In trying to further decipher whether we should worry about inflation or deflation now, many people look to the similarities of what Japan has experienced the past decade plus and wonder whether the U.S. will follow suit.
Could the U.S. be taking the same deflationary flight pattern as the Japanese have taken since 1989? What will that mean to the price of gold?
To answer this question, I’ll analyze four areas; the stock markets, the real estate markets, the 5, 10 and 30 year yields of the Japanese Government Bonds (JGB) and the U.S. Dollar T-Bonds and Debt to GDP. I’ll then correlate this with contemplations on what gold will do priced in U.S. Dollars moving forward.
The Japanese Inflationary Credit Expansion and Deflationary Credit Contraction Example
Japanese Inflate 1986-1990
Japan’s current episode of deflation was preceded by an inflationary period that saw the YEN money stock increase by 10.5% per year from 1986-1990.
The result of this expansion was a boom in the Nikkei Index and in Japanese real estate. But what has transpired since that time might lead one to some conclusions about what will happen to the stock and real estate markets here in the U.S.
Japanese Nikkei Index Reaches New High December 1989
On December 29th, 1989, the Nikkei Index hit its high of 38957.00 and since that time has continued to slide, losing over 75% of its value , sitting at 9,537 as seen in the following chart.
The DOW Follows Suit as it Reaches New High in July 2007
The inflationary, easy money, credit expansion period in the U.S. allowed the DOW to reach new highs on July 19, 2007. The DOW today, at just over 10,000, by comparison is currently sitting about 40% off that closing high.
Comparing the NIKKEI chart above to the DOW chart below, where do you think the DOW will go if we are truly in a deflationary credit contraction period similar to what Japan experienced? More importantly, what makes you think the U.S. will be different?
Japanese Real Estate Market Peaks 1991
The inflationary period in Japan caused real estate to double in price from 1980 to 1990. Since that time, prices of real estate have done nothing but come down as seen in the following chart.
This chart ended in 2005, but what has happened with Japan’s real estate prices since this time?
Japanese Commercial Land Prices Plummet to 36 Year Low
Japanese Real Estate has plummeted and Japanese commercial land prices hit a 36 year low this year, a third of what they were in 1991 at the height of the real estate bubble. That’s a 66% drop for those keeping track of the numbers.
Japan now is also experiencing record office vacancy rates according to Miki Shoji Co., a privately held office brokerage company as shown in the chart below.
Despite the increased vacancy rates, the Japanese today still have the world’s most expensive office location surpassing Hong Kong. Any bets on those prices coming down in the near term?
Japanese Property Developers and Real Estate Companies Go Bankrupt
Meanwhile, on the other side of the aisle, 8 out of the 10 largest bankruptcies were property developers and real estate companies the last year with the tightening of credit in global markets.
What makes anyone think the U.S. won’t be any different as the deflationary credit contraction takes hold of the U.S. economy? Do people think the spending the U.S. government and the Fed are doing will actually turn this economy around? Stay tuned for Part 2 and see what Japan has tried to do and find out.
Is the U.S. Real Estate Market Turning Japanese? I Really Think So…
Moody’s/REAL Commercial Property Price Index, is a “periodic same-property round-trip investment price change index of the U.S. commercial investment property market based on data from MIT Center for Real Estate industry partner Real Capital Analytics, Inc (RCA).” According to them, there has been a fall of 41% in U.S. commercial property values from October 2007 to December 2009 as shown in the following chart.
What about U.S. Home prices?
U.S. Home Prices according to the Federal Housing Finance Agency (FHFA), have declined 1.6 percent in the latest quarter and 6.8 percent over the four-quarter period. This includes all-transctions which includes data from mortgages used for both home purchases and refinancing. The chart below shows what has happened with home prices which saw a temporary bump thanks to the Obama administrations gift of cash for houses that expired April 30th, 2010.
When one looks at the FHFA website, they’ll see the following misleading chart which shows zero negative real estate prices for the last quarter anywhere in the U.S. as they mask it in the “<1%” group represented by the color blue.
While a negative return technically is less than 1%, they deceive anyone looking at the chart as they don’t account for it graphically by any color even though, as noted in the data above, the prices were negative for the quarter. Leave it to the government to mask the truth.
Red is usually associated with negative numbers. Notice how they used red in this case as the best case scenario, and blue as worst case? Who says our government hasn’t read a book or two on psychology: Blue represents peace, tranquility, calm, stability, harmony, unity, trust, truth, confidence, conservatism, security.
Hey…the Chicago Cubs primarily color is Blue too….maybe that’s why I still love them despite over 100 years of losing!
In looking at the comparison of the data above, how long will it be before the larger U.S. property developers and real estate companies go bankrupt?
So while the stock market and real estate market in the U.S. seem poised to follow the deflationary pattern of Japan, what has Japan tried to do to reverse its course? Will the U.S. try the same thing? What will this do to the price of gold? See Part 2 for the answers.