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How This Bear Market Could Last Another 18 Years… Just Like Japan’s

Written on 06 June 2012 by Kris Sayce

How This Bear Market Could Last Another 18 Years… Just Like Japan’s

Yesterday, Bloomberg News reported:

‘Japan’s Topix Index (TPX) entered a bear market, with stocks plunging to a level not seen since 1983 as Europe’s debt crisis spurs a global flight from risk assets, driving up the yen and threatening exports…

‘In 1983, the Topix was in the sixth year of a 12-year advance that ended when an asset bubble burst, ushering in an era of deflation and economic stagnation. The gauge has lost 76 percent since peaking on Dec. 18, 1989.’

It has been a rough time for Japanese stock investors.

An entire generation of Japanese have lived through a bear market. Japanese investors who were 18 when they bought their first shares in 1989 are now 41 years old.

And so, as the Aussie market nears the end of its fifth year as a bear market, the question on every investor’s lips should be: Will Aussie stocks fall for another 18 years?

We’ll give you our take on it now…

Until recently, most people thought asset prices always went up.

This was mostly the view among stock and housing investors.


Because it was what they had seen during their lifetime. Even when house and stock prices fell, it wasn’t long before they recovered and went higher again.

Take the 1987 and 2001 stock market crashes. Or the early 1990s housing bust. Soon prices stopped falling, levelled off, and then soared higher.

What the Japanese Bear Market Tells Us

But as the Japanese experience shows, stock and housing prices don’t always go up, and they don’t always recover after a crash.

Look at that quote from Bloomberg again. The Topix Index ‘has lost 76 percent since peaking on Dec. 18, 1989′.

And the important thing is, if Japanese stock market history tells you anything, over time the impact of the crash gets worse, not better. As this chart of another Japanese index, the Nikkei 225 shows:

chart of another Japanese index

Source: Wikipedia

Following the 1989 peak, the index halved over the next four years. Then it steadied into a range, before continuing to fall.

The Japanese stock market is an important lesson for any investor about the impact of credit-fuelled bubbles. We won’t go into the history of the Japanese bubble, except to remind you of how the 3.41 km2 of land containing Tokyo’s Imperial Palace was valued at ‘more than all the real estate in California’ during the 1980s boom (Edward Jay Epstein, 2009).

What it tells you is that rather than stock and housing prices always going up (in the long run), they behave more like a bouncing ball.

In Japan during the 1980s, the credit-fuelled boom threw the ball high into the air. It began to fall in 1989. The ball hit the floor in the early 1990s…bounced until the mid-1990s…fell and hit the floor again by the mid-2000s…and so on.

You get the point.

But why should this happen? And what can it tell us about the future direction of the Aussie market?

Following Japan’s Bear Market Lead

The Japan experts will tell us Japan is unique. The usual spiel is that Japan owns all its own debt and so it’s different to the debt picture in the US, Europe and elsewhere.

Maybe that’s true. And maybe it isn’t. Or maybe Japan’s economy is just a few years ahead of the game. Consider these two charts from the latest Banque de France Financial Stability Review:

Holders of government debt
Click here to enlarge

Source: Banque de France

Right now, Japanese residents and the Bank of Japan hold 94% of all Japanese government debt.

Compare that to 52% of US government debt held by the Fed and private residents. In fact, US Fed and government (including government agencies) hold USD$6.328 trillion…about 40% of all US debt.

And according to a 28th March report by the Wall Street Journal, ‘The Federal Reserve is propping up the entire US economy by buying 61 percent of the government debt issued by the Treasury Department…’

The report concludes that this is ‘a trend that cannot last’.

But what if it can last?

What if the US Fed keeps buying US debt?

Who’s to say that in 10 or 15 years, US residents and the Fed won’t own 94% of all US debt?

It doesn’t seem likely now, but then, four years ago it didn’t seem likely that the US government would own 40% of its own debt today.

With so much money flowing into government coffers, investors need to face the facts: the era of financial asset growth is over.

No government will ever choose to cut spending. Remember that all the talk of austerity is false. Government spending in the US, UK and Australia will go up over the next few years…even though the politicians claim they’re making savage cuts.

(All they’re doing is cutting the spending growth rate, not the nominal rate. In other words, if the previous forecast was to grow government spending by 5% next year, but it only grows 4.5% they call it a spending cut…even though spending has risen.)

We’re afraid things are the same for Australia.

The Boom is Over, Get Used to a Long Bear Market

Australia has benefited from a decade of the China resources boom. But that boom is over. US and European private spending is falling. And as Europe and the US are China’s two biggest export markets, any problems in those economies will impact China…and therefore Australia.

That’s despite what the mainstream media told you when they claimed Europe is ‘so far away’. That growth was in Asia…where we are. That’s only true if Americans and Europeans kept spending.

The problem facing Australia over the next few years is the problem that the US and Europe face now. How to pay for an expensive welfare system when tax revenues fall?

The answer will be to look to Japan, Europe and the US… print more money and have the central bank buy the government’s debt.

Anyone who thinks Australia is different due to the lower levels of government debt is kidding themselves. It only takes a few years of budget deficits and suddenly the government and taxpayer are running just to stand still.

So, far from being an exception, Japan is more like the blue-print for governments and central bankers everywhere. Get ready for this bear market to last another 18 years…at least.


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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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