The Long Malaise

It’s possible that stocks will not be worth their trouble for another many years. We could already be in a range that holds for so long that people simply move beyond stocks as a place they consider storing their money. The stock market could become a distant report for specialists only, much the way most people view esoteric investments like cattle futures. How much does the cattle report factor into the lives of most people you know?

It’s already like that here in Japan. For the first five years of the lost decade of the 1990s, individual Japanese investors tried scooping up bargains on every minor bottom. The more nimble among them probably made a few yen in the bounces of 15% in autumn 1990, 40% from summer 1992 to summer 1993, 48% from summer 1995 to summer 1996, and so on. Each was heralded as the start of a new bull market, all proved false. The three bounces just mentioned were followed by respective drops of 45%, 21% then a spike followed by another 32%, and 43%. After eight years of fighting it out in the trenches, most stock investors saw their accounts worth less than half what they had been at the end of the initial drop.

Small wonder, then, that people gradually packed up and left. That was 11 years ago, and the Japanese stock market trades today at a level 20% lower than it did at the end of that example. When the news of plunging markets covered papers, magazines, and websites last year, few in Japan cared. Why would they? They hadn’t had money in stocks for more than a decade and don’t plan to ever put any in again. If anything, last year’s headlines just confirmed that they’d made the right decision. “Gambling is fun,” one engineer told me, “but it’s not the right way to plan for the future.”

Such a sentiment could take hold in America, too. The same factors that killed Japan’s equity market are present. Banks blew up, government screwed citizens to bail out banks but didn’t bail them out enough to actually get things moving again, the unresolved bank debt was moved from banks to the country’s balance sheet and an increasing portion of tax revenue was siphoned off to service that debt, so a new normal took hold with a lower rate of growth and a much less enthusiastic population, most of whom never really understood what the hell happened. How did life go from golden bathtubs to goldfish for dinner because of some banker’s mistake? It did, though, and it’s happening in America, too.

During the savings and loan scandal of the late 1980s, a regulator named William K. Black exposed government connections to bank fraud when he accused then-house speaker Jim Wright and five US senators, including John Glenn and John McCain, of doing favors for the S&Ls; in exchange for political contributions. Black wrote a book about the experience, aptly titled “The Best Way to Rob a Bank Is to Own One.” Last April, he appeared on Bill Moyers Journal to discuss the subprime mortgage crisis. Among his many excellent observations, the following comment caught my attention:

In the savings and loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the savings and loan crisis — didn’t matter which party was in power — the US Treasury Secretary would fly over to Tokyo and tell the Japanese, “You ought to do things the way we did in the savings and loan crisis, because it worked really well. Instead you’re covering up the bank losses because, you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn’t work. You will cause your recession to continue and continue.” The Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets.

Yes, the bad assets are still there. The citizens of the United States unwillingly ponied up a national fortune via government’s big bank connections such as former Goldmanoid Hank Paulson serving as Bush’s Treasury Secretary. The Obama administration has employed many of the same people with banking industry connections, so the only thing that has changed is the name on the White House — which matters little because it changes every four or eight years but the industry interests that control Washington never change. We have made a permanent growth impediment out of the ungodly sum of debt created by bank fraud. It is hanging over the United States the same way it has hung over Japan for two decades. The difference is, we’re less than a year into our overhang.

This is treated as last year’s story, but it’s not. It’s this year’s story and, I’m afraid, next year’s and the year’s after that and so on possibly for a long enough time to remove stocks from the list of financial options in the mind of most individual investors. The problem is that few people ever grasped what had happened even when it was the hot news of the day. Now that it’s already labelled history, fewer still will keep track of the long-term effects or why things just aren’t quite as good as they used to be. As they say in Japan, “How long does a recession have to last before we stop calling it a recession and just call it the economy?”

Japan, too, had its periods of improvement over the last two decades. There were moments of good-times-are-here-again hope with this economic data growing more than expected, this company beating estimates, that bank getting squeaky clean, and so on. Overall, though, it’s been a down trend across the board. The good news is that people adjusted. What else can you do when the new normal isn’t just a slogan but is actually the new normal? If it’s normal, you’d better get used to it, so that’s what people did. People will do so in the US, too, but that doesn’t necessarily mean good things for stocks.

