There seems to be a growing consensus that the biggest threat facing the world is a Japan-style deflationary depression and 15-year bear market. I can see why. But in truth, the economies and the markets of America and Britain really don’t look much like those of Japan in the early 1990s.
Take the stockmarket. When the Nikkei peaked it was on a p/e of not far off 80 times. Five years later it was 60 times; even ten years later it was still around 40 times. These stupid numbers were constantly justified by analysts and equity sales people (myself included, I’m sorry to say – I was young and trusting) on the basis that the very low bond yields made them make sense. They didn’t, of course – as the market taught us over and over during the long bear market. Indeed, only in the last few years have valuations in Japan returned to levels that make them look properly cheap.
It isn’t taking that long here. Not only did we not start from p/es of 80, but already the value argument is pretty easy to make. If Shell and BP had been trading in Japan in 1995, they would have been on p/es of 35 and yielding 0.75%. That wouldn’t have been cheap (whatever my boss at the time would have claimed). Instead, they are each trading on around five-times forward earnings and yielding 5%-6%. Even the older, wiser me thinks that looks cheap. We aren’t ready to buy equities at MoneyWeek yet and I’m not sure when we will be – bear market momentum trumps value, particularly when the economic news across the world is as bad as it is now. But this isn’t Japan. The time to buy can probably be counted in a matter of months (double digit months…) rather than a matter of years.
Japan also started its crash from a rather different place. Yes, it had had its own little credit bubble on the go for far too long and, sure, the bursting was nasty. But it still had a huge stash of personal savings to draw on. So when crisis came and the government rolled out its ‘bridges to nowhere’ stimulus plans, it knew where to turn: the Post Office was strong armed into buying trillions of yen worth of Japanese Government Bonds and one of the world’s most beautiful countries was concreted over.
We don’t know if it worked, because we don’t know what would have happened had it not been done. But we do know this. Because there was a ready supply of savings for the taking, there was no need to worry that printing money would lead to hyper-inflation. Not so here. Here, we have no savings and every reason to worry about the consequences of our mad state-borrowing binges. While we are worried about deflation for now, we are probably laying the groundwork for massive inflation. I don’t suppose living with that will be much nicer than living with grinding deflation – but it will at least be different.