Despite the massive rally domestic markets have enjoyed since bottoming out on March 9--the Standard & Poor's 500 is up 56%--there are still some disturbing signs that all is not well with the U.S. economy. The unemployment rate is at 9.8%, with few signs of turning around. The recession, at 22 months, is the longest such contraction in 70 years.
With every piece of seemingly good news there is more bad news. Housing may show some signs of stabilizing but that could merely be a function of the government backstopping virtually the entire housing market on its own. Corporate profits are up, but that's from laying people off and cutting back, rather than making more sales. Gold has proven a safe-haven, but it's because the dollar has been so devalued. Finally, some very smart people are saying that this recovery might not be "V" shaped after all, but "W" shaped, meaning we are just halfway through the roller coaster and the second steep decline is coiled and ready to strike.
The obvious fear is that the U.S. might not simply will itself out of this recession, as hoped. And while our recession is already one for the record books there is no law saying it can't go on longer, much longer. Just look at Japan.
Over the past 20 years, as U.S. markets rose 194%, Tokyo stagnated. The Nikkei 225 index is down 72% in that time. Over the past decade it's fallen 44%. The Land of the Falling Yen has finally started to show some life in 2009, with its markets up 39% since bottoming on March 9, but this recent burst of friskiness can't erase the damage wrought.
Among other things, Japan has been bedeviled over the past two decades by deflation, one of the two worrying scenarios the U.S. faces as it tries to get out of the weeds. The other, of course, is inflation--which seems like a reasonable assumption given the hundreds of billions of dollars the U.S. mint has churned out in order to pay for one stimulus package after another.
While inflation surely seems a terrifying fate--evoking memories of a sweatered Jimmy Carter and bell-bottoms--deflation is no picnic either. It means as prices fall scared consumers hold off on spending, waiting for them to fall still more, creating a negative spiral that can prove very hard to break. Japan, it can be argued, still hasn't entirely freed itself. Our own Great Depression was also so persistent due to deflation, as prices for many assets, including commodities, fell.
If there is one silver lining from Japan's ongoing deflationary debacle, it's that it gave the U.S. the ability to learn from it. In 2002 the Board of Governors of the Federal Reserve, wrote a discussion paper called "Preventing Deflation: Lessons From Japan's Experiences in the 1990s" that detail what should have been done. Perhaps the major lesson the Fed's governors drew was that as Japan confronted its own collapse in asset prices its monetary policy didn't loosen nearly enough. As our own inflationary spending shows, this was not lost on the U.S.
Our own industry observers point to a few other reasons as to why a stagnating U.S. differs in key ways from its neighbor to the East.
Gerard Klingman, the head of investment house Klingman & Associates, says that unlike Japan our markets, central banks and regulators acted in a much more unified and speedy way than Japan did in its first lost decade. Like Japan, however, Klingman sees our high deficits and ongoing taxes will continue to drag growth into the coming decade. "The 'new normal' will be 2-3% growth and 5-8% unemployment for the U.S. economy," he says. "Not a disaster but nothing to cheer about." Japan's current unemployment rate is 5.5%.
Bill Singer, shareholder at the law firm Stark and Stark, and a longtime securities attorney, says another key difference between the U.S. and Japan is demographics. The U.S. is younger and more diverse, and has a more dynamic political culture. "We do not have a birthrate so perilously low that we are not able to replenish our labor force," he says. As for Japan itself Singer is fairly bearish, as the nation struggles with the exodus of its young, ambitious workers, remains resource poor and faces increased competition from China, Hong Kong and the like as a finance center.
Marc Lowlicht, the head of the wealth management division at Further Lane Asset Management, also says that although Japan's suffered through two poor decades--for many of the reasons above--this might partly be reversion to the mean. "Japan had unheard of growth through the '60s at the rate of 10%, slowing to a still respectable number of 5% through the '70s and 4% through the '90s," he says. "We did not experience this kind of growth and therefore didn't have the type of excess investment that was made across many sectors with the exception of real estate."
Still, not everyone is quite so down on Japan. The International Monetary Fund predicts Japan's growth to be at 1.7% in 2010, while the U.S. will eke out 1.5%. And some savvy investors see opportunity there, partly because prices had been beaten down so long.
Jean-Marie Eveillard, senior adviser of First Eagle Funds, likes various industrial companies in Japan, including Fanuc Limited and SMC Corp. The latter competed directly with American firm Parker Hannifin. He also likes pharma firms Astellas Pharma and Ono Pharmaceutical.
Eveillard says he likes Japanese firms because their managers tend to think longer term than just the next quarter, unlike most domestic names. You'd hope so, considering their nation has been in the doldrums for 20 years. But nothing lasts forever.
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