More chatter about the Double Dip recession this morning, despite the building proof that the DD is not a likely outcome. Apparently Mr. Market has not taken his Wellbutrin this morning, so we sell off.
This morning Credit Suisse published a research note between the differences in our economy at present versus Japan in the late 80’s and 90’s.
The U.S. is not Japan 15 years ago. We find many more differences than similarities between the U.S. today and Japan 15 years ago:
- The U.S. has had far more proactive fiscal/monetary policy. (Japanese monetary conditions were tight until 1995. Unlike the U.S. today, Japan fiscal easing was small.)
- Japan had falling wages since 1997 and negative inflation expectations since 1993. (U.S. wage growth and inflation expectations are >2%.) Falling wages creates sustained deflation.
- Asset deflation was more acute in Japan, with house prices declining by almost 80% in the big cities.
- The U.S. moved to recapitalize banks quickly and has already written down 85% of their estimated losses (Japan needed 13 years.)
- Japan was very slow to deregulate, and hence the price of labor fell as opposes to the quantity. With companies having little incentive to maximize return on equity, the return on capital is one-third that of the U.S.
- Deflation became economically and politically acceptable because Japanese households have net financial assets of 41% of GDP, so they benefit from deflation.
If this remains the case, its quite bullish for equities although the road will likely be bumpy and a potential for a major bubble in US bonds, especially Treasuries.
No Positions
Brad Pappas