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How Bad is the Japanese Scenario?

If you only look for information that supports your preconceptions, then you are falling prey to the confirmation bias.  Today, you can find a tremendous number of websites or media pundits that error on the side of extreme doom.  Nouriel Roubini, David Rosenberg, Nassim Taleb, Marc Faber, Peter Schiff, Tyler Durden, etc.  If you only want to hear those opinions, then by all means read away. There are a few extreme optimists out there, but in the current market environment they get little press.  Plus, it is human nature to fixate on the extremely ugly scenarios.  You might notice this characteristic when traffic piles up as gawkers look intently at accident sites on the highway.

Your goal as an investor should be to look at both sides of the fence.  It is likely that the optimistic outcomes will never materialize and that the extremely pessimistic outcomes will never materialize.  Despite that, a bit of education can be gleaned by researching both perspectives.  My own outlook is not optimistic, but I am also not predicting 500 levels on the S&P 500 or gold hitting $5,000 per ounce.  I expect growth to be slow, but I have a hard time making sense of 2% 10 year treasury yields and economic forecasts that predict massive recessionary forces coming to the forefront.  One comparison that keeps coming up is that of the United State’s current fiscal situation is extremely similar to the Japanese experience.   Japan’s “bubble” burst in 1990 and since then they have been caught in a 20 year deflationary cycle that has been coined the “liquidity trap”.  It has been speculated that we are headed directly down their spiral, just 20 years later.  One very ominous and interesting chart is that of the Japanese Nikkei starting in 1979 and the European Eurostoxx 50 and United State’s S&P 500 both starting in 1990:

Re-living the Japanese Experience?

Does this chart have predictive power?  I certainly hope not.  If you look at enough charts you can always come up with convincing analogies.  Is the story exactly the same?  Absolutely not.  Is the story similar?  Absolutely.

Let us just hope that innovation, positive demographics, a pro-active Federal reserve, and the resilient american spirit can help these charts diverge.


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3 Responses

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  1. henry bee says

    Hi surlytrader, from my experience overlapped price charts rarely repeat themselves. There are simply too many published papers studying 1938 and the Japanese experience for the Fed to repeat the same mistake. Even then, demographics could still be a huge drag on US equities. The only wild card is if China relaxes their capital control and allow foreign investments, which may counteract the secular bear market.

  2. Honestly Banking says

    Every year for the last 15 years people have been telling me that Japan will be back again this year – i’m still waiting. Hope you’ve spotted something I haven’t! Great Blog.
    best of luck

    Honestly Banking

  3. Justin says

    Henry Bee, I agree with your point regarding “price charts rarely repeat themselves. Yet, I think in this case your argument stating ” There are simply too many published papers studying 1938 and the Japanese experience for the Fed to repeat the same mistake. ” Is one that forgets to take into account one major underlying factor. “PEOPLE” OR “THE HUMAN CONDITION.” While you make two fine points regarding the affects that demographics could still be a huge drag on US equities, & the possibilie scenario of China allowing foreign investors. SOME DAY…? You forget that people, better yet politicians, leaders in govt., finance, economics, & everything else under the sun. Do not always think rationally. In fact we Americans certainly do not, & are always comfortable. Too comfortable with the ideal that the USA is “Too Big To Fail.” Too powerful, & to wise. Yet, this is not true, & never will be true. Why? Because, my friend “History repeats itself.” This is the factor you forget, & while there are many published studies of 1938 & the Japanese expierence. This doesn’t mean that any of our LEADERS/PEOPLE. Will consider them in their decision making process! I am not saying we are doomed, or due to fail. Yet, I am saying its a possiblity that our run at the top is over, because we like many great powers before us. Have allowed ourselves to become complacent, worrying to much about the rest of the world, & not enough about what is going on in our own backyard.

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