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2010 AND BEYOND - DEFLATION À LA JAPAN?
"The cause of sustained price falls is a lack of demand. When demand itself is weak, prices won´t rise just through liquidity provision."
~ Masaaki Shirakawa, central bank governor of Japan
Dear Mountaineers,
We´ve entered a new decade. Looking back at the past decade, and looking forward to the next, seems like an opportune thing to do. However, I find myself slightly stuck with a trivial and yet somewhat tenacious difficulty: how should I refer to these two decades in a concise manner? In the last century, we used to be able to refer to the Seventies, or in brief the 70´s. We could talk about the 80´s or 90´s.
But, what should I call this new decade: that started just a few days ago - the "Tens", the "Ten´ties"? And then the last decade; should it be referred to as the "Zeroes", the "Zero-ties", or the Noughties, as many have been throwing around already?
Well, certainly, the term "Zero-ties" could suit the performance of the stock markets quite well. After all, most stock markets are pretty much back to where they where ten years ago: a weak performance indeed, filled with weak monetary policies, weak fiscal policies, weak geo-political progress and weak leadership altogether. So, let´s just call it the "Weak Decade" for our purposes here.
Looking back at the ‘Weak Decade´, we can´t avoid being reminded of Japan´s TWIN decades of weakness. Today, at about 10´880, the Nikkei 225 stands pretty much at the same (nominal) level as it did around 1987. And, it´s A LOT LOWER than it was at the end of its great bull market in 1989. On December 29, 1989, the Nikkei peaked at 38,876. In other words, the price levels of the Nikkei today stand at roughly a quarter of what they were 20 years ago...TWO decades later!
Source: Datastream, SG Cross Asset Research
It´s an ongoing debate whether global economies and financial markets have entered a similar path as did Japan more than twenty years ago. The chart above compares the S&P 500 since 1990 to the Nikkei 225 since 1980. The similarities are striking. Most importantly, two things appear to be worth pointing out.
First, Japan experienced repeated and substantial rallies on the way down. If indeed we should consider the Japanese story line a blueprint for the decade ahead, then the current market has potential for more upside in the current bear market rally before it goes A LOT lower.
Secondly, patience is big factor in these kinds of markets. Bear markets can take a long time. Similar to the Great Depression, when the Dow took approximately 23-and-a-half years - until early 1953 - to regain the nominal level it first reached on September 1, 1929, the Nikkei is taking a VERY LONG TIME to regain its health. Despite all the monetary inflation around the globe and certainly in Japan, hardly anyone would at this point expect the Japanese market regaining its 1989 highs anytime soon.
Twenty years of "Easy Money Deflation"
In the aftermath of the global stock market crash of October 1987, Japan experienced a twin-bubble ride into orbit. By May of 1988, the Nikkei had already regained its October 1987 losses. And, by the end of 1989, the index had almost doubled from its October 1987 lows. It is noteworthy that, similar to the US, the Japanese stock market boom was accompanied by a property boom of immense proportions. By late 1989, the grounds of the Emperor´s Palace in Tokyo were said to be worth more than the entire state of California!
In summation, Japan experienced in the late 80´s what the world experienced in the lead up to the recent ‘global financial crisis´ - a huge property and stock market bubble. In Japan, the collapse came in early 1990 and the nation´s economy has never recovered since.
The Japanese did everything possible to get back to where they had come from. Japan cut its official interest rates to zero in 1999 and held them there unchanged until 2006. For all intent and purpose, Japanese official rates have been non-existent for more than a decade. The Japanese government ran one bailout and one stimulus package after another. A wild mix of monetary and fiscal policies, financial market regulations, and protectionist rules was jotted out, all to no avail.
Japan today - still trying to inflate itself out of disaster
More than two decades into its economic nightmare, Japan is still fighting hard to keep its economy from a complete and utter collapse. As 2010 begins, one of the most common ‘predictions´ for the New Year is that Japan will find it very difficult to continually pop out one stiumulus package after the other. With a public debt-to-GDP ratio of well over 200 percent, Japan is by far the most indebted nation amongst the world´s major economies.
Today, after twenty-some years of unprecendented ‘deflation fighting´, Japan remains mired in deflation, with unemployment on the rise once again and the economic ‘recovery´ once again losing steam. The Hatoyama government, despite any prior promises made, is increasing the deficits and growing the country´s debt further. At this point, there appears to be no other way to keep Japan from tipping over completely.
