How The U.S. Economy Will Go the Way of Japan — At Best!

by Addison Wiggin & Ian Mathias

  • The next wave of the credit crisis: Euro bank debt

  • Bill Bonner & Dan Amoss offer their latest long-term U.S. forecasts

  • A ratio worth watching… how the Dow is valued when priced in gold

  • Frank Holmes on investing in the rising yuan… which countries stand to benefit the most


  When it’s all said and done, America “would be lucky to experience a fate similar to post-bubble Japan,” Dan Amoss leads off our week of 5 Min. Forecasts. You may recall, “we are turning Japanese, we really think so” was a major theme in Financial Reckoning Day, first published back in 2002

To wrap our heads around Mr. Amoss’ amplification of that dire prediction, we’ll have to take a trip around the globe… starting in Europe:

  Credit crisis, Euro-style!

Eurozone banks will have to pay up or refinance $1.65 trillion in debt in the next 18 months… making even U.S. bankers seem like monkish penny pinchers.

You’ll find eerie similarities to the American credit crisis here. Essentially, no one was worried about all this debt last year. Financing such a sum — while enormous — isn’t a big deal… unless some large looming failure spoils the easy money party. In the U.S. it was Bear Stearns and Lehman. In Europe, now it’s the PIIGs, or GIIPS countries (if you don’t mean to belittle the noble hog with such a distinction).

So not only will investors shy away from euro-bank bonds because so much debt is coming due, and because troubled European borrowers are now more likely to default… but the coming rush of European bank debt will pile on top of all the debts European governments need to finance as well. After all, they’re broke too.

A complicated mess, eh? Odds are it will get worse before it gets better.

  The U.S. Treasury remains perfectly tone-deaf to the debt-screeching coming from across the Atlantic. The Treasury has another $69 billion in bond auctions on the docket for this week.

And why not, they must be thinking. The drama in Europe has pushed the yield on a 10-year note down to a 16-month low of 2.8% earlier this month. It’s barely 3% today.

“People come to think what they need to think when they need to think it,” Bill Bonner muses, bringing us up to date on the theme. “And right now, the U.S. government doesn't need to think that debt is such a bad thing. It can borrow at low rates — almost indefinitely. In fact, U.S. Treasury yields are falling… it's getting cheaper and cheaper for the U.S. to bankrupt itself.

“Which is what makes us think we have entered a period of gentle, pernicious deleveraging.

“The rest of the world is saving. What happens to the savings? The savers can thank the USA for taking them off their hands. While the rest of the world saves, the U.S. is still borrowing… helping the world get rid of its surplus savings.

“In effect, the U.S. government is now playing Japan's role in its long, tired saga of deleveraging. We guessed that the U.S. would follow Japan into a long, slow, soft slump. OK… we were 10 years too early! But now it seems to be happening.”

Bill will be the keynote speaker at the Agora Financial Investment Symposium next week in Vancouver. He’ll no doubt be sharing his latest thoughts regarding U.S. policy makers and their Japanese tendencies. For three easy ways to get up to the minute commentary on the symposium… check out the mail bag below. 

  “The policies of addressing each collapsed credit bubble are similar,” Dan Amoss concludes, bringing us back to where we started today’s 5: “keep squandering taxpayer dollars on failed financial institutions and prop up unaffordable federal and state spending programs.

“The key difference: Japan's competitive export-oriented manufacturing base was strong enough to prop up the Japanese welfare state (until now, at least). The U.S. manufacturing base is certainly powerful and efficient, but it's nowhere near profitable enough to support both itself and the ever-growing U.S. welfare state. What policymakers seem not to understand: Each dollar that funds so-called ‘stimulus’ programs must be extracted out of the private sector. And they wonder why the private sector is not recovering!

“A far more effective Keynesian stimulus plan — as long as the bond market remains unworried about deficits — would have been to slash government spending and slash taxes even faster. While that would also have been fiscally irresponsible, at least we'd be seeing ‘multiplier’ effects on GDP by now.

“But I expect U.S. GDP will keep decelerating — likely approaching to a 0% growth rate by 2011.”

Hmmm… as we wrote Friday, 0% growth isn’t always bad for stocks, but it’s rarely good. To gain some valuable short side protection, Dan’s your man. Check out his Strategic Short Report right here.

  Stocks are off to a tepid start today as the U.S. second-quarter earnings season starts in earnest. As usual, Alcoa will get the ball rolling when they report after the market’s close. Traders are on hold in the meantime… major indexes opened flat.

  That lingering fear is reflected in the price of gold, which has stabilized well since its recent sell-off. An ounce now hovers around $1,200.

  “Let's look at the long-term Dow-gold ratio,” Byron King suggests, looking to forecast the fates of both blue chips stocks and the yellow metal.

“If you chart the ratio over time, it shows the price of the Dow relative to the price of gold. Another way to look at it is the number of ounces of gold it takes to buy one share of the Dow. Here's an example: If the Dow is 10,000 and gold is at $1,000, it requires 10 ounces of gold to buy one share of the Dow, so the ratio is 10.

