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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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