Still Turning Japanese
I think I’m turning Japanese
I think I’m turning Japanese
I really think so.
Learning from the mistakes of others is cheap tuition.
An e-mail message yesterday told the story of an amateur pyrotechnician. Sure that diesel fuel would not ignite…and wanting to show off to coworkers…he passed a cigarette lighter over a stream of fuel spilling out of a tank, without effect. Then, just to prove his point, he repeated the trick, perhaps coming in closer contact with the fuel.
He is presently recovering from burns over most of his body.
Today’s letter is written in the spirit of the inquisitive onlooker…amazed that anyone could be so dumb…fascinated by the spectacle of it all…and happy to let someone else conduct the experiments.
The economic engineers in Washington, too, might be just a little bit curious. Opening the jets of both monetary and fiscal stimulus, they may at least wonder about what it takes to set them on fire…and spark a real recovery.
There has been only one major experiment with such vigorous rate cuts in a fully modern economy. It was conducted under imperfect conditions. Still it may be worth studying.
In the 1980s, the Japanese economy was a marvel, the most successful, most dynamic, most self-confident economy the world had ever seen. American businessmen cringed and quaked before the threat of Japanese competitors and the Japanese economy grew at 4% per year throughout the decade.
But epic levels of confidence, like epic P/Es, eventually give way. Japanese economic power soon proved an illusion. Stocks crashed in January of 1990…and the economy went into a slump.
Of course, by 1990 books by Milton Friedman and John Maynard Keynes could be found in any good Japanese library…and it was not long before Japanese policymakers were doing exactly as the two great economists counseled. Interest rates were cut…and cut…and cut. Rates fell below 1% five years ago. Since then, they’ve dropped all the way to zero. Did the Japanese economy bounce back?
No, it didn’t. GDP has grown only about 1% annually since 1991. And unemployment rose from 2.1% in 1991 to around 5% today. This number is probably low. In Japan it is disgraceful to be unemployed…so it is often unreported. Bankruptcies and suicides have surged.
You may recall a note in Daily Reckoning more than a year ago. So many Japanese businessmen were committing suicide by jumping in front of trains that the rail stations began to put large mirrors on the edge of the tracks so those planning suicide could “reflect” before doing themselves in.
Zero interest rates are not new to the world. They were a feature of the Depression in the U.S. too…when rates dropped as low as 0.02%. Then, as in modern Japan, they seemed to have no effect.
U.S. economists may want to reflect on that. And on what effect fiscal policy can have on such an economy. Yesterday, a $78 billion “stimulus package” was announced in Washington.
But, here too, there is empirical evidence on which to draw. Japan has already subjected itself to the stimulating effects of spending the taxpayers’ money before the taxpayers earn it. In the 1980s, Japanese consumers went wild…getting, borrowing, and spending with the confidence of a teenager. In the following decade, their confidence declined as their savings and frugality increased. Government stepped in to fill the gap, spending money people did not have on projects they did not need.
“Think of it as the W.P.A. on steroids,” suggests economist Paul Krugman, writing in Sunday’s New York Times magazine. “Over the past decade Japan has used enormous public works projects as a way to create jobs and pump money into the economy. The statistics are awesome. In 1996, Japan’s public works spending, as a share of G.D.P., was more than four times that of the U.S. Japan poured as much concrete as we did, though it has a little less than half our population and 4% of our land area. One Japanese worker in 10 was employed in the construction industry, far more than in other advanced countries.”
In 1992, Japan ran a budget surplus. In that year, too, it had public debt of about 60% of GDP – in line with other modern economies. Today, after 10 years of vigorous boondoggling, the public debt in Japan is the highest in the developed world, at 130% of GDP.
And still no economic turnaround. In fact, a dozen years after the slump began…things look worse than ever.
“We’re in a very bad way at the moment and things are getting worse,” says James Malcolm, senior economist at J.P. Morgan Securities (Asia) Ltd. Kazuhiko Ogata. “Japan is no longer in recession,” adds a colleague, “it’s a depression.”
For all their stimulating effects, neither fiscal nor monetary policy has aroused the Japanese economy. Why?
As promised, here is the answer.
“Alan Greenspan’s aggressive rate cuts are proving to be a complete failure,” writes Dr. Kurt Richebacher. “They ought to have reinvigorated the U.S. economy long ago…when was the last time the Federal Reserve cut interest rates 8 times in a row and the stock market still kept falling?
