Japan Unexpectedly Reports Terrible GDP As It Slides Into Recession

One look at the latest GDP print out of Japan, and one would think the country's economy was already being ravaged by the coronavirus: at -1.6% Q/Q and a whopping -6.3% annualized - nearly double the 3.8% estimated drop - this was the second worst GDP print since the financial crisis and the second-worst quarter of the Shinzo Abe era, surpassing even the drop in the aftermath of the Fukushima disaster.

Of course, the latest plunge in Japan's GDP has nothing to do with the coronavirus as it took place in Q4, and the drop was largely a byproduct of the sale tax hike, which led to a similar collapse in Q2 2014 GDP, following the first such tax hike.

One look at the GDP components confirms that the plunge was largely the result of collapsing consumption, with Houshehold Consumption plunging at an 11.5% annualized pace, the second biggest drop that Private Demand plummeted at an -11.1% annualized basis...

... the second worst on record, and also just behind the -18.1% drop recorded after the first sales tax hike in 2014.

It wasn't just households who retrenched, however, and as the following breakdown from Japan's cabinet office reveals, in Q4, Japan's capex fell fore the first time in 3 quarters, dragged down by construction and production machinery. Finally, the economic misery was complete as a result of a second consecutive drop in exports led by cars, as the global automotive sector remains mired in the deepest recession since the financial crisis.

And since Q1 GDP will likely be even worse due to the paralysis in Chinese supply chains which have knocked out a good part of Japanese domestic manufacturing indefinitely, today's bleak GDP report means that a Japanese recession - definied as two quarters of negative GDP - is now just a matter of time.The unexpected plunge in Japan's GDP triggered a kneejerk reaction of selling on the Topix, which slid more than 1% in early trading, though bond yields and the yen showed little reaction to the worst nominal GDP performance since Prime Minister Shinzo Abe took office (U.S. futures were of course higher, because the closer the world gets to depression, the more likely central bankers are to start buying, well, everything).

Dominos Are Falling – China Shutdown To Crush India’s Already-Crumbling Economy

The supply chain shock emanating from China to other Asia Pacific countries and Europe, could become a major headache for India.

Bloomberg focuses on how an industrial shutdown of China's economy has already had a profound effect on India’s economy and could get worse.

Pankaj R. Patel, chairman of Zydus Cadila, said prices of medicine in India have exponentially jumped in the last several weeks, thanks to much of the medicine is sourced from China.

The Indian pharmaceutical industry is experiencing massive disruptions that could face shortages starting in April if supplies aren't replenished in the next couple weeks, Patel warned.

He said prices of paracetamol, a common analgesic, have risen 40% in India, while some antibiotic medicines have soared 70% since Covid-19 broke out in China last month.

Manufacturers in China have idled plants, and at least two-thirds of the economy is halted. Some factories came online last week with promises of full production by the end of the month, but for most factories, their resumption will likely be delayed. This will undoubtedly lead to medicine shortages in India in the coming months ahead.

A new theme is developing from all this mayhem – that is the reorganization of complex supply chains out of China to a more localized approach to avoid severing. But in the meantime, these complex supply chains in India and across the world will experience massive disruption caused by the shutdown. All of this points to ugly end of globalization:

Pankaj Mahindroo, chairman of the India Cellular and Electronics Association (ICEA), said the wrecking of supply chains in China could soon have a devastating impact on India's smartphone production. 

Mahindroo represents companies including Foxconn, Apple Inc., Micromax Informatics Ltd., and Salcomp India, warned the "impact is already visible… If things don't improve soon, production will have to be stopped." 

Already, the production of iPhones and Airpods has been reduced in China because of factory shutdowns.

The closure of Foxconn plants in India would be absolutely devastating for Apple. 

Apple produces iPhone XR in India. If the production of affordable smartphones is halted or reduced, the Californian based company could see full-year earnings guidance slashed. 

Mohnidroo said if things don't improve in the next couple of weeks, smartphone factories in India could start running out of "critical components like printed circuit boards, camera modules, semiconductors, resistors, and capacitors." 

