Phantom Bust

While Americans enjoyed the greatest financial boom in history – apparently getting rich beyond their dreams and deserts – the poor Japanese were stuck. The New Era, the New Economy, the Information Age – all of the wonders of the last decade of the 20th century missed them entirely. Stocks fell from almost 40,000 – on the Nikkei average – to below 13,000, and stayed there.

The economy did no better. Year after year, growth was slow or negative – it was as if the Japanese were running backward. No promethean light struck their faces. Computers and the Internet – the twin innovations that are thought to have boosted U.S. productivity and now offer a new “golden age of prosperity,” according to Paul O’Neil, the new Secretary of the Treasury, provided none of their blessings to the Japanese. What is wrong with the Japanese?

The poor Japanese. And not only was their economy shrinking – so was the population, literally. There are more people over the age of 65 in Japan, proportionally, than any other country. And each year, there are fewer Japanese – the population itself is in decline!

The poor Japanese – dumb, short, old, few and poverty- stricken.

Not that American economists and politicians have been unwilling to lend a hand. They’ve repeatedly urged the Japanese to increase their money supply, advice that the U.S. has followed, perhaps to a fault.

Inflating the currency, according to U.S. economists is the key. If the yen were destroyed, little by little, Japanese consumers would be more willing to spend, rather than save.

But the stubborn Nipponese have been unwilling to destroy their own currency in the name of prosperity. Instead, they have crucified their economy on a cross of relatively hard money. At least, that is the popular view in America.

So moved was Treasury Secretary O’Neil by the Japanese plight that he entertained the issue from a humanitarian, rather than a central banker’s, point of view: The question, he said, was “how do we help the people of Japan achieve a higher standard of living.”

The problem with such generous sentiments is that they ignore the reality of the situation. The trend, dare we say, of thinking that America is an unstoppable New Economy headed for “a golden age of prosperity” while Japan is thought to be stuck in a past of permanent recession, poverty and ignorance, may be one whose premise is false.

“Japan is the largest net creditor in the world,” replied the chief economist at Mitsubishi Research, as reported in the International Herald Tribune, “and is thus the richest country in the world.”

Incomes are higher in Japan than in the U.S. People work fewer hours. They pay less in taxes. They get more in social services for the taxes they pay. They are in better health. And they live longer.

The average employee in manufacturing in Japan, for example, works 5 fewer hours per week than a similar worker in America. On average, an American puts in a full two additional weeks of work than a Japanese.

Not only is his income higher in Japan, but his tax burden is lower. The average Japanese pays 12% of his earnings to the government. In the U.S., it is 16%.

Japan is a marvel of well-functioning social services. Health care is practically free. Public transportation is ubiquitous and efficient. Trains pull into the station, on average, 18 seconds before the scheduled arrival time.

Compared to U.S. workers, the average Japanese takes more overseas vacations. And he buys more luxury goods. Two- thirds of the world’s high-end products are bought by the Japanese.

The Japanese live better and longer. Japanese women live longer than any other group in the world. Japanese men have life expectancies second only to Swedes, where people don’t actually live longer, it just seems longer.

“The average standard of living and the satisfaction level,” said a partner in Accenture, formerly Andersen Consulting, “is higher here than in the U.S.”

How could that be? How could people suffer an entire decade of stagnation…while the stock market loses 65% of its value – and while the competitive Americans dash ahead at their fastest speed in 70 years – and still be at the head of the field? How is this possible?

The cause of Japan’s economic trouble, according to the popular view, is the propensity of the Japanese to save money. Even though they live well, travel abroad, and buy luxury goods, the average Japanese saves 13% of his earnings, compared to less than zero for Americans. Currently, the Japanese have $6.5 trillion in savings.

Could it be that saving money is not so bad after all?

The IHT refers to Japan’s economic malaise as a “phantom stagnation.” Unemployment has risen – but only to 4.7%. Even in a slump, Japan’s unemployment number is not much different from America’s at the top of a boom.

If Japan has experienced a phantom bust, was America’s prosperity a phantom boom?

Maybe, dear reader, maybe.

Your correspondent,

Bill Bonner Ouzilly, France February 12, 2001

*** If the Depression was great…maybe this slump will be fun, too. A friend reports that the slowdown has been welcomed by many over-worked, over-hyped New Yorkers.

“I wanted to be unemployed,” said one laid-off on-line worker quoted by the New York Observer. “I wanted to be laid off for, like, four months, collecting unemployment.” “It was a relief,” said another, of his unemployment. “We no longer felt like we had to work really hard and not make any money.”

“Stupid kids!” comments former Mayor Ed Koch, “If they knew what it was to live in a depression, or a recession, they wouldn’t say what they’re saying.”

*** Friday’s news seemed to bring America a little closer to recession. Secretary of the Treasury Paul O’Neill, for example, said he agreed with Greenspan – that growth has slowed to near zero.

*** The NY Post ran an article illustrated with a “Layoff- o-meter”, on which the needle had moved to the “bloodbath” position. There were more than 54,000 layoffs announced at the end of the week – 50,000 at GE alone.

*** In December and January the layoff total came to 275,000 – making the 2-month period one of the worst in a very long time.

*** The world’s two largest economies are probably in recession. I say probably, because you can’t tell for sure until the numbers are toted up later on. Japan has been in and out of recession and near-depression for the last 10 years…. But it is a strange calamity…after more than a decade of stagnation, the Japanese are still the richest people on earth…more below…

*** The Dow fell 99 points on Friday – bringing it about even for the week. The Nasdaq, on the other hand, lost 7% of its value over the week. And Internet index fell 9%. Gold stocks fell too – by 5%.

