To See How It All Turns Out, Here’s What Happened in Japan

What Happened in JapanIf you want to see how this all turns out in the end, I’m talking about the Federal Reserve’s program of printing over $1.0 trillion a year in new paper money (something that’s never happened in history), we need not look any further than the Japanese economy.

Why? Because the Japanese economy collapsed about 15 years before our credit crisis collapse of 2008. What we are doing now (artificially low interest rates, deep government debt, and money printing), the Japanese did years ago.

But unfortunately, when I compare the “Japanese experiment” to what our government and central bank are doing now, I don’t like what I see. In fact, I question the long-term benefits and effectiveness of quantitative easing.

Did quantitative easing help the Japanese economy? Turns out the answer is, NO. Since 1990, when troubles in the Japanese economy began, until 2011, the average annual growth rate (as measured by GDP) of the third biggest nation in the global economy has been less than 1.1%. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 4, 2013.) In 2012, the Japanese economy didn’t perform so well and fell back into recession.

This year, the Japanese economy grew one percent in the first quarter and then declined to 0.9% in the second. (Source: Trading Economics web site, last accessed October 4, 2013.) Albeit a generalization, if quantitative easing and low interest rates were working, the Japanese economy would not be suffering like it is.

Which investments made money for the investors in the Japanese economy during its post-boom era? To say the very least, just don’t count on the stock market.

While the American stock market has moved slightly above its 2007 boom-time peaks, the main stock market in the Japanese economy has done horribly. The main index in the country, the Nikkei, is well below its record high, as the chart below illustrates.

NIKK Tokyo Nikkei Average Chart

Chart courtesy of www.StockCharts.com

Since its peak in 1990, the Nikkei is still down about 60%.

Last month, we heard the U.S. Federal Reserve won’t be slowing down on its quantitative easing. The Federal Reserve said it will start to slow quantitative easing when the unemployment rate in the U.S. economy reaches 6.5% and the inflation expectation increases above two percent—two events that can be more than one year away, if not more.

Earnings growth for U.S. corporations is running at its lowest pace in four years, while revenue growth is almost non-existent. The mirage called the stock market in the U.S. economy is running on newly printed money; the rally will only go so long as the easy money continues to flow.

Michael’s Personal Notes:

Income is the largest factor when it comes to determining changes in the consumer spending. Unfortunately, personal income is declining in the U.S. economy—not a good indicator; no matter how anyone tries to spin it.

In the first eight months of 2012, the average change in real personal disposable income (income adjusted for price change) in the U.S. economy was 0.11%. In the first eight months of this year, real personal disposable income has actually contracted by 0.4%. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 4, 2013.)

As real disposable income pulls back, we are seeing the effects of slow consumer spending starting to emerge.

Total light vehicle sales by the automakers in the U.S. economy declined 4.2% in September compared to the same period a year ago. Passenger car sales declined 5.6% in the month. Automakers like General Motors Company (NYSE/GM) saw their total car sales fall 17.1% in September from the same period in 2012. (Source: Autodata, October 1, 2013.)

Another indicator of slowing consumer spending, crude oil inventories are increasing. For the week ended September 27, the Energy Information Administration reported that there was a build-up of 363.7 million barrels of crude oil in the U.S. economy. The agency reiterated these inventory levels are “toward the upper range for this time of the year.” (Source: Energy Information Administration, October 2, 2013.) When there’s less consumer spending, or companies are producing less, then fewer barrels of crude oil are used.

And worst of all, 19 companies in the consumer discretionary sector of the S&P 500 have issued negative guidance about their corporate earnings for the third quarter. (Source: FactSet, September 30, 2013.) This is roughly 23% of all the companies in the sector. (Source: S&P Dow Jones Indices, September 30, 2013.) The consumer discretionary sector is very dependent on consumer spending. Companies in this sector see the trends in consumer spending long before anyone, because they are very close to the customers. If they are warning about future profitability, something isn’t right when it comes to consumer spending.

Mainstream outlets are too focused on the debt ceiling debate and the U.S. government shutdown. Few are talking about consumer spending, which can actually change the fate of the U.S. economy going forward. We are fixated on quantitative easing, which helps out the big banks and Wall Street, but not the average American Joe. And optimism among stock advisors is growing again. The reality of what’s going on in the economy, dear reader, is very different from the picture the stock market paints. Beware of the bear dressed up as a bull.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation as I’ve written about them (many times) before. Let’s just put it this way: Deflation is about the worst economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in Profit Confidential, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.