A spokesperson for Xiaomi Corp.'s India unit said alternative sourcing attempts are underway to mitigate any supply chain disruption from China. 

Even before all of this, India's economy is rapidly decelerating into an economic crisis. 

Former Indian Finance Minister Yashwant Sinha warned several months ago that the country is in a "very deep crisis," witnessing "death of demand," and the government is "befooling people" with its economic distortions  of how growth is around the corner. 

Supply chain disruptions are moving from East to West. It’s only a matter of time before production lines are halted in the US because sourcing of Chinese parts is offline. The disruptions of supply chains is the shock that could tilt the global economy into recession.

How VSNL launched internet services in India in 1995 when even China hadn’t

India's 'Telecom Man' Brijendra K. Syngal, under whose guidance internet was introduced, recounts in a new book the pains VSNL went through to set up the system.

here are more than 550 million Indians connected to the internet today, that is, more than 40 per cent of the population. This number also makes our country the world’s second largest online market. Yet, when we at VSNL introduced internet services two and a half decades ago in 1995 even China did not have the net. The Chinese vice-minister visited VSNL in 1996 to learn the tricks of the trade.

There had been a rudimentary version of the internet available in the country since 1986, when the Educational Research Network (ERNET)—a joint undertaking of the Department of Electronics (DoE) and the United Nations Development Program (UNDP)—was launched but ERNET was only meant for the use of the educational and research communities. Also, the software that would truly define the internet and make it accessible to the layman—the web browser— had not yet been invented. 

Developed in the American defence laboratories, and initially used only by the US military and research establishment, the US government 99 was now allowing the internet to be used by all. In the Indo-Pacific region, countries like Japan and Australia had already launched the service. Therefore, there was an inquiry from the government as to why we should not venture into internet provision. The government had three options—DoT, Mahanagar Telephone Nigam Limited (MTNL) and VSNL. Eventually the government leaned towards us because we had the international connectivity and relationships with external carriers. At the time of commissioning of the SEA-ME-WE2 cable in 1994 (see Chapter 2), we were approached to start considering providing internet as a service. 

We started planning as soon as we got the green light. We also started talking to our correspondents, like British Telecom, MCI and AT&T, about how they had gone about it. The building blocks were soon put together. The essential component was the connectivity to an internet service provider outside India. Our choices were very limited; we could get to Australia, Japan, Hong Kong, the US and the UK. We zeroed in on 128 kbps lines to these countries. Simultaneously, we started setting up the hardware. 

We chose five cities as the first lot for internet connectivity— Delhi, Bombay, Calcutta, Madras and Pune. We left out Bangalore and chose Pune because we had a large set-up there. From the logistics point of view, Pune was easier but from the requirement point of view, Bangalore was certainly more important. We set up the equipment, the servers and connectivity between these five cities so that we had some sort of a fail-safe system. Honestly speaking, according to our intelligence gathering, we thought we had done a reasonably good job. We started the beta testing about forty-five days before the launch date, which we had set as 15 August 1995—actually the day before, so that the announcement would come on Independence Day. 

So when VSNL introduced the internet in the country, they were happy to be around to bounce off ideas and suggest ways to make the service more user-friendly and popular. 

Our own staff was encouraged to use the internet system as much as possible to get a feel of what was going on. We recruited youngsters who were tech-savvy and curious. All of us took up the challenge to provide a world-class service and we did it! 

The proof of that was the NASSCOM meet at the Nehru Centre in Bombay in 1996. Dewang Mehta came to me and said: ‘Mr Syngal, this is the opportunity of a lifetime. We need to demonstrate what the internet is all about. Can you get a couple of 2 mbps lines into Nehru Centre?’

Now that would not be easy, to get two 2 mbps lines from VSNL to Nehru Centre. But I said to my people: ‘This is a god sent opportunity. We have mastered the art of providing digital connectivity. Let’s show the world what we can do.’ 

So we had a booth at the Nehru Centre where we would give live demonstrations of downloads. The excitement among the young people was tremendous. There would be a stampede every day. 

