Where Will You Invest If US Goes The Japan Way?

by Manshu on February 17, 2009

in Opinion

Japan’s Economy saw the worst quarter since 1974. In the last quarter – the economy fell at an annual rate of 12.1%. In comparison, US just fell at 3.8%.

The situation today in US is quite similar to Japan’s situation about a decade and a half ago. There was a massive housing boom and an equally massive bust, coupled with a troubled banking sector in which there were a large number of zombie banks that were kept alive on artificial support.

There are a lot of indications that US may go the Japanese way. If US goes the Japanese way – then that raises serious questions about investors who are invested (or investing) in stock markets.

To put this problem in perspective, consider the fact that its almost 18 years since the real estate bubble bust in Japan and the Japanese Nikkei is just about 20% of its peak levels.

The Japanese investors found out the solution to their problem by borrowing cheap Yens and then investing them abroad. And then keeping those investments as collateral for further borrowings, which they reinvested again to create what is commonly called as Yen Carry Trade. By virtue of being such a fancy thing – I don’t think a lot of common American investors will have the Carry Trade option.

So, Where Will You Invest if US Goes the Japan Way?

This is a really tricky question and one that has no “right” answers. The best bet would probably be to remain diversified across asset classes.

If you seriously believe that US is going to go the Japan way – then you are better off invested in commodities like Gold and stocks of emerging economies.

At the same time you need to have a lot of ultra safe bond investments that provide capital protection and insolvency protection. Not your insolvency, but the insolvency of your banks.

The current economic meltdown means that a lot of Japan’s bank’s loans will go bad now, and their situation will further worsen – leading to a lot more bank-ruptcies.

I don’t know when was the last time you planned your investments around your bank’s bankruptcy but I’ve certainly never did it.

If US goes the Japan way – there may well be no place to hide. If the top two economies in the world suffer from a prolonged slump, there is not much else that can drive global growth.

Will the US go the Japan Way?

The short answer is – No (at least to my mind).

The long answer is that Japan’s problems are well documented and everyone is well aware of them. If US goes down the same path for a few years – policy makers will recognize the same patterns and act.

The IMF has been giving the advice of  “shock – treatment” to developing economies for years. Now, when it came to US – this same advice was not heeded. Eventually, it will become clear that the current mess can’t be overcome without cleaning out the banking system and starting afresh. That may happen one year from now or a few years from now, but will certainly not take a decade and a half to play out.

Since history is there to act as a guide – US will not head the same way as Japan. Don’t sell off your Googles and Microsofts yet.

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