Baltimore, Maryland
You’ve got me turning up and turning down
and turning in and turning ’round
I’m turning Japanese
I think I’m turning Japanese
Dear Diary,
Are we all turning Japanese?
For longtime Diary sufferers it’s a familiar question…
We’ve been asking for almost 15 years – ever since we saw the US following in those Japanese footsteps, running from a big boom… to a big bust.
It all started for us when we were driving out to the country one evening many years ago. To keep the children occupied – there were five of them with us at the time – we asked them what they wanted to be when they grew up. Imagine our surprise. Among the fighter pilots and TV stars was one little boy who replied, “I want to be Japanese.”
Manga cartoons were popular at the time. So were Japanese video games. Japanese stocks, on the other hand, were not.
After hitting 38,000 points in 1989, Japan’s Nikkei stock market index (the equivalent of the Dow) fell to 7,000 in April of 2000.
Meanwhile, every smokestack in Nippon seemed to take a breather, every working man got 10 years older and every financial journalist wondered what was wrong with a people who had been so dynamic just a few years before.
We foresaw the same for US stocks and the US economy.
Maybe we were just 14 years – and counting – too early. Maybe we were just wrong.
Abenomics Has Been a Disaster
The Financial Times managed a particularly lunkheaded editorial on the subject of Japan in yesterday’s edition.
After rehearsing all the prime minister’s failures, it concluded that although the exuberance had gone out of Abenomics, Shinzo Abe “must continue with his course and not allow himself to be distracted.”
On the evidence, the Japanese prime minister would do better going and playing golf. His interventions so far have been ineffective or disastrous, depending on how you look at them.
The poor man came into office promising to break a long losing streak. Since 1990, Japan’s stocks and real estate have been flattened… its once smooth-running economic machine coughs and sputters… its people are getting older and its population is shrinking… and its public debt load is getting bigger.
As the FT put it, Abe came into office and brought a “huge fiscal stimulus followed by a massive dose of quantitative easing. This appeared to jolt Japan out of its deflationary torpor.”
Until the second quarter of 2014…
Then it became obvious that Japan was in an even deeper torpor, with GDP shrinking for the April-to-June period at an annualized pace of 7.1% – the worst performance since the Tōhoku earthquake, tsunami and nuclear disaster in March 2011.
All that Abe really seems to have wrought is a tax increase… and Japanese government debt approaching 250% of GDP.
Airy Claptrap
Abe is another data point that confirms our hypothesis:
Modern policymakers (central bankers most prominent among them) are either fools or knaves. Their programs are senseless and useless. Their theories are nothing more than airy claptrap.
But we admit that we live in an age of manmade wonders. We’re ready to be impressed. The trouble is the Abes of this modern era seem to lack imagination.
What is wrong with them?
Surely, there is something else officials can do, other than the same things that have never worked before. You cannot cure a debt crisis with more debt.
Why not try less debt?
And now Europe and the US are turning Japanese, as we predicted more than a decade ago.
Instead of Japan’s growth rates catching up to the rest of the developed world, growth is slowing to Japanese levels.
Instead of Japanese interest rates rising to match those in the rest of the world, in Europe and the US they are falling to match those of Japan.
And instead of Japan’s birthrate rising to keep the population more or less even with its rivals, women in Europe and America are having fewer children, too.
And we need not tell you that people in the developed world are all getting older, just like the Japanese.
How do officials react to the challenge?
They have also turned Japanese…
Regards,
Bill
Abe’s Dilemma
Paid-up subscribers of The Bill Bonner Letter will know that Bill’s new “Trade of the Decade” is to go long Japanese small caps and go short Japanese government bonds (JGBs).
This may surprise you…
Why would Bill be bullish on Japanese small-cap stocks if he is so bearish on the Japanese economy?
We’ll get to that. But first, this from Bill on what his “Trade of the Decade” idea is all about:
Behind the Trade of the Decade is a simple observation: Things that are out-of-whack tend to get back into whack. Over a 10-year period, you have a fair chance that they’ll return to normal.
This is another way of describing the phenomenon known as regression to the mean. One of the surest phenomena in the natural world is that things that are extraordinary will eventually become less extraordinary. And over a 10-year period, you have a decent chance that that’s what will happen.
Regular Diary readers will recognize this idea. As long as there is an element of luck involved with a series of results (prices, yields, sports results, etc.) outliers tend to move back toward the average.
This explains why neither bull nor bear markets continue forever. As prices move to extremes, regression to the mean pulls them back toward their long-run average.
Bill’s “Trade of the Decade” looks for an asset that is historically undervalued and an asset that is historically overvalued. You simply go long the undervalued asset and short the overvalued asset. As Bill explains:
What I needed for the buy side of the trade was something that was historically undervalued. Which led me to Japanese small-cap stocks, which had been going down since 1989.
Japanese government bonds are probably even more overvalued than US Treasurys. And with the Japanese borrowing more than ever… as the Japanese savings rate declines… it seems a fair bet that Japanese government debt will go down at least as much as US debt. Maybe more.
Bill’s trade got a big boost recently: To increase flagging returns, the country’s big pension funds decided to reduce their holdings of JGBs and increase their holdings of Japanese and foreign stocks.
In May, for instance, Japan’s $1.2 trillion Government Pension Investment Fund cut its target for JGB holdings by one-third to 40% of assets. And as of the end of the second quarter this year, Japan’s public pension funds were net sellers of JGBs for four straight quarters.
You don’t need to be a brainiac to tell that this will be bullish for Japanese stocks and bearish for JGBs, and for the yen.
But surely sluggish Japanese growth will hinder the performance of stocks there?
This certainly seems logical. After all, higher GDP growth should help lift corporate revenues… and profits.
But contrary to the conventional wisdom, studies have found no meaningful relationship between GDP growth and stock market performance. Something investors in US stocks found out in 2013, when the S&P 500 returned 30% against a backdrop of low single-digit GDP growth.
Shinzo Abe faces a dilemma. He wants to push down the yields on JGBs to “stimulate” the economy. In doing so, he is forcing Japan’s mighty pension funds to become sellers of the same securities.
Poor Abe, indeed.