Wide Disparity Among 10-Year Gov't Bond Yields in the U.S., Germany and Japan...

Chart of The Day: World Market Performance, Post-Financial Crisis

Chart Courtesy of Chart of The Day

For some perspective on the post-financial crisis rally, today's chart illustrates how much of the downturn that occurred as a result of the financial crisis has been retraced by several major international stock market indices.

For example, the S&P 500 peaked at 1,565 back in October 9, 2007 and troughed at 677 back on March 9, 2009. A recent close for the S&P 500 was in the 1,848 neighborhood -- a retracement of +132% of its financial crisis bear market decline.

As today's chart illustrates, China (Shanghai Composite), Japan (Nikkei 225), India (S&P BSE Sensex), Germany (DAX), France (CAC 40) and the U.K. (FTSE 100) are all above their financial crisis lows (i.e. above 0% on today's chart) and three of the aforementioned countries (Germany, India and the U.K.) are currently trading above their respective pre-financial crisis peak (i.e. are above +100% on today's chart).

It is interesting to note that the U.S. (epicenter of the financial crisis) has outperformed the other major stock market indices (* keep in mind that the German DAX is unique in that it includes for the reinvestment of dividends) while China has lagged to the point where it only trades +9.3% above its financial crisis lows -- not that impressive of a performance considering that the financial crisis occurred well over four years ago.


Chart Courtesy of Chart of The Day

Quote of The Day: The Fed Is Concerned About A Japanese-Style Economy...

“The Fed outlook was so extreme they have to be worried about a Japanese-style no-growth deflationary environment. ”

Harvard Professor, Niall Ferguson

"The Fed has made it clear they intend to be accommodative and proactive, and now I can assume that 'short' rates will remain effectively zero for three years, rather than a year and a half."

Christopher Molumphy, Chief Investment Officer, Franklin Templeton Fixed Income.

Are We Headed for A Prolonged Japanese Deflationary Slog?

If you look at the progression of the U.S. stock market boom and bust, it's easy to see comparisons to the long deflationary slog experienced by Japan.

What's more, we have a similar monetary structure (our own currency, with mostly domestically-owned, domestically denominated debt), and we're facing a similar crisis (too much private sector debt).

The Treasury market shows it as well.

The spread between current Treasury yields and yields on Japanese Government Bonds has hit a new multi-decade low.

And beyond that, the progression of the Treasury yield collapse has has gone at a similar pace.

This chart comes from Nomura's Richard Koo, lining up 10-year yields between Japan and the U.S. at the start of each respective crisis.

Bottom Line:

10-year Treasury yields have a lot longer to fall if you think Japan is a good guide. 

Quote of The Day: Japan-Like Economic Growth Ahead?

“It's pretty amazing that the Fed will (keep rates) exceptionally low until 2013,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They are telling you that we are in a stage of Japanese-like economic growth.”

Recession in the USA? Depends On The Global Economy's Big Three...

Turmoil Dampens Already Slowing Global Economy

The eurozone sovereign debt crisis has contributed to rising risk aversion in global credit markets. Even more fundamentally, the crisis has reinforced the increasingly weak outlook for European economic growth. 

Europe accounts for roughly one-fifth of the global economy. 

Weaker European demand will likely further damage already decelerating export growth in Asia and other regions.

China’s economy has moderated substantially in recent months amid significant monetary tightening. A slowdown in exports raises the near-term risks of a hard landing there. 

Japan has been unable to fully regain its footing after its nuclear and natural disasters.

With Europe, China, and Japan accounting for 50% of non-U.S. economic activity, the world’s three largest economies outside the U.S. may be stalling.

Chart of The Day: Reserve Bank Credit Outstanding - Japan vs USA

The USA's Federal Reserve balance sheet credit explosion, which began soaring in 2008, looks ominously identical to Japan's.

The credit explosion was unable to repair the economic malaise in Japan.

Will it work here in the U.S.?

Don't hold your breath...

Japan-Like Decade of Deflation A ‘Real Threat,' Experts Say

Pullback in consumer spending and reluctant lending by banks lay the foundation for a lost decade...

By some measures, deflation in United States is no longer a question of if, but for how long and how deep.

“In a lot of ways the economy is soft and there's absolute deflation in things like computers, food and energy,” said Barnaby Levin, managing director at HighTower Advisors LLC, which controls $16 billion in client assets.

Of course, any talk of deflation these days conjures up images of Japan, where businesses and consumers have been hoarding cash since the early 1990s while prices of goods and services have steadily declined.

“I think a Japan-like lost decade is a real threat here for all kinds of reasons,” said Mr. Levin. “After the 2008 market meltdown it scared the heck out of all of us and everybody is now pulling back their spending just like our grandparents did during the depression.”
 
Read more here...

Japan-Like Decade of Deflation A ‘Real Threat,' Experts Say

Why The Stimulus Hasn't Worked. And Won't Work. Ever.

"We've got to keep spending, to keep from going bankrupt."  — Vice President, Joe Biden

Brilliant observation, Joe. No wonder the economy is on life support.

Think of the U.S. economy like a household. If you were in trouble financially, how would you be FORCED to behave?

1. You'd cut spending dramatically.
2. You'd stop all borrowing immediately and pay down existing debt as fast as possible.
3. You'd refuse to lend anyone money.
4. You'd stop all charitable giving until you got back on your feet.
5. You'd try to be as productive as possible, perhaps taking on a second job or starting a new business to bring in more money.

The U.S. government doing the EXACT opposite, isn't it?  Borrowing isn't being curtailed. It's increasing exponentially. Spending isn't being cut. The bigger the hole gets, the more the politicians keep digging. 

If borrowing and spending what you don't have won't rescue your household from financial ruin, how can it possibly remedy the economy's predicament?

It can't, because unrestrained borrowing and spending is the antithesis of financial security.

The economy, we're told depends on credit. That's exactly backwards, and is no more correct than if you'd said your own prosperity depends on credit. It doesn't.

Credit depends on the economy and the existence of capital, which is only accumulated through savings, not spending. The only way you can truly stimulate the economy in a lasting way is to cut the burden of government immediately, dramatically and permanently.

The U.S. government is destroying value by increasing spending astronomically. That's why the U.S. dollar is in a free fall. A conceptually bankrupt plan cannot work, and President Obama cannot reach his stated goal of halving the deficit by 2013 on the current track. Our economy will not soon spring back to health. The more the government spends and the more it interferes in the financial system, the riskier every entrepreneurial or investing endeavor becomes.

We only have to look to Japan for an example of the folly of blindly embracing the desperate delusion that it's possible to borrow your way to prosperity with stimulus by running deficits of over 200% of GDP.

After 10 stimulus packages, Japan had little to show for its efforts. It was what economists call a "Lost Decade." Make that TWO Lost Decades! 

During the '90s, Japan's economy grew a paltry +0.5% a year — way down from a +3%-plus average in the preceding 20 years. And its net wealth plunged by -$16 trillion, more than three times the size of the Japanese economy.

Japan does have one lingering legacy from this: a Total Debt of roughly 200% of GDP, the developed world's highest. This has and will continue to hinder Japan's economy and, along with aging demographics, slow economic and productivity growth for the rest of this century. 

Two decades of borrowed and spent stimulus have failed miserably in Japan, which is now drowning in debt.

Are we wise enough to learn from Japan's mistakes or foolish enough to follow Japan down the road to fiscal and financial ruin?