*** The big news on Friday was the continued collapse of the Big Techs. It was disclosed on Friday, that Larry Ellison sold $850 million worth of shares in his Oracle — the stock dropped 13% to close at $23 on Friday.

*** IBM lost $2. GE was down $1.48. Cisco fell to $28. Microsoft fell $3 to under $60. Amazon drifted down $1 to just $13. Lucent slumped 9% after news of an SEC inquiry surfaced. Dell fell 10%. And Intel lost more than $1.

*** Remember, these were the ‘must own’ stocks of the New Economy. I will pause here for a brief message of self- aggrandizement. Okay, the price of gold still hasn’t risen…and the dollar still hasn’t collapsed. But those Big Techs have melted down – just as I said they would. Billions of investment dollars have been lost as these stocks grope for the Big Bottom of their dreams.

*** While stock prices are steady or falling, P/Es are going up, thanks to declining earnings. The average P/E on the Dow is now 22.2.

*** But not to worry. Paul O’Neil says that tech-led productivity gains will take the nation to a “golden era of economic prosperity.”

*** The Fed is doing its part – attempting to pump up consumer spending by making more cash available. Japan, though, is way ahead. It announced a rate cut of its own – from 0.5% to 0.35%. Yes, Japan is practically giving money away – and still its economy is barely growing. And its stock market is still down about 65% from its high 11 years ago.

*** “We are currently in the midst of another extraordinary mortgage refinancing boom,” writes Doug Noland, on The Prudent Bear website. “Yesterday Freddie Mac announced that the average 30-year mortgage rate again dropped below 7%, so the deluge of refinancings will continue. Wednesday, the Mortgage Bankers Association reported that its weekly mortgage applications index jumped 19% from the previous week, with purchase applications increasing 4.5% and refinancing applications surging 31%. Applications to refinance are running almost 500% above the levels of this time last year and have almost returned to last month’s peak refinancing rate… Figuratively and otherwise, there simply could not be ‘easier money’.”

*** Lowering rates, to harp on a subject upon which one cannot harp too much, is considered the magic potion that will make consumers fall in love with more borrowing and more spending.

*** But of borrowing and spending we already have plenty, comments Marc Faber in Forbes Global. “The booms usually come to a painful end when the phase of accelerating growth gives way to decelerating growth rates. Financial asset prices collapse. In addition, while growth rates were overestimated, supply was underestimated. Cutthroat price competition and competition from newer technologies lead to widespread losses. Stock prices collapse some more. Subsequently, the cost of capital rises and credit is sharply curtailed, as the new-issue market shuts down, and as bonds can be placed only at prohibitively high interest rates.”

*** The problem is not too little demand, says Faber, it’s over-investment in the tech-led boom. Making more money available allows bad businesses and bad investments to survive – thus postponing the day of reckoning. “I predict,” he says of the Nasdaq, “that it will fall by another 50% or so from the Jan. 29 level of around 2840.”

*** “Every time the market misbehaves like this, people wonder about 1929,” says the Fleet Street Letter’s Lynn Carpenter. “Sorry… Wrong crash, wrong decade. Value investors should think 1961-1962 instead. Here’s why:

“In 1950, the average P/E for the Dow Industrials was 6. But by 1961, growth-crazed investors bid stocks up to outrageous prices… P/Es of 100 were common on the hot stocks of the day. The mania was so widespread that even cautious investors abandoned the 10 times earnings rule the market had followed in the previous three decades. They moved their sights to 15 – even 20 times – earnings. The market fell apart in December 1961, then rebounded quickly. Just as today, people thought it was over, the bottom was in… but on May 28, 1962 the real crash took another 20% off the market. Stocks did nothing for two years. The next real bull market didn’t begin until 1964. Here’s what’s important – after the 1962 crash, the 10 times earnings rule proved a winner again.”

*** “While it is not a precise one to one ratio,” John Myers tells me, “over the past 30 years, there is a consistent correlation between Fed rate cuts and a rise in the price of gold. In 1973, the Fed cut rates for several months, gold rose from $100 to $183. The crash of 1987 also saw the Fed cut rates… while the DJIA corrected 22% in a single day, bullion prices rose 10%. Again in 1989, when the Fed moved to abrogate a short-term correction gold rose from $360 to $410. And most recently when the Fed cut rates in 1998, gold again rose 10%. Rates are again being cut… we may be on the cusp of a serious gold revival.”

*** We enjoyed one of the most beautiful weekends ever at Ouzilly. Skies were clear. It was so warm I could leave my windows open at night and look out on a beautiful winter moon.

*** “Now is the time to do my grafts,” announced the gardener on Sunday, surrounded by twigs and branches. “I have to do them this week, because the moon is full.” He has been scouting the countryside for old varieties of plum and cherry trees – which he’s going to graft and plant in our orchard. He’s also found some old grape vines, of the sort that are no longer planted.

*** “Oh no, this is scientific… proven,” he went on, sensing my skepticism, “if you graft fruit trees on a new moon all you get is a lot of growth in the plant and no fruit. I’ve tried it. It doesn’t work.” So there you are, dear reader, a little gratuitous gardening advice to go with your gratuitous investment advice. May they both be fruitful.

*** Henry and I went to church on Sunday. The others were excused for various reasons. But Henry is an acolyte and had to do his duty. We are all very proud of Henry. He is well-liked wherever he goes and always seems composed and dignified. But as the priest raised the cup in anticipation of the eucharist, I noticed Henry standing beside him in his altar boy outfit – jerking his shoulders and shuffling his feet. What is wrong with the boy, I wondered. He looked like he was warming up for a night at the disco. Well, it turned out that that very morning, his older sister had shown him a rather spastic Michael Jackson dance number. Henry couldn’t resist rehearsing it – even in front of the whole church. Pride goeth before a fall…and satisfaction before humiliation.