The Sushi Economy

If only Alan Greenspan could work some of his reputed magic on the other side of the world. You will recall from yesterday’s message that the Japanese are throwing themselves onto the train tracks in such numbers that the railways have put up mirrors in the stations so that the jumpers may ‘reflect’ before killing themselves.

Meanwhile, in America financial failure is rarely a cause of suicide. Ours is a fail-safe, no fault culture. We can smoke all our lives — with a warning label on the package staring at us each time we take out a cigarette – – and still sue the manufacturer when we get sick. Even bringing down a huge, multi-national corporation is generally cause for a rich severance package, not a one- way trip to the train station. What corporate executive or money manager in America would even dream of doing himself in — no matter how great his losses?

And fortunately, it so rarely happens that people lose money in America anyway. ‘Easy Al’ Greenspan prevents any serious clog in America’s financial plumbing…and rushes in to fix the minor ones immediately, with a gush of roto rooter cash whenever it is necessary.

While the Fed worries investors with modest rate hikes, it simultaneously keeps money growth and credit loose. So the cash keeps flowing. And the train tracks remain clear.

Japan is so different from America. While Americans spend, Japanese save. While the Fed splashes cash around like beer at a frat party, the Japanese Central Bank, treats it as carefully as a geisha treats a businessman. While the Fed hikes interest rates, Japan’s rates are near zero. While the U.S. economy booms, Japan’s Main Streets are as silent as a dead battery. While the U.S. runs a frightening current account deficit, the largest ever recorded, the Japanese run a persistent financial surplus of stunning size, equivalent of to almost 10% of GDP. While Americans chow down on steaks…the Japanese eat raw fish.

It is as if the two countries were on the opposite sides of the world. And in a curious way, contrary to what everyone knows to be indisputable fact…as we shall see…the Japanese are actually getting richer, while Americans get poorer.

While everything goes right for America, everything seems to go wrong for Japan. Investors keep expecting a turnaround. The “restructuring” story, wherein Japanese corporations undertake to adopt the American program for providing shareholder value — mergers, acquisitions, cost-cutting — drew investors into Japanese stocks on several occasions over the last few years. Wall Street firms love restructuring. They had made money in the 1980s helping U.S. companies adopt the practices of Japan, Inc. Now they make money helping Japanese companies adopt the US model.

But what did it produce?

“During the three months to last December,” explains Dr. Kurt Richebacher , “Japan’s economy actually contracted 1.4%. Annualized, this was 5.5%, following a 3.8% decline in the third quarter. For the calendar year, the economy grew 0.3%, considerably less than expected.”

“Gross domestic output has now fallen,” Dr. Richebacher goes on, “for seven of the last nine quarters.”

Nevertheless, those who believe the Japanese restructuring story take this negative data as a favorable indicator. It shows, they say, that the strong medicine is working. Well, it is at least distasteful. And Japanese stocks, which have shown an occasional tendency to rise over the past decade, are once again below 50% of their value in 1989 — and seem destined to stay there forever.

Year after year, Japanese companies have announced new restructuring plans. And the Japanese government has announced a new fiscally stimulating budget. So stimulating have these budgets been that $1,130 billion of new government debt has been added, bringing the ratio of government debt to GDP up from 60% in 1992 to more than 100% in 1999.

Perversely, more and more stimulus produces less and less real growth. From ’96 to 2000, deficits have risen from 4.3% of GDP to 7.2%.while real growth has fallen from 5.1% to 1.2%.

And Japanese consumers seem unwilling to spend their money. Instead, they save it and invest it. They pay off debts. They accumulate financial assets, rather than beach houses. Despite a sluggish economy, and a mood of desperation in the financial markets rather than US-style euphoria, the Japanese are actually getting wealthier. Slowly. And quietly.

The Japanese financial story is fascinating. It is fascinating because it is ignored, misunderstood and paradoxical. The Japanese market is in the doldrums for 10 years…with declining, weak, and often negative economic growth to boot — and still the Japanese grow wealthy. Even the yen goes up — though the Japanese government runs the biggest public deficits in the post- industrialized world…and the JCB keeps interest rates near zero. And even though the Japanese regularly eat raw fish, they have longest life expectancies in the world.

Japan has the world’s second largest economy. But, it is as if it did not exist. American economists, and Americans generally, believe the Japanese must have done something wrong and disappeared from the Earth.

And whatever they did wrong, (no one is quite sure what), Americans are convinced that we will not make the same mistake. After all, Americans are not fanatical savers. We have no large financial surplus. We cook our sushi. And we have ‘Easy Al’ at the head of the Fed, rather than some up-tight banker who would jump in front of a train if things go badly.

Bill Bonner

Ouzilly, France June 2, 2000

Enjoy the weekend. I hope it is as pretty where you are as it is here.

