Nikkei Deja Vu - all over again ?
...excellent commentary below from the daily reckoning:
TURNING JAPANESE, PART 73
By Bill Bonner
I think I'm turning Japanese,
I think I'm turning Japanese
I really think so.
- The Vapors
We take no pleasure in current trends. Each day that the
dollar rises our rent and rehydrations become more
expensive. And each day that the Dow falls, fewer people
care about stocks...or about the Daily Reckoning. Who
will want to reckon with stocks at all, we wonder, when
the bottom is finally reached?
But economies and markets - like teenagers - must be
reckoned with as they are, not as we would like them to
be.
Yesterday, we looked over our shoulder at the
traditional pattern of bear markets. Not that we know
for sure this one will follow the tradition, but since
we are just guessing...the habits of the past are a good
place to start.
Today, we look at the economy. We glance back
again...but only a decade...and across the wide Pacific.
Despite widespread anticipation, the U.S. economy still
seems bothered by hidden torments that keep it from
making a full recovery. Unemployment remains at a 19-
year low. And now the American consumer - who has been
the thick-headed spender-of-last-resort for the entire
world...seems to teeter on the edge of responsibility...
or perhaps insolvency. His net, spendable income and his
confidence are giving way.
Consumers and businesses have been encouraged to excess
by the Fed. Not in 40 years have interest rates been set
so low. Banks can borrow from the Fed at less than the
rate of CPI inflation. As in Japan for so many years,
the money is given away free. Even to businesses and
consumers, short-term money is cheap - if you can get
it.
Consumers took the bait, mortgaged their houses and ran
up so much credit card debt they're having trouble
making payments. Businesses, on the other hand, have
largely demurred.
Profits have suffered their biggest drop since the Great
Depression. Even at a real rate of 2% or 3%, businesses
find few expansion projects that seem worthwhile.
"Business is bad," writes the Mogambo Guru, "as costs
are rising and companies are said to have no 'pricing
power' to enhance revenue. How the calculus of rising
costs and falling revenue can be seen as anything other
than catastrophic is beyond me...My God! Things economic
are not responding to free money!"
What's the problem? It is like an honor student who
kills his favorite history teacher. We have the facts,
but no explanation. Herewith, we offer, perhaps not an
explanation...but at least a parallel.
"America's economy look awfully like Japan's after its
bubble burst," says a subhead from this week's
Economist. This will be news to most of the world. But
it is old news to us; we compared the U.S. situation to
the Japanese one so often we had to promise to stop. The
J-word was out-of-bounds for us here at the Daily
Reckoning for nearly 6 months.
But this week, the ban is over. The economist has made
it acceptable, once again, to discuss the parallels
between the Japanese downturn of 1990 and the American
bust almost exactly 10 years later.
Little noted in the financial press this spring was the
remarkable performance of the Japanese economy. While
the world raved over 5.6% GDP growth in the U.S., GDP
grew by 5.7% in Japan. Twelve years have gone by since
Japan sank into its long, slow, soft recession. Perhaps
it is finally over.
A 'New Era' dawned in the land of the rising sun just as
it did when morning came to America 10 years later. In
Japan, the credit went to superior management.
Americans, perhaps more modestly, named technology as
the cause. Neither 'New Era' survived a downturn in the
credit markets. But Japan is a trend-setter, we recall
writing two years ago:
** Between 1971 and 1985, Japanese stocks rose about
500%.
** Ten years later, between '81 and '95, U.S. stocks
rose about 500%.
** Beginning in '85, Japanese stocks really took off -
tripling in the next 5 years.
** Ten years later, beginning in '95, U.S. stocks really
took off, tripling in the next 3 years.
** In 1990, the Japanese market peaked out. The U.S.
market peaked out 10 years later.
Behind the headline numbers were other similarities, and
perhaps even the hint of a common cause. In both
countries, as share prices soared so did capital
investment. Unemployment fell to near-zero...credit
exploded...and both businesses and consumers went on a
borrowing and spending spree.
Still, except for us, no one seemed to notice that the
two boys - speaking different languages and on separate
continents - were related. American economists, analysts
and investors all expected the U.S. recession and
recovery to behave as all the others have since the end
of WWII. Instead, it began eating raw fish and dyed its
hair orange. The kid seemed to turn Japanese.
"America's economy over the past 2 years has in many
ways mirrored the performance of Japan's immediately
after its bubble burst," says this week's Economist
magazine. "In the 2 years from Dec. 1989, Japan's stock
market fell by 40%, slightly more than the 33% fall in
the S&P 500. Japanese economy held up well during those
two year. GDP growth did not turn negative until 1992.
Capital spending slowed sharply, but consumer spending
continued to boom. In fact, property prices continued to
rise strongly for two years after the stock market
tumbled. This sounds like America today..."
The J-word is back.
More to come...
Bill Bonner, still sweating... |