“It is indeed different this time…” Dr. Richebacher continues. “The single most important, most unusual, and also most ominous feature in the U.S. economic development during the past few years has been the steep drop in profits, which started at the pinnacle of the boom. It’s definitely the downturn’s one key cause. Everything else – the protracted plunge of stock prices, the savage cuts in business capital spending and the shrinkage of consumer income growth – is but a consequence of the profit carnage.”
Profit levels, generally, have made no progress since 1997. Nasdaq companies, according to the Wall Street Journal, “haven’t made a collective dime since the fall of 1985.”
Without profits, as Keynes once pointed out, “the whole process [of capitalism] comes to a halt.” No profits, no new investments. No new employees. Instead, companies cut costs – including laying off employees – in order to become profitable again. That is the real source of the slump – not consumers, not terrorists, not high interest rates.
Does lowering interest rates help? Not when companies do not want to borrow. They borrow to build new plants and buy new equipment. But the problem they face is that they can’t make any money on the capacity they’ve already got. Instead of investing in new capacity… they’re liquidating the bad investments they made when they were more confident.
Floyd Norris, in the N.Y. TIMES, elaborates:
“Broadly speaking, companies raise capital for two reasons, because they need the money to pay bills or because they want to make investments that appear attractive. Markets are not eager to provide cash to those who need it the most, and the volume of investment spending has fallen sharply from peak levels because some industries, notably telecommunications and technology, have excess production capacity. That glut is not likely to ease soon…”
If lower rates and massive public spending do little good, might they, in fact, do harm? Possibly. The glut of capacity will not ease as quickly if businesses are encouraged – by low interest rates – to continue adding capacity, even in a downturn. And public works – which produce no profits – may also have a negative effect, absorbing resources that might have been invested profitably elsewhere else.
Why else has the Japanese economic malaise lasted so long, if not for all their efforts to cure it? Even in this post-ironic age…Mr. Market still sniggers.
More to come…as usual…
October 4, 2001
The Dow was up again yesterday. Is it a continuation of the “dead cat” bounce from September’s 2147 point drop? Or a major new rally?
Of course, we don’t know…nor do we especially care.
Stocks bounce around in a largely unpredictable fashion. Smart investors don’t worry about it. Instead, they merely buy the good companies they want to own… when they are cheap, hoping that they will be less cheap in the future.
Barron’s thinks stocks are cheap now. The current issue lists 25 “good value” picks. Wait – what’s this – GE at 25 times its current earnings? Microsoft at a P/E of 28? Cisco at 112? Viacom at 412? Oracle, Fannie Mae, Verizon?
And the dividend yields? 1.8% from GE…nothing from Microsoft, Cisco, or Oracle. Verizon at least gives you a dividend almost equal to the inflation rate. And Viacom? Heh, heh…
These may be great companies, but these are not great prices. Why not wait? GE has lost 25% of its value in the last 12 months. Viacom is down 29%. And Oracle has lost 58%. What’s the hurry?
Eric, what’s shakin’?
Eric Fry, right in the thick of things:
– “Remember when Alan Greenspan was the most powerful man in Washington?,” Moody’s John Lonski wrote earlier this week. “For the first time in a long while, the President of the United States seems to matter more to both the U.S. and the world economy than does the chairman of the Federal Reserve.”
– How right you are, John! Two days ago, Greenspan worked his magic on Wall Street. He cut interest rates and voila, stocks rallied. But yesterday, it was the man himself, George W., who kicked the stock market into high gear. All he had to do was show up on Wall Street and stocks bolted higher. And while it may be impolite to compare such things, George’s rally was much bigger than Alan’s.
– The Dow raced ahead 173 points to 9,124, climbing above 9000 for the first time since the terrorist attacks. The Nasdaq soared 88 points – nearly 6% – to 1,581.
– President Bush and an entourage of several hundred security personnel paid a visit yesterday to the Federal building on the corner of Wall and Broad – immediately adjacent to my office at 30 Wall St.
– While he was inside yakking away with “business leaders” about our resilient economy, all the worker bees here inside the building were “locked-down.” No one was allowed in or out of the building between 10 AM and 1 PM. It was like being grounded by your parents, or as my childhood friend’s mom used to call it, “room confinement.”
– Outside our windows on the surrounding rooftops, a bevy of police sharpshooters stood watch – each one packing some kind of serious firepower.