*** Confusing signals, contradictory indicators – this is a very wily bear stalking the markets.

*** Bonds rose yesterday. For the second day in a row they went up a full point. Some analysts think they may return to their highs.

*** Bonds seem to believe that the economy is slowing.and that there probably won’t be any further rate hikes by the Fed.or any serious inflation.

*** That was what the report from Purchasing Agents seemed to show too – lower prices ahead. And new home sales are falling – new home starts fell 12% in California in April.

*** The dollar even rose against the euro, slightly, yesterday. And day after day, gold goes nowhere.

*** These things may indicate a slowing economy and low inflation.

*** But meanwhile, oil rose more than a dollar. It is over $30. And natural gas ($4.40) is near an all time record. It has never sold higher than $3.48 in the summer.

*** Consumer confidence, too, is near an all-time high.

*** So, there are signs of both inflation…and a business slowdown. This sounds alarmingly like stagflation, which economists once thought impossible – the worst of all possible worlds, rising prices in a declining economy.

*** I guess it shouldn’t be surprising, however. The Fed is raising interest rates to try to slow down the economy, while keeping the money supply expanding at nearly twice the rate of the GDP. Oxymoronic policies produce oxymoronic results. *** One of the popular predictions making the rounds on Wall Street is the idea of the Summer Rally, which is expected to take stocks back near their March highs. This hypothesis gathered strength yesterday as the Dow rose 129 points on the 1st of June. The Nasdaq rose 181 points. And the Nasdaq 100 – the focus of so many New Economy dreams – went up 194 points. *** Unlike the peaks of December and March, however, this rally seems to have a wide base. 2068 stocks advanced yesterday, on the NYSE, while 901 declined. There were 76 that hit new highs, while only 35 hit new lows.

*** And if today’s report on May employment numbers is favorable,, “we could have a real big day,” said one analyst quoted in a Reuters article.

*** The world of Internet start-ups has definitely changed. E-entrepreneurs have been shocked to discover the introduction of a hurdle or two – investors want them to make money. “You didn’t need a plan where you could be profitable in 24 months not long ago,” said Lonn Jonston, VP of TurboLinux, a company that just announced layoffs. According to Johnston, the market used to say “that’s cool; you can worry about profits later on.” No more.

*** Earlier this week, ex-Vice Chairman of the Fed, Alan Blinder, told the Nihon Keizai Shimbun (Japan’s WSJ) the Fed is likely to hike Fed Funds to 7-7.5% within this year. Blinder said May’s 50bp hike is not sufficient to stem inflation and that stocks’ current P/E of 30 is too high compared to the historic norm of 15. Can Fed rate hikes prick this bubble? Marc Faber doesn’t think so.

*** “I saw the top and didn’t even know it” says Dan Ferris. “Celera, a biotech firm, out of Rockville, MD, has decoded the entire human genome. They were hawking its fountain of youth technology on the cover of “Forbes” a few months ago. Then its stock split and doubled in two weeks. That was the top.” This was href=“” target=”_blank”> The Moment of Maximum Optimism. And the absolute top of the Nasdaq.

*** Could China be the next home of the mutating bubble virus? “Forbes” reports: “China has 40 million cell phone users in a population of 1.2 billion, only a 3% market penetration. Telecom use, land-based and wireless combined, will grow 50% or more during the next three years.” “Forbes” also reports 1.4 million PCs were sold in China last year. By 2003, they expect 42.9 million PCs to be in use.

*** Doug Casey, writing from Shanghai reports the Chinese “are already living in the world of href=“” target=”_blank”> Blade Runner .”And the rate of change is accelerating.”

*** And Bob Bauman of The Sovereign Society sent me this cheerful note about democracy in action: “The voters in Zurich, fed up with the costly boondoggling of the city fathers, voted on May 21 to REDUCE the salaries of the Mayor and other top officials. The Mayor’s salary was cut from Sfr 220,000 to Sfr 200,000.”

*** It’s another gorgeous day out here in the Poitou region of France, where we are celebrating the long Ascension Day holiday. Our gardener, Mr. Deshais, confided in Elizabeth yesterday, but not me, that his wife has asked for a divorce. Mr. Deshais seems to be telling Elizabeth that he will soon be a free man. Should I be worried? Should I read “Lady Chatterley’s Lover”?

*** Results of a focus group research project are in. Women would prefer a date with Al Gore to George W. Bush. Of course, I would like a date with the woman who modeled for those Aubade underwear ads in Paris. That woman, to borrow a phrase from our president, deserves some sort of recognition. Politicians are always protecting their derrieres; at least she has something worth protecting. But I don’t know if I’d want her as President…unless, perhaps, the only other choices were Al Gore or George W. Bush.