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How Apple Became Japan

Originally published on Slope of Hope:

Back in the late 1980s, the entire business world was obsessed with Japan. It’s no wonder that this was the case: here was a country which had emerged from the ashes of World War 2 and had become the world’s second-largest economy. They made high-quality cars, consumer electronics, semiconductors, plus they seemed to have a management style and work ethic that put the “good old USA” to shame.

As might be expected, a flood of books came out to instruct the business people of America how to best ape their Japanese betters. This fixation reached a fever pitch when American companies started hauling in their workers in the morning to do calisthenics, because if that’s what the Japanese are doing, well by gum, that must be the secret: calisthenics. In the morning.

Japan’s newfound wealth sent their stock market soaring, and the newfound wealth within the country compelled the corporations to go on a buying spree. I remember to this day the horror that Americans felt when the iconic Empire State Building was added to the Japanese portfolio. The same was true for Pebble Beach golf course. And the fact that the land area the Japanese Imperial Palace was purportedly worth more than all the real estate in California was uttered so many times as to become tiresome.

This all reached a crescendo with the publication of The Japan That Can Say No, a pro-Japanese, anti-US book that asserted, among other things:

+ Japan must use its technological superiority as a negotiating weapon, and it should
1108-japansayno even threaten to trade secrets with the Soviet Union as a bargaining tool against the US and refuse to sell components that go into US missiles.

+ The quality of American goods is low because the level of the workers is low, while the superior education of Japanese workers is a big advantage.

+ The Japanese character is innately superior to the character of Americans.

+ Americans believe that the Caucasian race is superior since the modern era is dominated by the western world, and this prejudice will hurt them in the end.

+ Former American colonies are rife with problems, while former Japanese colonies are thriving.

+ America’s dropping of the atomic bomb on Japan and not Germany in World War II arose from racism because Germans are white people and Japanese are not. (Though at the time of the German defeat in April 1945, the atomic bomb was as yet incomplete and untested until July 16, 1945, so that may have been a factory)

+ The trade surplus with the U.S. is caused by the lack of desirable products made in the U.S.

Of course, we all know what happened next. The arrow marks the point that the above book was published, and the Nikkei is now in its third decade of writhing around in an inescapable bear market. Stocks are off 80% from their peak (and this was from the 1980s, remember!) and Japan, in spite of still making plenty of manufactured goods, is a country drowning in debt. Japan’s financial situation actually makes the US look responsible and prudent.


So what does this have to do with Apple? Oh, come on; do you really need to ask? Let’s walk it through:

Apple had its own “World War 2” in the mid-1990s. It was hanging on to a miniscule share of the personal computer market; it was losing money at a furious pace; it made products that were, at best, mediocre; it was perceived as the maker of overpriced, overhyped, fringe products mostly used by hippie-dippie creative types. The company was privately shopping around for a buyer out of fear they might go bankrupt.

From 1997 to 2012 – – slowly at first, but then with increasing speed and surety – – Apple became perhaps the greatest corporate turnaround story of business history. The stock climbed thousands of percent; the company changed from a very minor personal computer maker to the largest consumer electronics firm in the world; and Apple itself was the single most valuable corporation on Earth. There was serious talk of Apple becoming the world’s first trillion-dollar organization.

Now Apple has always been a proud company, almost to the point of arrogance, and the more successful they got, the more self-entitled they became. But, for me, the breaking point was the August 24th verdict that awarded Apple $1 billion from Samsung. The stock spiked higher the next day, and the price peaked just a few weeks later on September 21, 2012. I submit that this will be the lifetime high for Apple, at least until we’ve colonized Mars.

1108-bullyThe reason the billion-dollar verdict made such an impression on me was that – – well – – it just seemed so dick. Apple was squeezing a supplier on some patent issue. You know as well as I do that whatever tangential “violation” may have taken place didn’t do a damn thing to dent Apple’s sales. I’ve been involved in patent disputes before, and 99% of them are about extortion, not actual intellectual property theft. Maybe one out of 10,000 patent cases actually involves some nefarious and ill-meaning party trying to get away with the blatant theft of someone else’s hard work, but the other 9,999 are unmitigated crap.

