Turning Japanese, Part 73
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…
June 18, 2002 — Paris, France
"You pick up the paper and you want to cry," says Henry Paulson, CEO of Goldman Sachs. Day by day, things that couldn’t have been more wonderful a few years ago begin to turn sour. Big things, little things, nearly everything…
The WAT, according to yesterday’s International Herald Tribune anyway, has probably increased the threat of terrorism:
* Government surpluses have turned into deficits…even before they ever showed up.
* Foreigners, who used to send their surplus cash to the U.S., are now taking it back….
* The dollar, which used to be America’s most successful export, is now losing market share…
* Even consumers are beginning to show signs of wear and tear.
And now comes a report in Barron’s that corporations are issuing more stock. You’ll recall that one of the explanations for rising share prices in the late ’90s was that the supply of stock was falling – as companies bought back their own shares. Today, corporations are under pressure to pay down debts…which leads them to try to sell shares. More shares available = lower share prices.
But what particularly bugs Goldman’s CEO is way the heroes of the bull market have become the enemies of the new, new era. Hardly a day goes by that another name or two is whispered to the greedy ears of the SEC, or knitted into the pages of the New York Times. The patsies want to see heads roll….so we watch the tumbrels go by, on the way to the guillotine.
And here’s an interesting item from Marshall Auerback: "Even more ironic is the fact that the Indonesian government, once synonymous in the US with crony capitalism, is now planning an inquiry into actions taken by Merrill Lynch in Indonesia. Officials in Jakarta are investigating Merrill’s recent sale of shares in PT Indonesia Satellite Corp. The minor complication here is that Merrill is advising Indosat on a rights offering of stock scheduled for later this year. Truly, we have come full circle."
The news was so good in ’99 "it couldn’t get any better," said Bill Clinton. It didn’t.
But, Eric, what about stocks?
Eric Fry, in the belly of the beast…
– Finally, a bear-market rally worth talking about!
– The Dow jumped 213 points yesterday to 9,687, while the Nasdaq vaulted more than 3% to 1,553. From its nadir last Friday morning, the Nasdaq has gained 6%. So is this the turning point that so many fretful investors have been hoping for? Is this "The Bottom," as CNBC calls it? Or was yesterday’s bounce merely the latest installment in a series of bear-market rallies – otherwise known as "head fakes?"
– We don’t know for sure, but we reckon it’s the latter. The near-term prospects for corporate America are no better today than they were last Friday. And if we recall correctly, the prospects weren’t too hot last Friday.
– "Six months after the recession supposedly ended," says Reuters’ Pierre Belec, "the Coke machines in the lunchrooms of a lot of companies are the only things making money."
– Pre-tax profits of non-financial US corporations have slumped from $517.5 billion in 1977 to $287.7 billion (annualized) in the fourth quarter of 2001, according to Dr. Kurt Richebacher. "As a share of phenomenal GDP," he says, "profits fell from 6% to 2.8%. For the postwar period, this decline is unprecedented."
– Reflecting this miserable dearth of profits, stocks have been sliding for quite a while. But after having fallen 11 out of the last 13 weeks, they were "due" for some kind of rebound. Finally, yesterday, stocks busted loose.
– We are prepared to christen this advance "The Cramer rally." James Cramer, the bombastic founder of the Street.com, seems to have an uncanny knack for jumping aboard investment trends just as they have nearly exhausted themselves. So it was that late last week he crowed, "I’m selling Cisco Systems to buy gold and I feel great about it."
– Almost from the moment he uttered the remark, Cisco has rallied and gold has faded. What choice did Mr. Market have?…Cramer declared a position and Mr. Market simply had to do the opposite.
– "I bought a gold stock – I’ve never bought a gold stock," he said. "I’ve shorted gold stocks all my career. But if you can’t beat ’em, join ’em." And just like that, Cramer drove a stake through the heart of the gold rally.
– Hey, nobody’s timing is perfect…And anyway, we are sympathetic to any investor who sells Cisco to buy gold…even Cramer. We suspect that, longer-term, he is on the right side of both trades.
– "Chances are," John Myers told me yesterday, "investors should be selling into the stock market rally, while taking advantage of gold’s short-term weakness to establish new positions or larger positions."
– Myers also believes the dollar’s one-day rally will be short-lived. He suggests preparing for a resumption of the dollar sell-off by buying call options on the Canadian dollar.
– Last week, Andrew Kashdan of Apogee Research laid out a compelling case for investing in Canadian assets. "Economic growth in Canada is more robust than in the U.S," said Kashdan, "the Canadian current account is running a surplus (remember what that is?) And the government’s budget should be nicely in the black. All of which suggests that Canada may be rapidly becoming one of the world’s most attractive investment destinations."
– John Myers, himself a Canadian asset, shares Kashdan’s bullish view. John has been recommending selected Canadian resource stocks for many months, both in his investment letter, "Outstanding Investments" and in his trading service, "Resource Trader Alert."
– Last week, he upped the ante by urging his Resource Trader Alert subscribers to buy call options on the Canadian dollar. "The Canadian dollar has been a miserable performer for the past two decades," John reminds his subscribers, "falling from almost par against the greenback to a low of 63 cents in 1998."
– However, says Myers, the trend has changed. A new bull market in the Canadian dollar is underway. "Canada is a resource economy," he explains. "As the price of natural resources climb against the U.S. dollar, Canada’s economy strengthens and so does its dollar…Today with Canada’s economy gaining on its giant neighbor to the south…the Canadian dollar should continue to gain on its U.S. counterpart."
– For the record, the last time John urged his subscribers to buy Canadian dollar call options, the trade gained more than 100% in about one month. Of course, past performance is no guarantee of future results. But John is hopeful that the Canadian dollar will launch another rally against the US dollar very soon.
Back in Paris…
*** Oh la la…the city is sweltering.
*** "It was so hot in the grocery store," Elizabeth reported last night, "all of the chocolate had melted."
*** Paris is not prepared for this kind of heat. Few buildings are air-conditioned. Instead, people cope as best they can…going about their business with languid resignation…
*** But even the heat has its charms. Windows are open…across the street a fat man gazes out of a hotel window in his underwear. The heat seems to inspire a sweaty familiarity. Fortunately, Parisian women are the prettiest in the world. Here at the Daily Reckoning office, we can’t ever recall seeing so much of them.