The Lost decade

In Japan, after the Nikkei bust and the infamous Nick Leason made the transition from high flying wide boy to jail bird to become a caring, sharing psychotherapist, the Japanese had what they refer to as the lost decade. Growth was anaemic at best, bad loans were held on banks books and real interest rates were negative. Since 1990, the stock market is still down over 75% and the property market is down over 50%. The world was awash in Japanese savings as traders raced to exploit the Yen carry trade, borrowing cheap yen and buying things like Icelandic Bonds and US treasury bills in what was regarded for a long time as a risk free punt. Bubbles formed on every other continent as mal-investment ran rampant.

Will the UK experience a similar lost decade?

Well, you could argue, not that we are already seeing it…but that we’ve already seen it! The FTSE is down in real terms over the last 10 years when inflation is taken into account. The measure of real returns is seldom looked at in the financial media when looking at the stock markets.

However, as all sophisticated investors know, measuring inflation is a key part to measuring returns. There’s little point in getting 10% returns if inflation is 10%….in reality there has been no appreciation in this scenario. Property could soon follow stocks dismal decade long performance in real terms as the printing presses whirr into high gear. Couple that with shaky looking growth prospects as we look out over the horizon right now and the picture isn’t a pretty one.

As companies struggle in the current climate, corporate earnings are likely to fall further and interest rates look set to continue to come down (in a attempt?) to try and push liquidity into the system. The problem is, as was the case with Japan that everyone is already up to their eyeballs in debt and so pushing liquidity into the system is like pushing on a piece of string…it may eventually find a way into savings as households rebuild their balance sheets….as is currently the case with banks and many large companies.

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Tags: FTSE, Inflation, Interest Rates, Nikkei, Yen