Weekly Market Commentary 3-14-2011

Does it Really Matter?

How do you write about Japan and its economy when the death toll from the earthquake and tsunami is expected to exceed 10,000? After all, nothing really matters like life, liberty and family. My thoughts and prayers are with the people of Japan.

Given my profession though, I cannot simply dodge the question:

When the fifth largest earthquake on record hits the third largest country by GDP, how does that impact the United States Economy and the markets?

Japan is the world’s fourth largest exporter and fifth largest importer. Main exports include cars, electronic devices, and computers and their largest export partners as of 2009 are China, the United States, South Korea, Taiwan, and Hong Kong. On the import side, Japan imports mostly fossil fuels, foodstuffs, textiles, and wood. Their largest import partners as of 2009 are China, the United States, Australia, Saudi Arabia, United Arab Emirates and South Korea.

Clearly, Japan plays a major role in the United States economy and the world economy. Anyone that suggests otherwise is simply wrong.

From an investment perspective, when people think of “investing in Asia” they think of high risk emerging market funds. However, Japan is one of the few countries in Asia that is considered a developed economy. As an investor, there is a concern about investments in international developed funds. Here at Phillips and Company we have been reducing our exposure to international developed markets for the last two quarters due to their increasing debt burden and aging populations. Japan is certainly no exception to either of those two. The Japanese Health Ministry estimates the nation’s total population will decrease by 25% from 2005 to 2050 and their public debt is over 200% of their GDP just behind Zimbabwe.

Unfortunately for Japan, from 1980 to 2010 their average quarterly GDP growth has been a dismal 0.55% and last quarter it shrunk by 0.30%. We do not believe this level of economic growth is significant enough to easily absorb a major shock to their economy. The Bank of Japan has been quick to provide stability and liquidity by pumping cash as needed after unleashing 15 trillion yen in one-day operations yesterday.

japan gdp growth rate

The last time a major earthquake hit Japan the Nikkei had a knee jerk reaction down but just as quickly recovered. Clearly some very difficult market activity may be in store for Japan.

nikkei during natural disasters

While the whole world will rightfully mourn this tragedy, there will be some economies and industries that benefit.

However, it might not be that straightforward because there are so many moving parts when it comes to our world economy. We will likely see increased volatility in world markets as new information continues to be released. The volatility will be dictated by the efficiency of the flow of information and the market participant’s ability to absorb and adjust portfolios.

In the final analysis, Japan’s suffering is awful; losing loved ones, as we all have, is life altering and rebuilding is exhausting and painful. Not one economic analysis, not one dollar made or lost, not one more blog will take anything away from the difficult journey many will have to endure in the years ahead for Japan.

When I watch the videos of this disaster, sometimes it seems like what we do doesn't really matter in the grand scheme of things. You depend on us to think through things and while it seems trivial at times - you matter and that's why we do it.

Tim Phillips, CEO

Please send me your comments or thoughts to tphillips@phillipsandco.com.