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The U.S. looks like Japan: Investors rejoice

May 16, 2013: 12:11 PM ET
America is almost halfway into its post-recession Lost Decade. But despite the comparisons to Japan, investors couldn't be happier.

America is almost halfway into a post-recession Lost Decade. But despite comparisons to Japan, investors couldn't be happier.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

The U.S. economy is still not close to being fully recovered from the Great Recession, but investors could give a mouse's posterior about this sad fact.

That point was hammered home Thursday. Stocks, which many believe are due for a fall because of how well they've done this year, were flat despite a trio (troika if you're nasty) of disappointing jobs reports.

Housing, which has been the life of the economic party so far this year, took a bit of a stumble. Starts plunged in April.

The job market, which seemed to be slowly getting better, also may be taking a step back. The latest weekly initial claims figures, which are admittedly volatile, rose sharply from a week ago.

Related: 11 cities where workers are disappearing

And inflation? What's that? Consumer prices fell for the second straight month. The absence of runaway inflation is of course a good thing, especially when you consider that the Federal Reserve has pumped an inordinate amount of money into the system with its asset purchase programs. But if prices continue to dip, that's a big problem. Deflation is much worse than mild inflation. Just ask Japan.

Ah yes, Japan! It has taken steps to combat deflation with a vengeance this year. The Bank of Japan's stimulus, dubbed Abenomics in honor of the country's prime minister, is like the Fed's quantitative easing.

On steroids.

And human growth hormones.

Related: CNNMoney's Fear & Greed Index shows Extreme Greed in market

There's the rub. The longer that the U.S. stays in tepid growth mode -- what I've been calling the "low and slow barbecue recovery" since 2010 -- the comparisons to Japan will only increase. After all, the U.S. also has an aging population and a large government debt load. The Great Recession ended in June 2009 and here we are in May 2013 still with a lackluster recovery. So we're almost halfway to our own Lost Decade.

The perverse thing about this is that Wall Street would be overjoyed if the Fed had more of an excuse to expand QE, as opposed to reducing or tapering it.

Investors naturally love that the Bank of Japan is out-Fed-ing the Fed. The Nikkei's more than 40% surge this year makes the 15% rise in the S&P 500 look puny by comparison.

Even though there are many smart people, including members of the Fed, who are worried that QE ∞ will eventually cause a huge inflation headache and create more nasty asset bubbles down the road, the market doesn't expect the Fed to pull back on its easing anytime soon.

That's really the only reason to explain why stocks are continuing to head higher despite a round of first-quarter earnings that has been mixed at best. Wal-Mart (WMT) posts disappointing sales and the market brushes it off? Farm equipment giant Deere (DE) issues weak guidance yesterday and we hit record highs again?

Related: Abenomics is good for Japan (and the U.S. too!)

Investors clearly expect the Fed to keep coming to the rescue. Forget about "Sell in May and go away." The only cutesy market aphorism that matters right now is "Don't fight the Fed."

And with good reason. The most influential members of the Fed -- chairman Ben Bernanke, vice chair and likely Bernanke successor Janet Yellen and New York Fed president William Dudley -- have gone out of their way to stress that they don't think the Fed can afford to end QE as long as the job market and overall economy remain weak.

Bernanke has also been taking pot shots at Congress for its refusal to help get the economy back on track. As long as the Fed talks about fiscal policy being a drag, there is absolutely no chance that the central bank is going to take away the heavily spiked punch bowl.

The so-called bond vigilantes have pretty much given up hope that rates are going to shoot higher anytime soon. Sure, the 10-year yield has crept up near 2% again. But that's still much closer to the all-time lows than where it was when the economy was roaring in 2005 and 2006.

And even Dallas Fed president Richard Fisher, a self-described inflation hawk who has in the past been critical of Fed stimulus, said in a speech Thursday that politicians are a big reason why the economy hasn't yet rebounded in the way most of us would like.

Fisher, who titled his speech "Fiscal Policy. Oy!" had these tough words for elected officials -- a group I like to call our nation's least and dimmest:

"I have sworn fealty to a dual mandate of conducting monetary policy so as to maintain price stability AND create the monetary conditions for full employment and prosperity for all, not just for the rich and the quick. This, I fear, we will fail to do unless Congress and the president develop and deliver on a strategy that complements ours at the Fed."

Translation? If you think the Bank of Japan is aggressively easing,  you've ain't seen nothing yet.

That's why stocks could keep climbing. It doesn't matter that the economy is not healthy enough to make most average consumers feel better. Wall Street only cares about the Fed.

Related: Warren Buffett worries about 'Fed experiment'

This can't last forever, of course. Sooner or later, the economy is either going to slow so much that we have to start worrying about another recession (and no amount of stimulus will help prevent a market pullback if that happens) or the economy will start showing signs of a legitimate, sustainable and robust recovery. In that latter case, the Fed will have no choice but to end QE and start raising interest rates.

But for now, at least, investors can enjoy the fact that the United States is basically morphing into Japan Lite. Who cares about the health of the economy as long as central banks keep those printing presses running 24/7/365? Joy.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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