February 27, 2024

Optimists On Housing Recovery May Have To Wait Another Decade – Humpty Dumpty Vs The Fed

It wasn’t supposed to be like this.

Housing prices were never supposed to decline year over year.

Economic depressions were supposed to be a relic of the past.

If the economy weakened, the Fed would fix everything with lower interest rates and Congress would pass some new laws to create new jobs.

If things got really tough, the government would temporarily increase the debt and the magic of Keynesian economics was supposed to quickly “re-stimulate” the economy.

Our children were expected to lead more prosperous lives.  They were not supposed to move back in with Mom and Dad after four expensive years of college – arriving on the doorstep with a diploma in one hand, student loan notes in the other, telling us that they couldn’t find a job.

Day by day, we are discovering that a lot of things that were never supposed to happen are happening and no one seems able to turn things around.

The Federal Reserve and the White House promised to re-inflate the collapsed humpty dumpty real estate bubble with printed money and bailout programs for banks and defaulted homeowners.

An ex Princeton professor, now Chairman of the Federal Reserve, spent his life studying the Great Depression of the 1930’s.  He was supposed to know how to prevent another one, or so he assured us.

Fast forward to 2022 – housing prices that were supposed to have recovered a decade ago are still at levels seen more than 20 years ago.

Not possible you say?  Optimists and shills for the housing industry might want to consider some inconvenient truths.

Will the U.S. have 20 years of stagnant home prices?

What if real estate prices remain the same for another decade?  As I look at economic trends in our nation including the jobs we are adding, it is becoming more apparent that we may be entering a time when low wage jobs dominate and home prices remain sluggish for a decade moving forward.  Why would this occur?  No one has a crystal ball but looking at the Federal Reserve’s quantitative easing program, growth of lower paying jobs, baby boomers retiring, and the massive amount of excess housing inventory we start to see why Japan’s post-bubble real estate market is very likely to occur in the United States.  It is probably useful to mention that the Case-Shiller 20 City Index has already hit the rewind button to 2003 and many metro areas have already surpassed the lost decade mark in prices.  This is the aftermath of a bubble.  Prices cannot go back to previous peaks because those summits never reflected an economic reality that was sustainable.

Courtesy: doctorhousingbubble.com

The days of “no doc” loans are long gone and not likely to return anytime soon.  Lenders have reactivated a quaint old mainstay of mortgage underwriting and now require borrowers to verify the capacity to service debt payments.  Higher home prices require rising incomes but real incomes for many Americans have been declining for decades.

The income of the typical American family—long the envy of much of the world—has dropped for the third year in a row and is now roughly where it was in 1996 when adjusted for inflation.

The income of a household considered to be at the statistical middle fell 2.3% to an inflation-adjusted $49,445 in 2010, which is 7.1% below its 1999 peak, the Census Bureau said.

The Census Bureau’s annual snapshot of living standards offered a new set of statistics to show how devastating the recession was and how disappointing the recovery has been. For a huge swath of American families, the gains of the boom of the 2000s have been wiped out.

Earnings of the typical man who works full-time year round fell, and are lower—adjusted for inflation—than in 1978.

Gary Shilling, who correctly called the housing bubble collapse, tells the Wall Street Journal that housing prices could decline another  20% or more.

It will take a 22% drop to return median single-family house prices to the trend identified by Robert Shiller of Yale University that stretches back to the 1890s and prevailed until the housing bubble began. (It adjusts for inflation and the tendency of houses to get bigger over time.) And corrections usually overshoot on the downside just as bubbles do on the upside.

The problem is excess inventories. They are the mortal enemy of prices, and we’ve calculated an excess of two million housing units, over and above normal working levels of inventories of new and existing homes. That is huge, considering that before the housing market collapsed, about 1.5 million new homes were being built annually, a figure that shrank to 568,000 in February. At current rates of housing starts and household formation, it will take four years to work off the excess inventory, plenty of time for those surplus houses to drag down prices.

Additionally, our inventory estimate doesn’t even include future foreclosures, some five million of which are waiting in the wings. The 49% drop in new foreclosures since the second quarter of 2009 is a mirage, and was partly due to the Obama administration pressuring mortgage lenders to try to modify troubled mortgages to keep people in their homes. (They were largely unsuccessful.)

We can say that “We are not Japan” but every passing day proves otherwise.  And for those misguided souls who still believe that the government and Fed can put humpty dumpty back together again, don’t you think that if they could have they would have?

Japan’ Solution To Debt Crisis – Expand Zombie Banking

Japan’s Zombie Banking Taken To New Levels Of Lunacy

Japan’s real estate and stock market bubbles burst in the early 1990’s.   Since then, twenty years of non stop Government stimulus programs have failed and left Japan with the highest debt to GDP ratio in the world and two decades of lost economic growth.   The costly attempt to have failed banks prop up failed companies has lead to a massive misallocation of capital and resulted in Zombie Firms and Zombie Banks.

Banks were not forced to recognize the condition of their balance sheets and were encouraged to continue lending to firms that were themselves unprofitable. Anil Kashyap labels these “zombie firms.”

Zombie banks continued to direct capital to zombie firms. This charade continued for more than a decade, with the result that the once-powerful Japanese economy was completely stagnant for that period. The government’s main response was to dramatically increase spending on infrastructure and frantically try to get Japanese households to save less and consume more. The resulting “lost decade” of economic growth cost Japan more than 20% of GDP.

Japan has now decided to exponentially expand policies that have not worked for two decades by forcing banks to agree to debt moratoriums.

Oct. 6 (Bloomberg) — Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.

Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.

“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”

Japan’s three largest banks, including Mitsubishi UFJ Financial Group Inc., posted combined losses of almost $14 billion last fiscal year as bad-debt charges surged.

“There is a potential for any proposal along the lines Kamei has made of debt moratoriums to backfire horribly,” said David Threadgold, a Tokyo-based analyst at Fox-Pitt Kelton. The plan could make banks more reluctant to lend to small firms, Threadgold said.

The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.

“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”

Japanese “salarymen” struggling to pay mortgages after bonus cuts may be eligible, he said. “We’re going to make it extremely easy for very small companies to get money,” Kamei said.

Let summarize the lunacy of this new plan: debtors pretend they will pay later; the banks pretend that the defaulted loans will be repaid; banks will be forced by the government to lend more money to debtors who cannot repay what they already owe and the banks will not have to set aside loan loss reserves on the defaulted debt.  Japan’s debt moratorium is a final desperate attempt to “save the system” by preventing deeply indebted, income poor borrowers from defaulting on debts that can no longer be serviced.  It will move private bad debt onto the already over leveraged public balance sheet and will encourage debt repudiation on a massive scale.

When Debt Becomes Inconvenient

Debt that cannot be repaid won’t be repaid and the consequences of default are in many cases relatively minor compared to the burden of continued payments.   Japan now joins the U.S. in actively encouraging the repudiation of debt as discussed in How The Government Encourages Ruthless Defaulters and Loan Mods – Just A Warm Up For The Real Thing – A Mortgage Holiday.

Ironically, the biggest impediment to future bank lending is the growing trend of debt repudiation directly sponsored and encouraged by a government concurrently seeking to encourage more lending.

Consumers having trouble paying their debts can now chose from a long list of government programs for debt forgiveness, loan modifications, rate reductions, 125% loan to value mortgages and more programs on the way.  Their is no  longer any shame or embarrassment associated with defaults and bankruptcy.  Defaulting on debt has become a rational choice for many with little repercussions.

If the long shot odds of economic recovery and job growth do not materialize,  expect to see defaults worldwide increase exponentially as even those who can pay will chose not to.  Zombie banking is alive and well.

The Futility Of Lower Interest Rates, Obama Motors, “Atlas Shrugged” Sales Surge & Confidence Mounts

As stock markets surge, GM’s future is suddenly bright and consumer confidence soars, here are some recent blog posts worth the read with some alternative insights.

Why lower interest rates are not effective monetary policy

If too much debt caused the financial crisis, why are governments world wide trying to force more debt on an over leveraged world?  Japan’s policy of rock bottom low interest rates did not prevent Japan’s “lost decade” of economic growth and results for the  rest of the world will be no different now.  Why low interest rates do not improve the economy.

We are all now GM shareholders but don’t spend the profits yet

Now that the government, aka known as “the people” own General Motors, can we expect to see a quick turnaround that has eluded GM management for decades?  If GM cannot come up with products at a competitive price that buyers in a free market will purchase, the huge taxpayers subsidies will have been nothing but “stimulus waste”.

Atlas Shrugged book sales continue strong

The truths in Atlas Shrugged continue to promote big sales of a book written half a century ago.  Government policies continue to protect and save the least productive while killing the overall economy.  Our present political system almost guarantees the continuation of self destructive governmental economic policies.

With no signs of real economic recovery in sight, consumer confidence grows

Is the increase in consumer confidence in the economy justified?  Although we seem to have avoided the economic collapse widely feared just several months back, what has really changed?  Balance sheets and incomes have not improved and job losses continue.  Do not expect a “V” shaped recovery.

New Twist On Stimulating Economies – Work Less

Desperation Produces Silly Suggestion yen

Governments worldwide are obsessed with pushing consumers to spend more.  From Japan we now have a new twist on how to stimulate spending.   Government bureaucrats (with obviously too much time on their hands) are mulling the stimulus  impact on Japan’s economy if workers were forced to take more vacation time.    Consider the logic as described in Businessweek:

Some 92% of Japanese workers don’t use up their vacation time, a recent global survey by travel site Expedia found. On average, they use 7 of an allotted 15 days each year. Prime Minister Taro Aso’s administration says the vacation law could spur $121 billion in spending and generate 1.5 million jobs. Critics say it may hurt struggling companies—and fail to loosen up outlays for leisure. Many Japanese “live to work,” says Toshihiro Nagahama, senior economist at Dai-ichi Life Research Institute, “and wouldn’t know how to enjoy more vacations.

Whether the Japanese are workaholics or simply like to spend time away from home is up for debate.  The issue not up for debate is whether this silly proposal will create new jobs.  Companies do not conduct new hiring to make up for employee vacations, and economies produce less wealth when there are fewer people productively employed.   The Japanese government simply seems to be out of intelligent options after attempting to stimulate the hell out of Japan for the past two decades with little success.

Big Picture

The Japanese bureaucrats are missing the big picture.  The Japanese worker (as in many other countries) does not need more vacation time to spend money they don’t have; they simply need more income.   The Japanese saving rate as a percentage of income has been high by necessity.  With real estate and stocks prices lower than they were 20 years ago, the Japanese cannot rely on asset inflation to increase their net worth.  Savings can only come from incomes which have been stagnant for decades and now dropping sharply due to the recession in Japan.

Bloomberg — Japan’s wages dropped at the steepest pace in more than six years in March as manufacturers slashed overtime pay to cope with a collapse in exports.

Monthly wages, including overtime and bonuses, dropped 3.7 percent from a year earlier, the most since July 2002, the Labor Ministry said today in Tokyo.

Overtime payments slid an unprecedented 20.8 percent as manufacturers cut extra working hours by a record 49.5 percent, the report showed. The government has been tracking the figures since 1990.

Governments Shooting At The Wrong Target

Governments world wide are obsessed with pushing customers to borrow and spend.  They are all shooting at the wrong target.  The borrowing and spending will come naturally to most people if they are confident in their job security and confident of increases in real wages.  Right now their is scant confidence for either outcome with job losses in the millions and widespread salary reductions or freezes.

Making matters even worse for the thrifty Japanese is that the interest earned on their savings is virtually zero at the short end and a paltry coupon of 1.3% on 10 year Japanese government bonds.   Savers like to see their savings increase every year and the only way to accomplish this is to save more and spend less.  Bringing rates to virtually zero to help the over leveraged has ironically resulted in punishing the savers who theoretically provide capital to borrowers.

Japan’s economic mess will not improve  without addressing the lack of real growth in incomes and jobs and the low return on savings.  Fix these problems and the rest will take care of itself.

Nikkei Continues Rallying As Japan’s Exports Plunge 49%

Bad News Discounted?

One of the hardest concepts for investors to grasp is the ability of markets to discount bad news.  As the news mounts daily about the Japanese economic collapse, the Nikkei 225 continues to rise.   As pointed out previously (see Can The Economic News From Japan Possibly Get Worse?) the Nikkei has refused to penetrate the lows reached in 2003 and at this point is up almost 22% from the March lows.

The ability of a market to rally in the face of horrific economic news is usually a sign that the worst has been discounted.  The argument could be made that informed stockholders have already done their selling since mid 2008 and at this point are looking down the road a year or so for a recovery in business conditions.  Consider also that the Nikkei is back to the levels it was at in the mid 1980’s before the world started its grand experiment with unlimited credit creation.

Time will tell whether or not the Japanese economy is due for some type of recovery.  Bear market rallies of 20% or more are not uncommon after huge declines.  As long as the Nikkei can stay above the 7,000 level, perhaps the worst has been seen.

Long Term Factors To Consider

As previously discussed (See Nikkei – Black Hole or Buying Opportunity?), some long term factors to consider are as follows:

-the Nikkei is already off 80% from its December 1989 high and has perhaps discounted the worst that can happen.

-a multi year double bottom may be forming at current price levels.

-the most fundamentally bullish factor may be that the Japanese government has reached the limits on its borrowing capacity, thus precluding the continuation of costly and ineffective stimulus plans (see Japan’s failed strategy). With the government no longer able to subsidize failed enterprises, free market forces can now accomplish the restructuring necessary to rebuild Japan’s economy.

Can The Economic News From Japan Possibly Get Worse?

Japan’s Exports Plunge By 45% In January

Six months ago, no one in his right mind would have predicted a 45% decline in Japan’s exports.  The drop in exports has no comparable statistics, as Bloomberg reports.

Feb. 25 (Bloomberg) — Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo.

Shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent.

Central bank Governor Masaaki Shirakawa said last week that the economy will remain in a “severe” state next quarter and companies will struggle to obtain financing as investors shun risk. The bank, which lowered the key overnight lending rate to 0.1 percent in December, last week said it will buy corporate bonds for the first time to stem the credit squeeze.

The Nikkei Puzzle

With astonishingly horrible economic news coming out of Japan almost daily, one would expect that the Nikkei would be crashing below its 2003 low – see Nikkei – Black Hole or Buying Opportunity. Is it possible that we are looking at a classic “buy on the bad news” opportunity?   At this point, one could take the position that the Nikkei’s refusal to sell lower means that the present bad news has been fully discounted.

Contrary Opinion Time?

The fact that the Nikkei refuses to hit new lows may indicate that the world economy will improve going forward.   How could it get much worse?  If we extrapolate the present rate of decline for Japanese exports, they would drop to virtually zero within six months!   Is the world’s second largest economy really going to ground to a dead stop?

This may turn out to be a classic (long term) “buy on the bad news” opportunity for the Nikkei, as long as the 7000 level can hold.

Economic Reality Crushing The American Dream

Reality Becoming Impossible To Ignore

There still appears to be a serene sense of calm by the American public.  They hope that the government will be able to solve our economic crisis in short order and restore to us the American dream of nonstop prosperity.

For those who have lost their jobs, the American dream is over.   For those who have seen their equity and real estate wealth disappear, there is growing uncertainty that asset values will recover any time soon.  Those who have ignored or denied reality will lose the most since they are the least prepared to deal with the extended economic nightmare we are facing.

Can the world’s governments put Humpty Dumpty back together again?  For further consideration of where we are and where we might be headed, the following links are well worth the read.

False Hope To Reality

It appears as though we are on the cusp of the next (of several) phases in this global economic crisis. The phase we just went through lasted roughly from August of 2008 through the first of this month.  This phase included identifying our problems, getting through the smoke and mirrors, initial false promises of recovery, and the beginning of finger pointing among the nations. It was a phase where the crisis was centered on the banking system and the financial economy. It was a phase where the majority (but not all) of the problems that we are facing was revealed.

It is time now for the next phase. This is the phase where the people of this country and of the entire world begin to awaken to the reality of our present situation, and that reality begins to find its way into world markets. This is the phase where the depth and breadth of the problems we face will be revealed. With this revelation, any remaining hopes of a quick recovery will be dashed on the rocks of reality, and people will begin to actually deal with the crisis. It is a phase where the crisis deepens, not just in the financial economy and the banking system, but in the real economy and in the very life blood of all economic activity – the currency markets.

It is during this phase where the character of the nation will begin to be tested.

Increasingly I am becoming aware of a growing group of people who are ready and willing to stand for the principles given to us by our Founding Fathers. These include our national sovereignty, the rights of the states, limited federal government, sound money, the ability of people to express their faith openly, and the very idea of freedom and liberty for “we the people.”  We are entering a time period where the DNA will be set for how this battle will be fought as new leaders arise within this group.  And how it is fought will be the determining factor of whether or not it will be successful. This is the history we are poised to begin making in the months ahead.

Debt Addiction Depression Destruction

America is so hopelessly addicted to credit that unlike the family that understands its addiction to heroin has destroyed everything they once had, Americans don’t even yet understand they are addicted.

Americans today view the on-going credit contraction much as heroin addicts view the disappearance of heroin—with anxiety, dread and fear. Americans are so addicted to the flow of credit from the Federal Reserve that they no longer believe they can live without it.

The unnatural availability of credit causes an unnatural expansion of economic activity. This “economic expansion” is later followed by an “economic contraction” wherein the debts introduced by the unnatural availability of credit cannot be repaid. The business cycle is as unnatural as the monetary system upon which it is based.

While it is now too late to undo what has been done, it is not too late to prepare for what is about to happen, a financial collapse that will exceed even the suffering caused by the Great Depression. History is now moving quickly and the end of this epoch is near.

Although the economic collapse is now in motion, there is still time to preserve what savings you still have. This is the end of a three hundred year system of credit and debt based on the debasement of money, a system now in its final stages. As the crisis moves forward, the time left in which to act will disappear. Soon, it will be too late to do so.

Today, two years later, although the collapse has started it has only just begun and cannot be stopped until it has fully run its course; and when it has done so, the global economic, social and political landscape will be dramatically altered. Wall Street was first, Main Street is next and, soon, everyone’s street will be affected.

The Long and the Short Of It

Several years ago – I don’t remember the date – I read an interesting comment: “The great boom that the world is enjoying, is in effect an enormous shorting of cash and going long on debt. Eventually, there will be a short squeeze on cash which will have to be covered by going long on cash and shorting debt.”

Deflation and Depression are actually a manifestation of a massive short squeeze on cash in an attempt to reduce a gross and unsustainable long position on debt.

The Deflation and Depression will continue until the long position on debt is reduced. The long position on debt in the world is so massive, that it will only be reduced by equally massive defaults.

Delaying the inevitable will only drag out the agony of Deflation and Depression for many years. Bringing all the massive liabilities of the banking system onto the Treasury’s indebtedness – while the corresponding assets are worth far, far less than these liabilities – will solve nothing.

Debt must be reduced by defaults and bankruptcies. There is no other solution!

There’s Only One Cure For A Depression

In contrast with a depression, a recession is relatively easy to bring to an end. The genesis of a recession is caused by excessive credit creation on the part of banks and the Fed.

However, the only cure for a depression is time. Not the abrogation of the free market. The seeds of a depression are sown when an extreme over supply of money and credit is allowed to continue for a protracted period of time.  When this phenomenon occurs, it produces a pernicious level of debt to pervade throughout the economy. All sectors of the economy become overleveraged and the need to reduce debt becomes paramount. The economy then experiences a severe contraction in GDP. In a depression, the pull back in borrowing is not caused by interest rate increases from the Fed but an inability of the economy to take on further debt. A depression can last for many years as consumers, banks and the government goes through the painfully long and arduous process of deleveraging.

Unfortunately, the kneejerk response on the part of the government and central bank is to stimulate the economy by spending money and reducing interest rates. That is the very same strategy used to combat a recession. However, their response fails to produce the desired result because it ignores the root cause of the problem—debt levels that have become unsustainable. It is not lower interest rates on borrowed money that the consumer seeks, it is less debt. If fact, all attempts by the government to mollify the depression tend to exacerbate the situation by force feeding more debt when it is least capable of being serviced.

