I’ve been trying for some time to find a shorthand way of describing how I view the current economic situation in the US. I think I’ve found one: it’s like Japan entering the 1990s, only without the threat of higher interest rates.
Japan’s lost decades
Last year Japan racked up its third consecutive “lost” decade of virtually no real GDP growth. It has started decade four with, as I see it, little prospect of change. That’s partly because the government continues to pursue the same anti-progress agenda it has followed for over a generation. It’s partly the lack of an effective political opposition to the ruling Liberal Democrats. It’s also a result of the elevated status accorded to hereditary wealth and the deeply ingrained Japanese cultural, religious, linguistic tendencies to respect the “wisdom” of elders.
What’s most of interest and concern to us as investors is not the cultural underpinnings of today’s Japan but rather the fact that Tokyo’s economically ruinous policies are virtually the same as those the Trump administration has been blithely putting in place in the US over almost four years–and which had already transformed the US from rude health into the emergency room, even before Trump’s pandemic debacle.
similar mistakes to Trumponomics
The major economic policies that have led to Japan’s dismal economic decline are very familiar:
–a strong preference for industries of the past. Especially true for the zaibatsu conglomerates, like, say, Mitsubishi or Mitsui, that make up today’s industrial and political royalty. They feature industrial companies whose heyday came in the 1980s–autos, ships and heavy machinery. Same now for the US, except Trump also supports the mining and energy industries that were in their glory much earlier
–barring foreign workers needed to bolster an aging–and long since shrinking–domestic workforce. Strong bias against domestic minorities, as well. No ICE equivalent in Japan, though. No secret police to incite violence, either, although the yakuza might occasionally perform a similar function
–strict barriers, formal and informal, against foreigners exercising corporate influence or ownership control, even to rescue dysfunctional, but politically connected, companies in any industry. Japan has always been xenophobia, but put in stout legal barriers in the early Nineties. The US uses, for example, the increasingly aggressive Committee on Foreign Investment
–strong anti-innovation bias. In Japan this expresses itself in a reluctance to support businesses not sponsored by the old guard, and especially those in new industries and/or run by women. The US equivalent is the administration’s strong anti-science bent, its protective measures for the Detroit auto firms, its defense of a laggard telecom industry and its failure to modernize infrastructure. Some of this isn’t new. For the past fifty years or so, the US has propped up the domestic auto industry, but Trump has intensified government protection. He also whiffed on the chance to address the special tax breaks natural resource firms enjoy in the US in his tax-cuts-for-big-donors bill in 2017, while also increasing the amount of environmental damage they are allowed to do. One difference: Japan wants to defend the status quo; the goal of Trump’s trade war with China is to return to the US the sweat shops and manual labor industrial jobs that left long ago and which China no longer wants.
I think the current sorry state of the US economy and of the empty-headedness of administration economic thinking have been very well understood on Wall Street for a long time. This is reflected in the deep underperformance, even pre-pandemic, of names that depend on domestic GDP growth and the rocket ship rise of capital flight stocks.
Recently, I’ve been thinking that on valuation grounds alone there must be at least some sort of stock market rally in the left-behind domestic economy-sensitive areas. To a degree this has already started to happen. Last month, for example, the Consumer discretionary outperformed IT, which has been the hands-down winner over the past year or so.
Will this rally have meaningful legs? I think the answer lies in whether/when we can expect to see domestic GDP growth again. The Japan comparison suggests to me that under Trump this is highly unlikely.
bad news is sometimes good, on Wall Street
Here’s where the twisted turn of mind that moves Wall Street comes into play. Put aside Trump’s racism, his constant lying, his ignorance, his denigration of public servants and his apparent mental decline while in office. His chief economic characteristic is he has no idea what he’s doing. While he is in office, the economy will remain a train wreck.
But having a know-nothing in the White House has its pluses:
–continuing favors for his wealthy financial backers and
— the near certainty of ultra-easy money policy as far as the eye can see, as the Federal Reserve tries to blunt the impact of Trump’s blundering. This, in turn, implies buoyant stock and bond markets.
That gets Trump lots of Wall Street support, especially from private equity and hedge fund recipients of special favors. Ironically, the ordinary Americans who vote for him will continue to bear the brunt of the damage he does.
if Trump loses
I think the course of the stock market is much less clear if Trump loses the upcoming election. Doubtless, the country will be far better off, even if the Democrats don’t have a coherent economic program, which I don’t think they’ve had for years. Certainly, interest rates will remain at intensive-care lows for a long while, although speculation will likely begin about when–and how high–rates will eventually rise. The air will doubtless come out of the most speculative “concept” stock winners of 2020 to date. Capital flight will cease to be the dominant investment theme. Consumer names will likely get a better reception than they have until very recently.
The important question will not be whether the market will rotate away from the capital flight and pandemic names that have dominated the market this year. It’s, rather, how sharply and when. Arguably, the market will begin to react before Election Day, reacting to poll results predicting who the next president will be.