Buying Japanese Stocks as the Economic Slump Continues

Nothing much to report from the markets yesterday. The Dow was down 79 points. Gold rose $5.

So, let’s look across the wide Pacific…to the land that invented suicide bombing. Did we update you on our “Trade of the Decade”? We did? We thought so…

And here’s our old friend Marc Faber…with the same idea (or at least half of it.) Buy Japanese stocks, he says…

After a two-decade bear market, now is the time to buy and hold Japanese stocks, Marc Faber, publisher of the Gloom, Boom & Doom report, said.

Faber, who is credited with predicting the 1987 stock market crash and said two years ago that shares would decline just as they began the biggest rally in more than 50 years, said the Japanese government will be forced to print money to monetize the country’s public debt, the developed world’s biggest. That will cause the yen to weaken, helping boost earnings for the nation’s exporters and buoying stock prices.

Faber joins other bullish investors on Japan, such as Goldman Sachs Group Inc. and David Herro of Oakmark International Fund, in countering skepticism about Japan earned through four recessions and dismal stock returns after the 1990 crash of the bubble economy. The Nikkei 225 (NKY) Stock Average has fallen about 73 percent since it peaked in December 1989.

“If I had to make a bet for the next ten years in terms of equity markets, I would seriously consider a very strong weighting here in Japan,” Faber said yesterday at the CLSA Asia-Pacific Markets’ annual conference in Tokyo. “Once the debt market starts to go down, the yen will begin to weaken and that will lift equity prices. I would buy equities at the present time.”

But wait. What’s this?

Here’s Dennis Gartman with a nuance:

Japan is demographically and fiscally doomed. Her population is collapsing in size and growing elderly at the same time, while her fiscal circumstances are far and away the worst of the industrialized world. Japan has survived for decades in a strange world of fiscal irresponsibility by being able to sell her debt to her own people rather than to the rest of the world as the US can do and must.

Of course, this just supports our position. The Japanese soon will have a bitter choice. Either they abandon their whole silly economic model – with its eternal stimulus budgets and its perpetual zero interest rates. Or they print money. If they give up, it will bring on the final and devastating bottom of their 21-year slump. If they print money, on the other hand…they might hold off the disaster long enough to make it worse.

It is a bit like their situation after the Battle of Midway. Had they examined their situation carefully, they would have seen that the gods of war had gone over to the other side. They faced a superior adversary. And they were out of fuel. They needed control of the seas in order to re-supply; and they had just lost it.

What to do? They had a choice. They could have pulled back to the home island, begged forgiveness and negotiated a settlement. Instead, they soldiered on…in a long, hard, nasty retreat…and eventually turned to kamikaze pilots to try to save the day.

What choice will they make this time? Probably, they’ll print money. Inflation rates will rise. Japanese government bonds will collapse. And investors will try to protect themselves from inflation by buying stocks.

And more thoughts…

Let’s look at the US. What is different in America, compared to Japan?

Huge deficits? Check.

Zero interest rates? Check.

Great Correction? Check.

Out-of-control spending on old people? Check. (About which, more tomorrow…)

In Japan, the financial structure will come down when the country has to begin relying on foreign investors to fund its deficits. The foreigners will look at the figures and inevitably want higher interest rates to protect them against defaults and inflation.

But the US already counts on foreign investors to fund its huge deficits.

Which one will get blown away first? Our money is on Japan.

*** Want a peek at the future? The New York Times gave it to us last week:

Vallejo, a city about 25 miles north of San Francisco, offers a sneak preview of what could be the latest version of economic disaster. When the foreclosure wave hit, local tax revenue evaporated. The city managers couldn’t make their budget and eliminated financing for the local museum, the symphony and the senior center. The city begged the public-employee unions for pay cuts – all to no avail. In May 2008, Vallejo filed for bankruptcy. The filing drew little national attention; most people were too busy watching banks fail to worry about cities. But while the banks have largely recovered, Vallejo is still in bankruptcy. The police force has shrunk from 153 officers to 92. Calls for any but the most serious crimes go unanswered. Residents who complain about prostitutes or vandals are told to fill out a form. Three of the city’s firehouses were closed. Last summer, a fire ravaged a house in one of the city’s better neighborhoods; one of the firetrucks came from another town, 15 miles away. Is this America’s future?

Cities across America are facing dire financial distress. Meredith Whitney, a banking analyst turned independent adviser who correctly predicted the banking meltdown, has issued an Armageddon-like prediction of mass municipal defaults. Others – notably Newt Gingrich – have suggested that state governments as well as cities should be allowed to file for bankruptcy. Congress held a hearing to examine the idea.

