As if the poor Japanese investor hadn’t had misery enough! He’s been beaten up for the last 18 years. He was whacked when Japan, Inc. went bust in 1990. He was smacked when stocks fell 70%- 90% during the ’90s. He was racked with pain when property collapsed to as little as one-tenth its late ’80s value. He was starved for yield when the Japanese Central Bank dropped its policy rate to zero and kept it there for six years. He was tortured over an entire decade as his government wasted $1 trillion trying to force him to spend and invest. And he was hung by his thumbs in four separate recessions. You’d think Mr. Market would have the grace not to kick him when he was down.
When the sun rose on 2008, the typical Japanese was still in a fetal position, with his head down and his wallet closed up tightly. But along came the sell-off of 2008 – and he got the boot again. The Nikkei fell another 50%. The Japanese investor who bought stocks in 1982 when he was 35 years old is now 61…and his stocks are not worth a penny more! And this week he got the news that the Japanese economy is once again in recession. Today, we feel his pain – not so much because we sympathize with the Nipponese themselves, but because now we are Japanese too.
The G20 nations met in Washington last weekend, hoping to get a little preview of the future. They thought they might do a little editing before the film was released to the public. But while the Japanese example was available for all to see, no wanted to look. And so, the meeting came to an end and the heads of state left town with a clear conscience; while they had done no good, at least they had done no harm.
Even seasoned hacks seem to have no idea what is going on. “Barron’s” has been putting out a financial weekly since 1921. You’d think in all that time they’d get a little idea of how things worked. Nope. The best advice they could give to President-Elect Obama was the same program that didn’t work in Japan: protect the dinosaurs…and spend more public money. Curiously, the paper wants to bail out Ford and GM but let “Chrysler go under.” (What does Barron’s have against Chrysler? Maybe the publisher owns one of its cars….)
Since neither pundits, ministers plenipotentiary nor Wall Street pros pre-penitentiary have yet explained the crisis, it falls to us to do so. We will pass over what went wrong; everyone now knows. But we offer an important nuance: this is not a typical business cycle recession. The idealized business cycle downturn came about after an economy “overheated.” Labor rates rose and the cost of living went up. This consumer price inflation forced the central bank to raise rates, causing the economy to “cool off” again.
Today’s recession in America and Britain is a credit cycle recession; it is different. For proof, we offer exhibit A: a corporate bond from International Paper Company with a yield of nearly 10%. Compare that to the yield on U.S. Treasury paper – barely one tenth of one percent on 91-day T-bills. Even the 10-year Treasury notes pay less than the official rate of consumer price inflation. The “spreads” between corporate bonds and U.S. government bonds are wider than at any time since America’s Great Depression. Why?
Investors all over the planet are taking a beating. Mr. Market has taken a cudgel to stocks, property, consumer spending and the economy – just as he did in Japan during the “Lost Decade.” People are afraid to lend and afraid to borrow; they worry that the money will be knocked senseless before it finds its way home.
This time, the economy did not overheat…nor did labor rates go up. And when the bubble popped, the pin was not higher lending rates. This bust was caused by too much credit, not by too little. It is what economist Richard Koo calls a “balance sheet recession” a la Japan in the ’90s. That is, it is a time when businesses, investors and householders realize that if they don’t cut back they could go broke.
And unlike the more typical recession, this is a slump the feds can’t control and can’t cure. They can offer easier credit; but more debt is just what both lenders and borrowers are most afraid of. The feds can offer more props, more handouts, and more public spending too, just like Japan. But all they are doing is retarding the correction. Mistakes of the bubble era need to be fixed. Balance sheets need to be brought back into balance. There’s no way around it. Japan proved it.
Just a few months ago, investors reached for the highest yields they could get. Now, they fold their arms, clutching to their breasts the lowest-yielding paper on the planet. Once they believed in capitalism and its bonds. Now, they want nothing that does not have the seal of the US government on it. A few months ago, they saw no danger. Now, they see nothing else.
Years ago, driving out of Paris for a long weekend, we tried a diversion:
“What do you want to be when you grow up?” we asked the children. To our surprise, among tomorrow’s pilots and ballerinas was one little 6-year-old with a strange itch: “I want to be Japanese,” said Henry.
That was 12 years ago. What seemed impossible then seems inevitable today.
Enjoy your weekend,
Markets and Money