It took me some weeks of subconscious post-market connections to figure out why a Japanese pitcher was hot property in America.
The sport introduced in 1872 by an American professor is the Japanese national sport, and Nippon Professional Baseball and MLB Major League Baseball are vying for top talent. But there's more than baseball the two economic giants are batting for. Who came first on the global economic cycle, the Japanese or the American economy?
Despite the 510-year economic cycles oscillating between East and West, cyclists might also stand divided regarding the leader between the two. Who leads whom? Though this economic challenge has no reference on the web, a conclusion can redefine macroeconomics, capital market research and investment strategy in the decades ahead.
We at Orpheus are unequivocal about our view that Japanese economy leads not only America, but the overall world economy. This is no simple hypothesis and can really change how Ben Bernanke handles the ongoing global credit crisis, which coincidentally happened exactly on the centenarian year of the Federal Reserve in 2007.
The regulatory body was formed a century ago in 1907, after a banking crisis caused a run on the banks and bankruptcies. Economists like Bernanke and many others swear by the Great Depression as the most important lesson of macroeconomics.
But in size and proportions, the Japanese depression of 13 years pales the three-year falls of the Great Depression. It took 15 years for Dow to cross its 1929 high, while even after 25 years the Nikkei is still far away from historical highs seen in 1980's. The Japanese slowdown of contemporary times is the largest slowdown we have ever seen.
And there can be many reasons it did not get the much deserved attention by macroeconomists around the world. First, maybe because markets are not sure whether it's over, or it's still ongoing. Second, because Japanese are not too happy talking about it. Third, maybe because the slowdown happened in the most prosperous 20 years of the world economy. The reticent two halves of have and have-not's were polarised. Fourth, because we have few econohistorians today and fewer readers of econohistory. Fifth, humans understand things in retrospect and not in the present. There is too much emotion involved to result in any profound learning. Sixth, conventional economics failed in Japan. And talking about failure is admitting to a mistake, which is hard. Nobody likes asking or answering uncomfortable questions.
All economic axioms were junked in this time by Japan. Depression happened in an era of falling interest rates, which are supposed to do more good than bad. Nikkei fell more than 80 per cent from 1990 till 2003. The excesses of the 1980s collapsed as prices in real estate fell 1/100 to 1/10. And there are people still paying mortgage for houses bought at the peak of 1980's.
The depression in mood has not eased and a suicide happens every 15 minutes, with average 30,000 people taking their lives every year. The bestselling book was The Complete Manual of Suicide written in 1993. And more Japanese want to emigrate, as salaries are still poor and corporates highly conservative.
Despite all this negativity in the mood which is linked with economic depression, yen not only strengthened over this period, but has historically outperformed gold by nearly 100 per cent. This means that if gold quintupled since 2000, holding the yen could have bettered that performance.
Japan is the most energy efficient country in the world, and has technological capabilities which it's selling to neighboring China and world over. If the country shares its stockpile of rice, international food crisis can really ease and prices can fall by half. This is the power Japan can exercise on a global forum today.
Above all this, the Japanese market has the largest proportion of listed debt-free companies in the world, about 40 per cent. More than half of the listed companies are below price to book of 1, meaning that the companies are worth less than their strip value.
These two extreme aspects in a society with extreme negative mood and on one side and real value on the other are not surprising. This happens all the time as a euphoric society gets ready for a crash and vice-versa.
The Japanese social mood is conservative. A Time reporter was wondering recently why Japan does not do much to promote tourism. It has all to do with the society that has lost reasons to celebrate as morale remains low.
This conservative mood has saved Japanese banks from the current credit crisis, as the banks lost just a couple of billions in the sub-prime crisis compared to the $400 billion losses reported worldwide.
The cues we get from the Japanese markets suggest that the balancing aspect for the world economy going forward is not going to come from over extending emerging economies, but from Japan.
This despite the fact that the Japanese markets have been on a secular downtrend for more than 13 years. It has exhibited cycles of outperformance and underperformance just like the Kitchen (inventory) and Berry cycles (commodity) of 3-4 years and 25-30 years respectively. Nikkei relatively gains vs. Dow every 15-20 months and relatively loses a similar time before repeating the cycle again.
These short term cycles are now adding up to complete a larger performance cycle from 1980. For about 10 years, Nikkei outperformed the Dow and from 1990 it underperformed the American benchmark.
Now we are reaching a multiple decade underperformance low again in Q4 2008 or early Jan 2009. And if our cycle interpretation is accurate, Nikkei should hold above 12,000 levels in the months ahead.
What does it mean for the rest of the world and India? First and foremost it tells us that good fundamentals cannot dissuade you from suicidal tendencies. Second, it needs more than good corporate governance to avoid asset inflation. Third, when Imperial Palace in Tokyo is worth more than the entire state of California in 1989, it is usually late. Fourth, conservatism is more valuable than euphoria. Fifth, global asset linkages can tell us where we are going tomorrow and not the Bank of Japan or Fed.
From an investment strategy point of view either you can learn Japanese and move to Japan now, open an account with a broker routing trades in Japan or use the Nikkei indexing. We did a simple indexing of some Indian stocks and sectors with the Nikkei and guess what?
The few stocks that outperformed the Nikkei from the start of the year are HUL, Cipla and Infosys from the FMCG, pharma and technology sector respectively. The skew is still towards the classic late economic sector. We will review the picks when we revisit intermarket cyclicality soon.
The intermarket pairing we did with Nikkei and Dow can be extended to VIX (Volatility Index) and the S&P 500, Reliance and ONGC, gold and oil and late economic sector stocks with the overall universe.
Every time you will see cyclicality, there is a link with repeating patterns in mass psychology, which are similar whether you are a cricket or baseball lover in an emerging or developed economy.
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The author is CEO, Orpheus CAPITALS, a global alternative research firm