What’s the Deal with Son and Trump?

President-elect Trump got plenty of headlines out of his recent meeting with Softbank president Masayoshi Son, boasting afterwards:

“Masa, a great guy of Japan, he’s pledged that he’s going to put $50 billion into the United States because of our victory. He wasn’t investing in our country — $50 billion. Fifty thousand jobs — 50,000 jobs he’s going to be investing in. He is a great guy.”
Donald Trump, in Fayetteville, N.C., 2016-12-06

Clearly, Trump is hoping to get some mileage out of this meeting with Son, but what’s in it for Softbank? Why is he meeting up with the next president and not just with business leaders?

It’s unlikely the surprise victory for Trump was much of a factor in the announced investment plans. Three weeks before the election, when most pundits were still expecting a Clinton victory, Softbank already announced it was setting up a $100 billion dollar investment fund, with Saudi Arabia supplying the biggest share of the funds. Given the size of it and the special role the US plays for technology startups, it is unlikely most of it wasn’t meant to be invested there anyway. So take any claims that Son will be investing in the US only because Trump won with more than a pinch of salt.

Softbank already made a huge investment in the US under Trump’s predecessor, President Obama. In 2013 Softbank acquired US mobile carrier Sprint for $22 billion. However, its plans to acquire smaller carrier T-Mobile were thwarted by the FCC. And this is the likely background for the recent meeting and announcement:

Analysts said Son may be seeking to improve the chances of a merger between Sprint and T-Mobile. Sprint and SoftBank abandoned an effort to buy T-Mobile in 2014 after the Federal Communications Commission signaled the deal might violate antitrust laws.

Trump will be responsible for appointing the next FCC chairman. Speaking from the lobby of the Trump Tower on Tuesday, Son said that he wanted to celebrate Trump’s election “because he would do a lot of deregulation.”

“SoftBank’s original plan may come true with the new FCC chairman,” Naoshi Nema, analyst at Cantor Fitzgerald, said in a note.
The SoftBank investment Trump touted looks pretty great for SoftBank (LA Times, 2016-12-07)

By flattering Trump’s ego, Son is hoping to gain political influence to pull off a plan that was shot down by the FCC because it would be bad for competition and bad for consumers. With fewer players in the market, mobile plans will go up in price. Most likely a merger of Sprint and T-Mobile would would also lead to “synergies” (aka layoffs) as the companies would share infrastructure and other resources. Sprint already laid off thousands of employees to save billions of dollars under Softbank. But never mind reality when headlines of “50,000 new jobs” sound much better! 😉

This is not how a market economy should work in a country operating under the rule of law. Trump has not even taken office yet and the US is already starting to look like a Third World country, where the key to doing well in business is to cozy up to the president.

Abenomics and the Pension Bubble

Last week it was reported that the Japanese Government Pension Investment Fund (GPIF) had made a record annual return of over 12 percent last year. Considering the rapidly aging population in Japan and the related problem of how to finance pensions for large numbers of retirees with a shrinking active workforce, this may have seemed very welcome news. However, if you look a bit closer, it isn’t all what it seems.

The GPIF owes the record return mainly to increasing share prices of Japanese companies, of which it is holding stocks. The Nikkei 225 recently reached its highest level in about 15 years and it wasn’t all because Japanese exporters profited from the weakening yen. Another big factor was the decision of the Abe government to have the GPIF shift its asset allocation from government bonds to stocks. It reduced the bond target from 60% to 35% while increasing the stock target from 9% to 25%. Most of the above-target bonds have since been sold to the Bank of Japan (BoJ), which under “Abenomics” will buy up any volume of government bonds.

With the money from the bond sales the GPIF could go on a buying spree, while individual investors have actually been selling more shares than they bought. The GPIF has been sucking up shares like a vacuum cleaner with money basically printed by the Bank of Japan and this extra demand has inflated market values for shares, whether held by the GPIF or by banks, insurance companies or private investors. Beating deflation was a major declared goal of Abenomics, but so far the stock market is the only part of the economy where the government has succeeded in that goal (albeit only by some impressive stage magic by the Bank of Japan and the GPIF).

Will this recent on-paper gain shore up public finances for pension payments and health care for the elderly? Not really. The stock market can be a tricky beast. Just ask the Chinese, who had experienced an even more impressive stock market bull run until their bubble burst!

If the GPIF holds 25% of its assets in shares and it needs to pay pensions, it can only do so by selling shares at whatever the market rate happens to be at the time, which will directly influence those market rates. And if it needs a lot of cash because there aren’t many workers relative to pensioners it will need to sell a lot of shares. Share prices went up because the GPIF was a huge buyer; if it were to become a huge seller, the opposite would happen. This is even true if the GPIF were to reduce its share allocation before the pension problem will reach its peak.

If the real economy tanks, it will hit tax revenues and the stock market at the same time: With the GPIF heavily invested there, the government finances and the pensioners will be doubly exposed.

