Tuesday, March 30, 2010

The Last Real Estate Boom

A generation ago there was a real estate boom and bust on the other side of the globe not so different than the one we have just experienced. On the last business day of 1989 the Nikkei reached 38,957. Today it sits at 11,097, less than one third the level of that day twenty years ago. Does that mean that U.S. markets will follow? According to Mark Twain, history doesn't repeat itself, but it rhymes.

The wildly excessive speculation in real estate was the catalyst to a still deeply ingrained deflationary economy and slow growth in Japan which is now entering the third decade. Unlike the typical US post WWII recession, Japan's lingering state of affairs was a credit and banking crisis. Rather than deal with the destruction of capital loaned, the bank instead kept assets on the books which were badly impaired and never to return. To confront the crisis honestly and accurately would have brought about the recognizable insolvency of the banking system. Instead it was papered over. It is at that time that we were introduced to the term "zombie banks."

(click on image to expand)

The unwillingness to treat the banks according to market rules rather than political expedience will prolong the pain, not remove the dysfunctional.

The chart above is intended not to predict the future of our own market, but to serve as an illustration of what CAN happen. The similarities are too many and the performance too similar to ignore.

“Before I draw nearer to that stone to which you point,” said Scrooge, “answer me one question. Are these the shadows of the things that Will be, or are they shadows of things that May be, only?”

Still the Ghost pointed downward to the grave by which it stood.

“Men’s courses will foreshadow certain ends, to which, if persevered in, they must lead,” said Scrooge. “But if the courses be departed from, the ends will change. Say it is thus with what you show me!”

John Barnyak