Good point<<The US equities market is soaring on excess liquidity with mediocre earnings and heavy debt.. an unsustainable condition. Managed inflation with growth has been the solution, but if it backfires we'll be like the Japanese.. with debt inflating against deflating asset values. Stocks, seen in that light are very much overvalued.>>
Deflation is a worry, and debt overhang is a major issue with Japan.
Asset inflation has been the biggest problem with Japanese economy inability to deal with this slowdown since the break of the market. The asset bubble of Nikkei and real estate bubble that led to equity inflation had one marked difference with US model in present case, the Japanese banks had a huge exposure to real estate and equities at the same time, when Tokyo central properties were selling for 1 millon $ /sq m, the banks were landing on a house of a 1000 sq-m a cool 900 million, the borrowers were taking out that kind of equity and investing it in Nikkei to lead Nikkei higher to 35000 level, they would than come back to the bank with SNE over inflated stock and use their stocks at 31000-35000 as collateral to borrow 90% of the stock valuation and reinvest in a market that was going higher.
The double whammy was compounding as market kept going higher and so did the real estate valuations. Now same thing happened with Yahoo, imagined based on that 400$ / share Yahoo Amazon shares someone would have borrowed 90% to invest in prime real estate in Manhattan, imagine if this was Citicorp, who than would have valued the new real estate asset at three times the acquisition and lend more money, when the internet market came home to roast, the stocks now trading at 16 would have not provided any collateral against the bank lending so would be the fall in real asset values of assets purchased by the borrower. The banks in USA if I am not wrong do not have this kind of exposure, the reason is the huge losses of Venture capital market. Other factors and similarities cannot be overlooked in discussing comparisons to Japanese deflation like the fact that prices are falling in US but limited to few commodities only, there is no sustained decrease like in case of Japan. The lack of sustained price fall is one clear difference. Price fall in Japan has made consumer complacent in case of USA the customer is taking its chance and spending like car figures and housing figures are showing, live is moving on. Productivity increases have helped, and prices fall is revving up demand from people who are pro consumption inherently unlike Japanese.
In case of US banks unlike Japanese Banks if I am not wrong VC’s supported most of the capital expenditure on information technology 600 bn $/ annum binge. Now that expenditure has trickled to 350-400 bn $/annum the chances that we will see Naz rallies like the one we saw in 99 are difficult proposition. However, once most of the paper profit has disappeared and Venture capitalist have licked their wounds enough, I would suggest that huge charges taken by VOD GLX Marconi LU Nortel JDSU have helped writing down the goodwill of these businesses to a realistic levels.
If like Japan, US banks would be involved where last few mentioned have written down 290 billion $ accumulatively, the BKX index would have gone through that 750 support and created unwinding of that asset inflation bubble that leads to double whammies.
The difference here in US and Japan is that in both countries asset valuation had been blown out of proportion but in US the losses were taken by private big money, the concept of creative destruction is very pertinent along with Banking lack of exposure to communication capital spending. VOD and Marconi both have huge loan books but both their loans are fully collateralised by good assets with lot of cash flow, the present low interest rate environment is helping them quite a bit to carry this cost. If VOD would have been unable to support the exposure than this whole game would quite different.
If you remember Resolution trust US was quick to take that 650 bn $ over build, although banks were not directly involved the companies involved in RTC related businesses were liquidated and done with.
Japan could not act to put business out of business!! The creative destruction of business is very strong point of US where in Japan it is considered as a loss of face. Creative destruction strengthen the system in Japan they maintain the losing businesses far too
long.
Iqbal Latif
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