You have every right to be angry. This is the biggest failure of American leadership we’ve seen in our lifetimes, though few see it that way yet. This is the culmination of a growing corporate ownership of America that began after World War II and spun out of control. About one-third of US tax revenues go toward a defense establishment strong enough to wipe out the Third Reich, but impotent against a bunch of box-cutter-carrying terrorists from our oil ally, Saudi Arabia. Our response? Launch an unrelated war in Iraq that’s slated to cost $3 trillion before it winds down — and it won’t wind down until the new war in Afghanistan ramps up.

Even Robert Gates, Director of Central Intelligence under the first President Bush and Secretary of Defense under both the second President Bush and President Obama, pointed out the need for a more reasonable defense budget when he wrote last January, “As much as the US Navy has shrunk since the end of the Cold War, for example, in terms of tonnage, its battle fleet is still larger than the next 13 navies combined — and 11 of those 13 navies are US allies or partners.”

This is not a political discussion, it’s an economic discussion. Notice how much of the opposition to health care reform has centered around the inability of the country to afford it. Why is there never such consideration for military expenditures? It’s the same Treasury paying, and the same Treasury paying off banksters, too. There’s an endless supply of money for meaningless wars and bank heists, but not enough for health care. You know how much the proposed health care reform would cost? About $100 billion per year for ten years. You know how much Paulson’s Troubled Asset Relief Program (TARP) cost? $700 billion. Poof! Just like that, the banks got the dough. For health care’s smaller cost, angry mobs turned up at town hall meetings to scream “socialism” at the very idea.

Is the country heading for bankruptcy? It sure looks that way. Is it because of social spending? No. It’s not really because of military spending per se, either. The country is heading for bankruptcy because corporations control government and the nation’s treasure
is redirected to where it most benefits corporations, not citizens. Government military spending helps corporations because they want to sell the most expensive weapons systems to government. Government health care spending hurts corporations because it reduces profits at private insurers and lowers the price people pay for medicine and equipment. Lobbying by corporate interests in both cases has garnered more government military spending and less government health care spending. In these and other cases, corporations win and citizens lose.

This is not a discussion about the military or health care, though. It’s a discussion about America’s culture of corporate control. The same way government is manipulated to benefit corporations in those two sectors, it is also manipulated in the banking sector. There, the culture of corporate control has finally gone too far and made public the private debt disaster that bankers created. That overhang will crimp stocks for years.

Coming back to Japan, one reason people got tired of stocks is that none of the usual ways of analyzing them made sense anymore. It became a guessing game of what stimulus would come from government next, when it would peter out, what new shenanigan banks would try to prop up their balance sheets and how many people it would fool, when that would peter out, and so on. Gambling, indeed. Fundamentals? Please. Cash from government to banks to pour into the stocks they own to drive up those prices so the stocks could be dumped at a profit looks to the casual observer like a rigged game. Once the public sees the stock game as being rigged, it starts to pull out and leave the game to the big guys with government connections. Stock markets began as a way for companies to get financing to grow their business ideas. That’s not what they are anymore. They’re a competition of connections. If you have as many family members working at the Treasury as Goldman Sachs has, then you might just stand a fighting chance. If not, maybe other assets will prove better for you.

Are we there yet? No, and there’s a chance the US will pull out of this funk the way it pulled out of the 1970s. For that, though, it took the vision and strength of Ronald Reagan. As popular as Obama may be, he’s no Reagan. His first half-year in office has proved that, and his dropping poll numbers betray that even the political babes who fell for the hope gambit have realized that nothing’s any different. Those who’ve been around longer knew from the get-go that the same people who ran things at the beginning of January would still be in charge at the end of January, and so it was. Having a Sunday morning celebrity for a president is good fun, but doesn’t get much done.

Edward Lucas wrote in the Telegraph last Sunday:

Mr. Obama has tactics a plenty — calm and patient engagement with unpleasant regimes, finding common interests, appealing to shared values — but where is the strategy? What, exactly, did ‘Change you can believe in’ — the hallmark slogan of his campaign — actually mean? The President’s domestic critics who accuse him of being the sinister wielder of a socialist master-plan are wide of the mark. The man who has run nothing more demanding than the Harvard Law Review is beginning to look out of his depth in the world’s top job. His credibility is seeping away, and it will require concrete achievements rather than more soaring oratory to recover it.

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