The most harrowing words in finance are "this time is different." For investors able to look past a potential European remake of the 2008 financial crisis, there's a bigger picture ghost looming over US equities: America of 2011 is Japan of 1990, facing decades of stagnant growth and moribund markets.
Is Japan is our model, and if so, is there any long-term bullish case for US stocks? I posed the question to Rob Arnott, founder of Research affiliates. Arnott says it's not so simple. "When people say 'this time is different' they're always absolutely correct and absolutely wrong at the same time," he explains. For instance, Arnott says that worrying about a repeat of 2008 is a "misplaced fear, whatever happens next will be different, but the lessons of history are very, very important and very dangerous."
In the macro picture, Arnott says both the US and world have to deal with a "3-D hurricane" of economic headwinds that are all intertwined, and start with...
Deficits: The US, Europe, and Japan are increasingly in the hole, limiting their ability to stimulate badly lagging economies and exacerbating the ability to meet...
Debt burdens. Slowing economic growth, not just in the developed world but emerging markets make it difficult, if not impossible, to deal with enormous interest payments. A situation which won't be easy to remedy because of...
Demographics. Aging populations, particularly in the developed world, where the Baby Boomers are retiring, leaving it to a smaller population base to stop deficit spending, and pay down debt burdens.
If Greece seems much like Lehman Brothers, then Arnott's 3-D theory seems precisely like the situation Japan found itself in after their stock market bubble burst in the late 1980's and early 1990's. Japan's median age of 55-years old is slightly less than 20-years ahead of the US, though the gap will slow over the next few decades. This places a huge financial burden on the children of the Boomers to pick up the tab on a Social Security system that even advocates acknowledge is a financial time bomb.
Retirement benefits are "sacred promises my generation made to ourselves, failed to pre-fund, and fully expect you to honor," Arnott says. Allow me to be clear on two points. First, by "you" Arnott means me and anyone else born after 1966. Second, I don't begrudge the Boomers' Social Security; but I want mine just as I assume you want yours. And there's the rub. Balancing the budget would require not getting ours for a while and would take 10% off GDP, Arnott estimates. No politician on earth wants to preside over that kind of economic pain.
"The challenge here is a political one; it's not an economic one," he says. "The path to a successful economy involves short term pain for long term gain." In other words, solving our economic puzzle lies in the hands of the voters electing politicians who don't run on the promise of near-term sunny days. A better economy involves real sacrifice rather than lip-service.
Put plainly, would you personally be willing to vote for a politician who vowed nothing but a deep recession in order to save the American economy for our children?
If not, in the view of Arnott, welcome to Japan.