Japan was already in a world of hurt, financially speaking. Their tremendous deficits are estimated at over 210% of GDP, and the world was no longer turning a blind eye as everybody from traders to the credit agencies were essentially putting them on notice. However, now the Japanese government has an excuse to borrow and spend and will be given consent to do so. They will be required to borrow trillions to repair their infrastructure…and who would fault them. Sure, it will only increase their debt load and create a worse economic situation years down the road, but investors and the financial markets do not look that far. The fact of the matter is that trillions will be spent by the government which will put people to work and actually be a boom for Japan, albeit a mini one, and they will be given a hall pass to do so.
The bigger picture is that we are simply in the middle of a corrective phase in this bull market rally (within a larger cyclical bear market), and this could very well be the capitulation that pushes the sellers over the edge (exhausts supply). As I have said in previous client newsletters, corrections come from the evil that you do not know and are not prepared for. The world events of the last month certainly qualify as that! A correction needs about 5-7% to relieve the excesses. We only had about 2-3% following the Mid-east turmoil. With this new crises we now have gotten to the 5 ½% level, which is probably enough. The stock market has absorbed the worlds recent meltdown (yes, pun intended) resoundingly well and should resume the uptrend shortly.
My bigger fear will come when the Federal Reserve ends its easing programs. The market is absolutely addicted to stimulus and absent of government intervention, the economy could easily roll back over. My best guess is that Bernanke will end the program and see what happens. When the stock market sends a message to Bernanke by selling off like it did last time, he and the Fed will be forces to institute QE3 or something of a different name.
Please understand, I do not intend to be cold or indifferent to the tremendous suffering going on in Japan, my heart goes out to them. I am simply trying to take a top-down tactical (TDT™) investing approach to this situation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.