Iâ??ve often said that the US economy is largely following a Japanese path. The natural conclusion is to also conclude that the US stock market is likely to follow a path similar to that of the Nikkei. Youâ??ve probably seen some version of the chart below. Now, I am not a believer in the idea that anyone can predict where stock prices will be more than a quarter in advance, but if I had to venture a guess I would guess that the USA/Japan equity market theory will not hold. Why? Several reasons:
In short, without some sort of unforeseen catastrophic event in China or Europe I find it hard to believe that stock prices in the USA will follow the Japan story down to the 600 levelsâ?¦..
First!
(sorry)
Iâ??ve always wanted to do that but never had the stones.
You hear that people? Trixie has bigger stones than me.
Itâ??s even better when you do it when you are not first
Ovaries > Stones. Everyone knows that. Prove me wrong.
Well, thereâ??s no denying that women are the superior sex. The problem is, you all are too busy caring for kids and doing REALLY important stuff to get more involved in the business world to the magnitude that is required. So, if you could get on that weâ??d all be in a better place. Oh, and we need you to raise our kids also because we have certain deficiencies there as well. I hope that being the breadwinner AND raising the kids isnâ??t too much to ask. Thanks.
- Man
Balance sheet issues from different sources but we are more reliant on the consumer than J was. Also, there are few opportunities to restructure for a consumer (well, less than corporate anyways). Donâ??t disagree with your conclusion â?? just saying.
Interesting point. So the US economy remains dependent primarily on the US consumer, but US corporations do not.
I think Iâ??m missing something because I believe the Japanese household also face a balance sheet recession from their housing bubbling (which prices have still not recovered).
The Japanese corporations also have a large global footprint like many US multinationals but that fact alone did not save their stock price. One difference in Japan is mutual loyalty of employee/employer and so a resistance to layoffs. This means lower Japanese unemployment at the expense of corporate profits. In the US we see larger layoffs (unemployment) and higher corporate profitability and stock prices.
The critical success factor or US corporations to improve profitability is lowering costs (labor and fixed) which implies a lower standard of living for some Americanâ??s. And corporations will cut costs but whether corporations can maintain profitability while american employment (and wages) decreases is an interesting question.
Perhaps they can replace foreign sales to offset any loss of domestic sales but Iâ??m not convinced that is the best interest of America.
Despite the fact that USâ??s situation is different to what Japan went through, the chart speaks volume. Irrespective of where the balance sheet recession is occurring (corporate or private) the end outcome will be the same. Again, the chart itself is saying so. So we might agree that causation is different but nevertheless the correlation is irrefutable. Why? because the emotional response to the problems is the same now as it was then by the Japanese despite the differences in the details. In other words, failure to accept the losses and move on. Deleveraging is deleveraging irrespectivve of who does it, bringing about an inevitable economic slowdown.
Ultimately you are correct with your 3 points observations but these allowed us the final bull market of 2003/2007 and together with QE1&2 helped the 2009/2011 run up. A global slowdown is clearly looming on the horizon. IMHO I donâ??t see a downward market of the ferocity like 2008 & 2009 (if we do, it could well be game over) but more of a â??traditionalâ?? downward recessionary type. A slowdown nevertheless
Many people see the current GLOBAL crisis as having a potential to become more severe than 2008. So 600 in the S&P 500 here we come again (no decoupling of the US). And even 450 were possible in 2008-2009 if it were not for removal of marking-to-market.
Cullen, Since you donâ??t see the market going to 600â?¦. what would your target price be? I here lots of chatter, of 950, 1000, a few in the 800â?²s and of course those that say we go below 666.79 from 03/09. I donâ??t claim to know personally. Thx.
I am by no means a stock market expert but what if we rewrite a couple of your bulletsâ?¦
"? Because their households were so excessively indebted aggregate demand remained weak for many decades without adequate government support as households paid down debts rather than focusing on material goods consumption.
"? Japanese companies benefited from expanding growth throughout the rest of the developing and industrial world and still lost significant losses in corporate stock values. US corporations have no such luxury and have resorted to cutting costs massively and are already experiencing close to no growth in domestic revenues. With a looming further slowdown in world growth and possible outright world recession again it may see a collapse in foreign revenues too.
