Edwards: Japan Still Leads ...

Albert Edwards, the top ranked strategist at Societe Generale, writes today:

I have long believed that a post-bubble world would play out in a very similar fashion to Japan's lost decade of the 1990s. To be sure there are huge differences, but the similarities are also surprisingly close. Bubbles have a habit of playing out in a certain way.

I remind readers of a few simple key facts that continue to nudge me towards the view that the Western authorities are set for dismal failure in their attempts to atone for being asleep at the wheel.

and this is key mssage, in my view:

The de-rating of Western equity markets from their New Paradigm highs is still unfinished business. In Japan it took many cycles to fully purge their excess valuation. I have a clear and vivid recollection that at the peak of each mini-cycle, market strategists protested that equities were so very cheap they couldn't possibly de-rate any further; yet they did (see chart below).

However, allow him for:

But let me be humble for just a second. One question I am often asked at the end of a presentation is “how will you know if you are wrong?” Resisting the temptation to totally reject this possibility, I think perhaps I can identify one thing that might indicate this post-bubble world had defied the law of gravity and was reinflating again. Back in the early 1990s minicredit crunch it was not until the middle of 1993 that private sector demand for credit began to grow (supply was not a problem as banks were already healthy). To gauge whether the world economy can surprise and escape this balance sheet recession, keep a very close eye on the bank lending numbers. They may hold the key.

John Hussman also wrote quite interesting commentary yesterday, I would like to point out this one paragraph:

Probably my clearest drawback as an investment manager is that I have too often assumed that investors should recognize what seemed to me to be patently obvious dangers (the predictable collapse of the dot-com bubble, the tech bubble, the housing bubble, the oil and commodities bubble, etc) with a longer lead-time. Unfortunately, we inevitably experience a period of frustration – at least temporarily – for assuming such foresight. Still, none of those has caused trouble for us like they did for the rest of the world. Sustainable long-term returns require the avoidance of major losses, and the best way to avoid major losses is to avoid a) securities where the probable long-term cash flows do not justify the price, and b) markets where the probable returns from accepting risk are unlikely to be durable. There are a lot of investments that can be bought for short-term speculation that fail this test, but advance anyway - until they don't. The most important lesson I keep having to re-learn is how utterly myopic investors can be when there's an uptrend to be played.

There is still an uptrend to be played!

But below 990 for S&P500 one should have a clear picture, why the game ...