Mr R.K. Takkar, chairman of the Telecom Commission, heard about it and came down to see it. The staff asked me whether they should clear the crowd around the booth for him. I said: ‘No, let him wade through the crowd. Let him see the euphoria among the youth.’ They still tried to make way for him when he visited but yet he was quite amazed by what he saw. Someone remarked in jest that we did not need to rent a crowd—the crowds came like bees homing into their hives or iron filings drawn to a magnet. Such was the euphoria. 

After that we never looked back and continued to provide wider connectivity, which ultimately resulted in private sector participation. There was a clamour for opening up the space for private players. There were many meetings that went on till late at night, discussing the issue. The meetings were chaired by none other than A.P.J. Abdul Kalam, then defence and scientific adviser, who would go on to become President of India, in his South Block office. The high point of the meetings in those foggy Delhi January evenings was a nonstop supply of steaming hot idlis and crisp medu vadas. The meetings would generally end up after midnight. 

My stand was that if the government wanted to open up internet services, let it, but there were security issues. We were challenged that nobody could track a customer down from a mere email account name. We had to convince them that the account name is for the public but the system converts that to a binary number which is used to track a customer down to his address. A lesson in Boolean algebra was no help to the scientist in Kalam. We were outnumbered by his cronies from DRDO, the likes of Dr Vidyasagar, et al. Our intelligence agencies, too, questioned the hasty decision based on uninformed mob frenzy, like it was some sort of gold rush. 

Also, we knew the pains we had gone through to set up the whole system, how difficult it was, but finally, it was the government’s decision and I was not going to question its wisdom. So internet services were opened up, but DoT and VSNL continued to set up more and more nodes across the country. My public view was that I loved competition but I loved killing the competition even more. Of the some 400 companies which applied for the gold rush, the vast majority ended up losing money. Today, even after twenty-five years, one can count the number of internet service providers on the fingers of one hand

Turkish Mint Outpaces U.S. Mint

For the third year in a row, the Turkish Mint has produced more gold coins than the U.S. Mint.

In the international English-speaking gold community, the U.S. Mint is often regarded as the largest mint globally in terms of gold coins produced (measured by weight). Western media regularly report on U.S. Mint production numbers as if they serve as a proxy for gold sentiment in general, which is a false analysis. In 2019, for example, the U.S. dollar gold price was up 18.9 %, while the U.S. Mint’s annual production was lower than in the previous 17 years.

Hardly ever is the Turkish Mint mentioned. One, because Western media tend to be very U.S. centric. Two, the Turkish Mint exports few coins to the West. If you look around on websites of Western coin dealers, seldom will you find a product minted in Turkey. Western dealers mostly sell coins produced by the U.S. Mint, South African Mint, Chinese Mint, Canadian Mint, Austrian Mint, and Australian (Perth) Mint. Coins from the Turkish Mint and Iranian Mint aren’t popular in the West, though these fabricators are among the largest globally.

Considering the U.S. Mint exports its coins the world over, while the Turkish Mint does not but produces more coins, highlights the magnitude of Turkish coin production. The enormous difference in Gross Domestic Product (GDP) of both countries puts their production data truly in perspective. U.S. GDP accounts for more than $20 trillion dollars, while Turkey’s GDP is less than $800 billion dollars. In conclusion, the U.S. economy is 26 times larger than the Turkish economy. Still, the Turks produce five times more gold coins (which are mostly purchased locally).

In 2019 the Turkish National Mint produced 37 tonnes in gold coins (up 31% y/y) and the U.S. Mint 7 tonnes (down 42% y/y). For the third year in a row, the Turkish Mint has produced more gold coins than the U.S. Mint.

The Perth Mint in Australia sold 12 tonnes in gold coins in 2019 (down 3% y/y). Production data by other mints has yet to be published.

In Turkey Gold Coins Function as a Parallel Currency

It’s not that coin sales in any country are the primary drivers of the global gold price. But by examining the Turkish coin market we see more evidence for the deeply rooted differences in gold cultures between East and West.

