United States, the next Japan? The Taste of Deflation

Is Japan's current economy a sign of things to come for the United States? In the 80's, Japan's financial markets and real estate market created a bubble much like our bursted bubble today. Although we are not having to issue 100 year bonds and US citizens are not acquiring foreign skyscrapers and other forms of real estate around the world, at our real estate apex much like Japan's, real estate values were over-valued creating their bubble, where trillions were wiped out. Sound familiar? Although we have not lost trillions(yet), we have not fully felt the repercussions of the easy credit which we are feeling in our residential real estate, but not quite yet in our commercial sectors, which means our bubble is still half full. Whenever there is easy credit, there is increased risk taking and an increase in the likelihood for default. Furthermore, with increasing bank regulations, loan officers and the investment community are having a hard time finding profitable investments and consumers are starting to increase their savings at a time when the economy really needs their old spending habits. As these savings rates increase and people fear the safety of their banks, who already give little incentive to save with the bank with low interest rates, compared to burying a can in the backyard or under the mattress, the government started to subsidize those failing banks and businesses. Sound like AIG, Citi, BOA, Merrill or familiar? Yes, well this was Japan back then. Alarming? It should be because they called this period of time "the lost decade". The Nikkei bottomed out around 7600, we hit a bottom of 7000. Furthermore, we are stuck at the moment when Japan started their unsuccessful quantitative easing policy creating their "lost decade", where they tried to artificially create inflation. In addition, this is what the news is talking about when they are talking about the United States being the next carry trade. Furthermore, Japan is still stuck in deflation or stagflationary economy, where the Nikkei 225 is stuck at half its peak value. The main reasons for this deflated "lost decade" are bubbles in equities and real estate.

During the "lost decade", the banks continued to lend to companies and individuals that continued to invest in real estate, when the values dropped, these loans went unpaid and banks delayed the decision to collect on the collateral in hopes that asset prices would improve, escalating deflation. In addition, these banks were unable to lend more money until their cash reserves were built up to cover potential bad loans. This is where TARP was helpful for us to some degree. TARP was designed to reduce the quantity of these bad loans and to increase the funds available for economic growth, kind of like grease for the economy. In fear of insolvent banks, Japanese citizens were afraid of bank failures increasing their holdings in gold and real estate. Interestingly, sounds all too familiar and Japan's economy is still in a rut.

Now, Japan has a dilemma with it's demographic shift, much like our "Greying of America" compounded with a decreasing birth rate and decreasing wages, exacerbating deflation. Decreasing wages caused by retiring, top pay scale, baby boomers being replaced with lower pay, contract hire, and part time employees decreasing salaries close to 10 percent in the last decade.

TBC

"Sitting on the Sidelines": the in thing during this Recession

Last week, Ben "the Great Timing" Bernanke, said we are out of recession. This is the same guy, when all this started, kept raising interest rates. Ouch! Although Bernanke has many more years in academia and age on me, come on. I call this recession the "Sitting on the Sidelines" Recession, or "SOS" Recession, simply because everyone has been and still is Sitting on the Sidelines.

Remember last year during the holiday season, when everyone was SOS to do their holiday shopping? We had horrible retail sales numbers until the final week before Christmas because everyone was SOS, kind of like the opposite of ebay, waiting for the price to come down as the auction gets closer to ending. Ouch, since we are a consumer driven economy. This is also apparent in the Real Estate market. Remember during the interest rate decreases? Everyone was SOS for their refinance for their 2 year ARM, 3 year ARM or interest only loans. Ouch! again, since Real Estate has helped us get out of all our previous recessions. Now, everyone(well, except in Texas) in the United States is waiting for Real Estate prices to hit bottom before they start jumping back in for their new home, SOS. Furthermore, possible employers are SOS awaiting better sales and top line growth numbers to start a massive re-hiring process and thaw out their hiring freezes. And again, Ouch!, since obviously people can't do any of the above without jobs.

Interesting enough, with all those ouches above, we cannot be out of recession yet. As a matter of fact, we still have much further on the downside to go. Funny, all this talk about a V-shaped economic recovery. More like this, VVVVVV. At this rate some of those V's will be lower than the others. Yes, I am saying it, the stock market has created another mini-bubble. We are headed lower, the DOW will probably hit 9000 to 8800 again and if it breaks 8800 we will revisit near 8500 again. We are bouncing on the ceiling as I type, right at 9900. Why? First of all, we are all SOS! Second, we have a new wave of foreclosures coming because of that cycle above or the lack thereof. There are a lot of people without jobs or scared that they will lose their jobs, without jobs and those confidence levels, they cannot or will not buy homes and consumer goods setting up for some dismal consumer confidence numbers going into the holiday season which is a lot of that topline growth that companies are looking for.

Weak Dollar for interesting times and $4 gas

Remember a year ago when oil hit $170 a barrel and gas was over $4 per gallon at the pump? This is a large effect the weak dollar has on consumers. Currently, the dollar index is headed lower and by end of the first quarter 2010, headed to its near all time low or most likely even lower. Although our economy and the world economies are in far worse condition than they were a year ago during the record high gas pump prices(which requires a lot of explanation in itself), which would normally lower world demand and drive prices lower, we have emerging economies that are chugging away all those surpluses. If you think this is depressing, read no further.

These emerging economies, called BRIC's, an acronym for Brazil, Russia, India and China require a lot of fuel, or petroleum, to sustain this growth. However, Brazil and Russia are self sufficient countries in regards to Energy. So, China and India require much of these petroleum reserves to keep growing. Brazil, Russia and China are also threatening to remove the United States Dollar as their reserve currency. Although replacing the dollar as their reserve currency cannot be done overnight and would especially be unadvantageous to start replacing when the dollar is weak, the thought that they even thought about doing this is very scary. Why would anyone think about this, if they possibly didn't have the intention? Any other old newshound will remember that the Old Soviet President, Vladimir Putin first brought up replacing the dollar as their reserve currency a couple years back. Now we have Russia, Brazil, China and even the UN? ...and to a lesser degree but still can be significant, Chavez and Ahmadinejad.

The replacement of the dollar as reserve currency would cause for interesting times in the United States. The main reason the dollar is able to hold this amazing and ballooning budget deficit is because the US Dollar is the number one reserve currency on earth. If this were to change, what would keep all our debt holders from asking for their borrowed money back?