Will Japanese Stocks Survive a Meltdown?

Markets were closed in America yesterday. In the rest of the world nothing much happened. This leaves us free to talk about whatever we want.

What do we want to talk about?

Let’s talk about Japan. You remember, Japan? It’s the country with the 20-year on-again, off-again depression. You could have bought stocks in Tokyo 20 years ago…held onto them…and guess what you’d have today? Well, for every dollar you invested two decades ago, you’d have about 25 cents. How’s that for ‘stocks for the long run?’ How’s that for capital appreciation? How’s that for getting rich from investing?

Stocks in Japan are back to their levels of the mid-’80s. So, an investor who was 40 in, say, 1984, is now 66. He’s retired. During his ‘investing years’ he made zero…nada…rien…zilch…from his money.

What to make of it? Is the whole promise of investing nothing but a Wall Street fantasy? The idea is that you can give your money to Wall Street…put it in a fund…in stocks…in some sort of investment…and it will grow larger. You will pay Wall Street a fee for this service. In fact, you could pay a lot of money…trading in and out of various investments.

And where would you end up? Well, if you were the typical Japanese investor you’d end up with less than what you started with.

The lesson we draw from that is that you only make money from investing when you buy assets that are cheap and sell them when they are dear. ‘Buy and hold’ doesn’t work. ‘Stocks for the long run’ is a trap.

But what about Japanese stocks now? We thought you would ask. Since we announced our new ‘Trade of the Decade’ – sell US Treasury bonds/buy Japanese stocks – we have gotten nothing but grief on the subject. Everyone thinks he knows what will happen to Japanese equities over the next 10 years; and everyone thinks they will go down.

Here is Ambrose Evans-Pritchard in London’s Daily Telegraph:

“…2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

“Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

“The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. ‘A global fiasco is brewing in Japan.’”

We don’t doubt it. Evans-Pritchard is right. So is everyone who thinks Japan is going to meltdown or blow up. A global fiasco is brewing. But it will not necessarily be bad for Japanese companies. Investors will leave Japanese debt and buy Japanese equities. Inflation will reduce the real cost of operation for Japanese companies. Frugal, solvent, efficient Japanese companies will prove to be a refuge, not a trap.

More on this subject as the decade progresses. We will be proven right…or wrong… Geniuses…or idiots… Visionaries or hallucinaries… Depending on how the chips fall.


Bill Bonner,
for The Daily Reckoning

The Daily Reckoning