So it simply struck me that Apple was bullying another big corporation for a billion bucks, mainly because they could. And the Silicon Valley jury was somehow sympathetic to their favorite son, and they gave them what they wanted (they actually wanted $2.5 billion, but, hey, let’s all be reasonable, right?) So, with this final step, Apple completed the journey from scrappy, full-of-heart hero (1997) to corporate dickhead (right now).

The bloom is off the rose in a number of ways. First of all, the bizarre cultish habit of camping out for days in front of an Apple store before a new product is introduced is now completely passe. The “mini-pad” that just came out was received with a relative yawn. Second, nearly $170 billion in shareholder wealth has been nuked in the span of just a few weeks. And third, how do you think a plummeting stock price and increasingly gigantic pool of worthless options is going to inspire the folks in Cupertino, who over the past decade have basically expected to be made rich as a divine birthright?

As I so often do any time I write about Apple, I want to be clear that I have been a loyal consumer and fan of the company for longer than probably 99% of the people reading this post. I became a Steve Jobs disciple in 1982, bought the original Macintosh in June 1984, bought the first iPhone on its intro day, the first iPad on its intro day, and was a bright-eyed, bushy-tailed employee at Corporate HQ at the age of twenty. So I’m far from an Apple basher.

But the company has become a bully, and this has set them on a new path. It doesn’t mean that they’re going to be the next RIMM. Instead, I think Apple’s future is more along the lines of Cisco’s: a formerly-great company that was once the most valuable corporation on the planet which, after it peaked, settled into existence as a very rich, very bloated, lumbering giant that just sort of ambles through the years, issuing regular dividends to shareholders, and really not doing anything particularly worth noticing.

It’s a shame, but all of this is to be expected. After all, no one expected Apple to be “Apple” for the next 300 years, did they? Innovation and momentum wax and wane from company to company; motivations change; leadership emerges in different places; simply stated, Apple has unwittingly passed the future’s torch to someone else. No one – certainly not Apple – knows who it’ll be, but Apple, like Japan, marked its peak with a loudly-proclaimed assertion of certitude about its own superiority and entitlement. The ancients told us that pride comes before the fall, and it is as true today as it was thousands of years ago.

As for the stock price, I suspect it’ll resemble the Nikkei chart found way above, although perhaps not as dramatically. I imagine AAPL will be in the low 400s next year and will meander around relatively trendlessly for years to come. Its multi-thousand percent gain will be a part of financial history, just like similar gains enjoyed many years ago by RIMM, CSCO, and YHOO.

First Ohio; Next 'The Moon'?

While markets are digesting the probabilities of a dramatic rise in taxes and cut in spending as we approach the fiscal cliff, it appears that behind-the-scenes there has been a secret plan that we can only imagine is designed to rocket-boost us over the cliff – new manned missions to the moon. As reports, NASA is serious about sending astronauts back to the moon’s neighborhood and will likely unveil its ambitious plans soon now that President Barack Obama has been re-elected, experts say. They go on to comment that “The space agency has apparently been thinking about setting up a manned outpost beyond the moon’s far side, both to establish a human presence in deep space and to build momentum toward a planned visit to an asteroid in 2025. The new plans have probably already been cleared with the Obama Administration but have been kept under wraps in case Republican candidate Mitt Romney won Tuesday night’s (Nov. 6) presidential election.” While the claims are that this will not increase the budget, we suspect out-of-this-world manned outposts cost a little more than the $17.7bn budgeted for NASA in 2013… someone is clearly eating space-cakes. Ironic really given our earlier post…




NASA is serious about sending astronauts back to the moon’s neighborhood and will likely unveil its ambitious plans soon now that President Barack Obama has been re-elected, experts say.


The space agency has apparently been thinking about setting up a manned outpost beyond the moon’s far side, both to establish a human presence in deep space and to build momentum toward a planned visit to an asteroid in 2025.


The new plans have probably already been cleared with the Obama Administration but have been kept under wraps in case Republican candidate Mitt Romney won Tuesday night’s (Nov. 6) presidential election, said space policy expert John Logsdon, a professor emeritus at George Washington University.


