|
Issue 34 • JULY 22, 2009 The Future of Our Economy: Lessons from Japan
The “worst” of the crisis may well be over ... although I’m not ready to wager all my money on it. The bigger question is, will the recovery, when it comes, be a typical rebound? Will it be robust and back to business as usual? I believe it’s unlikely ... for several reasons that I have outlined in past issues of Weiss Advice. More likely, the “new normal” for the global economy will be very different from the typical post-war economic recoveries we’ve experienced. For a glimpse at one possible road map for our economy, you can take a lesson from Japan’s recent history. As many investors are aware, Japan’s economy has suffered for the past 20 years from the after-effects of a spectacular bubble that inflated and then burst in both its equity and real estate markets ... sound familiar?
In fact, this year is the 20th anniversary of Japan’s stock market peak at about 39,000 on the Nikkei Index in December 1989. Yesterday, the Nikkei closed at 9,723 ... and that’s UP nearly 40% from the March low ... but still down about 75% from the peak.1 To be sure, within this long secular bear market decline, there have been a number of profitable rallies in Japan. In fact, since the Nikkei today is truly one of the world’s MOST unloved stock markets, we view it as an attractive opportunity at present. But you have to stay nimble. The key for investors betting on Japan is to recognize that the short-term, counter-trend rallies in their markets have been fleeting in nature, with sharp gains often evaporating just as quickly. In other words, it has been better to “rent” these rallies, rather than “own” them. Perhaps the same lies in store for U.S. stocks in the near future. Since 1989, Japan’s Nikkei stock index enjoyed no less than five separate bear-market rallies … averaging more than +50% on the upside (see graph above)! But each time stocks fell to new lows.2 This is a cautionary tale that investors must take to heart today. “Stocks for the long run” may have worked well in the past ... when U.S. stocks were GAINING +12% per year since 1950 … but since 2000, the S&P 500 has LOST -6.4% per year instead ... times have clearly changed!3 In my view, the main reason that stocks in Japan failed to gain any lasting traction over the last two decades, is that growth in its economy has been highly erratic too. During the 1980s and 90s, lasting economic recovery proved elusive in Japan, and sustainable prosperity just could not seem to gain much traction (see graph below). Japan went from a steady, robust growth trend pre-bubble (1989) to a very erratic economy afterward, which has suffered repeated recessions and recoveries ever since that time. Not surprisingly, its stock market experienced intense up and down volatility over this period as well.
In this scenario, the U.S. economy may appear to be on the road to recovery … perhaps even by late this year or early 2010 … only to relapse into recession once again several months or a year or so down the road. Rather than average GDP growth of nearly +3.5% per year in the U.S., as was the case from the 1950s to 2000, going forward we may have to get used to an economy able to grow only +2% per year … or even less.5 This could be the “new normal.” Such a down-shift in potential economic growth would likely drag down expected stock market gains as well ... despite the robust rallies that may occur along the way. If you’re a long-term oriented investor, this means you may need to get used to more modest returns from stocks. You should consider a portfolio strategy that can play good “defense” ... by hedging downside risks and dynamically shifting into cash as market conditions warrant. Rather than 12% annual gains, you might consider yourself successful earning 6%-8% a year from stocks over the next decade, with plenty of twists and turns along the way. No doubt, the rally since March has been impressive. And, as I said last week, we may see a second-stage rally getting underway that could push stocks even higher toward year-end. For the time being however, I believe it’s best to consider “renting” such rallies, not “owning” them. Good investing, P.S. We recently published a new special report titled: The Weiss All Weather Investor Guide to go with the launch of a new Weiss Capital Management investment strategy. To get your copy of this report at no-cost, go here now! 1 Bloomberg market data: 7/22/09 Disclaimers: 1. Weiss Advice is a publication of Weiss Capital Management, an SEC Registered Investment Adviser. Weiss Research is a separate, but affiliated publishing company. Both entities are owned by Weiss Group, LLC. 2. "Weiss Advice" is published for general information and educational purposes only and should not be construed as a specific recommendation to buy or sell any security. Specific recommendations can only be given to advisory clients of Weiss Capital Management, with the benefit of knowing their financial condition and suitability. Receipt of this publication should not be construed as a solicitation to do business outside the jurisdiction for which the Firm is approved. Currently, Weiss Capital Management offers investment advisory services to individuals maintaining legal residency within the United States. For details, please contact the Firm. View Weiss Capital Management's Privacy Policy. To make sure you don't miss our urgent updates, add Weiss Advice to your address book. Just follow these simple steps. |
The stock market continues to enjoy a very healthy bounce, spurred on by hopes of a second-half economic rebound, but my thoughts turn to the likely shape and durability of such a recovery.
The lesson to be learned for those looking forward to a quick economic recovery in the U.S., is that the pattern to watch for here may look a lot like a “W” in the years to come (perhaps even a run-on W). It could be eerily similar to the 1930s in the U.S. … and to the multiple false-starts in Japan’s inconsistent economy over the past 20 years.
