The Equity Rally Rolls On But Investors are Still Buried

"After the collapse of the equity and real estate bubble that has plagued us for the last 10 years, Americans have absorbed a tremendous blow to their wealth. We all know housing is down about 30% from its peak. But I’d like to concentrate on what the equity market has done since December of 1999 in both nominal, dollar and gold terms. In nominal terms the S&P500 is down “just” 28.6% since the decade began. But when you ask questions like what how much of my purchasing power have I lost vs. gold and other currencies, the data become even scarier. On December 31st 1999 the S&P closed at 1,469. As of this writing, it stands at 1,050. Meanwhile, the US dollar has lost 26% of its value during the same time period. That means the S&P is down nearly 48% as measured against a basket of foreign currencies. But only when measuring the performance of the benchmark index against a proven inflation hedge like gold, do you find the truth about how difficult the decade really was. The price of gold increased by more than 233% while the major averages were busy doing their imitation of Japan’s lost decade. That means if you have kept your money in the market since the turn of the century, you have lost about 79% of your purchasing power against gold. The above data means that even though the S&P 500 is up over 50% since March, not only is it still way below its nominal price at the start of 2000." "So don’t be surprised to find that a zero percent Fed Funds rate continues to drive more people to chase yield and into riskier assets, which sends the market higher from here."

We are not over with major losses yet, and there seems to be no engine of recovery on the horizon in spite of assurances with nothing of substance in the offing.

Zero Interest Rate Policy has calamatous financial, cultural and social portent for the US. Such is the experience of Japan. Here is a good description of what ZIRP menas to a country that has it for a while:

An excerpt: " Solar Eclipses And Human Magical Thinking Systems The Family Is the Most Important Economic Unit Of All July 23, 2009...3:34 pm ZIRP Leads To Social Collapse Of Families Jump to Comments

Picture 17When industrialization comes to town, immense social changes are unleashed. In particular, women cease being chattel and become their own agents. Women’s rights rises. The ZIRP system the US has embraced has tremendous dangers. Denninger has noticed what I have explained in the past: the US is now, thanks to being a ZIRP banking system, is now a carry trade tool! This will cause us to unwind exactly like Japan did after its immense credit bubble. Today, I want to expand on the social implications of all this, as seen from within families in Japan and the US.

.Picture 17

Can Japan Avoid Another Lost Decade? – Forbes.com

Japan’s Lost Decade might thus be more aptly called its “Lost Decades.” The sharp economic slowdown of the early 1990s culminated in a recession in 1998-99, only to be followed by another near decade of recessions and paltry growth. Being the most trade-dependent of major industrialized nations, Japan suffered the worst GDP contraction among these countries in first-quarter 2009, and is on track to perform the worst of the G-3 in 2009. Aggregate demand slid precipitously, and deflation took hold once again, despite massive fiscal spending and monetary expansion. My analysts and I project Japan’s recession will persist through 2009, then give way to gradual recovery in 2010.

Though the pace of economic contraction has slowed since first-quarter 2009, the inventory-driven rebound in production and exports will at best make for stabilization at low levels, rather than a strong economic expansion. Japan’s recovery will hinge on external demand from the U.S. and Europe–the main final consumers of Japanese goods. Chinese demand, which helped boost Japan in 2005-07, may be of little help this time. China is the top destination for Japanese exports, but Chinese demand is mostly a function of U.S. and European demand. Most Japanese exports to China are inputs for goods bound for the U.S. and Europe, not finished goods bound for Chinese retail stores or raw materials needed for infrastructure projects.

Forbes magazine supports ‘free trade’ very aggressively. But even while doing articles like this one, the magazine cannot put 2+2 together and see the DANGERS of ‘free trade’. Japan is the world’s #3 economy now that it was displaced by China which will be #1 in another 20 years or less. But Japan isn’t #3 in consumption. The Japanese people consume less and less and less and those who used to own cars are not owning cars anymore and everything is being reduced drastically.

The major reduction in Japanese consumption is all things that revolve around building a family: buying a larger home, buying things and services for the children, setting up the children so they can leave the home. Instead, this is all imploding. As the childbirth rate collapses towards zero, families cease expanding and begin disintegrating. In the case of Japan, women are divorcing men more and more and instead of remarrying, like in the US, they often live alone with their sons and increasingly, their daughters.

