As the economy recovers from its extreme lows and GDP growth turns positive I am seeing more and more similarities with debt burdened Japan. The credit crunch in small business, lending and consumer balance sheets continues unabated, but investors have grown quite confident regarding the longer-term outlook mainly due to the extraordinary government measures that have helped prop up national growth. As we transition from the panic phase of the credit crunch into the malaise phase of the credit crunch you just have to begin to wonder if we aren’t going to experience the same repercussions Japan suffered from throughout their battle with deflation – relatively strong GDP growth accompanied by a deleveraging consumer and a nearly non-existent lending market. All of which leads to a spectacular churn in the markets which essentially takes us nowhere.
A quick review of history’s bubbles and this fantastic comparison with the Nikkei (courtesy of dshort.com) gives a nice visual of what might be in store for the U.S. stock market over the coming few years: