The Last Bear

1. Interest rates in Japan were already near 0%, and anyone who honestly claims that ten basis points will have any impact is either severely mentally challenged with this topic or simply ignorant and flat out stupid. It will have no impact at all.

The Nikkei 225 surged 1.5% because 90% of market participants are derived from the Dumb Money Camp and thought the move will boost the faltering Japanese economy. The Japanese economy struggles since the late 1980's and currently faces a slowdown in exports and a strong yen thanks to a worthless U.S. Dollar.

Since they have decided to bail out their financial system in 1998. Japan has not yet recovered from that mistake which was their "Economical Seppuku" and continues to suffer as a direct result from it. Todays interest rate cut towards 0% together with the asset purchase program coupled with the reaction of Japanese traders and analysts is a clear indicator that no lesson was learned and that Japan is headed for its third consecutive lost decade.

a) Excess capital initiated an equity bubble as well as real estate bubble, collectively known as the asset bubble

b) Over-regulation as well as policy mistakes fueled the Japanese asset bubble

c) The Nikkei 225 reached an all-time closing high of 38,915.87 on December 29th 1989 and one square meter in the top district was selling for over $1 Million 

d) Pop! The bubble busted and financial institutions were faced with total collapse

e) The Bank of Japan slashed rates to 0% (with a delay) and launched massive asset purchase programs

f) The Nikkei 225 corrected to a closing low of 7,162.90 or 81.59% on October 27th 2008; 19 years later

g) Policy makers continue to make the same mistakes

Should you answer no, don't bother! Those who understood the direct connection to how the U.S. has reacted in 2008 and continues to act, congratulations. 

It is never possible to make one-to-one comparisons, but when the same actions are applied to the same problem then the same outcome should be expected. Please keep in mind that the economy and financial markets are based on math since they deal with numbers and therefore the same equation will have the same result.

The S&P 500 reached an all-time closing high of 1,562.47 on October 10th 2007. A correction of 81.59% would take the S&P 500 down to 287.65 by 2027, back in line with fair value for the S&P 500 which is around 300.

Back to the rate cut, it lacks importance because it will not stimulate anything besides the ego of some central bank governors. Rates were already at 0.10% and now they will float between 0.00% and 0.10%, same difference. The rate cut was nice for some media hype and even inspired this post, other than that it only ensures that Japan will lose another decade and the Nikkei 225, loved by contrarians for quite some time, will likely set new all-time lows this decade. By the way, those new lows will also set the road map for our previous S&P example and therefore do not be surprised by even lower numbers beyond 2027.

2. Japan lives off their huge export industry, and we are talking quality exports. Some refer to those exports by Japan, China and Germany as the pulse of the global economy. Having said that, the Japanese export industry struggles and signals lower demand ahead, especially out of the U.S.

Growth contraction is not the only problem for Japanese exporters. They also face a strong yen which cuts their profits and poses budget problems due to decreased tax revenues. The U.S. achieves the same effect with counter-productive policies by the socialists which drives companies and their revenues overseas. Two different strategies, same outcome. Again, simple math. Two plus two equals four, just as five minus one equals four. The examples are indefinite. The point is that if you want a different outcome, you need to change the equation. 

...Japan intervened in global Forex markets on September 23rd and bought U.S. Dollar while dumping Japanese Yen in order to artificially weaken the yen for the first time since 2002. It caused the yen to drop against the USD, but as expected that moves was short lived and not even three weeks later the yen has snapped back into reality.

It is not that the yen is a great place to be but rather that the USD is such a lousy currency thanks to the policies applied by the Septic Tank and his Plumbers. The USD will continue to deteriorate thanks to the same pathetic idiocy applied by governors of the BoJ to their asset bubble. The Septic Tank was a good Gakusei and learned from his Sensei. 

As you may be somewhat shocked and in awe that the Septic Tank managed a semi-intelligent statement (Fed boss: Threat from deficits 'real and growing'; AP), he continues down the same road as you have gotten used to by now from Helicopter Ben. OK, Ben is late to the party as by now John and Jane Doe know about the problems with the twin deficits. 

The difference between the Septic Tank and his Plumbers and John and Jane Doe is that John and Jane Doe understand the fact that the solution to the problem is not to increase the deficits, which will almost double this decade thanks to the policies promoted and signed by Dumbama. Since Barack Hussein Obama took over the circus in D.C., there have been plenty of counter-productive polices put in place which will further harm the economy. Those policies, some inhibited from the previous administration, will ensure that there will be no economic recovery in the U.S.

The Septic Tank is on a mission to guarantee that a sustainable recovery will remain an illusion (Fed Boss: More securities buys could help economy; AP). Not at all. On the contrary it will only fuel the Second Wave of the financial crisis which will be unleashed in 2011.

a) The resignation of Ben Bernanke

b) The resignation of Timothy Geithner

c) The end of the Obama administration

d) Simplification of the tax code followed by tax cuts for everyone

e) Less but effective regulation of financial markets

f) End of bailouts

g) End of protectionism

The above seven examples are just a short-list of events which would have an immediate impact on the economy and will pave the way for a recovery which will leave the U.S. in a global position in order to take advantage of opportunities. It is very important to understand that the global power-shift has taken place and that the return for the U.S. towards global supremacy is an illusion.

The end of U.S. dominance, and more important the realization of that fact will benefit the U.S. economy. In order understand it, we require real change and not the fake change promised in 2008. Change comes with pain, and it is time to comprehend that the best place for the U.S. is right beneath BRIC and the EU. With the global power-shift, the U.S. should shift its focus from international affairs to a national level in order to tackle domestic problems. 

The U.S. has lost its competitive edge, and any attempt to race with the next generation of global leadership will have the same effect the cold war had on the Soviet Union. After the break-up of the Soviet Union, Russia struggled until the next generation of leadership under Vladimir Putin emerged. Now Russia is the second richest country behind China. The Russians did not bail out their financial system in 1999 and allowed banks to fail. Russia adapted a capitalistic business approach and prospered as a direct result of that. Similar story in China. 

China and Russia form the new global power team and together with Brazil and India emerge as the new global leadership. It is time to face reality and harvest the domestic potential in order to not be left out. Change takes time and it will take another two decades for John and Jane Doe to understand the events which unfold in front of their eyes. Once they have comprehended, it will be too late to take advantage of the opportunity.

The U.S. has a wealth of entrepreneurship, and unless that wealth is harvested the U.S. will be left with the sticky little shit at the bottom of the barrel. Don't waste time to focus on international affairs, focus on domestic talent and position the country for growth in the future. The talent pool is great, but policy makers and politicians focus on the wrong end of the spectrum.

Another clue can be taken from the EU which happily accepted its support role for BRIC and emerged as a global leader in other sectors such as alternative energy. The EU has plenty of problems as well, but their different approach has allowed the combination of support and leadership.

Understand your assets, know how to use them. Identify sectors were you can establish sustained leadership and harvest them, offer support in other sectors to the leadership. Better to lead in one or two categories than to be average in all categories.