The Lost Decade

by Larry Levin


The Vapors released a song in 1980 titled Turning Japanese. Although this song has nothing to do with economics, it reminds me of our Japanese friend's problems following the Nikkei Dow peak in 1989. The Japanese stock market went down for 10-years, which was followed by another decade of sideways to lower share prices. The refrain in the song makes me think of US shares - I think we're turning Japanese, I think we're turning Japanese I really think so (repeat).

Moreover, the so-called Masters of the Universe and other money shufflers sneered at the Japanese for its malaise: Such a thing could NEVER happen here, they said. Well, it has! The US stock market has returned LESS THAN ZERO over the prior 10 years: The Lost Decade. I think we're turning Japanese, I think we're turning Japanese I really think so.

Yes, you read that right. For the prior 10-years to today, the S&P 500 index delivered less than zero. Nominally, the market is down about 19% from the close of 1998; however, adjusted for inflation the market is down roughly 50%! Thanks to the Federal Reserve and Congress, your purchasing power has been embezzled: you probably never saw it coming. Stealth inflation really sucks, doesn't it? If you were in dividend paying stocks, however, and reinvested every penny in more stock (called adding to a loser on the floor), then your returns were less bad than a real return of -50%.

But what about the 90's your thinking? It was an aberration. The long-run average dividend yield running back 120 years and starting in January of 1888 is 4.3%. The capital gains enjoyed by NASDAQ and S&P owners between Jan. 1990 and the end of 1999 came at the cost of decent yields offered to new stock-market buyers. That decade saw dividend yields on the S&P fall in half, according to data from Robert Shiller at Harvard University , down from 3.3% to below 1.15% per year. An aberration indeed.

The Great Depression was also an aberration; taking stock prices so low, dividend yields shot up towards 14% per year. One could have expected NASDAQ crash and bear market of 2000-2003 would set the dividend yields back on track (higher), but that didn't happen. Alan Greenspan's easy money saw to that - reflating the bubble in a new form: all that is housing. Even at the low of Oct. 2002, the dividend yield offered by America 's 500 biggest corporations remained well below 2.0%.

What happens now? Well, either we will witness multiple miracle earnings surprises or stock prices need to fall further to reach the long term trend. Since the former is highly unlikely, I have been betting on the latter. Another possibility, however, is that inflation could go negative (mega-deflation) which would make Lilliputian-like dividend yields attractive.

The Japanese are now almost TWENTY years removed from the Nikkei Dow high in 1989 and may be entering yet another recession. I sure hope that doesn't happen here, but the housing price madness in the US was worse than Japan circa late 80's. The US economic empire was built not on saving and sound investments, but credit - and the credit bubble has just popped. If we do follow their model of malaise, we have at least another 10-years of churning ahead of us. I think we're turning Japanese, I think we're turning Japanese I really think so (repeat).

Real Time Trading Signals*for

Trade Date: 10/7/08

E-Mini S&P Trades*
(before fees and commissions):

1) The early part of the day was missed due to PC problems.

2) VA buy @ 1:45pm at 1118.50 = -2.00 (1 lot)

3) Algorithm positions (1)...combined total...+2.00

ZB (30 Year Bond) Trades*
(before fees and commissions):

1) No ZB trades today.


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