A 20-year curse on the economy and the stock market
This U.S. advisory draws a lesson from 20 years of Japanese economic woes, warns about Canadian complacency and updates its gold stocks.
History may not repeat itself exactly.
But it can come much too close for comfort. As we contemplate one problem after another in an economy that is struggling to recover, the past rises up with a sharp reminder.
It was 20 years ago this month that the Japanese asset bubble hits its peak. “And we have witnessed, unfortunately, a 20-year period of misery and problems since then.”
The words are those of Review & Outlook, an advisory published by a Boston money management firm. The editor, Dr. Hans P. Black, takes a long view of the markets, and invariably gives a thoughtful perspective on the forces that are driving the economy and markets around the world.
Before we discover what chilling lessons we may take from Japan’s economic experiences, we take a detour for a look at the advisory’s gold stocks — and a warning on the Canadian dollar.
Gold to head higher
We begin with an update on the four precious metal stocks this advisory has been holding, two from Canada, one from Australia and a giant with feet in both countries as well as the U.S.
The price of gold bullion declined during the month of December, and has proceeded by stops and starts in January. Although troubled by the “over-bought nature” of the gold market in late 2009, the advisory nevertheless feels the price “should head significantly higher in the months and years to come.”
Its biggest holding is the world’s second largest gold mining firm, Newmont Mining (NYSE-NEM; TSX-NMC). The share price has dropped almost $7 in just over a month, trading today in Toronto at $47.31 and yielding less than 1 per cent on its dividend of $0.43.
The advisory has been a “net seller” of Canada’s IAMGOLD (TSX-IMG), which has fallen from its peak of $21 in December and now trades at $15.24. It yields 0.4 per cent on its small $0.06 dividend.
On the other hand, the advisory pronounces itself “happy” to stick with two mid-cap producers. Canada’s Orvana Minerals Corp. (TSX-ORV) has been holding steady for a month and trades at $1.06. Australia’s Intrepid Mines (TSX/ASX-IAU) is trading at $0.26 after reaching a high of $0.43 last fall. Neither pays a dividend.
Canadian complacency
The Canadian dollar has been “marking time” in the relatively tight band between US$1.02 and 1.09 for some months now, the advisory comments. But it’s time for Canadians to wake up.
“We continue to be struck by the complacency surrounding the attitude of most Canadian investors as they simply are unwilling or unable to believe that the difficulties south of the border will profoundly affect them.”
The advisory believes that “the old adage that when the U.S. catches a cold Canada has pneumonia is probably still true.”
What’s more, that contagion should hit the Canadian dollar. “As astounding as it may seem, we are maintaining a sharply lower target for the Canadian dollar which we believe will be in evidence once the Olympics in February are past.” That target is 1.30-1.35 during the next 18 months.
Toxic assets
Speaking of the months ahead, are we about to repeat history? We’re pretty close, says Dr. Black. “While situations are never the same and history never really repeats itself, unfortunately there are many similarities between our situation and circumstances in Japan.”
For one thing, Japanese bankers had their hands planted firmly over their eyes. “Aside from the initial scares, the Japanese situation was really not taken seriously for a number of years as the Japanese banking system simply did not wish to cope with the realities of massive asset deflation.”
North American and European banks reacted much more quickly to the recent crisis — they had no choice, really — but “it is clear from our point of view that banks today also confront a similarly protracted period of asset devaluation,” says Dr. Black.
Indeed, the situation is worse than that faced by Japan two decades ago. There are still close to four trillion dollars of toxic assets infecting the balance sheets of major global banks.
Look at the clearly deteriorating state of assets in the Gulf Cooperation Council, adds this writer. The collapse of Dubai World and other entities “is in our opinion a seminal event.”
Canada falls into the trap
Another parallel arises in commercial real estate. It slumped in Japan, and outside of the major centres of New York, Washington and Los Angeles, it is “awful” in the United States.
What’s more, consumers are retrenching, trying to battle debt and cutting down on spending. And it’s not any better in the United Kingdom, Ireland, Spain, Italy, Greece and Eastern Europe, says Dr. Black.
In Japan, deflation is still a going concern, with consumption and real estate prices both down. Plus Japan got itself into another fix.
It responded to collapsing asset prices with the decision to raise tax levels by introducing a consumption tax. We are going right down the same primrose path, Dr. Black notes glumly, especially but not exclusively in the United States.
“Canada, too, is falling into this trap, especially at the provincial and municipal levels.” Although he does not say so, it seems clear that he includes the harmonized sales tax in his assessment.
So budget levels rise and the ability of governments to deliver on services gets squeezed until the inevitable cutbacks occur.
So why does the stock market still move slowly higher? “In many ways, we believe it expresses a desire by many that things, with a bit of luck, might just return to the way they were,” comments the writer.
“Unfortunately, we believe this will not occur and that we are due, in the next 18 months, for some further severe bouts of price weakness in many stocks and, in particular, those involved in banking, credit and, you guessed it, most things to do with the consumer.”
It’s like the high you get from eating sugar coated donuts in the morning, concludes Dr. Black. It will not last.
But we can still hope that 18 months of weakness does not turn into 20 years of trouble.
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