Japan is trapped in a perpetual ZIRP system. Zero interest rates are not a wonderful thing. It kills incentive to save money via handing it over to banks who then make the money grow by lending it out and then sharing the interest accrued with the savers. Instead, it makes more sense to put money under the mattress. Or ship it overseas. And this is the Japanese carry trade: desperate Japanese wanting to make some money via a bank lending money, sending their savings, en mass, overseas.

The Market Ticker

The last week or two I had noticed that the /DX (dollar index) had a somewhat-odd correlation to the stock market – one that had not been present to the same degree, if present at all, before.

Specifically, it would move just before the /ES – S&P futures – moved, and the correlation between the two was almost lock-step.

I had mentally blocked out the worst of the possibilities until last night, when it was said right up front by a user who had lunch with a banker in Australia: The dollar has become a carry-trade funding currency; he was executing an increasing number of these trades with the dollar.

We are following Japan’s script almost exactly, but our trip down this road will be far worse than it was for them, because as a nation we are monstrous net importers and in tremendous debt, both as consumers and as a government, where Japan is a net exporter and their population is full of savers.

Tuesday I wrote about the dollar decline powering this latest ramp job in equities, but this development, if it has become or is widespread, is a major problem for The United States, and opens the yawning maw of a trap that we will find it tremendously difficult to escape from.

Yes, this is the dread ‘carry trade’ and it operates best when some places, often much smaller economies like Iceland or New Zealand, have much higher interest rates than the world’s biggest economies like Japan and now, the US. The US dollar is the world’s fiat currency. The US has, by far, the world’s smallest FOREX holdings. The US also has, even today, by far, the world’s biggest trade deficit. The US dollar is weakening against the yen and since August, 2007, has often dropped against the yen. This, in turn, is killing the unbalanced trade with the US. Japan wants a strong US dollar and for that, needs the US interest rate to be at least 300 bp above their constant ZIRP rate.

Instead, the US is also ZIRP. This is a most unusual situation. Throughout history, the interest rates have moved in this massive curve between poles. During the gold basis era, the rates moved between 2-6% with the ‘golden mean’ being around 3%. When Japan went to 0%, this was astonishing. When Japan sat on this for a decade, this was literally unprecedented and I said more than once, extremely dangerous. Now, the US is stuck in the same tar pit and can’t escape, either. Japan depends on us to pull them out. We depend on the Japanese carry trade to fund our spending and that is gone. If we are now the ‘carry trade’ this will violently unwind the US/Japan balance of trade power.

Libra is at work here: since the US and Japan refused to balance trade one way or the other, She will do it by becoming a counter force that is unstoppable. Greater historical forces are at work here: China is now rapidly displacing both the US and Japan in world trade as well as global finances and this will boomerang on this older bipolar business arrangement.

Here are some Australian videos about Japan’s social life:

YouTube – Ageing Economy – Japan

The numbers of Japan’s elderly is shooting upwards rapidly as the baby dearth is now over 20 years and going on, relentlessly. All depressions cause drops in birthrates in industrialized nations. Japan has a dual economy. While the entire middle and working classes suffered nearly 20 years of depression, the industrial giant’s owner class enjoyed record profits. For 15 years, they thrived while the rest of Japan took a nose dive. Japanese industrialists saw their global reach grow greater and greater. The working and middle class saw their domestic status drop like a rock.

Japanese industrialists moved a great deal of their production offshore for two reasons: cheaper workforces in Asia and to keep the US from passing protectionist laws. Toyota, for example, gives heavily to our Congress which is totally corrupted by now. None of this rebounds in a positive fashion in Japanese society. Japan has been ravaged by offshoring jobs just as badly as the US.

This means, the families that once had well-paid workers supporting not only a wife and children, but the elderly parents, has collapsed. The elderly in Japan can’t call on the children for care. For example, in old Japan, the man was most anxious to have a wife because she took care of his own mother. All women wished for sons so they could do this for them. The son didn’t take care of her, his WIFE did that.

As wages fall, sons don’t get married. And since everyone has to earn money in order to survive, women have flooded into the workforce. These daughters all get similar incomes compared to the sons and this is due to the compression of wages which we see here in the US. When all jobs pay nearly the same while the rich get much, much richer, we get an entire society that is depressed. This is why the statistics in the US showing Goldman Sachs and JP Morgan top dogs getting filthy rich while secretaries working for them as well as industrial workers end up with the same low, miserable wages, this should set off alarm bells."

Denninger and Supkis are featured in the piece, it is wor th reading:

http://emsnews.wordpress.com/2009/07/23/zirp-leads-to-social-collapse-of-families/

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