“NASA has been evolving its thinking, and its latest charts have inserted a new element of cislunar/lunar gateway/Earth-moon L2 sort of stuff into the plan,” Logsdon told (The Earth-moon L2 is a so-called libration point where the two bodies’ gravitational pulls roughly balance out, allowing spacecraft to essentially park there.)


“They’ve been holding off announcing that until after the election,” Logsdon added, noting that Romney had pledged to reassess and possibly revise NASA’s missions and direction.



A new vision of human space exploration


In 2010, President Obama directed NASA to work toward sending astronauts to a near-Earth asteroid by 2025, then on to the vicinity of Mars by the mid-2030s. To reach such deep-space destinations, the agency is developing a huge rocket called the Space Launch System (SLS) and a crew capsule named Orion.


But astronauts likely won’t head straight to a space rock when SLS and Orion are ready to fly together in 2021. In the last year, word has begun leaking out that NASA wants to explore Earth-moon L2, a point in space that lies beyond the moon’s far side, as a precursor.


Rumors currently point toward parking a spacecraft at the Earth-moon L2 gateway, so NASA (and perhaps international partners) can learn more about supporting humans in deep space. Astronauts stationed there could also aid in lunar exploration — by teleoperating rovers on the moon’s surface, for example.


NASA officials think they can pull off such manned missions without busting their budget, which stands at $17.7 billion in the proposed 2013 federal budget.


“They’re not talking about plans that imply significant budget increases,” Logsdon said. “It gives a more focused use for SLS and Orion before an asteroid mission.”


Moon missions coming soon?


Exploration of Earth-moon L2 could get started as early as 2021 with the first manned flight of SLS and Orion, which NASA calls Exploration Mission 2. (Exploration Mission 1 is the initial, unmanned test launch of SLS, slated for late 2017.)


“I’m not privy to the specifics of this, but one could conceive of the second SLS mission being the start of activity in cislunar space, rather than just being a lunar orbit mission,” Logsdon said.


We may know soon enough. NASA higher-ups have dropped hints recently that a big announcement may indeed be in the offing before too much longer.


“We just recently delivered a comprehensive report to Congress outlining our destinations which makes clear that SLS will go way beyond low-Earth orbit to explore the expansive space around the Earth-moon system, near-Earth asteroids, the moon, and ultimately, Mars,” NASA deputy chief Lori Garver said at a conference in September.


“Let me say that again: We’re going back to the moon, attempting a first-ever mission to send humans to an asteroid and actively developing a plan to take Americans to Mars,” Garver added.

Following Japanese Models?

Perhaps those sage English philosophers ‘The Vapors’ were on to something 32 years ago when they asked if we were “Turning Japanese” for it seems the following charts from Nomura certainly suggest the US bond market is heading in that direction. From demographics to monetary policy; from investor allocations to flows; and from bond bubbles and volatility to long-term interest-rate paths, it seems we share a lot more than a love for sushi and pachinko with our neigbours across the ocean as we seem to be chasing after many Japanese models (of asset allocation and macro-economics).


Via Nomura:

In the three years since the Great Recession ended, real GDP has grown at a lackluster 2.2% pace. Demographics play some role among structural factors holding back the recovery. The US and Japan are both dealing with an aging population and lower birth rates.

Slower population growth coupled with a greater share of the population aged 65 and older likely enhances the degree of risk aversion on average. Moreover, based on the life cycle model, elderly people tend to de-cumulate savings, which means less investable money. A natural conclusion of these arguments is reduced money flow into risky assets/real estate such as equity and homes.

Monetary Policy
On the monetary policy side, the Bank of Japan is a pioneer of non-conventional monetary policy tools including QE and a commitment to the future path of the policy rate. In March 2001, the Bank of Japan introduced a quantitative easing target, which was designed to increase the size of the current account balances held at the Bank of Japan, mostly bank reserves. At the same time, they committed to continue the quantitative easing until “deflationary concerns were dispelled.”

