A lot of people are comparing the current U.S. economic mess with that of Japan, a supremely underperforming economy for much of the past two decades.
That's a mistake.
What's more, for those who don't buy into the "we are the next Japan" hysteria, there could be some tidy profits.
The thrust of the (ultimately false) comparison is that low interest rates in Japan couldn't help the country out of its own real estate bust, which started in 1990. If it didn't work for them, so the theory goes, it won't work for the U.S.
It is true that Japan's economy is still a relative laggard almost 20 years on. It's also true that
rate-cutting efforts have failed to stem the fallout from our own housing bust.
U.S. Economy Won't Suffer Japan's Fate
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Still, the comparison is a stretch.
The truth is that the economic similarities between the two countries are largely superficial; both saw housing booms turn to bust followed by rate-cutting efforts.
But the two economies have some very big -- and crucial -- differences.
One of those differences is what happens to companies that have outlived their economic usefulness.
The U.S. has "jungle capitalism," says Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
By that, he means that weak and failing firms are destroyed by newer, fitter and better ones. It's what renowned Austrian economist Joseph Schumpeter called "creative destruction."
In the U.S., weak or failing firms go bankrupt, or are ripped limb-from-limb in other ways, either through takeovers or through being broken up. It's the way America reinvigorates its economy.
Art Hogan, chief market strategist at Jefferies in New York, points to the takeover of
( BSC) by
as a prime example of what happens to ailing operations in the American economy.
Although there does seem to have been a small subsidy from the U.S. government to help ease the way for JPMorgan, what the government didn't do was to "prop up" a failing institution, he says.
That's pretty much the opposite of how things worked in Japan during the 1990s and early 2000s.
In those days, the business sector was "effectively bankrupt," says Wells Capital's Paulsen.
But being insolvent in Japan didn't mean the end for many of those Japanese firms. They were
typically forced into bankruptcy. The banks themselves stubbornly resisted marking down bad loans they held.
Why is that so important?
It means that economic resources -- such as labor, capital, real estate and other assets -- were kept in nonproductive uses in Japan for far longer than they will be in the U.S. It is, after all, the productive use of resources that over time creates wealth.
Digging down into the weeds, Paulsen uncovers further evidence that shows we are not turning into Japan. In contrast to corporate Japan, which was then functionally bust, the balance sheets of the U.S.' nonfinancial companies have seldom been as strong. In a recent research report, he says the ratio of cash to total debt for such firms is at a 40-year high -- around 20%. Debt as a percentage of net worth is now as low as it was in the late 1960s.
That strength can help the overall economy weather the housing problems and the credit squeeze better than was the case with Japan in the last decade, agree Hogan and Paulsen.
They do, however, differ slightly on the ways to play the likely resurgence in the economy and eventually the greenback.
Paulsen says focusing on stocks sensitive to the health of the business sector would be a prudent move. Since businesses are the biggest buyers of technology, he says tech is a good place to stick some investment dollars. He also points to metrics that show there could be some pent-up corporate demand for tech gadgets: Net cash flow to capital spending has been falling dramatically over the past few years, while at the same time corporate profit margins as a proportion of GDP have been rising.
Paulsen won't mention specific stocks, but the big names in the sector set to benefit from a spending surge are likely
Hogan says the way to play the coming strength is to look at the early-cycle plays that will benefit from a strengthening U.S. dollar. That means steering clear of the multinational companies that have benefited from the weak dollar. Instead, look to those with a domestic focus that will benefit from more spending inside the U.S. and won't be hurt by a rising dollar reducing overseas revenues.
He likes retailing behemoth
BJ's Wholesale Club
Hogan also recommends avoiding the financial-services sector, at least for the time being. Although it may be possible to make money in the sector, it's hard to know which names will be hit hard with new revelations of bad loans.