D&D Securities - blog

Back in 1979 at Gardiner Watson we started a yearly presentation to highlight what had happened in the previous year and showcase our ideas for the coming year. It was called Focus and the measure of its success is how many brokers now do something similar and some even use the name.

We will present over the coming days our views on last year and developments we believe are likely to happen in 2009. Specifically we will look at some history and tie that into what happened. We will discuss the current consensus that we are now in a Japanese style liquidity trap and why we believe the risk to equity markets is to the upside. We will talk a lot about Hedge Funds because they were so central to last year’s events, and will discuss regulation change, mergers, closures, retirements, as well as commodity prices, the auto industry, and of course the economy.

Once before we paraphrased Queen Elizabeth and called last year “Annus Horribilus” for her it had been the divorce of Charles and Diana – unprecedented - and Diana’s subsequent TV interviews where she admitted to multiple affairs and rubbished both the Royal Family and life at the Palace. Worse yet, the people loved it!

We had a very bad year – unprecedented - in the financial markets and especially the stock market. But if we look back to 1987 and that crash, we had a greater one day decline in percentage terms, brought on by the futures-related portfolio insurance strategies that were a huge contributor to the debacle.  The insurance actually exacerbated the decline. Really, they did call it Portfolio Insurance! A decade prior the market had melted down with the end of the Nifty Fifty, the one decision stocks. A decade after came the Asian crisis and the Russian default. Still one more decade later we had a liquidity crisis of unprecedented global proportions. All this to underscore that complexity of markets and products and that the coupling of markets does lead to periodic “normal accidents.”  Who knows what it will be ten years from now.

The prevailing view that we are about to follow the Japanese into a “lost decade” should prove to be quite wrong. There’s no similarity except that it started with a real estate bubble. At the peak of the Japanese bubble, the land under the Imperial Palace in Tokyo was worth more than the State of California. House prices went up a lot on the US, but nowhere near those in Spain, Australia, Ireland or the UK. Also if you read the headlines, it sounds like the housing markets are totally under water, where in reality 57 percent of US homes have no mortgage upon them.

The Japanese are savers, they build consensus and are willing to put collective interests ahead of their own. In the US independence is a virtue, individuality is aspired to and they have a 100 year history of spending. They invented the never never plan with no money down. America is capitalist and capitalism requires selling more products to more people.  It’s the American way.

The demographics could not be more different. Japan has an old and aging population and with current trends the last Japanese will die in the 24th century.  They are a xenophic, closed society compared to the US.  America is an immigrant nation that is still growing. The largest visible minority is now Latino and they work hard, are financially and politically conservative and have large families. Try shopping anywhere in the south and Spanish is the language of choice.

The wholly justified admiration for the Japanese work ethic and productivity of the “Toyota man” is juxtapositioned with their politics which is full of patronage, pork and corruption where the government has been in power for 50 years. Just imagine how bad 50 years of George Bush would be. The Bank of Japan helped cause this debacle with “free” money which led to the famous “Yen Carry Trade”.  They hesitated, flip flopped and fumbled, destroying two attempts by the economy to re-start growth. The new US Obama government is a global breath of fresh air and the US determination to re-liquefy the credit markets is sensational. Obama is also inspirational, at least for the moment, and will help change sentiment.

Several years ago the Economist ran an article on demographic profiles for the US and Euroland. Currently the average age is 38 and 39 respectively. By the end of the forecast period in 2035 (if we remember correctly) the average age would be 37 and 52.  The implications are huge. The US will continue to grow and Euroland won’t. They need Turkey even if they don’t realize it.

So no, we are not going to end up like Japan. There will be consequences but not those.

Stay tuned!

Ed Pennock, CFA
Managing Director
416-369-6921
epennock@dominick.ca

Kris Fisher

Institutional Equity Trading

416-369-6924

kfisher@dominick.ca

The above note is prepared by an Institutional Salesperson based on morning meeting comments and general Institutional desk discussion and should not be construed as a research report or a solicitation. For information purposes only. DD Securities, its clients, and principals may have positions in these securities.