Much is made of the Fed being faster and bigger in the extreme monetary policy experiment than the BoJ was – as seen below…

Some limits of the Fed’s monetary policy: Based on the past experience, BOJ launched new asset purchase programs after the Great Recession under which they extended their scope to private risky assets (ETFs and REITs) (Figure 1). This is the direction of evolution of BOJ’s QE. However, the FRB technically is not able to purchase private assets. Given that the agency MBS market is not likely to expand in the near future, the Fed would face liquidity issues if they continue QE3 for an extended period. Moreover, in terms of setting quantitative thresholds to end the zero interest rate policy, the Fed should care more about the balance between inflation risks and boosting economic activity than the Bank of Japan.

However, after all that QE by the BoJ, they remain in a far worse place now than 20 years ago (from an economic point of view, an equity market perspective and a sovereign debt / leverage perspective) and perhaps the US has merely to revert to reality.

Investor Allocation To Bonds

The most apparent difference is that over the past 20 years, the US domestic investor base has reduced its UST exposure overall, whereas Japanese domestic investors have increased their holding of JGBs. This is important because many in the marketplace seems to assume that the Japanese have always owned JGBs and thus have always been able to finance their debt internally, whereas the US needs foreign investors to buy its debt. This also means that currently, US investors start from a lower base and thus have the potential to allocate more to USTs if they wished.

Japanese JGB buying had to start somewhere – and the accumulation phase began soon after their bubble burst. Prior to 1989, the investment culture in Japan was very similar to the US in the 1990s and 2000s (i.e., not risk averse). Currently, US Treasury buying has already started to pick up among the domestic investor base, similar to the ramp up in Japan around the mid-1990s. We continue to believe that more UST buying lies ahead with the domestic investor base.

Where’s the bond bubble there?

We understand we cannot just extrapolate the trend of the JGB’s buyer base to see what is in store for USTs. And we reiterate that we do not believe that US investors will follow exactly the Japanese example. But even if we only see half of the sort of government bond buying behavior that occurred in Japan, we can expect US domestic accounts to acquire large amounts of UST debt in the years ahead.

Even a small convergence to the Japanese multi-year government bond buying trend by US investors will result in sizeable amount of UST buying (in terms of percentage of assets in government bonds). This buying could occur across many investor types that are currently hovering around multi-decade low allocations to USTs. The current global regime, with UST continuing to benefit from the flight to quality bid amid crises elsewhere, as well as the regulatory need for high quality collateral, should add tailwinds to the UST story of the domestic buyer base revival.

Corporate Bond Spreads and Volatility

One of the most frustrating outcomes from the Japan’s lost decade, especially when QE and ZIRP were in full effect, was the declining trend in corporate borrowing, where Japanese corporates were more inclined to pay down debt than take on new debt, even with zero rates. Corporate deleveraging was at play as companies grew defensive after the Japan credit crisis and attempted to keep inventory and capital investments below cash flow generation.

The same deleveraging process has been happening in the US, but we saw very different reactions by corporate borrowers. US corporates seized the moment of low rates for longer, first thanks to the FDIC guarantee of bank debt right after the crisis, and then the Fed’s unprecedented easing responses brought back the animal spirits in the debt markets and hence investor demand went further out the credit spectrum.

The chart above nicely sums up the different trends in corporate issuance in US versus Japan. In this chart we plot the quarter-on-quarter growth, on a 1-year rolling basis the increase in the total size of the credit markets in the US and Japan. We indexed both countries credit growth rates to the start of their QE programs (2001 for Japan and 2009 for US). Despite the fact that both governments took bold measures to avoid corporate bankruptcies and each central bank introduced monetary easing, the US managed to keep issuance in positive territory.

However, we caution that just because policy rates were anchored for years in Japan, it doesn’t mean that there wasn’t spread volatility (as is clear in the chart above). Moreover, there was a limit in how tight spreads went as well. We highlight above the unique credit dynamics amid low rates.

And Finally, take a look at these 6 charts… Are We Really Turning Japanese?


We really think so…

Source: Nomura

Guest Post: Another Planet

Submitted by John Aziz of Azizonomics blog,


The losers in elections often take the loss badly. Just as some Gore supporters in 2000 shouted about moving to Canada, some Romney supporters have taken the loss particularly badly too:


And perhaps the most poignant:


All the Republican rage made me think about the origins of America. So much emigration out of Europe to America came out of political and religious or ethnic friction and disagreement with the regimes in Europe (and later, the rest of the world). Many, many Americans are the descendants of Europeans who came to America to practise religion or politics the way they wanted to, and not the way that their nation, or the Catholic church, or a Feudal lord wanted them to.