What does history say about the effectiveness of government intervention? In Japan, the Nikkei Dow hit a high of 39,957.44 on December 29th 1989. Then it’s epic real estate and equity bubble burst. The composite average is trading below 7,600 today. Even after two decades of trying to turn their market around, their government’s barrage of stimulus plans and a near zero percent interest rate policy has done little to ameliorate the malaise.

A similar result was experienced by both Herbert Hoover and Franklin Delano Roosevelt after they deployed a plethora of government interventions to combat the Great Depression. After four years of Hoover’s wealth distribution and trade wars, and five years into the New Deal, they both failed to bring the economy out of the depression. Unemployment reached 20% in the years 1937-1938 and the percent change in GDP dropped 18.2%. It wasn’t until we fought and won WWll that the economy began to enjoy a sustainable recover.

Unfortunately, we see the same playbook being deployed today as was used under the Hoover/Roosevelt regime. President Obama is following George W. Bush with the signing last week of his own stimulus plan that totals $787 billion. And of course, this is probably the first in a series of spending plans that are intended to help bring the economy back on track.

The reason all the government’s efforts fail to solve the problem is clear. Time is needed to allow asset values to retreat back to historically normal levels that can be supported by the free market. And time is necessary for debt levels to be attenuated to a level where the can be serviced without having the Fed artificially forcing interest rates down. Any and all attempts to prevent deleveraging and to prop up asset prices will cause years to be added to the healing process. Additionally, all government efforts to “help” end up becoming a huge misallocation of resources as they take capital from the private sector and redistribute it in the most inefficient manner. What’s worse is that the increased government spending adds yet more public sector debt to an economy already reeling from a mountain of liabilities.

This buildup in debt levels was unprecedented in history, thanks to a Real Estate bubble that was used to bail out an equity bubble. It would stand to reason that if the government continues to try to manufacture a recovery, it could take more than a decade to return to prosperity. The question is, do we have the patience to let the free market function and endure several years of hardship, but then emerge as a much stronger country. Or will the compulsion to intervene just propel us yet deeper into the abyss.

Nikkei – Black Hole Or Buying Opportunity?

Has Japan Been Pulled Into A Black Hole?

According to Einstein’s theory of general relativity, a black hole is a region of space in which the gravitational field is so powerful that nothing, including electromagnetic radiation can escape its pull after having fallen past its event horizon.   Recent accounts of Japan’s economic woes are beginning to sound like a black hole event.

Japan’s Economy Goes From Best To Worst On Export Slump

Feb. 17 (Bloomberg) Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S.

The credit crisis that crippled the U.S. financial system may have also knocked out the props that supported Japanese growth between 2002 and 2007: a U.S. consumer-spending bubble and a cheap yen. The speed of the deterioration has taken companies by surprise.

Since then, industrial production plunged at the steepest pace in 55 years in the fourth quarter, and unemployment rose at the fastest rate in 41 years in December. Panasonic Corp., Pioneer Corp., Nissan Motor Co. and NEC Corp. announced a combined 65,000 job cuts in the past month.

Devastating Effects

The end of easy credit in the U.S. will lead to a “quantum downward shift” in consumer spending in the world’s largest economy that may have long-term and devastating effects on economies that have relied on it, according to Allen Sinai, chief global economist at Decision Economics Inc. in New York.

Worst Isn’t Over For Japan

TOKYO — Japan’s economy contracted at its fastest pace in nearly 35 years during the final quarter of 2008 — and is likely to underperform other major nations early this year as demand for its goods collapses.

Japan’s gross domestic product shrank by 3.3%, or an annualized pace of 12.7% during the quarter, the government said Monday, a steeper decline than contractions of 3.8% reported for the U.S. and 5.9% in the euro zone for the same period. The world’s second-largest economy was slowed by a staggering 14% decline in exports and diminished capital spending by companies.

Japan’s economy is facing “without a doubt, the worst crisis since World War II,” said Economy Minister Kaoru Yosano.

