A Comparison by ECRI
A few more charts published in the chart round-up at Business Insider have caught our attention. One was a comparison of economic growth and employment in Japan after the the asset and credit bubble of the 1980s burst with the same data in the U.S. over the five years following the 2008 crisis, which marked the end of the Fed-induced housing market and mortgage credit boom. The chart below has been created by Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), who incidentally has undergone a remarkable transformation in recent years from a "glass half full" man to someone who has a very pessimistic view of the U.S. economy (as an aside, Achuthan also harbors a refreshing conviction that interventionism is doomed to fail).
A comparison of U.S. and Japanese economic statistics in their respective post bubble eras by Lakshman Achuthan of ECRI
Of course one must caution that such comparisons are rarely apple-to-apple comparisons, as different statistical methodologies are employed in different countries, which have been altered a number of times over the years to boot.
However, the method used to compile Japan's "real GDP" in the 1980s was probably a good sight more conservative than the method employed in the U.S. today (we have discussed many of the flaws of GDP and similar aggregations in previous articles - see for instance "The Mirage of Economic Growth' or "Aggregate Economic Data as a Means of Propaganda" for details).
In light of this fact, it is actually likely that the differences in economic growth are even greater than suggested by Mr. Achuthan's chart. An interesting aside to this is that although the BoJ engaged in "QE" as well, broad money supply growth in Japan remained at or below 2% over most of the period concerned, while broad true money supply growth in the U.S. was at about 10% over most of the post bubble period to date.
In other words, more extensive monetary pumping resulted in a worse outcome for the economy, which actually shouldn't be too big a surprise. Adding more money from thin air to the economy weakens real wealth generation and therefore damages the economy structurally. Any increase in "economic activity" bought with monetary pumping is unsustainable and certain to consume scarce capital.
Still, most people will probably be surprised to learn that Japan did better than the U.S. by comparison, since there is an incessant chant that the "U.S. isn't going to be like Japan". Actually, that seems to be correct, but not in the way imagined by those propagating the meme.
The Yen Conundrum
Speaking of Japan, we also wanted to show a chart presented by James von Simson of Thurleigh Investment Management. Apparently the contrarian approach is not yet ready to be consigned to the dustbin of history, even though central bank intervention has given the 'herd' an unusually persistent lease of life in many markets in recent years.
The chart shows the path of the yen over the years, contrasted with the analyst consensus on the yen according to Bloomberg surveys. Funny enough, von Simson blames government for leading analysts astray, with the result that they have been consistently wrong about the yen. We actually believe that on the contrary, government intervention has made life a tad easier for the consensus (as in: interest rates at zero, printing press running 24/7 = rising asset prices).
As regards the yen, we have only been surprised by how persistent its decline in 2012/13 proved to be, since the underlying data in terms of Japan's relative money supply growth rate continued to favor a stronger rather than a weaker yen - in spite of the BoJ's inflationary efforts to date. This fact could of course have been ferreted out by other analysts as well during the many years of yen strength.
With regard to the yen, the consensus has been wrong in five years out of five according to the chart below. However, as far as we are aware it has actually been wrong in ten years out of ten. When the yen's rally began in 2002, the consensus was at maximum bearishness. Note that the chart employs the usual inverse notation (i.e., when the line rises, it means the yen is weakening and vice versa):
The yen's path over the years compared to the Bloomberg consensus forecast (the red dots). The consensus has been wrong with unwavering regularity.
On the yen's daily chart we can still see the triangle which we have previously discussed, with no clear resolution having occurred just yet (although as one can see below, it could be argued that a breakout has already occurred and the yen is now merely in the process of "back-kissing" the broken trend line). Note that the notation of the yen futures contract on this chart is actually the other way around: a rising line indicates a stronger yen on this chart.
Yen, December 2013 futures contract, daily. It could be argued that the triangle breakout is already in the bag, provided the broken trend line holds on the current "back-kissing" attempt.
Given the yen's propensity to defy the consensus, it should either strengthen from here on out or weaken rather materially further. We are slightly more inclined to expect a strengthening yen based on money supply growth rates, but there a few new factors have entered the equation of late, such as falling real interest rates and a shrinking current account surplus.
The government has so far managed to convince the markets that it is "serious" about inflating the currency, so market perceptions have for quite some time helped to drive the yen's exchange rate down. This in turn has created a certain 'self-fulfilling prophecy' effect, as import prices are rising and the domestic price structure in Japan is beginning to adapt to the lower exchange rate, which in turn influences inflation expectations.
Still, we think that relative money supply growth rates are the most important factor determining exchange rates in the long term. It should also be kept in mind that the direction of the yen is likely to be the opposite of the moves in so-called 'risk assets' such as stocks. A rising yen exchange rate is usually associated with falling stock prices and vice versa; this is a function of the fact that the yen is used as a funding currency for carry trades, as well as due to the habitual increase in the repatriation of capital by Japanese investors during times of uncertainty.
Charts by: ECRI, BarCharts, James von Simson