A couple of interesting tidbits (hopefully) to start and then on to the main theme of today’s piece. The new highs/lows numbers for the NYSE were 592 and 5 respectively last week putting the ratio at 118:1. The previous week those numbers were 629/11 producing a ratio of 57:1. The point here is that even though the market did not have one of its best weeks, the numbers show it to have some pretty good internal strength.
While on the “fun with numbers” track, Michael Santoli offered some statistics generated by market historian John K. Harris in his piece in Barron’s this week:
“In the 82-year history of the S&P 500 index, a year’s high has occurred in December 25 times. For the 24 excluding ‘09, 18 were followed by positive Januarys, and the average return for those years was 17.2%. Six of the 24 were followed by negative Januarys, and the average return for those years was -3.5%.
The year’s high has occurred after Christmas 14 times, Harris says. Again, the most recent case is 2009. The prior 13 years that had a post-Christmas high were followed by nine positive Januarys, and the average return for those years was 19.4%. Four of the 13 years were followed by negative Januarys, and the average return for those years was a mere 0.6%.
This history indicates that the January Barometer — the notion that January’s direction tends to determine the year’s course — has particular significance for 2010, Harris says. The barometer seems even more “reliable” following years when the market reached a high in late December.”
All that said, the January effect did not work in 2009. Now on to the main theme.
In direct opposition to Henry Morgenthau Jr.’s experience as Treasury Secretary under Franklin D. Roosevelt in seeing profligate government spending not pull the nation out of the Great Depression and known for his summation of those efforts:
“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot,” Richard Koo, a former economist for the Federal Reserve Bank of New York and chief economist at the Nomura Research Institute, says that the way out of the current dilemma in the U.S. is not to cut government spending but to increase it and do so mightily.
Mr. Koo outlines many similarities between Japan in the 1990s and America today in an interview in this week’s Barron’s calling the condition a “balance sheet recession.” The cure, he states, is not to worry about the deficit or amount of debt that Uncle Sam needs to issue but to spend as much as possible to keep the economy moving while households de-lever. He likens our deficit anxiety to what occurred in Japan in 1997 and says that by cutting the deficit back then Japan lengthened the recession by at least 5 years.
Richard’s take on the proper economic solution is an interesting one given that Japan has just recently announced another assault on the deflation that is gripping that nation along with a soaring Yen, injecting as much as $115.68BN into the economy.
While another round of “stimulus” spending would seem to be political suicide in this country at the moment, Mr. Koo suggests another dollop of dollars of around the $500BN level, give or take.
It should be noted that Japanese investors were actually unimpressed with the size of the package announced. “While Japan’s economy is picking up, there is not yet sufficient momentum to support a self-sustaining recovery in business fixed investment and private consumption,” a spokesperson for the Bank of Japan said adding, “The bank believes that the decision [for additional stimulus spending] together with the government’s efforts will firmly support Japan’s economic developments toward recovery.”
Not everyone is buying it however, as a number of hedge funds are starting to place bets on the collapse of the Japanese government bond market. Kyle Bass, head of Hayman Advisors in Dallas, TX said it “is going to happen; it’s just a question of when."
Tom Byrne, a sovereign credit analyst for Asia with Moody’s Investors Service, describes the situation thusly: “In Japan, the mist has subsided and you see this huge mountain of debt.” Tom thinks “this could blow” but doesn’t put a high probability on that outcome.
Unlike the U.S., the largest purchasers of Japanese government debt are the Japanese and as such it is less likely that the selling would reach crisis levels. George Papamarkakis with North Asset Management in London is on the other side of the trade saying, “I just don’t think it’s the blowout trade some funds think it is.”
Given that Japan has made a few more attempts at restarting its economy than the U.S. has over the last 20 years there might be something to Richard Koo’s thesis. Then again, with the savings rate now at 3% when it used to be at 10%, Kyle Bass might have it right.
Japan’s CDS hit a low of 36bps on June 6th of 2009 after bouncing off of the 38bps level in January and peaking at 121bps on 2/17 of last year. The most recent peak was 80bps on 11/27/2009 before closing at 68bps on New Year's Day.
Uncle Sam’s probability of default had been on a steady path upwards from his low tick of 20bps on 10/21/2009 to the low print high of 42bps on 12/21 of the same year before closing at 38bps on New Year’s Eve.
Enjoy the week.
