12/10/09 Johannesburg, South Africa - The US stock market is still in bounce mode. All bounces come to an unhappy end. This will be no exception.
If you step back a bit further, you could see it in a different light. Ten years ago, The Daily Reckoning warned of a long, Japan-like slump. Then, the stock market fell and the economy went into a recession. But the downturn didn't last long. And in the bubbly years that followed, our alert was quickly forgotten - especially by us! But now, 10 years have gone by. The S&P 500 has lost 20% of its value during that period. Wages and income are static. And there is not one single more job in America than there was then. It was a Lost Decade for the American economy.
So get ready...
How about a depression that lasts for 20 years? It could be on its way.
In December, exactly 20 years ago, Japan's stocks closed at an epic high - 38,957 for the Nikkei 25 index. Last week, that same index closed at 9,977.
Readers will quickly note that the Japanese are idiots. Why else would they allow a 20-year bear market? Why else would they permit their economy to slide sideways for nearly an entire generation?
Where is the Japanese Bernanke?
This is almost the same question we posed readers 10 years go. Except then, we asked: Where is the Japanese Greenspan?
Greenspan...Bernanke...it didn't seem to make any difference. American central bankers seemed to have magical powers, at least compared to their Japanese counterparts. They seemed able to succeed where the Japanese failed...
American economists mocked the Japanese 10 years ago. But what goes around, comes around...
Japanese and American economists go to the same schools. They have the same silly ideas. They are equally incompetent, as near as we can see. And yet, the Japanese have suffered one 'lost decade'...and then another...while Americans went from bubble to bubble....
But, maybe our first idea was right after all. After we warned that the country could follow on Japan's heels...entering a long, soft, slow depression...the Greenspan Fed and the Bush federal government opened up with all cannons. They blasted away on both fiscal and monetary fronts...ending up with the biggest barrage of stimulus the world had ever seen.
And what happened? They inflated another bubble...bigger and more dangerous than any before it.
Now, that bubble too has blown up. And now we look around. Once again, the Bernanke/Obama team is firing every gun; just as the Greenspan/Bush team did in the early 2000s...only more of them. But this time, the volleys are not having the same effect. Even though asset markets are bubbling up as hoped, the depression won't go away. Unemployment is over 10% and still increasing. This is not another jobless recovery like the one in 2002-2003. This is no recovery at all.
Then, we look back at the last 10 years. What do we see? Instead of making economic progress, we see a nation making economic mistakes. And, under the leadership of the Obama/Bernanke/Geithner team...they're still making mistakes. The same mistakes. Only bigger ones. And so we have to wonder...
Maybe the next decade will be 'lost' too. Stocks have gone nowhere for the last 10 years, but they are still expensive. On average, they sell for 50% more than the long-term average P/E. Usually, when they are this high, the next generation produces piddly gains. Could it be that, 10 years from now, we will look back without having added a single dollar of net return? Yes...it is quite possible. Likely even. That will mean a total of 20 years with no profit for stock market investors.
Which would serve them right. You'll recall, perhaps, that at the end of the '90s it was widely advertised that the surest, simplest road to riches was the stock market. The Dow was supposed to go to 36,000, according to one well-publicized forecast. All you had to do was 'buy and hold.' You'd get rich for sure.
Of course, it doesn't work that way. As soon as investors all come to think the same thing the only sure thing is that what they all think is balderdash.
Well...then...what do they think now?
As near as we can see they believe two contradictory things. On the one hand, everyone says the dollar is doomed. On the other hand, they all seem to want dollar-denominated US Treasury bonds.
But actions speak louder than words. They may talk about the end of the dollar; but that is what they still own. And that is what they're still buying - via US Treasuries. So...we want to be short US Treasuries for the next 10 to 20 years.
But wait. Isn't it too soon? Ah, there's the rub. Treasuries seem to be approaching a major peak. Maybe they are there already. Maybe they aren't.
What bothers me is that we still haven't had that other major leg down in the stock market, we told colleagues Issy Bacher and Dan Denning today. It's not natural for a bear to take a chunk out of asset prices...and then just go away. Typically, the assets bounce back...and then the bear takes another chunk out of them.
Since we haven't had that next leg down...we have to assume it's still ahead. But investors seem totally unprepared for it. When it comes, they're going to panic. They're going to sell shares all over the world. And they're going to seek safety...where? They're probably going to turn to US Treasury bonds. Treasuries will go up, not down...
Now the funny thing is that moving to Treasury bonds will help the US government finance its deficits...and possibly stretch out the depression for years. As long as the dollar is in jeopardy, the feds are in danger. They might not be able to finance their deficits. Which means, foreigners...and investors generally...could walk away from the dollar at any time. That would cause a major crisis. If the feds couldn't finance the deficit with borrowed money...they'd be forced to print it...causing hyperinflation.
As long as they can finance it, on the other hand...we could face a long depression.
That's the risk that no one is paying attention to...and no one is prepared for. That's why it seems like the most likely outcome. A long, slow, on-again, off-again depression...just like we forecast 10 years ago.