“Look at the history,” Mr. King continues. “The Dow-gold ratio was high in the late 1920s and then crashed down during the Great Depression. The ratio soared again during the booming mid-1960s, and plummeted during the l970s, reaching a super-low under the presidency of Jimmy Carter. Then things got better in the 1980s and 1990s, reaching another high in the early 2000s.

“Right now, the Dow-gold ratio is about 8, with the past historic lows in the range of 1 or 2. So if you believe in charts, there's plenty of room for the Dow to fall and gold to rise. Time will tell.”

  As Western nations stammer, China continues to position: China’s foreign exchange reserves rose by the smallest margin in 11 years last quarter. They added just $7.2 billion in the last three months… a small sum compared to China’s $2.45 trillion war chest of foreign currency.

Can you see the pieces being moved in place? China announced it would slowly alter the yuan peg in June. Then last week, out of the blue, assured the U.S. it need not be afraid of the “nuclear option” of a sudden Treasury holdings liquidation, but that the U.S. does need to get its house in order. And now today, we see China is tapping the brakes on FX purchases… all further signs China is preparing for a stronger national currency.

 “A stronger Chinese yuan makes exports into China cheaper and imports from China more expensive,” Frank Holmes of U.S. Global explains.

“The U.S. stands to benefit both ways — Chinese consumers get more purchasing power for high-end American exports and domestic manufacturers will be better able to compete against Chinese producers and help America chip away at its massive trade deficit with China.

“Other countries stand to benefit as well, perhaps none so much as Indonesia and India.

“From mid-2005 to mid-2008, the last period when the yuan was not tightly pegged to the U.S. dollar, the top stock index performer was China itself, but then came Indonesia’s stock market at 104% and India at 83%.

“Indonesia is a major natural resource producer, and China is one of the main markets for its liquefied natural gas, palm oil, wood pulp and rubber. India competes with China in a range of manufactured products, including textiles and electric components. A stronger yuan could make Indonesian and Indian products more attractive to Chinese buyers (assuming the rupiah or the rupee is not appreciating at the same pace).”

Frank will once again be joining us in Vancouver next week for our Investment Symposium, where he will share his latest and greatest economic analysis and investment ideas. If you want to be among the first to get them, look here… we’re calling it “Vancouver Confidential.”

  “I cringe every time I read some ignorant comment about China,” a reader writes, taking issue with another reader last week who suggested China is a “totalitarian regime.

“Communism and totalitarianism are not by definition identical, and China is not totalitarian; the people are, in fact, among the freest on earth. The reason gold was confiscated by the revolutionary Chinese government was because that great champion of liberty, America's friend Chiang Kai-Shek, had stolen every last penny from the Chinese state when he fled to Taiwan and took it over — now, there was a totalitarian if ever there was one. And no, the people aren't given U.S. dollars to buy gold; anyone can buy gold in just about any shop, in the form of jewelry, and can also buy bullion through various exchanges — and they use their own money.”

The 5: Hmmm… while researching for our latest issue of Apogee Advisory, we learned quite a bit about China’s hukou system. Just considering that alone, your suggestion that the Chinese are “among the freest on Earth” seems cringe-worthy, too.

By the way, we’re still giving away free “beta test” subscriptions of Apogee Advisory. While we fine-tune the ins and outs of our latest newsletter, you get to enjoy the fruits of our labor for free… not too shabby.

  “Won't Agora Financial Reserve members get the twice-daily reports as part of that membership?” a reader writes, asking about our new product: Vancouver Confidential.

“Do members of Financial Reserve get the Vancouver emails automatically?” another asks.

The 5: In a word, yes.

As a Reserve member, you are invited to the Investment Symposium at no cost, so the price of Vancouver Confidential will be the same: zero, zippy, nada. Thank you for becoming a Reserve member… we hope you enjoy the daily updates. They should arrive in your inbox automatically starting next week.

Not a Reserve member? No sweat… you can gain access to every stock pick and investment recommendation from this year’s Symposium for a reasonable fee, right here. Had we offered this service last year, the subscription could have paid for itself remarkably quickly… here are some track records from the 2009 event.

You can also call John Wilkinson at 866-361-7662 to find out what discounts are applicable to your account, should you wish to upgrade to a Reserve membership and receive Vancouver Confidential free of charge before the event begins in earnest.

This time next week, we’ll be holed up in the Fairmont Hotel Vancouver, doing our best to bring you quick and useful highlights from this year’s event. Stay tuned…


Ian Mathias

The 5 Min. Forecast

P.S. This is your last chance to get in on that exclusive conference call we mentioned Friday. Later today, our associates at S&A will present the findings of their latest research prospect… an intriguing underwater gold mining operation. (You heard that right.)

“About a mile below the Pacific Ocean, in a region called Melanesia,” says Phase 1 Investor editor Brian Hunt, “there's an incredible amount of gold and other rare metals such as silver, copper and zinc. Billions of dollars worth. And one tiny company may soon have the rights to mine and produce it.”

For the full story, you’ll have to sign up and listen to today’s call. Details here.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More