A Global Depression?

The iShares Global 100 (IOO) which tracks the S&P Gobal 100 Index, is essentially a picture of the global economy on one chart. It consists of 100 large cap international stocks. It is to the world what the DOW is to the United States. Several of its holdings are DOW components due to the dominant presence of the US in the global economy.

We can see from the chart that after a sharp recovery from March 2009 to Jan 2010, the chart has faltered and has retested break out level support at $50. We could test this strong support level again or trade at or near it for a period of time. A break below this support level would signal another global recession and a break below $40 would signal a global depression.

Economics is a progressive discipline, not a regressive discipline. Economies learn from past mistakes and become more efficient as time progresses, not less efficient. It is true that history seems to sometimes repeat itself as bubbles form and subsequently burst intermittently. However, this is due to the nature of human psychology, not ecomonics. Progress is cumulatively exponential in nature. The long term trend is always up.

Despite the intensely negative media reports, looking back 10 years from now, this could be the greatest buying opportunity of a generation.

How Low Will Japan Go?

An index to a country is what an ECG is to a heart patient. The Nikkei clearly illustrates that Japan has been in cardiac arrest since a major heart attack in 1990 following years of dietary excess.

Despite the fact that from a technical perspective it appears that all of the damage has been fully priced into Japan's economy, it is unlikely Japan will rebound dramatically anytime soon. Japan as an economy is still facing challenges greater than anywhere in the world. Their rapidly ageing population, lack of immigration, enormous debt to gdp ratio will hold their growth rate at a relatively low level for the forseeable future. Japan is a classic example of a perfect storm of problems that grind an economic system to a halt.

Putting things in perspective, Japan is simply in a really bad 20-year secular bear market that may be reaching its conclusion. It is important to realize that the run up prior to the decline that began in 1990 was faster and greater in intensity that the 1920s DOW or the 1990s NASDAQ. Growth was not modurated in Japan during this period. The chart went straight up. It only makes sense that the subsequent bear market would be deeper and longer as their economy consolidates.

I don't know enough about the fundamentals of Japan to make any predictions about a recovery. I do appreciate the fact, though, that the chart tells an interesting story.