That same independent-mindedness and the hunger for self-governance was the force that gave the Founding Fathers the chutzpah to finally sever ties with the British Empire in 1776 and strike out on its own as an independent nation.

For those who want to strike out into the unknown in the pursuit of self-governance, such options don’t exist anymore. There is no great sparsely inhabited continent spread out (except perhaps Antarctica which is already claimed-for) for those who want to strike out on their own. Those of a libertarian temperament and with a hunger for self-governance used to come to America. But in the modern, globalised world, where can they go?

Where is the next America? Where is the next land that people seeking self-governance can emigrate to?

One prospective answer has been seasteading — moving out onto floating cities in international waters. Perhaps that will satisfy the desires of a few in the coming years, but not everyone wants to live at sea. It is another frontier, but there are many challenges to overcome. For one thing, governments have navies, and may lay claim to successful floating cities near their waters, seeking new tax revenues. Pirates may pose a similar challenge.

In the much longer term, the answer will almost certainly be leaving the planet. The only uncolonised great new continents left are the ones up in space, on other planets.  There is no more effective or complete way to depart. So it is rather poetic that in the past couple of days a new Earthlike planet in a star’s habitable zone has been discovered.

Via the BBC:

Astronomers have spotted another candidate for a potentially habitable planet — and it is not too far away.


The star HD 40307 was known to host three planets, all of them too near to support liquid water.


But research to appear in Astronomy and Astrophysics has found three more – among them a “super-Earth” seven times our planet’s mass, in the habitable zone where liquid water can exist.


Many more observations will be needed to confirm any other similarities.


But the find joins an ever-larger catalogue of more than 800 known exoplanets, and it seems only a matter of time before astronomers spot an “Earth 2.0? — a rocky planet with an atmosphere circling a Sun-like star in the habitable zone.

The hunger for self-governance led to the birth of America. It seems highly likely, in the very long run, that the hunger for self-governance will be the force that leads not only to local space colonisation (near-earth asteroids, Mars, asteroid belt, the moons of the gas giants) but ultimately deep space colonisation. The private space industry today is already driven by libertarian-leaning individuals like Bert Rutan, Robert Zubrin and Peter Thiel.

Powerful central government drives nonconformists to find ways to escape it. If the only road to self-governance left is up into space, then that is the road that will be taken. In the end, fury over a lost election may be the thing that drives humanity to the stars.

A Snapshot In Charts: You Are Here

While there was clarity in the recent election results –  there will not be any impending vote recounts that would leave control of the country hanging in the balance – Tuesday night’s results did nothing to change the basic dysfunctional dynamic between the two political parties. Now the fiscal cliff will have to be addressed in the coming lame duck session, and it won’t be easy to find a solution… Congressional Republicans retained the House majority — and by extension, in their view, a stance against higher taxes. Democrats kept control of the Senate and the White House, which they see as an affirmation of their view that deficit reduction must include some serious tax increases.

Victory guarantees the president nothing more than the headache of building consensus in a gridlocked capital on behalf of a polarized public, that has become tired of struggling with heightened uncertainty. If the president begins his second term under any delusion that voters rubber-stamped his agenda on Tuesday night, he may be doomed in his second term, and so is the outlook. The probability of Ben Bernanke’s tenure at the Federal Reserve being extended has also gone up – Mitt Romney had expressed his dissatisfaction with Bernanke’s wide-ranging and unconventional measures.

In this issue of the PunchLine I reiterate my concerns regarding the growing gulf between the behavior of investors enamored with monetary largess and the realities on the ground of globally weak economies… Add the risk of more corporate-earnings disappointments and we have a situation that needs remedying. The continuing slowdown in the global economy through late 2012 will almost certainly damage household and business outlooks even into 2013… and make fiscal repair more difficult. Indeed, visible signs of growth acceleration are difficult to find as the advanced economies remain inadequate almost across the board and the expected cyclical recovery in developing countries will be slow to develop, and probably not up to previous peak trends.


The Punchline