Economic data already signal more deterioration. Industrial output is expected to drop by around 20% during the first quarter, a government survey says. After tumbling by a record 35% in December, exports sank 46% from a year earlier during the first 20 days of January.

Japan doesn’t have much room for further fiscal stimulus. It has the most debt in the world, coming to 157.5% of annual GDP in the fiscal year starting in April.

Japan Heads For Worst Postwar Slump

Jan. 30 (Bloomberg) — Japan headed for its worst postwar recession as factory output slumped an unprecedented 9.6 percent in December, unemployment surged and households cut spending.

“Japan’s economy is falling off a cliff,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “There’s really nothing out there to drive growth.”

The International Monetary Fund said this week that Japan’s gross domestic product will shrink 2.6 percent this year, the bleakest projection for any Group of Seven economy except the U.K. That contraction would be Japan’s worst since World War II.

“We’re in a very grave situation,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo today. “Japan is being hit by this wave of weakening global demand.”

Japan’s Economy – No End in Sight?

Turning to the immediate news in off the wire the situation in Japan apparently went from bad to worse and then onto horrendous in Q4 2008. The latest data points from December are thus quite staggering as will also be detailed below.

Add to this that the debt to GDP ratio is already running at alarmingly high levels, Japan finds itself in a situation where, despite policy makers’ best intentions, the room to manoeuvre is very small. Or as Edward succinctly puts it;

This is the real core of the problem that Japan faces in 2009, that previous fiscal policy did not attack the growing fiscal deficit in the good times, so there is little room to manoeuvre in the bad ones. Which is why the Japan economic outlook in 2009 is grim, grim and nothing but grim.

On the fiscal front the steps are also fundamentally sound I think, but once again Japan is constrained on the debt side and especially of the fact that before a single penny can be spent on the crisis at hand the fiscal authorities need to issue a handsome portion of paper just to cover the primary budget deficit. In terms of the immediate outlook for Japan it is consequently dire.

Do The Japanese Read The News Reports?

Reports on the recent economic news from Japan cited above have included the following words or phrases: “most severe, plunged at the steepest pace, quantum downward shift, devastating effects, collapses, staggering, worst crisis, deterioration, worst postwar recession, unprecedented, falling off a cliff, bleakest, very grave situation, horrendous, staggering, alarmingly, grim, grim and nothing but grim, dire.”

The Japanese readers of these news reports might consider a rendezvous with a black hole as a better option than facing the future.  Is this really a time of desperation or is it the point at which the news can’t get worse, so it has to get better?   Acquaintances of mine who have recently been to Japan report that trains still work, planes still fly, people still go about their business, the streets are crowded and Japan Inc is open for business.  To evaluate the situation further, let’s examine how the horrific economic news has impacted the Nikkei 225.

NIKKEI 225 Ignores Horrific Economic Stats

If we look at the price action of the Nikkei 225 there appears to be a glaring disconnect from the current litany of bad news.  The Nikkei appears to have already discounted today’s bad news last year when the average fell 47% from its June 2008 high of 14490 to the October low of around 6868.   To date, the Nikkei refuses to pierce the October lows and now stands at 7670, almost 12% higher than the October 2008 low.   I am not a chart technician, but this type of price/news divergence is usually a positive sign.  If the Nikkei can stay above last year’s lows, perhaps investors have already discounted the worst.  Conversely, should the Nikkei start posting new sub 7,000 lows, it might be “lights out”.  Time will tell.

Long Term Factors To Consider:

-the Nikkei is already off 80% from its December 1989 high and has perhaps discounted the worst that can happen.

-a multi year double bottom may be forming at current price levels.

-the most fundamentally bullish factor may be that the Japanese government has reached the limits on its borrowing capacity, thus precluding the continuation of costly and ineffective stimulus plans (see Japan’s failed strategy). With the government no longer able to subsidize failed enterprises, free market forces can now accomplish the restructuring necessary to rebuild Japan’s economy.

-logical minds have made a persuasive case that the United States is now following the same failed policies that did not work in Japan for the past 20 years.   If this is the case, the United States needs two decades, deficit spending of $30 trillion and a Dow Jones at 2800 to achieve the same economic status that Japan has today.