In many countries in the East gold continues to be part of everyday life. In Iran gold coins are still used for large payments, such as rent. In India gold jewelry and ornaments are used as gifts at weddings or childbirths. Gold is deeply embedded in the Turkish culture too. Coinage was invented around 600 B.C. in Lydia (now Turkey), then a province of the Achaemenid Persian Empire. Just like the people in Iran and India, the people in Turkey still have a strong tradition of saving in physical gold. In Turkey, the products made by the mint serve as a parallel currency.

All coins produced by the Turkish Mint are 22 carat (an old measure from the Middle-East still used for jewelry), which equals 916 parts per 1000 fine. Historically this has been the most common fineness for gold coins used as currency. Adding copper or other metals to gold hardens it and increases durability.

Coin production at “Darphane” (the Turkish National Mint) is done on-demand, when bullion with a fineness of no less than 995 parts per 1000, weighing at least 1 kilogram, is offered for manufacturing. The Turkish Mint produces two types of products, each in five sizes ranging from 1.8 grams to 36.1 grams. There is “republic jewelry gold” and “republic gold coins”  The former can be best described as medallions, and the latter as coins. On the website of local coin dealer Gökçe Koleksiyon the different uses for the two products are explained.

Ata 100 Kuruş (7 gram). Google translate: “ZİYNET. It is an Arabic originated word and means ornament and decoration. It is the general name given to gold used for jewelry purposes. Republic jewelry gold produced by the mint is generally used for jewelry purposes and seen as the guarantee of a married woman in the social structure of our country.”

Ata 100 Kuruş (7.2 gram). Google translate: “MESKUK. Meskûk, which derives its source from the Arabic coin, means stamped and converted into a coin. Meskûkât; means coins. In practice, Republic gold coins, which are produced by the mint, are divided into two types: meskûk and ziynet. Meskûk Cumhuriyet gold is a means of saving in our country.”

So, ziynet is “republic jewelry gold” and meskûk is “republic gold coins.”

On the website Gold Bars World Wide we can read:

For many in Turkey, there is a social obligation for family and friends to provide gold coins on important occasions. For example, coins are often given at the time of a couple’s engagement, marriage, birth, male circumcision, graduation and conscription into the military.

Remarkably, in 2019 Darphane mostly produced the smallest 1.8 gram, followed by the 7 gram medallion in “republic jewelry gold” (ziynet). For “republic gold coins”, mostly the 7.2 gram coin was produced (meskûk). This confirms the currency element of the Turkish Mint’s products. Gold is an expensive precious metal, but small amounts (1.8 gram, 3.6 gram, and 7 gram “republic jewelry gold”) can be used as gifts for weddings. Small denominations of 7.2 grams in “republic gold coins” can be used for savings and payments.

One would expect a high premium on the gold content of the small Turkish coins. But the premiums are remarkably thin. The most popular meskûk has a gross weight of 7.2 gram, and its fine content is 6.61 gram. The production cost at Darphane is paid in gold, and is only 1%. For 1 Kg fine gold one is required to pay Darphane 9.43 gram, to receive 149 coins. (Though, in the free market the premiums widely differ.)

The minting costs, for most coin sizes, are paid in gold. Darphane retainins a part of each gold kilobar delivered by the entity ordering manufacturing. Hereby, it recognizes that gold is money.

Although Turkish coin production has been impressive in recent years, the rising gold price in Turkish Lira has dampened coin off-take. This fits the long-term Eastern mentality regarding gold: buy low.

In the first chart, you can see coin production spiked in 2013 when the gold price declined globally.

Another reason to put a spotlight on the Turkish gold market is its gold banking system introduced in 2011. In this system, the Turkish central bank allows Turkish commercial banks to use gold as an eligible reserve (requirement) asset. (I will discuss this form of “gold QE” in a future article.) It could be a system that will be rolled out in more countries.

Unconventional monetary policy in, for example the U.S. and Eurozone, is becoming increasingly ineffective. At some point, things will change. While it’s hard to say in what direction central banks will move, it’s valuable to be aware of all options