What do we want to talk about?

Let's talk about Japan. You remember, Japan? It's the country with the 20-year on-again, off-again depression. You could have bought stocks in Tokyo 20 years ago...held onto them...and guess what you'd have today? Well, for every dollar you invested two decades ago, you'd have about 25 cents. How's that for 'stocks for the long run?' How's that for capital appreciation? How's that for getting rich from investing?

Stocks in Japan are back to their levels of the mid-'80s. So, an investor who was 40 in, say, 1984, is now 66. He's retired. During his 'investing years' he made zero...nada...rien...zilch...from his money.

What to make of it? Is the whole promise of investing nothing but a Wall Street fantasy? The idea is that you can give your money to Wall Street...put it in a fund...in stocks...in some sort of investment...and it will grow larger. You will pay Wall Street a fee for this service. In fact, you could pay a lot of money...trading in and out of various investments.

And where would you end up? Well, if you were the typical Japanese investor you'd end up with less than what you started with.

The lesson we draw from that is that you only make money from investing when you buy assets that are cheap and sell them when they are dear. 'Buy and hold' doesn't work. 'Stocks for the long run' is a trap.

But what about Japanese stocks now? We thought you would ask. Since we announced our new 'Trade of the Decade' - sell US Treasury bonds/buy Japanese stocks - we have gotten nothing but grief on the subject. Everyone thinks he knows what will happen to Japanese equities over the next 10 years; and everyone thinks they will go down.

Here is Ambrose Evans-Pritchard in London's Daily Telegraph:

"...2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

"Once a country embarks on such policies, the game is nearly up. The IMF says Japan's gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

"The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. 'A global fiasco is brewing in Japan.'"

We don't doubt it. Evans-Pritchard is right. So is everyone who thinks Japan is going to meltdown or blow up. A global fiasco is brewing. But it will not necessarily be bad for Japanese companies. Investors will leave Japanese debt and buy Japanese equities. Inflation will reduce the real cost of operation for Japanese companies. Frugal, solvent, efficient Japanese companies will prove to be a refuge, not a trap.

More on this subject as the decade progresses. We will be proven right...or wrong... Geniuses...or idiots... Visionaries or hallucinaries... Depending on how the chips fall.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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When the sun rose on 2008, the typical Japanese was still in a fetal position, with his head down and his wallet closed up tightly. But along came the sell-off of 2008 - and he got the boot again. The Nikkei fell another 50%. The Japanese investor who bought stocks in 1982 when he was 35 years old is now 61...and his stocks are not worth a penny more! And this week he got the news that the Japanese economy is once again in recession. Today, we feel his pain - not so much because we sympathize with the Nipponese themselves, but because now we are Japanese too.

The G20 nations met in Washington last weekend, hoping to get a little preview of the future. They thought they might do a little editing before the film was released to the public. But while the Japanese example was available for all to see, no wanted to look. And so, the meeting came to an end and the heads of state left town with a clear conscience; while they had done no good, at least they had done no harm.

Even seasoned hacks seem to have no idea what is going on. "Barron's" has been putting out a financial weekly since 1921. You'd think in all that time they'd get a little idea of how things worked. Nope. The best advice they could give to President-Elect Obama was the same program that didn't work in Japan: protect the dinosaurs...and spend more public money. Curiously, the paper wants to bail out Ford and GM but let "Chrysler go under." (What does Barron's have against Chrysler? Maybe the publisher owns one of its cars....)

Since neither pundits, ministers plenipotentiary nor Wall Street pros pre-penitentiary have yet explained the crisis, it falls to us to do so. We will pass over what went wrong; everyone now knows. But we offer an important nuance: this is not a typical business cycle recession. The idealized business cycle downturn came about after an economy "overheated." Labor rates rose and the cost of living went up. This consumer price inflation forced the central bank to raise rates, causing the economy to "cool off" again.

Today's recession in America and Britain is a credit cycle recession; it is different. For proof, we offer exhibit A: a corporate bond from International Paper Company with a yield of nearly 10%. Compare that to the yield on U.S. Treasury paper - barely one tenth of one percent on 91-day T-bills. Even the 10-year Treasury notes pay less than the official rate of consumer price inflation. The "spreads" between corporate bonds and U.S. government bonds are wider than at any time since America's Great Depression. Why?

Investors all over the planet are taking a beating. Mr. Market has taken a cudgel to stocks, property, consumer spending and the economy - just as he did in Japan during the "Lost Decade." People are afraid to lend and afraid to borrow; they worry that the money will be knocked senseless before it finds its way home.

This time, the economy did not overheat...nor did labor rates go up. And when the bubble popped, the pin was not higher lending rates. This bust was caused by too much credit, not by too little. It is what economist Richard Koo calls a "balance sheet recession" a la Japan in the '90s. That is, it is a time when businesses, investors and householders realize that if they don't cut back they could go broke.

And unlike the more typical recession, this is a slump the feds can't control and can't cure. They can offer easier credit; but more debt is just what both lenders and borrowers are most afraid of. The feds can offer more props, more handouts, and more public spending too, just like Japan. But all they are doing is retarding the correction. Mistakes of the bubble era need to be fixed. Balance sheets need to be brought back into balance. There's no way around it. Japan proved it.

Just a few months ago, investors reached for the highest yields they could get. Now, they fold their arms, clutching to their breasts the lowest-yielding paper on the planet. Once they believed in capitalism and its bonds. Now, they want nothing that does not have the seal of the US government on it. A few months ago, they saw no danger. Now, they see nothing else.

Years ago, driving out of Paris for a long weekend, we tried a diversion:

"What do you want to be when you grow up?" we asked the children. To our surprise, among tomorrow's pilots and ballerinas was one little 6-year-old with a strange itch: "I want to be Japanese," said Henry.

That was 12 years ago. What seemed impossible then seems inevitable today.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning Australia

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