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While it is common to compare the current US stock market with the Japanese experience in the early 1980’s, there is more to it than a similar market profile.
The comparison between the two countries and situations is made in a recent report from Societe Generale titled “Worst Case Debt Scenario“. Both Japan and the US share:
- Ballooning Public Debt
- Banking Crisis
- Property Bubble & Crash
- Stock Market Crash
- Low Interest Rates
If we expand the US experience to the 2000 market top then we can squeeze in even more similarities. For example, corporate debt crisis, high valuations, and another stock market crash.
The only real difference is in the reaction from their respective governments. While Japan was slow to respond to the unfolding crisis, the US government (and the rest of the world) lost no time in enacting expansionary fiscal programs.
Having so much in common, then perhaps it would be instructive to use the Japanese experience as a blueprint for what is yet to come for the US. In a word, that would be deflation.
With unemployment peaking, it seems illusory to expect inflation in the coming 12 months and hence a higher risk of increasing bond yields. The bond market suggests the real risk is one of deflation, again calling to mind the Japanese scenario.
As for the stock market:
If we accept the idea of a two-stage crisis (taking as our starting points 2000/01 + 2007/08), we have probably reached a situation similar to that of Japan in the 1990s. This analogy would suggest that we are now exiting a bear market rally, which was fuelled by restocking and fiscal stimulus. If the fiscal incentives boosting auto consumption are reduced, “normal” consumer spending will be unable to pick up the running so long as unemployment remains depressed.
Which reminds me of another chart we looked at from a Morgan Stanley report back in August: The Aftermath of Secular Bear Markets.
You can download the complete 66 page SocGen report, “Worst Case Debt Scenario” from the Trading Resource Section (Reports & Articles).
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