December 29th, 2011

Stock Market Malaise: Japanese vs. US Style

A reader lamented about the market’s dismal performance and wondered whether we aren’t victims of the American version of the Japanese Malaise (according to Dictionary.com, “a condition of general bodily weakness or discomfort, often marking the onset of a disease.  A vague or unfocused feeling of mental uneasiness, lethargy, or discomfort.”).  This feeling of despair is understandable, shared by many and is reflected in the public’s general attitude towards Congress and the Administration.

Some of the focus shifted this year away from Japan’s failures to concerns with monetary and fiscal concerns in Europe.  But since we’re approaching the end of a year without any clear stock market direction and the prospect of an exciting and frustrating Presidential election campaign, it’s easy to return to the Japan’s condition isn’t contagious.  Darell Whitten addressed that question on iStockAnalyst in August in which he summarized the U.S. variation of the malaise in these terms:

the failure of Keynesian and Monetarist policies to put the U.S. economy back on a sustainable, employment-creating growth path while government debt continues to pile up. A probable outcome of such a malaise of course is a decade of lost growth—declining nominal GDP, persistent deflationary pressures, declining disposable income, persistently high unemployment/underemployment and long-term bond yields below 1%.

According to Whitten,  Japan’s problems began in 1990 and 1991 with the collapse of their stock and property markets with the near meltdown in the financial system continuing today.  Japanese politicians, financial authorities and central bankers were at first sanguine about the crash in stock and property prices but, as time wore on, found themselves doing the same thing over and over while expecting a different result.

Japan has been slipping in and out of deflation while nominal GDP has actually shrunk to early 1990 levels despite 18 fiscal stimulus programs, a zero interest rate policy) and quantitative easing leading to an explosion of net government debt (from just 20% in 1993 to over 120% of GDP by 2011), even as the private sector was awash with excess cash not being recycled back into the economy.  The irony is that Japan continues to suffer from “excess” savings that are not being recycled into the domestic economy. Companies have never been more cash rich and individuals hoard huge cash savings that are transferred overseas.

It does all sound vaguely familiar?  The major differences seem to be that 1) American’s have never been great savers so the US debt has been financed primarily from overseas and 2) the $US, debt and stock market are still the preferred international “safe haven”.  That might explain the difference in the slopes of the Japanese and US stock markets … so far (click on image to enlarge)!

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