Yes, there are differences between the lost decades of Japan and our Weak Decade. For instance, the Japanese people continued to save throughout the crisis. They largely stayed away from living beyond their means, at least privately. And, the Japanese economy did continue to produce real goods and to export.
Unlike the US, Japan cannot export its money in return for the rest of the World´s goods. It must export goods for the rest of the world´s money. To an extent unmatched by any other Asian nation, including China, Japan relies on its exports to fund its standard of living. That means a ‘cheap Yen´ so that its export pricing can remain competitive.
In this context, for more than a decade, Japan relied on the Yen ‘carry trade´. However, since 2007, the problem has been that as the rest of the world (notably the US) quickly erased the ‘advantage´ Japan´s ultra-low interest rates gave it, the Yen has been going up. Since mid-2007, the Yen has risen by about 25% against the Euro and, much worse, by 27% against the US dollar.
This has destroyed Japanese exports and rendered huge damage to the Japanese economy. And things are going to get worse as the US dollar is taking over from the Yen as the preferred global carry trade currency.
Captive to low interest rates that they don´t really control
Economic growth is getting VERY expensive! So far, lower interest rates have been a trend largely produced artificially by governments and central banks. However, we have reached rock-bottom. And, the fact is that governments and central banks can only manipulate the price of money to a certain degree. Once short-term interest rates start rising - yields for long-term bonds are on the rise already - financing the boom will become increasingly difficult.
Yet, every time government fights the economic downturn with FRESH and HUGE amounts of taxpayer money, a true recovery is postponed and the artificial daydream of economic growth, financed on the back of coming generations, becomes yet a little more expensive.
Although the Japanese scenario is not completely comparable to the global economy, the Japanese monetary and fiscal anti-deflation reflex in reaction to the crash in the 90´s was very much the same as the recent and currently ongoing GLOBAL PUMPING APPROACH. Japan has been running exactly the same "stimulus" as the rest of the world is now employing to fight the downturn.
It didn´t work in Japan. And, I doubt it will work globally. If ever there was an economic illustration of the fact that "stimulus" cannot revive a REAL economy, Japan is that illustration.
At then end of this commentary, I still wonder what we will call the next decade?!?!
Sincerely,
Your "Swiss Mountain Guide"
Frank R. Suess
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WHAT GOVERNMENT REALLY MEANS
By Doug Casey, December 30th, 2009, Stowe, Vermont, U.S.A. This review of what governments really are, what they should be and the problems with them, was sent to us last week. It´s a thoughtful article: courageous, to the point, and Casey-style.
"The most dangerous man, to any government, is the man who is able to think things out for himself without regard to the prevailing superstitions and taboos. Almost inevitable he comes to the conclusion that the government he lives under is dishonest, insane and intolerable, and so, if he is romantic, he tries to change it. And even if he is not romantic personally he is apt to spread discontent among those who are."
~ H.L. Mencken
I give a good number of speeches each year. For some time I´ve asked audiences a question: "What useful purpose does the US government serve?" I do that not to be challenging or provocative, but to actually find out if anyone else can think of a useful purpose the government serves. The question at first shocks, then amuses and then perplexes almost everyone because it is both so obvious and outrageous that no one ever thinks of asking it. Most people accept the institution of government because it has always been there; they have always assumed it was essential. People do not question its existence, much less its right to exist.
Government sponsors untold waste, criminality and inequality in every sphere of life it touches, giving little or nothing in return. Its contributions to the commonwealth are wars, pogroms, confiscations, persecutions, taxation, regulation and inflation. And it´s not just some governments of which that´s true, although some are clearly much worse than others. It´s an inherent characteristic of all government.
The essence of something is what makes the thing what it is. But surprisingly, little study of government has been done by ontologists (who study the first principles of things) or epistemologists (who study the nature of human knowledge).
The study of government almost never concerns itself with whether government should be, but only with how and what it should be. The existence of government is accepted without question.
What is the essence of government? After you cut through all the rhetoric, the double-think and the smokescreen of altruism that surrounds the subject, you find that the essence of government is force. And the belief it has the right to initiate the use of force whenever expedient. Government is an organization with a monopoly, albeit with some fringe competition, on the use of force within a given territory. As Mao Zedong said, "The power of government comes out of the barrel of a gun." There is no voluntarism about obeying laws. The consent of a majority of the governed may help a government put a nice face on things, but it is not essential and is, in fact, given with any enthusiasm.
