Monday, July 27, 2009

Following in Japan's footsteps

In 1990 the Japanese real estate and stock market bubble burst. History as shown time and time again that the cure when this kind of excess comes apart is to get out of the way and let the market cleanse the system. However Japan in it's infinite wisdom decided that history was wrong in their case (just like Roosevelt decided to ignore history and now Obama is going to ignore history). Let me show you what happened to Japan as a result of their attempt to sidestep the natural economic laws.

Japan is now in it's 19th year of a secular bear market. Only briefly during this period have they been able to crawl out of recession and then it's been fleeting. Keep in mind that this occurred during the greatest bull market in history.

The rest of the world joined Japan in a secular bear as the market topped in 2000. However Greenspan decided he was not going to allow that to happen and proceeded to print dollars, billions and billions of dollars. That massive debasement of the worlds reserve currency rescued the stock market and the world economy for 5 years. Unfortunately, as I'm fond of saying, there is no free lunch in this world and you can see the ultimate result of Greenspan's efforts in the second chart.

All that money printing didn't stop the secular bear, it just created a credit bubble that when it popped caused economic damage on a scale multiples greater than the bursting of the tech bubble. Now Bernanke is going to up the ante. Instead of printing billions, Bernanke has decided that the cure is to print trillions of dollars. Anyone want to guess what the end result of this insane strategy will be?

Ultimately I expect we are going to see a collapse that will probably make last October and November look like child's play. When it comes I doubt any amount of money printing, stimulus or accounting gimmickry will stop it. I'm afraid it could start with a currency crisis somewhere in the world, maybe even the US dollar. Bernanke if your listening you can't fix a collapsing currency by printing money.

The only thing that will stop a collapsing currency is to raise rates sky high and drain liquidity from the market. Of course the end result of that is deflation and depression. Bernanke is ultimately forcing the US and most likely the rest of the world, straight into the lions den.

The only way to protect ones self from this madness is by owning real stuff, commodities. By trading your increasingly "worth less" dollars for oil, wheat, cotton, etc. you protect your purchasing power.

Of course it's much easier to buy and store gold or silver than a barrel of oil :)