Japan: Coming to America?

The S&P500 dropped a second week in a row, this time almost 2%.  The VIX, or fear index, soared almost 12% suggesting that traders are willing to pay more for insuring against downside losses.  Volumes also rose, providing more support to the direction of the price movement.

The economic data were mostly poor.  Consumer confidence fell, when it was expected to rise.  Chicago PMI also dropped after economists had projected an increase.  Personal income and spending were both up slightly, month over month.  Unemployment claims rose to 551,000, above the consensus.  After the expiration of Cash for Clunkers, September auto sales collapsed–suggesting that natural, unsubsidized demand is very low.  September non-farm payrolls were much worse than expected: they jumped to -263,000 from -216,000 in August.  Consensus estimates called for a loss of only 170,000 jobs.  The unemployment rate rose to 9.8%, the highest since June 1983.  Hourly earnings fell more than expected and average weekly hours worked also fell back to the lowest level ever recorded (33.0).  Even worse, the most broad measure of unemployment (U-6) rose to 17.0%, the highest level recorded in this data series.

Technically, the S&P500 is topping, on the daily charts, from an extremely overbought level.  It also showed very strong bearish divergence:  prices rose to higher levels yet may underlying technical indicators did not rise to equally higher levels.   On a weekly basis, the S&P is also toppy and showing signs of weakness.  On a monthly basis, the downtrend that began almost two years ago is still in effect, although barely.  If prices continue to back away from the mid-September highs, the downtrend will have re-asserted itself.

In August of 2008, The Economist published a piece titled “Lessons from a lost decade” where it highlighted the eerie similarities between the economic prospects for America and the stagnation of Japan after 1990.  Both had housing bubbles that burst.  Both had strong monetary responses to these bursts.  Only one, Japan had a stock market crash.  Only Japan initiated quantitative easing (printing money).  And only Japan avoided the clean up of the banking system’s toxic assets and the explicit deleveraging that is associated with it. 

In conclusion, The Economist warned that “by learning from Japan’s mistakes, America can avoid a dismal decade.  However, it would be arrogant for those in Washington, DC, to assume that Japan’s troubles simply reflected its macroeconomic incompetence.  Experience in other countries shows that serious asset-price busts often lead to economic downturns lasting several years.  Only a wild optimist would believe that the worst is over in America.”

Then the U.S. stock market crashed. 

Then the U.S. initiated its own massive quantitative easing program.

Then the U.S. began to systematically avoid the clean up of toxic assets from its banking system.

Twenty years after the Japanese housing and stock market bubbles burst, the economy is still in the doldrums.  Unemployment is at record highs.  The stock market is still 75% off peak.  Japanese sovereign debt has reached 200% of GDP.  After almost 50 years of rule, the LDP led government fell. 

And yet, Japan has several advantages over the U.S.  1)  Over 90% of its sovereign debt is funded from its own citizens who saved a large portion of their incomes.  2) Japan, during the last 20 years of stagnation, was able to generally maintain a positive balance of trade, thereby generating income from abroad.

The U.S.?  Nope and nope.  We rely on other nations to buy a huge chunk of our sovereign debt; and lately, we’ve relied on the Fed to print money and monetize our debt.  Also, the U.S. has generally maintained a negative balance of trade, thereby borrowing more capital from abroad to finance its deficit. 

So fourteen months after The Economist published its piece, the U.S. finds itself staring at an ugly reality–Japan and the Japanese experience. 

Is Japan coming to America?  Arguably, it’s already here.  Let’s hope things don’t get even worse.

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