A person´s attitude about government offers an excellent insight into their character. Political beliefs reflect how a person thinks men should relate to one another; they offer a practical insight into how he views humanity at large and himself, in particular.
There are only two ways people can relate in any given situation: voluntarily or coercively. Almost everyone, except overt sociopaths, pays at least lip service to the idea of voluntarism, but government is viewed as somehow exempt. It´s widely believed that a group has prerogatives and rights unavailable to individuals. But if that is true, then the Ku Klux Klan, the Irish Republican Army, the PLO - or, for that matter, any group from a lynch mob to a government - all have rights that individuals do not. In fact, all these groups believe they have a right to initiate the use of force when they find it expedient. To the extent that they can get away with it, they all act like governments.
Terrorists, Mobs and Governments
You might object that the important difference between the KKK, IRA, PLO or a simple mob and a government is that they aren´t "official" or "legal." Apart from common law concepts, legality is arbitrary. Once you leave the ken of common law, the only distinction between the "laws" of governments and the ad hoc proceedings of an informal assemblage such as a mob, or of a more formal group like the KKK, boils down to the force the group can muster to impose its will on others. The laws of Nazi Germany and the USSR are now widely recognized as criminal fantasies that gained reality on a grand scale. But at the time those regimes had power, they were treated with the respect granted to any legal system. Governments become legal or official by gaining power.
The fact that every government was founded on gross illegalities - war or revolt - against its predecessor is rarely an issue. Force is the essence of government. But the possession of a monopoly on force almost inevitably requires a territory, and maintaining control of territory is considered the test of a "successful" government. Would any "terrorist" organization be more "legitimate" if it had its own country? Absolutely. Would it be any less vicious or predatory by that fact? No, just as most governments today (the ex-Communist countries and the kleptocracies of the Third World being the best examples) demonstrate. Governments can be much more dangerous than the mobs that give them birth. The Jacobin regime of the French Revolution is a prime example.
Is the State Necessary?
The violent and corrupt nature of government is widely acknowledged by almost everyone. That´s been true since time immemorial, as have political satire and grousing about politicians. Yet almost everyone turns a blind eye; most not only put up with it, but actively support the charade. That´s because although many may believe government to be an evil, they believe it is a necessary evil. (The larger question of whether anything that is evil is necessary, or whether anything that is necessary can be evil, is worth discussing - perhaps in another forum.)
What, arguably, makes government necessary is the need for protection from other, even more dangerous, governments. I believe a case can be made that modern technology obviates this function.
One of the most perversely misleading myths about government is that it promotes order within its own bailiwick, keeps groups from constantly warring with each other and somehow creates togetherness and harmony. In fact, that´s the exact opposite of the truth. There´s no cosmic imperative for different people to rise up against one another - unless they´re organized into political groups. The Middle East, now the world´s most fertile breeding ground for hatred, provides an excellent example.
Muslims, Christians and Jews lived together peaceably in Palestine, Lebanon and North Africa for centuries, until the situation became politicized after WWI. Until then an individual´s background and beliefs were just personal attributes, not a casus belli. Government was at its most benign, an ineffectual nuisance that concerned itself mostly with extorting taxes. People were busy with that most harmless of activities: making money.
But politics does not deal with people as individuals. It scoops them up into parties and nations. And some group inevitably winds up using the power of the state (however innocently or "justly" at first) to impose its values and wishes on others, with predictably destructive results. What would otherwise be an interesting kaleidoscope of humanity then sorts itself out according to the lowest common denominator peculiar to the time and place.
Sometimes that means along religious lines, as with the Muslims and Hindus in India, or the Catholics and Protestants in Ireland; or ethnic lines, like the Kurds and Iraqis in the Middle East or the Tamils and Sinhalese in Sri Lanka; sometimes its mostly racial, as whites and East Indians found out throughout Africa in the 70´s, or Argentines, Guatemalans, Salvadorans, and other Latins discovered more recently. Sometimes it amounts to no more than personal beliefs, as the McCarthy era in the 1950´s and the Salem trials in the 1690´s proved.
Throughout history, government has served as a vehicle for the organization of hatred and oppression, benefiting no one except those who are ambitious and ruthless enough to gain control of it.
