Putting the Japan to U.S. Economic Comparison to Rest

One of the most common questions I hear these days: “Is the U.S. headed in the same direction of the Japan economy of 1990s?” The big fear is that we are headed to 10 years of deflation, as Japan experienced in its “lost decade.”

Yes, there many similarities between the Japan of the 1990s and the U.S. of the 2000s. Japan’s real estate market and stock market both peaked in euphoria and collapsed, just like they’ve done here.

Today, the yields on government bonds in the U.S. have collapsed as investors run to safety (I find the concept that people find security in U.S. T-bills ironic). A two-year U.S T-bill pays about 0.20% today. In Japan, two-year government bonds pay 0.15%—U.S. government bonds are close to matching the yield on Japanese government bonds for the first time in 20 years.

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But there are two big differences between Japan and the U.S., after their economic crashes. The difference leads me to believe that we will not follow the path of Japan. In fact, we will take a different path and face inflation, not deflation. Here’s why.

About 95% of Japanese government bonds are bought by domestic investors. In the U.S., we have the opposite. About 50% of our bonds are bought by foreign investors.

This goes back to the question: at what point will foreign investors tire of the devaluation of the greenback, and the increasing U.S. deficit and national debt, and thus demand higher interest rates from U.S. Treasuries? That point, in my opinion, is not far off.

The next big difference between Japan and the U.S. has to do with each country’s respective action after their real estate market and stock market crashes.

Yes, both Japan and the U.S. are based on fiat currency systems, but the response from the central bank of each country post-economic crash has been very different.

After the Japanese economy collapsed, Japan’s central bank failed to do the one thing necessary to kick-start its economy: increase the money supply. In the 12 months following April 1992, when Japan was officially recognized as being in a severe recession, the broad money supply in Japan did not change. And only 10 years after the recession started did Japan begin any type of central bank quantitative easing (“QE”).

The Federal Reserve did the opposite. Once we were recognized to be in a recession in December of 2007, the Fed flooded the system with money. The Fed cranked up the printing presses and significantly increased the broad money supply. The Fed has already gone through two sets of QE and might be getting ready for QE3.

Two countries: Japan and the U.S.; both experienced the same crashes, a real estate market crash and a stock market crash. Japan’s central bank chose not to increase the broad money supply and the result was that Japan went into years of deflation.

The U.S. central bank has done the opposite following the crashes of its real estate market and stock market. The Fed has flooded the economic system with cash. It has greatly increased the broad money supply. Is stands ready to unleash another round of QE if necessary.

There is a tremendous, actually unprecedented, amount of liquidity in the U.S. economy thanks to the Fed. And that’s why I believe we will get the opposite of what Japan got. We won’t get years of deflation; we’ll get years of inflation, which is what the rise in the price of gold bullion has been yelling about.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Why You Might Want to Look at Buying the Miners

Metals are under selling pressure, but I feel that the selling has been overdone. Use the current weakness to buy, but be careful, as metals are extremely volatile at this time.

Gold investmentThe reality is that the global climate continues to be favorable for metals given the U.S. deficit and the debt crisis in Europe (and the U.S.).

Yes, metals have been in correction mode, but I do not see this as fear. I smell opportunities, especially in the miners, which have lagged behind the gold and silver rally.

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I like the smaller mining companies, especially those with a massive reserve of metals in the ground waiting to be developed.

The October Gold is hovering around the $1,600 level on oversold buying, but remains below its key 50-day moving average (MA) on weak Relative Strength. The golden cross on the chart remains, with the 50-day MA of $1,742 above the 200-day MA of $1,524.

Gold is extremely oversold. I feel that gold prices will hold and edge higher if the U.S. economy falters and another recession surfaces.

The SPDR Gold Shares (GLD) exchange-traded fund (ETF) is worth a look. For added risk and potential gains, take a look at the Direxion Daily Gold Miners Bull 2X Shrs (NASDAQ/NUGT)—an aggressive trade aimed at capitalizing on surges in gold at twice the normal rate.

The December Silver is around $30.00, but is facing selling. The next target is the 200-day MA at $36.05. The 50-day MA is at $39.95. The near-term view is bearish, but the chart is holding on to the bullish golden cross. With the selling, silver is extremely oversold.

While the downside risk is high, there are some opportunities. To play a bounce in silver, take a look at the iShares Silver Trust (NYSE/SLV).

If you want to play the small miners, there are hundreds of plays. I have listed several below that look interesting for the speculative trader.

Keegan Resources Inc. (AMEX/KGN, TSX/KGN) recently reported positive feasibility results.

In the mining area, Canada-based Taseko Mines Limited (AMEX/TGB) mines for copper and gold in Canada. The small-cap has a market-cap of $680 million and is profitable, with above-average price appreciation potential. The stock is interesting, as it is trading just above its 52-week low and well below its 52-week high of $7.23.

Take a look at small-cap Golden Star Resources Ltd. (AMEX/GSS). The gold company has operating mines in western Ghana and southwest Ghana, along with exploration properties in Ghana, Sierra Leone, Burkina Faso, Niger, Cote d’Ivoire, and Brazil. Trading at 8.05X its 2012 earnings per share, I like the valuation and potential for long-term gains.

In non-precious metals, take a look at Thompson Creek Metals Company Inc. (NYSE/TC), a miner of molybdenum—a metal used for creating stainless steel and other applications, including the production of rare earth used in electronics.

My advice to you is to buy a mixture of exploration-stage gold miners and small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers. Please note that the investments mentioned in this article are not specific recommendations, but are meant to serve as examples.

Debt Crisis in Europe Highlights Continued Strong Fundamentals for Gold

It’s pretty difficult to get enthusiastic about the stock market with sentiment so focused on the sovereign debt situation in Greece. Even in the face of solid earnings expectations for the third quarter, investors are looking into the future and seeing slow economic growth, translating into slower earnings. It’s the perfect storm for equities and it makes choices for equity investors very limited.

The one sector that continues to stand out in my mind as offering the best risk-versus-reward scenario is precious metals, especially gold and silver. Both these commodities are experiencing a well-deserved correction and the fundamentals for higher spot prices remain intact. With investment risk very high in the equity market and so much uncertainty surrounding European banks and the euro currency, gold is going to be a key asset over the next several years.

And, even without all the turmoil surrounding sovereign debt in Europe, the fundamentals for gold are strong in the face of a huge increase in the U.S. money supply, inflationary pressures, and central bank demand for gold bars.

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And don’t tell me that inflation isn’t an issue. The last time I checked, prices for things weren’t going down. Inflation jumped to three percent in the month of September in the 17 countries that use the euro currency, which was the highest inflation rate since October of 2008. And this is happening in a slow growth environment. I understand reduced expectations for global economic growth, but with the world awash in debt and countries stimulating their economies with increased money supplies, inflation is a very real threat and potential wealth destroyer over the next several years.

In any case, gold investments are one of the few asset classes that should outperform over the medium term and gold stocks should be on every investor’s radar screen.

The stock market is going through a tumultuous time right now, and has been doing so since the end of July. The S&P 500 Index just recently broke through its 25-day moving average and does not look healthy from a technical perspective. I wouldn’t be surprised at all if the Index hits 1,050 or even 1,000.

The saving grace over the near term should be third-quarter earnings, but any good news from corporations will be usurped by the debt crisis in Europe. Accordingly, equity investors will be well served by keeping a close eye on the spot price of gold and the opportunity for a new entry point. If everything comes apart in Europe, cash, gold and the U.S. dollar will be the marketplace’s only friends.