We Are Japan Now

Sometimes you want to tiptoe around an issue; sometimes you just have to deliver the bad news unvarnished. Here is the bad news: The United States has descended into the same path as Japan did in the early 1990s. Note the using of the present perfect tense. This process has been underway and is likely to continue with tragic inevitability.

Interest Rate Analog

Let's revisit two charts from an October 2002 column comparing the paths of U.S. and Japanese six-month LIBOR and 10-year government interest rates. Both markets are re-indexed to their respective bull market peaks of December 1989 for Japan, and March 2000 for the U.S.

I noted in October 2002 that U.S. rates had fallen further and faster than their Japanese counterparts at this stage. The paths diverged for six-month LIBOR by late January 2005; this was in the midst of those 17 consecutive rate hikes between June 2004 and June 2006. We are now collapsing downward at a rate unseen in the Japanese experience.

A Tale of Two Rates

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Source: Bloomberg

The divergence in 10-year government yields occurred in July 2005. Indeed, U.S. long-term yields seemed poised to re-enter a bear market by June 2007. The drop in 10-year-note yields has rejoined the Japanese trajectory and, indeed, is collapsing faster now than in the Japanese experience.

Ten Years After

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Source: Bloomberg

Now for the scary part: This point in the history of post-bubble Japan maps out to April 1997. They did not begin their quantitative easing until March 2001, when the Bank of Japan decided its zero-interest-rate policy was not easy enough. That is almost four years. Those who believe all that is required for the market to head north and for flowers to bloom and birds to sing is one more rate cut by the Federal Reserve are invited to ponder this history.

The Dollar Carry Trade

Just as I invited everyone to start thinking about the unthinkable two weeks ago in the context of the Federal Reserve, here is another mind game. What if a "dollar carry" trade emerges to parallel the yen carry trade ongoing since 1995? Such a trade would involve borrowing the dollar, selling it, and then buying assets denominated in other currencies.

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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