Twenty years of going nowhere! - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 14 June 2012
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Baltimore, Maryland

Twenty years of going nowhere! Where are we, Hokohama?

Dear Reader...and anyone who has been paying attention...you already know there was something wrong. The world's leading economy, in the most dynamic, inventive period in human history, failed to make people a penny richer.

GDP went up. But real wages did not. In fact, people got nowhere financially - if they were lucky. And many families got caught in the credit/housing bubble. When it blew up they got knocked back...actually losing wealth.

We'll give you the conclusion before we give you the facts: the "growth" in the last 20 years was largely phony. The wheels on the economy spun around faster and faster. The shopping malls were full. Houses were built on nearly every vacant lot. Wall Street cashed big checks. But, overall, it was an illusion. Compared to a real boom, it was a counterfeit. Nobody got anywhere.

Here's the story from the New York Times:

Family Net Worth Drops to Level of Early '90s, Fed Says

WASHINGTON - The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.

A hypothetical family richer than half the nation's families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

Families' income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation.

The new data comes from the Fed's much-anticipated release on Monday of its Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families.

While the numbers are already 18 months old, the survey illuminates problems that continue to slow the pace of the economic recovery. The Fed found that middle-class families had sustained the largest percentage losses in both wealth and income during the crisis, limiting their ability and willingness to spend.

The share of families saving anything over the previous year fell to 52 percent in 2010 from 56.4 percent in 2007. Other government statistics show that total savings have increased since 2007, suggesting that a smaller group of families is saving more money, while a growing number manage to save nothing.

You might be tempted think that this is just a temporary setback...that when things return to normal the typical household will recover two decades of financial progress too.

Don't count on it. Household wealth in the US rests on housing and wages. Housing prices might stop dropping; they are unlikely to enter a new bull market. Instead, they will probably track GDP growth, just like they always did. Nor can you expect to see wages rise substantially. Why? Because there are 15 million people who don't have jobs. It will be a long time - practically forever at the current rate - before they are absorbed into the labor force again. Until this huge inventory of willing and able labor is put to use, don't expect wages to go up.

In other words, when things return to normal they will be what they are now... The bubble was an illusion. The current, dismal situation is real.

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*** The New York Times continues, pointing out that if the feds had let Mr. Market do his work in '08/'09 the rich wouldn't be so rich...

The data does provide the latest indication, however, that the recession reduced income inequality in the United States, at least temporarily. The average income of the wealthiest families fell much more sharply than the median, indicating that some of those at the very top of the ladder slipped down at least a few rungs.

Isn't that what we've been saying? First, the feds made the rich richer by creating a phony, credit-fueled economy, where the amount of credit grew 50 times over the last 50 years. Then, when the credit bubble blew up, the feds stepped in to prevent the rich from losing money. And now the feds moan about the 'inequality' in our society...and how they have to do something about it. Haven't they done enough already?

*** And now, we know you've been wondering. How's our "Trade of the Decade" going? Remember, we're long Japanese small cap stocks. We're short Japanese government bonds. How are we doing?

Well, so far, not very well. Awful, in fact. Japanese stocks have gone down...recently hitting a new low for this cycle. Japanese bonds, on the other hand, have done well. Colleague David Stevenson, in London, has the story:

While most investors' eyes have been focused on the turmoil in the eurozone, Japanese shares haven't exactly been having a smooth ride.

In fact, they've dropped right back. Our favoured measure here is the Topix index (TPX), which tracks the performance of all the country's leading domestic companies. Last week, the index hit a 28-year low.

That's a pretty grim-sounding statistic. But it could also provide a very promising entry point for investors in Japan...

Japan's recent performance is better than it looks

It's no surprise that Europe's stock markets have been tumbling recently. Yet at first glance, the returns from Japan look as bad. From the end of March to the start of June, the Topix lost 20% of its value.

However, when you drill a bit deeper, a rather different picture emerges. The latest drop in the Topix is clearly a setback. But it's merely been a mirror image of the 20% gain the index saw in this year's first quarter.

Put another way, Italy has declined by 15% this year when measured in sterling terms. Spain is more than 25% lower. The TPX, on the other hand, and the FTSE 100, are both down by around 5% on balance. So of late, Japanese shares haven't done too badly in comparison to the rest of the world.

But a 28-year low is still a major milestone. As regular readers will know, we've been keen on the Japanese stock market for a long time now. So what should you do?

You probably already have a good idea why we like Japanese shares. So I'll keep my summary brief. In a nutshell, Japan's stock market looks cheap.

First, the stocks in the Topix currently trade on an average price-to-book value (p/bv) ratio of 0.86, according to Bloomberg data. So investors are able to buy Y100 of assets for just Y86. Compare that with a p/bv ratio of 1.55 for the FTSE 100 and more than two for the S&P 500 index.

Second, TPX stocks look good on the corporate profit front. They're standing on a forecast p/e multiple for 2012 of just over ten (also on Bloomberg numbers). In contrast the S&P 500 is on more than 12 times current year earnings.

Yes, on a p/e of slightly below ten, the FTSE 100 is a touch cheaper on this score. But when you compare the indices on a price-to-sales (p/sales) basis, Japan again comes up well.

The p/sales measure is useful because it shows the scope for a company to expand its profits, as I'll explain in a minute. For 2012, stocks in the Topix are set to sell on just 43% of their sales. Against this, the FTSE 100 is on a p/sales ratio of 0.9. And the S&P 500 is on a multiple of more than 1.25.

The strong yen has hammered Japanese stocks

So why are stocks in the Topix standing on half the p/sales ratio of UK shares, but on a similar p/e ratio? It's because their profit margins are lower. This holds down their earnings relative to their sales. I don't have space here to examine all the reasons for this. But there's one key factor at work: the strong yen.

Since the financial crisis kicked off in 2007, the yen has become just about the top 'safety-first' currency choice. Against such a backdrop, Japan's exporters have had to cut their profit margins to keep selling their products.

Recent euro weakness has simply driven more people into buying the yen. And that has hurt the Topix even more. But after its latest drop, does now look a good time to buy?

The country's stock market clearly isn't risk-free. It's China's largest trading partner. So Japan's corporate sector would be hit by a prolonged slowdown in the latter's economic growth rate.

What's more, the eurozone's woes are a very long way from being resolved. OK, lots of money has moved from Europe into the dollar. But the yen looks likely to remain the world's favourite major currency.

Sure, the Bank of Japan has taken steps to reduce the yen's value with its own version of quantitative easing. But other central bankers' fingers are poised over the printing presses too - and they seem to have more enthusiasm for the idea than Japan's central bankers. So the yen could stay strong anyway.

But there comes a point when all the negatives become factored into a price. And the Topix at a 28-year low is 'discounting' a great deal of bad news. This really does feel like a good time to buy Japan.

The downside risk from here looks limited. And if the yen does weaken a bit, exporters should really cash in profit-wise, which should give a big boost to their share prices.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Twenty years of going nowhere!"

Murugan

Jun 14, 2012

Hi,
i like the sentence, "The world's leading economy, in the most dynamic, inventive period in human history, failed to make people a penny richer". Yes.

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