– Meanwhile, across the street inside the stock exchange, retailing stocks led the charge amid pronouncements from the talking heads on CNBC that “the consumer is back.” How the consumer could be back so soon after going AWOL is a mystery to me. My friend, Michael Martin: “Maybe Americans can lose their jobs and still buy twice as much stuff. What do I know?”
– Investors must think they know something because retail stocks were flying off the shelves. The S&P Specialty Retail Index jumped 9%. A few individual names put in an even more sparkling performance. Surfware retailer Quiksilver rode the wave up 15% and Williams Sonoma, vendor of $100 wine openers and other household necessities, popped 22%. (The fact that Wine.com filed for bankruptcy earlier this week should in no way be taken as a leading indicator of wine-opener demand). The consumer may not actually be back, but the consumer of consumer goods stocks returned with a vengeance yesterday.
– If the consumer has returned at all, it is because he never completely left. Despite the fact that September’s consumer confidence reading plunged a jarring 31.5% year-over-year, it did not fall evenly from coast-to- coast. Confidence dropped precipitously in the regions close to “ground zero.” But distance seemed to soften the negative impact of the attacks. In the Northwest, September consumer confidence actually increased by 3.6% from August.
– That said, a vigorous consumer spending rebound seems unlikely. “September’s tally of those actually collecting state unemployment benefits could be up by 49.5% yearly,” John Lonski observes. “A year-to-year advance of that magnitude has not been seen since therecession years of 1980-1982.”
– Furthermore, Lonski continues, “One of the U.S. economy’s remaining pillars of strength may have succumbed to the terrorist strikes. Prior to September 11th, home sales were apparently proceeding at a brisk pace. Unfortunately…a residential real estate trade association claimed that home sales have only partly recovered from their near standstill immediately following September 11th’s terrorist attacks.”
– To judge from recent stock market action, life in the U.S. is almost back to normal. But there is still that small matter of finding and disposing of Osama bin Laden, along with several “terrorists to be named later.” And there is that other small matter of American businesses doing a lot more firing than hiring.
– Certainly, life in the U.S. is less abnormal then it was three weeks ago, but “normal” seems a ways off.
Back in Paris…
*** You’ve been extremely generous, Christoph Amberger tells me.
*** As you know, we’ve been following the Taipan Group’s “Open For Business” relief drive for victims of the WTC attacks. Including the $5,000 Christoph kicked in, readers of the DR have helped to raise over $36,000! 100% of the proceeds will be handed over to the Red Cross to help out the disaster relief efforts in New York.
*** If you plan to donate you should do so today. The funds will be awarded next Thursday, October 11, at 2 PM at our company headquarters. “Tell you what,” writes Christoph. “Since it’s your donation I’ll be handing over…if you happen to be in the area, just come join us. The event will take place at 14 W. Monument Street in downtown Baltimore. (If you decide to come, just shoot us an email, so we can mentally prepare: Taipan Red Cross – email@example.com)”
*** Meanwhile…What’s the best investment to own, right now?
*** The price of gold rose 70 cents yesterday. Gold stocks fell 4%. “I’m still pushing gold as the ONLY asset to own right now,” writes the Mogambo Guru, “The Fed has announced that they are fully aware that their easy-money posture will create inflation in the future!
They admitted it right to your freaking face! Every textbook ever written on economics says that vastly increasing the money supply is a cause of inflation! Gold is the ultimate hedge against inflation! Every economist in the world agrees with that, as far as I know. It is selling at little more than the #%@& cost of production RIGHT NOW! The WORST it can do is just sit there for no gain!
“Gold is, RIGHT NOW, the bargain of the century…” (More on gold, tomorrow…)
*** “Think Japan’s Economy is Bad Now?,” writes William Pesek in a Bloomberg article. “Just Wait.”
*** The poor, dumb Japanese. All of the magic of the New Economy and other illusions of the late ’90s were lost on the Japanese. Their economy limped along and their stock market fell, from a high of nearly 40,000 down to under 10,000. An entire decade, and what do investors have to show for it? A 75% loss!
*** And not for lack of trying. All the elixirs and patent medicines upon which Americans put so much hope were administered by the horse bucket…Rates cuts? Japan went all the way…down to zero. Fiscal stimulus? Oh la la…they ran enough juice through the body economic to straighten out a lunatic.
*** But for what? The situation just gets worse. Why? You’d think the inquiring minds at the Federal Reserve or the Treasury Department might want to know. But no. So, it’s up to us, dear reader, to figure it out. More below…