S&P 500 and Nikkei 225: A Similar Tale of Burst Bubbles

By Rob Weigand

Motivated by Cassandra Does Tokyo’s eloquently-written post about the pundits prematurely anticipating economic and financial conditions returning to “normal” (because normal may not mean anything any more), and Paul Krugman’s recent comments at the National Press Corps Luncheon about ZIRP in Japan vs. the U.S, I decided to share a little experiment I’ve been keeping track of for about 5 years now. This is a picture that’s truly worth the proverbial 10,000 words: I overlayed the compound returns to the Nikkei 225 and S&P 500, beginning 4 years before each market’s bubble top, and continuing for the next 8 years. I believe the graph speaks for itself:

click to enlarge

The behavior of each market is similar for the 4 years preceding their peaks and the subsequent bursting of the respective bubbles. In early 2005 the S&P 500 diverges as returns are positive through the summer of 2007, which back then was hailed as proof that “it’s different this time,” but we are now wise enough to attribute to the artificial tailwind created by the credit, real estate, emerging market stocks and commodities bubbles.

As of December 15 2008 the total cumulative return over the two 12-year periods was +38% for the Nikkei 225 vs. +37% to the S&P 500. And we all know what happened to Japan from 1997-2008 . . .

By itself, of course, the graph means absolutely nothing. Given the similarities between our two economies and our governments’ and central banks’ efforts at reviving them, and the well-known belief that the stock market is a forward-looking discounting mechanism, the message I take away from the graph is that the resurgence of U.S.-style capitalism is hardly a given at this point. We’re going to need sharp, focused leadership from the Obama administration, and maybe even better, more than a bit of luck. I don’t think it would take much more in the way of economic and/or financial shocks to plunge the U.S. into a Japan-style funk for a protracted period of time.

Comments

[mumbaikar:]

It is interesting to know how events in the distant past have parallels to what we have going on. For example, did you know of the link between the American Civil War and Mumbai's rise to industrial age. There was a cotton bubble going on at that time in Mumbai.

2008 Dec 23 04:35 PM

[y3115y:]

But we barrowed one trillion from Japan.
Japan's saving rate is ten times higher.
Average Americans owe more money to other nations than any nation in this world. We are too poor to pay it, and Federal is barrowing more for us, we have to declare chapter 11 sooner or later, to write it off. We are paying for Reagan's tax cut for our father and mother, and our children will pay our debts the Bush barrowed for our tax cut. They use tax cut to secure their reelection, but voters did not know.

2008 Dec 23 10:00 PM