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The Japanese Test Case

May 16, 2013

There was an article that caught my attention some time ago because its headline read DOW 100,000. Remember the book Dow 30,000? I didn’t read the book for obvious reasons. However, since the DOW is setting new records recently, the author of this book — who wrote it the last time the DOW was setting records — has resurfaced, reclaiming his prediction. He doesn’t seem even a little embarrassed that in between his poorly timed first prediction and this current market run we had one of the largest equity sell-offs in history.

So my thought was that the “DOW 100,000” article was in the same vein as the DOW 30,000, but it wasn’t. The main theory laid out by the author of the “DOW 100,000” was quite legitimate and consistent with some of my own thoughts. The author’s main point was that our nation’s monetary policy would lead to a very high and extended period  of inflation (10 percent annualized) and that over a period of 20 or so years the DOW could reach a 100,000 and still not have kept up with inflation. There are many variables in this theory — like what might happen to equities when interest rates go up as a result of inflation — but it is reasonable that the price of stocks would increase simply because of inflation.

From the article:

If central banks continue to inject football field after football field into the markets and the economy, could this in the long-run lead to anything else than inflation ? Or are the injections just enough to compensate for the massive deleveraging in the financial sector and with the over indebted American consumer? Time will as always tell,” Gijsels said on Monday.

“This being said, what is certain is that we are looking at the largest financial experiment in history. An experiment of which nobody can really guestimate the consequences. There is simply no point of reference” Gijsels said in an interview with

Japan might be a case study of this theory playing itself out right before our eyes. This wouldn’t be the first time Japan’s economy foretold the future for the rest of the world. As bad as the U.S. has been about adding massive amounts of liquidity, Japan seems to be beating us in this race. There seems to be some interesting developments in Japan these days. They have recently added a lot more money (liquidity) to their economy. Their stock market had been languishing even while our markets steamed ahead since 2009. But since their recent double-down on their liquidity bet, the Japanese stock market (NIKKEI) has rocketed up over 6,000 points (from about 8,700 to nearly 14,800) in six months! That is nearly a 70 percent gain.! And nearly 10 percent in the last week or so.

Yet on the other side of the Japan equation, their government bonds are beginning to collapse,so much so that trading on the open market was halted twice. Collapsing prices mean increasing yields, which could reflect concern over inflation or ability to repay excessive debt. However, since most of you are unlikely owners of Japanese government bonds, my reflection about what is happening in Japan might actually tell us whether the DOW 100,000 theory has a good test case in Japan. In other words, if the next economic shock coming our way is high inflation, what does that mean for the U.S. stock market?

Regardless, all this monetary manipulation will ultimately prove to be very caustic for good, sound fundamental economic growth. While a stock market gaining 70 percent in six months may have a favorable “wealth effect” on some, I cannot interpret these developments as the signs of a healthy economy. We should watch Japan and learn.

One Comment
  1. TStacy permalink
    May 17, 2013 4:02 pm

    Hi Jon, This isn’t exactly in response to this article. I just thought you would like to read the attached article I found in our local advertising magazine regarding our money supply. It is pretty much along the same lines. Terry

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