his wages to cut the lawn. Then we need look no further than the hard evidence of virtue signalling owners who run the other way when the subsidies disappear.

To prove the theory of the recent thought bubbles made by policy makers, they are already getting urgent emails from energy suppliers on how the projections of EV sales will require huge investment in the grid. The UK electricity network is currently connected to systems in France, the Netherlands and Ireland through cables called interconnectors. The UK uses these to import or export electricity when it is most economical. Will this source be curtailed as nations are forced into self-imposed energy security?

So haphazard is the drive for EV legislation there are over 200 cities in Europe with different regulations. In the rush for cities to outdo one another this problem will only get worse. Getting two city councils to compromise is one thing but 200 or more across country lines? Without consistent regulations, it is hard to build EVs that can accommodate all the variance without boosting production costs. On top of that charging infrastructure is an issue. Japan is a good example. Its EV growth will be limited by elevator parking and in some suburban areas, where car lots are little more than a patch of dirt where owners are unlikely to install charging points. Charging and battery technology will keep improving but infrastructure harmonisation and ultimately who pays for the cost is far from decided. With governments making emotional rather than rational decisions, the only conclusion to be drawn is unchecked virtuous bingo which will end up having to be heavily compromised from the initial promises as always.

Then there are the auto makers. While they are all making politically correct statements about their commitments to go full EV, they do recognise that ultimately customers will decide their fate. A universal truth is that car makers do their best to promote their drivetrains as a performance differentiator to rivals. Moving to full EV removes that unique selling property. Volkswagen went out of its way to cheat the system which not only expressed their true feelings about man-made climate change but hidden within the $80bn investment is the 3 million EVs in 2042 would only be c.30% of VW’s total output today. Even Toyota said it would phase out internal combustion in the 2040s. Dec 31st, 2049 perhaps?

Speaking to the engineers of the auto suppliers at the 2017 Tokyo Motor Show, they do not share the fervour of policy makers either. It is not merely the roll out of infrastructure, sourcing battery materials from countries that have appalling human rights records (blood-cobalt?) but they know they must bet on the future. Signs are that the roll out will be way under baked.

While mean reversion is an obvious trade, the reality is that for all the auto makers kneeling at the altar of the EV gods, they are still atheists at heart. The best plays on the long side are those companies that happily play in either pond – EV or ICE. The best positioned makers are those who focus on cost effective weight reduction – the expansion of plastics replacing metal has already started and as autonomous vehicles take hold, the enhanced safety from that should drive its usage further. Daikyo Nishikawa (4246) and Toyoda Gosei (7282) are two plastics makers that should be best positioned to exploit those forking billions to outdo each other on tech widgets by providing low cost, effective solutions for OEMs. Amazing that for all of the high tech hits investors pray to discover, the dumb, analogue solution ends up being the true diamond in the rough!

59yo COO sues Fujifilm Australia for ageism

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The Australian Financial Review (AFR) reports that one of Fuji Film Australia’s executives, COO David Marshall is suing for ageism. There is a sense of irony in that the Chairman of Fujifilm Japan is 78. The AFR reports,

At a dinner at Melbourne’s Rococo restaurant in 2015, former Fujifilm CEO Kevin Masuda allegedly stood up and pointed at Mr Marshall, laughingly saying “Dave is too old” in front of senior clients…During 2017, Mr Koshimizu repeatedly referred to himself in front of Mr Marshall as “old, like past 60, retirement age” and allegedly told him Fujifilm “wants you to find the next Mr Marshall” and it was looking for a “young, strong” team.’We need a younger person’

On May 18, during a dinner at Palace Hotel in Tokyo, the chairman Mr Koshimizu told Mr Marshall “Dave, you and I are old too. We need a younger person to make strong as a general manager.”

Retirement is a hot issue in Japan. Corporates are retiring expensive workers (who are often paid based on seniority) and reemploying them as ‘advisors’ (pp.15-24) on relatively paltry sums of $1,000/mth. While it is not unusual here, it would be rather strange if Fujifilm in Australia were to make such a rookie mistake in trying to flip a worker approaching 60. In 1984 85% of male employees were full time vs 62% odd today. It isn’t surprising to see the most active demographic seeking work aren’t young uni grads but the elderly struggling to make ends meet.