Tokyo and tech through the eyes of a split pea

Au contrare

Here’s an excerpt I’ve been meaning to post, mostly for my personal archive.  Something to think about as the markets chug along and Tokyo is a decade “overdue” for its little jolt (though keep in mind this was written in 1989…)

“What if there is a massive earthquake in Tokyo?  Tokyo is reduced to rubble.  Investors in Japan panic.  They are selling yen and trying to get their money out of the japanese stock market.  What do you do?

…what Alexander would do is put money into Japan on the assumption that since everyone was trying to get out, there must be some bargains.  He would buy precisely those securities in Japan that appeared the least desirable to others.  First, the stocks of Japanese insurance companies.  The world would probably assume that ordinary insurance companies had a great deal of exposure, when in fact, the risk resides mainly with Western insurers and with a special Japanese earthquake insurance company that’s been socking away premiums for decades.  The shares of ordinary insurers would be cheap.

Then Alexander would buy a couple hundred million dollars’ worth of Japanese government bonds.  With the economy in temporary disrepair, the government would lower interest rates to encourage rebuilding and simply order the banks to lend at those rates.  Japanese banks would comply as usual with their government’s request.  Lower interest rates would mean higher bond prices.

Also, the short-term panic could well be overshadowed by the long-term repatriation of Japanese capital.  Japanese companies have massive sums invested in Europe and America.  Eventually they would withdraw those investments, turn inward, lick their wounds, repair their factories, and bolster their stock.  What would that mean?

Well, to Alexander, it would suggest buying yen.  The Japanese would buy yen, selling their dollars, francs, marks, and pounds to do so.  The yen would appreciate not just because the Japanese were buying it but because foreign speculators would eventually see the Japanese buying it and rush to join them.  If the yen collapsed immediately after the quake, it would only further encourage Alexander, who sought always to do the unexpected, that his idea was a good one.  On the other hand, if the yen rose, he might sell it.”

- Liar’s Poker, by Michael Lewis