For the GPIF to do well out of stock sales it will need a huge number of individual buyers, as it keeps liquidating its portfolio. But who is going to invest in stocks when they know the market will keep on getting flooded with sell orders for years to come?

Instead of addressing the real problems, the government of Shinzo Abe has been using smoke and mirrors to con the public. While pensions are no more secure than before, a lot of stock market investors have made a mint out of the BoJ-financed buying binge, enriching wealthy Abe supporters.

There are no easy answers to the pension problem. As the age pyramid changes and inverts itself, lots of things will have to change. For one, the retirement age needs to increase to re-balance the number of workers vs. pensioners. Japan will need to open its doors more for immigration. We’ll all have to work more years and the sooner the changes are made, the less painful it will be later. More emphasis will have to be put on covering the minimum needs of retirees vs. tying payments to previous income levels and contributions. Wealthier pensioners will have to make bigger sacrifices. The necessary steps will be painful and controversial, but they are unavoidable. Smoke and mirror “Abenomics” are no way around that.

Romney’s energy self-sufficiency fallacy

Mitt Romney, the Republican candidate for US president, recently made headlines by proposing that under his policies the US could become independent of energy imports by 2020. To make this claim slightly less incredible (the US uses 20% of the world’s petroleum while holding only 3% of its proven reserves), he included Canada and Mexico in his plan, effectively widening the scope to all of North America. The essence of his plan, which was received favourably by conservative media, are policies to boost hydrocarbon output (oil and gas production). The aim of the policy is to create jobs in exploration while keeping energy costs low for consumers, boosting the economy.

Let us assume that government policy could actually significantly boost oil and gas production. What effect would that have on the US and world economy in the next decades?

There was a time when the US was largely self sufficient on petroleum. Output was growing rapidly until the 1940s. However, new discoveries could not keep up with the rate of depletion of old wells. Production in the contiguous 48 states peaked in the early 1970s. The US became increasingly dependent on imports for oil supplies.

Worldwide hydrocarbon reserves are limited. There will come a point when worldwide production will peak (some believe it has already been reached) and from then on, rising oil prices will ensure that consumers reduce their demand to match available declining production.

Let us assume that, thanks to Mr Romney’s policies, oil and gas production in North America will magically rise enough to cover the entire amount currently being imported from the Middle East, South America and elsewhere (an assumption that is extremely optimistic according to experts). The amount currently imported will then become available as extra supplies to China, India, Brazil, Europe, Japan and other countries, keeping energy costs low for them and allowing them to compete more effectively with US manufacturers over the next decade.

At some point those new oil wells, shale gas wells and tar sand pits will run dry too. What then? By then oil will be a far more scarce resource, with more cars, motorcycles and power stations in China, India, Brazil, Thailand, Malaysia, etc. burning it than today, as those economies will have been rapidly growing. At that point the US will have to revert to buying oil from Saudi Arabia again, whose reserves are estimated to be more long-lasting than North America’s. It will have no reserves left to replace those premium price imports then. Every dollar saved on import substitution in the next couple of years could cost US consumers 10 dollars then.

Imagine a world in which the price of oil were to double every decade. The oil in the ground in North America won’t go away unless it is pumped up and used. Why would you want to consume it while it’s worth only $70 a barrel instead of when it’s $140 or $280 a barrel? In a world of rising prices it pays to be a buyer early and a seller later.

Perversely, one of the beneficiaries of US policies on oil could be Iran. Economic sanctions linked to the country’s suspected nuclear weapons program have depressed Iranian oil sales. The more slowly Iranian oil reserves are depleted, the more Iran will benefit economically from these reserves when they are eventually used after oil prices have gone up.

Top 10 employers list, made in Japan

A recent survey amongst Japanese third year university students indicates that relatively few aim to join the well known companies producing the export products “made in Japan” that, economically speaking, put the country on the world map during the 20th century.

According to the list published in Nihon Keizai Shimbun (2009-02-23), five of the top ten companies that students would like to work for were banks or insurances. There were also one airline (All Nippon Airways, #3), one travel agency (JTB, #5) and two railway companies.

Only one electronics company made it into the top ten (Panasonic at #4, unchanged from 2008) and no car manufacturer at all. The ranking clearly reflects the hit that Japan’s export industries have taken during the global economic downturn. Industrial icons such as Toyota (#46), Honda (#60), Sony (#22), Sharp (#37) dropped sharply from last year’s survey, when three of these were in the top 10 – Toyota (#3), Sony (#5) and Sharp (#6) while Honda at least made #22 then.

As an engineer I may be a bit biased, but I can’t help feeling sad when companies that make stuff for customers worldwide are seen as less interesting to work for than companies that domestically move money around.

Japan depends almost entirely on imports for primary energy resources and domestically produces little more than one third of the food that the Japanese eat. It will always have to depend on exports to pay for vital imports. The more bright minds that concentrate on competing globally, the better for the country.