THE FLAT LINE MARKET?
As the economy recovers from its extreme lows and GDP growth turns positive I am seeing more and more similarities with debt burdened Japan. The credit crunch in small business, lending and consumer balance sheets continues unabated, but investors have grown quite confident regarding the longer-term outlook mainly due to the extraordinary government measures that have helped prop up national growth. As we transition from the panic phase of the credit crunch into the malaise phase of the credit crunch you just have to begin to wonder if we aren’t going to experience the same repercussions Japan suffered from throughout their battle with deflation – relatively strong GDP growth accompanied by a deleveraging consumer and a nearly non-existent lending market. All of which leads to a spectacular churn in the markets which essentially takes us nowhere.
A quick review of history’s bubbles and this fantastic comparison with the Nikkei (courtesy of dshort.com) gives a nice visual of what might be in store for the U.S. stock market over the coming few years:
Source: Dshort.com
Looks like widely sideways for the US markets. Luckily the US is not the only equity market in the world. The demographics in the US are much more favorable than in Japan over the medium term. The dollar is a big wildcard.
Speaking of the medium term, I ran across an excellent article written by Warren Buffet in 1977 “How Inflation Swindles the Equity Investor”.
http://www.valueinvesting.de/en/inflation-equity-investor-by-warren-buffett.htm
Maybe Bernanke will somehow be successful in whipping up some (non-asset) inflation in the face of collapsing private credit and ballooning public debt.
If we go up – which we could with earnings coming up – it will be on borrowed time. Gov’t is trying to soften the impact which will lead to a trailing tail – like a saw blade but pointed down.
http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/
“But whenever the debt to GDP ratio becomes substantial, changes in debt come to dominate economic performance, as can be seen in the next two charts…
It is this effect that eluded Bernanke and his neoclassical brethren, because of their insistence on trying to model the world as if it is always in equilibrium. The debt-driven demand process is obvious when you think dynamically, but if you try to put it into an equilibrium straightjacket–as neoclassical economists did–then you can’t understand it…
This however will be a Zombie Capitalism: the private sector’s reductions in debt will counter the public sector’s attempts to stimulate the economy via debt-financed spending. Growth, if it occurs, will not be sufficiently high to prevent growing unemployment, and growth is likely to evaporate as soon as stimulus packages are removed.
The only sensible course is to reduce the debt levels. As Michael Hudson argues, a simple dynamic is now being played out: debts that cannot be repaid, won’t be repaid. The only thing we have to do is work out how that should occur.”
Also, Steve Keen posted comments to this blog entry:
“I expect instead deflation–low to negative growth with, for a reasonable period, both falling consumer and asset prices. This is what happened during the Great Depression.”
TPC . . . Japan does look more and more like a good example of what’s in store for us. The most notable difference is that the excessive leverage in Japan’s case was in the financial system and corporations more generally. In the US, it’s in the financial system and the consumer (corporate balance sheets are very clean.) Regardless, Japan enjoyed a relatively healthy global economy for most of the ’90s that allowed them to hobble along, supported by a strong export sector and unending fiscal stimulus. With so much of the global economy in the same boat this time there may be no such tailwind for us. One thing I would note, were it not for persistent bouts with deflation over the past decade+ Japan’s GDP growth would look even worse. In fact, Japan’s nominal GDP has shown zero net growth for 18 years. That’s why, despite exploding gov’t debt JGB yields have stayed below 2% for 12 years now.