These forecasts of apocalypse have touched a nerve. Americans, still reeling from the devastating impact of the mortgage debacle, are fearful that the next economic disaster is only a matter of time. To anyone reading the headlines of budget deficits and staggering pension liabilities, it takes little imagination to conclude that the next big one will be government itself. The problems of cities are everywhere. The city council of Harrisburg, the capital of Pennsylvania, has enlisted a big New York law firm to explore bankruptcy as a means of restructuring a crushing debt. Central Falls, R.I., is in receivership. Hamtramck, Mich., a small city within Detroit’s borders, says it could run out of money next month. Hamtramck has only 90 employees, yet it is saddled with the pensions and health care obligations of 252 retirees. Detroit itself is at risk. Large deficits will mean closing about half of the city’s schools and will push high-school class sizes to 60 students.

The United States has nearly $3 trillion in municipal bonds outstanding.

*** “I have a headache… Well, it’s like a headache…but not exactly.”

Our 89-year-old mother was doing something unusual. She was talking about herself. Yesterday, for the first time we can recall, she asked to go to the doctor.

In the 62 years we have known her, we’ve never heard a complaint. We thought she was just stoic. And now, we presumed she suffered in silence from the aches and pains that are bound to assault an octogenarian.

Maybe. Or maybe she just had nothing to complain about.

“I guess at my age, I should be used to a little headache. But I don’t think I’ve ever felt anything like it. I was worried that I was having a stroke. But I don’t have any of the signs of a stroke. Everything seems to work just as it did before. Which was not all that great.

“But I’m just so happy to be alive. And to have my wits about me. I was hoping to go to a birthday party for Uncle Jules (her brother). He’s turning 94 this week. But he insisted on not having a party. He said we can have a birthday party for him next year, when he turns 95.

“That seems rather too optimistic, don’t you think?

“Last month, Jules had an auto accident. You know, when you’re driving at 94 and you have an accident, everyone assumes it’s your fault. But the car that ran into him was driven by a guy who was 85; he was at fault. I don’t know what the policeman must have thought.”

*** Speaking of old people… Are they really egotistical and selfish? We’ll talk about it tomorrow…


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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7 Comments on "Buying Japanese Stocks as the Economic Slump Continues"

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Good to hear to are built on solid genetic foundations, I have though a few times who will correct my inconsistent mussing in the months / years to come without the daily writings and publications of the world’s best moral philosopher.

I disagree on Midway. The Japanese were done for before Pearl Harbour. They were about to get walloped then anyway. They faced the same choice that Milosevic had in front of Holbrooke and Albright. Save for distractions from Europe Midway was just the logistical wheels turning the way they always would. I’ve read thereabouts that Japan’s standards of living have held up remarkably well despite two decades of deflation. Bill also proves again and again that he has no cultural nose. This impacts on his judgement in this matters as it does in others out there in the colonies, so… Read more »
I can think of two things that the USA has that Japan does not: 1. A positive birth rate 2. A positive flow of and positive attitudes about immigration. People want to come to the USA, and on the whole the USA is welcoming. While there may be those who want to go to Japan, Japan does not want them. In ten years time there will still be people who want to live in that bankrupt town in California, and there will be workers coming into the workforce to replace the aging population and take care of them. Society will… Read more »
“It is often remarked that Japan is a rich country, whose citizens have greater wealth than any other. At first sight this is entirely true. Japanese households have a wealth to income ratio which is 100% greater than that of any other G5 economy. Unfortunately this wealth largely represents the debts of the corporate and government sectors and is thus largely illusory. “A country is not wealthy when one half owes debts to the other half that it can never repay” (Andrew Smithers, Japan’s Past Decade – Bad Luck of Policy,, December 22, 2003). History as Future: “Rereading history… Read more »
Someone might have a stab at naming a mercantilist country going economically into a deep reversal during a period where they sustained both their household savings and their trade surplus. No doubting the aging population story but one could hold the same of Germany without a deflationary bias in the past two decades. Neither scenario is meaningfull in terms of the numbers that have unfolded in that time. Japanese militarism didn’t come out of nowhere and the social conditions mentioned that arose during the opening to foreigners ignores any fuller view of history. Naval treaty negotiations and the White Fleet… Read more »
Tom Dalgleish

What’s the point of buying Japanese shares if the Yen is going to fall?


My thoughts as well Tom.

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