Regards,
Doug Casey |
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NEWS BRIEFS
Three Cheers for the Swiss People!
The following link to an article on LewRockwell.com, written by Paul Green, was sent to us. During this time of popular Swiss-bashing, this article provides a welcome and extraordinarily insightful antidote. Its credibility is raised particularly - and surprisingly - by the fact that it was not written by a Swiss, but by a Brit.
This is how the article starts off: "There are not many people I will happily take my hat off for in this world. But the Swiss people are among those few. In a sea of despotism these people have maintained an island of liberty even into the modern age of the all-intrusive State".
For those Mountaineers sincerely interested in a more complete understanding of the current mood and tenure of the Swiss people, those who would like to look beyond the global mainstream charade of lost banking secrecy and the like, this is a must read.
Go to Story
Russia, China, Iran Redraw Energy Map!
An excellent and most relevant article in the Asia Times:
The inauguration of the Dauletabad-Sarakhs-Khangiran pipeline last Wednesday, connecting Iran´s northern Caspian region with Turkmenistan´s vast gas field, may go unnoticed amid the Western media cacophony that it is "apocalypse now" for the Islamic regime in Tehran.
The event sends strong messages for regional security. Within the space of three weeks, Turkmenistan has committed its entire gas exports to China, Russia and Iran. It has no urgent need of the pipelines that the United States and the European Union have been advancing. Are we hearing the faint notes of a Russia-China-Iran symphony?
Go to Story
Is the Stock Market Rigged? Did Government Directly Intervene, or is that All Just Conspiracy Talk?
Another excellent commentary from the Daily Bell! A WSJ MarketWatch article on the topic of the "Plunge Protection Team" is discussed and reviewed. According to the WSJ article, the unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market.
"We cannot identify the source of the new money that pushed stock prices up so far, so fast," Biderman said in a statement Tuesday.
The Bell nails it on the head in their conclusion to their commentary: "When the painfully erected promotional supports of the modern Western state (especially in America) are coming into this much disrepute, the power elite has a lot more to worry about than the degradation of its stock-market promotion. It ought to be worried about the legitimacy of its larger operation. From global warming, to mass vaccination to fiat money, people are turning away from fear-based promotions. We think this is one reason why gold and silver have run up and have further to go. We think this is why we may even see a reversion to a private gold-and-silver standard during our lifetimes."
Go to Story
Banks are Warned to Guard Against Rate-rise Risks
As we´ve been warning our Mountaineers, the bank crisis is not over. According to Bloomberg, U.S. regulators, including the Federal Reserve, warned banks to guard against possible losses from an end to low interest rates and to reduce risk or raise capital if needed.
"In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates," the Federal Financial Institutions Examination Council, made up of agencies including the Fed and the Federal Deposit Insurance Corp., said in a statement last week.
Go to Story
A Bizarre Year for US Estate Taxes
Tax rules tend to take on an increasingly complex nature as time goes on. This goes for most countries. It is in the nature of the politicians who create these tax rules. Over time, tax codes are adjusted, twisted and re-invented in whichever way is required to meet the growing budget of the biggest spender - government.
The pinnacle of twisted tax rules and a growing joke amongst tax planners worldwide is the US estate tax rules for 2010. Estate tax in the US has EXPIRED at the end of last year. This, per se, might be seen as a great thing. However, in America, the tax is expected to be revived in 2011 at a higher level and at a lower exemption. Thus, in 2010, no estate tax will -- assuming one can trust the rule of law -- be applied in America.
Consequently, this is the first time since 1916 that rich Americans might contemplate dying without one last tax. It is a crazy world we live in!
Go to Story
Burj Dubai - a Sign of Our Times?
Fireworks of prosperity and progress, or simply too much easy money spent on lots of bubbles - too much ego, bad investments and artificial glory? Time will tell.
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| © Copyright 2009, by BFI Capital Group AG, Bahnhofstrasse 29, 6300 Zug, Switzerland, website: www.bficapital.com. The MOUNTAIN VISION UPDATE is published by BFI Capital Group (‘BFI’). Quotation is allowed if credit is given. Although every care has been taken in the preparation of Mountain Vision, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. The publisher is not a registered investment advisor. Readers should not view MOUNTAIN VISION as offering personalized legal or investment advice. |
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