Repeat with me: USA is not special (at least not anylonger). A lot of USA corporations are actually weaker, remember Japan was able to import inflation via exports, while USA corporations canâ??t and depends on a indebted US consumer who is saying â??No moreâ??.
Unless helicopter drops take place this wonâ??t end well, and if helicopter drops take place this canâ??t be good either (no, 4% inflation is no low inflation if the economy is not growing, and we, the world, canâ??t stand skyrocketted oil prices).
The Japan analogue is the worst case scenario as a post bubble road map. Personally I still prefer the 1966-82 overlay as uniquely American so to speak. Either way they both call for a retest of the lows in the next couple of years. If we learn nothing, like the Japanese, the chart above is probably in our future. I do believe, as slow as we can be, that we are quicker than the Japanese at making changes for cultural reasons. We suffer lesss from the tall nail syndrome.
What should not be forgotten is that analogues work for macro eventsâ??bubbles- primarily because human nature has changed very little in the last couple of thousand years. It is no coincidence, no matter the market, that certain rates of change up will generate certain rates of change to the downside in very similar patterns of price and time. Thatâ??s all a chart is-a representation of price vs time = psychology. Analogues work for this reasonâ??the bigger the underlying event the better the fit. Like a good horror movie, it works on everyone!
Cullen in another post you wrote that the BRIC are falling, that is the main reason to sustain that corporate USA will be able to produce good results, is vaning. So whatâ??s your real opinion because the two posts point in different directions. Sorry for this, Iâ??m not polemic, youâ??re doing a great job for all of us.
Agreed, I think a BRIC slowdown (especially China) + continued European weakness is going to be a drag on corporate profits over the next year. Expect another 20% or more drop once the bad news starts rolling in.
Itâ??s economic vs market action. I am not calling for a collapse in BRIC economies. I really donâ??t know where theyâ??re going. I am merely pointing out the risks. My expertise is not Emerging Markets so I canâ??t really tell you whatâ??s going to happen there. What we know is that theyâ??re slowing so it would be reasonable to expect some slowdown in corporate profits, but not a collapse at this pointâ?¦.Does that make sense?
Cullen,
Is this chart also corrected for time elapsed?
If yes, the correlation coefficient between the two markets must be very high. The scary thing is that they do not occur contemporaneously which in my mind makes it that much more interesting as an analogue.
China Is Quietly Unraveling as the World Frets Over Europe http://finance.yahoo.com/blogs/breakout/china-quietly-unraveling-world-frets-over-europe-183900363.html
w/ Michael Darda, chief economist at MKM Partners
Oro,
Very interesting link. Scary.
Thanks
Well, yes and no. - Net debt of US corporations is at historic highs. They are highly indebted despite high cash levels. - Japanese economy is and was highly export oriented, much more than US. - I do not know much about cutting costs in Japan historically, yet their current cost structure is quite lean.
Hey Cullen, did you see that Martin Wolf from the FT called helicopter drops fiscal operations in his column today? Maybe heâ??s reading your stuff.
http://www.ft.com/intl/cms/s/0/045aab84-e61c-11e0-960c-00144feabdc0.html#axzz1ZR64y6Dh
No, he also called for QE to â??lendâ? to govt in that article. That means he totally misinterprets how the govt funds itself.
True, heâ??s not all the way there but heâ??s at least partly along the MMT path. Heâ??s also big on Sectoral Balances.
Yeah, heâ??s making progress for sure and as far as mainstream pundits go heâ??s about as good as weâ??ve gotâ?¦.
â??unforseen catastropheâ?..
Hardly unforseen ,but â?¦
http://www.ft.com/cms/s/0/5fa01836-eb70-11e0-adbf-00144feab49a.html#axzz1ZSCErvPg
Is it too near the weekend for people to be looking at what this prersumably means although DR Streubel intimated somethng the other day which I took with a pinch of salt ,but now looks much more likely to be a reality .
Cullen â?? what do you think of David Stockmanâ??s comments?
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