I Think I’m Turning Japanese, I Really Think So

After digesting the news of the downing of a Russian jet in Turkey, the US share market recovered ground and finished only slightly in positive territory. All eyes are firmly fixed on the Fed.

The strained relations between Russia and Turkey sent the gold price up a few dollars to US$1,075.

In 1980 the gold price and The Vapors both had a hit. Gold hit a high of US$850 and The Vapors released Turning Japanese. Gold and The Vapors were both at the top of the respective charts.

Few people remember the high in the gold price, but the chorus line of Turning Japanese just stuck in your head…and still does.

Very few people actually knew what the lyrics are about.

According to The Vapors guitarist Rod Kemp, ‘it’s a love song about somebody who had lost their girlfriend and was going slowly crazy, turning Japanese is just all the cliches of our angst…turning into something you never expected to.

When it comes to matters of the heart, objectivity can go out the window. Losing love can be devastating… ‘You’ve got me turning up and turning down and turning in and turning ‘round

Your world is suddenly thrown into chaos. How can you function without that certain someone in your life? Will life ever be the same again?

Little did The Vapors realise how relevant their 1980 hit would be to matters of finance in 2015.

The love of money can be just as powerful.

It’s said that money is the root of all evil. This is blatantly untrue. Man is the root of all evil — and all good.

It’s our attitude towards money — and the emotion we attach to it — that creates the forces of good and evil.

In 1980 the world had an affection for money, but was not in love with money — with the exception of the Japanese love affair with debt.

The 1970s had been a decade of high inflation, political upheaval and social unrest. In 1980, global share markets were down for the count and interest rates nudged 20%. Only the very brave or very foolish borrowed money at those rates.

The attitude towards money was more respectful.

People paid off their homes. They still used lay-bys. Life insurance policies were the predominant long term savings plan. And people put away a ‘few bob’ for a rainy day.

Households tended to save in order to do things…which is why every room in a 1970s home had its own unique style. Oh how I remember that loud wallpaper and swirly carpet combination in our lounge room.

After inflation was tamed and brought permanently into the low single figure range, our love affair with all things money began. Steady at first. But then the intensity increased.

Share markets. Investment properties. Credit cards. Lines of credit. Derivatives. Our love knew no bounds.

The catchphrase was ‘growth, growth and more growth’. Everything had to grow — population, economy, house sizes, incomes, government, entitlements, debts, asset prices.

They were refreshingly exciting times. Anything felt possible. Millionaires were yesterday’s news. Wealth was measured in the billions.

We were in love with this exciting world of abundant credit and asset price appreciation.

The old fuddy duddy world of living within your means was replaced by this new and exciting temptress…instant gratification.

Oh what a love affair we had with debt. At its most intense, it lasted for nearly two decades.

But too much of a good thing is always a recipe for disaster — too much cognac, too much chocolate, too many cigars — there is always a price to pay.

In 2008 our love affair waned. The financial world was bewildered.

You’ve got me turning up and turning down and turning in and turning ‘round

Asset prices, like the emotions of one who is scorned, were depressed. The world was turned upside down in a matter of months.

The central bank matchmakers needed to rekindle the love affair. They needed the fairytale to continue.

Our central bank cupids provided the most romantic setting they could dream of — a candlelit dinner with an excessive serving of zero interest rates and QE. Who could resist?

But for most lovers of debt the passion had gone flat. They were a little older now and started to look back more fondly on those old fuddy duddy days. Perhaps it was time to settle down and focus on getting the house in order for retirement.

It was a different story for those with a lust for money — the Wall Street types. They took full advantage of the matchmaker’s opportunity to indulge their wildest fantasies — more derivatives to earn fees on, more share buybacks to distort earnings per share, more junk bond issues to skim success fees from, more dubious values placed on unprofitable tech companies, more bonuses…more, more, more. For those with a lust for money there can never be enough QE, or interest rates low enough to ever satisfy them.

After seven years, those playing cupid are at a loss on how to reignite our passion for credit and consumption.

They see what lust has done and must know this is unhealthy. An obsessive love affair with asset prices not supported by genuine affection from real economic activity is destined to end in tears.

Ironically, it’s our falling out of love with debt that is turning us into something we never expected to be…Japan.

The collapse in inflation expectations tells us that the market believes the central banks, despite their monetary profligacy, are failing to prevent the western economies from turning Japanese, and thus at risk of repeating their devastating slide into outright deflation in the 1990s.

Albert Edwards, Society Generale, October 2015

The following chart from Society Generale (on the inflation expectations for the next five years) shows Europe and the US holding hands as they walk towards the deflation.

Source: Datastream

Japan’s love affair with debt went cold in 1990. Since then, Japan’s Cupid has fired off more arrows than a Braveheart battle scene.

The latest three arrows — Abenomics — all ended in the foot of Prime Minister Abe.

As with any relationship breakdown, there are differences on how you arrived at that point and the personalities involved.

Japan’s economic and demographic situation IS different from the rest of the West.

But what is not different is that an economy hooked on the love of debt suffered greatly when that debt is withdrawn by either party in the relationship.

The once nubile consumer is now a retired and less frisky consumer. That dynamic is the fundamental change that is taking the wind out of the sails of the global economy.

The passion is gone. Replaced by respect.

When Janet ‘Scarlett’ Yellen ponders her next strategic move with questions like ‘Where shall I go? What shall I do?’ The consumer response is, ‘Frankly, my dear, I don’t give a damn.’

Today is the ‘White Ribbon Day’ — love your partner and respect your capital.


Vern Gowdie

For Markets and Money

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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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