Even If We Are The Next Japan, Stocks Aren’t Necessarily A Short
I’m one of the newest members of the ‘we are the next Japan’ community. The similarities are just too striking. A real estate bubble, followed by a financial crisis with no clear solution. Wasteful government spending, ballooning the countries debt/GDP ratio (Japan is at 170%, we’re projected to be at least 120% and our ’stimulus’ plans have just started). We share the highest corporate tax rates in the developed world. Midway through this mess, both countries raise taxes. Japan raised a consumption tax, and the Democrats are projected to let the Bush tax cuts expire for those making $250k or more (if any of those people are left).
My Democrat friends will quickly point out that Japan raised a consumption tax, whereas we will just raise income taxes on rich people (who just burn their money lighting their Cuban cigars while making an evil laugh). After all, it’s not like people making $250k or more would ever actually spend their money or put it towards expanding their own businesses (since that group is disproportianatly composed of successful small business owners).
There are some other differences as well. Japan’s asset bubble was seemingly worse in terms of overvaluation of assets, though at least their people had actual savings. Japan’s preferential method of wasting money was building bridges to nowhere, whereas we prefer to spend $10 million so some middle school can have a state-of-the-art drill team.
Even if we are the next Japan though, that does not necessarily mean stocks are a sell. Let’s look at how the Nikkei did. The Nikkei’s peak was about 38,915 in 1989. In 1990, it dropped to 23,848, a loss of 38.7%. The S&P 500 dropped 38.5% last year.
In 1991, the Nikkei closed just shy of 23,000, recording a small loss on the year. It ranged though from 21,456 to just over 27,000. Given the S&P 500 is already 50% off of its highs, it means our low is lower than their low in the second year of their great bear market, and we have a lot of temporary upside to go.
The Nikkei then cratered again in 1992, ending the year around 17000, a loss of about 26%. From 93-99, their market seesawed. It then boomed with the tech bubble and has now bust along with ours, with the Nikkei just above 7400 today.
This is a crude comparison, but it serves as a reminder that even if a decade of economic malaise is ahead of us, stocks aren’t necessarily a sell right now. If we’re on the same path of Japan, stocks are due for a short bull run before collapsing again. As bearish as I may be about US economic’s future, I won’t bring myself to short stocks right now.
But if we hit S&P 950 again, it’s time to sell, sell, sell.
Disclosures: Long stocks….for now.