It was a pleasure welcoming a number of Tucson friends to our spring seminar on Tuesday evening, May 17. We analyzed massive debts and deficits, unprecedented money creation and the implications for inflation or deflation. We also broadly examined global factors that would likely affect the progress of stocks and bonds in the quarters and years ahead. The following is a small portion from Tuesday night's presentation.
Looking at the long-term stock market charts and analyzing the underlying conditions of the world's three largest economic powers makes one question the staying power of the current global economic expansion.
The graphs of Standard & Poor's 500 and Nasdaq Composite indices demonstrates clearly the rocky road our markets have endured since the turn of the century. At the end of the 1990s, the confluence of excessive debt and absurd stock market valuations led us to forecast the beginning of a long weak cycle that would span a decade and a half or so, give or take a few years. We're now more than a decade into that long weak cycle, and valuations remain extremely high, although down from the nosebleed levels at their most extreme. The debt crisis, however, is far worse. We've made no price progress in more than a decade, and the problems continue.
Japan's troubles with excessive debts and extreme valuations began a decade before ours. Thus they've had many more years of strong rallies and big declines. While we've had two market collapses and two roughly 100% rallies, prices remain below where they started more than a decade ago. Japan's had more rallies -- the biggest of which exceeded 150% -- and many more declines. Their prices remain 75% below the level at which their problems began more than two decades ago.
Japan tried to resolve its dilemma by not recognizing the bad loans in its financial system, by bailing out its banks and by dropping its interest rates essentially to zero. They remain in a deflationary, recessionary condition today.
The sad thing is that we in the United States are trying to solve similar problems caused by excessive indebtedness with the same policies: don't recognize bad debts, rescue the banking system and drop interest rates to zero. The 100% stock market rally over the past two years is testimony to the widespread belief that we will successfully solve these problems with the same tools that have failed badly for Japan and that failed in this country just three years ago.
It is unfair to directly compare China, an emerging nation, with the U.S. and Japan, the two largest developed economies in the world. It is curious, however, that despite China's phenomenal growth story, its stock market is selling for less than 50% of what it was 3½ years ago. Clearly there are fears that something will disrupt that Chinese growth story.
There are ample fundamental reasons to justify a slowing global economy. The preceding graphs demonstrate prices beginning to roll over in the U.S., a two-decade-long decline in Japan and a halving of stock prices in China since 2007. These pictures hardly instill confidence in the sustainability of the global recovery as government stimulus recedes.