Shortly after the earthquake and tsunami struck Japan, government and Wall Street economists downplayed the impact on Japan’s economic growth as well as that of the rest of the world. Next, the nuclear reactor meltdown began to worsen and still, these same economists minimized the economic impact of these events.
In the Intelligent Investor newsletter, I discussed that these estimates had been significantly downplayed. My view was that the combined impact of the catastrophes in Japan would add a significant component to what I had already forecast as a slowdown in the global economy in the second half of the year. I even wrote a follow-up on the site several months later confirming this reality. See here.
At the time, there was not even mention by Wall Street or any of the establishment economists (ECB, IMF, etc.) of the possibility of a slowdown in the second half of the year. Thus, once again, the so-called experts confirmed just how useless they really are.
Never mind that officials at the IMF are very well-paid and receive one of the most generous pensions in the world (they can retire at age 62).
Never mind that Washington economists benefit from the revolving door between corporate America and Wall Street, providing 7-figure jobs once they depart for the private sector.
The most important point to keep in mind is that these individuals have been placed in a position of high influence, yet they continue to demonstrate a consistent level of incompetence.
Only recently have these same bumbling economists finally realized the reality; only after the fact.
How did these officials miss things yet again? Has Japan changed its role in the global economy?
Not at all.
Japan is responsible for one-fifth of the world's semiconductor production. This relationship has held firm for a number of years. In particular, Japan is a critical upstream supplier for many countries across the globe. For instance, in the machinery and reactors sector, Japan accounts for more than a third of global exports of machinery and wafers, providing more than 50% and 35% of U.S. and Chinese imports, respectively.
Japan also controls 90% of the world‘s production of bismaleimide-triazine (BT) resin, which is used to manufacture substrates in the production of integrated circuit chips and printed electronics boards. Shortly after the earthquake hit, production at Mitsubishi Gas and Chemical was suspended for two months. MGC accounts for 50% of the world‘s supply of this vital semiconductor chemical.
Consensus estimates from industry analysts expect worldwide semiconductor production to pick up between July and September, and to have largely normalized by the end of the year. This assumes that the impact of the earthquake will be short-lived.
I do not agree with these estimates. Semiconductor production, requires a stable supply of electricity and clean water. Prolonged power shortages or unexpected blackouts remain likely. Such events would continue to constrain production in both in Japan and abroad.
Now let’s have a look at some of the firms most affected by the disaster in Japan.
First, we have MEMC Electronic Materials. As you can see, shortly after the first earthquake hit Japan in early March, shares began to sell off. Economists and analysts were underestimating the impact on MEMC and other firms through May. By June, they had revised their estimates more in-line with reality.
Next, we examine Sony. As you can see, Sony suffered a similar fate.
Finally, we examine Toshiba. The interesting thing about the impact of the earthquake on Toshiba was that it collapsed immediately after the earthquake hit Japan. Since hitting recent lows in mid-March, shares have rebounded nicely, but remain 18% lower than the performance of the Nasdaq late February.
I already knew about the exposure of many of these companies, especially MEMC and Sony. I was also aware of the spillover effects.
The question is, did you?
Did any of the guys you rely on for financial advice warn about these issues?
Did you hear your favorite “expert” on CNBC discuss these issues?
The effect of Japan’s supply chain disruption has several implications for not only the firms mentioned here, but the entire semiconductor industry. As well, one can draw numerous conclusions regarding the ability of certain firms in developing Asia to fill this temporary deficit.
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