U.S. stocks just came off their Lost Decade, but stocks in Tokyo recently hit a 28-year low. In 1984, when Japan’s economy was going strong, a three-decade drought would’ve seemed impossible. Yet, here we are.
Could America be doomed to suffer the same fate as Japan?
In an hour-long interview last week in Washington, D.C., I put that question to Eddy Elfenbein, who writes about stocks at Crossing Wall Street. Elfenbein, a long-term, fundamentals-oriented investor, was named by CNNMoney as “the best buy-and-hold blogger” on the Web. (Check out his free newsletter here.)
You can view our conversation here (run time: 4:29), or see the transcript below:
Brian Richards: Eddy, thanks a lot for taking the time today. I wanted to start with a general market question. The Nikkei in Japan is at a three-decade low. Nobody thought that was possible three decades ago. What are the odds that the U.S. could see a similar slump over that sustained period of time?
Eddy Elfenbein: I would say it's very, very remote. Even though the U.S. market has had … I would say we've already had our lost decade from March 2000 to March 2009, almost exactly nine years. The problems Japan faced were much more severe than what we had.
Their markets in the late '80s were terribly rigged. I remember Peter Lynch, legendary fund manager at Fidelity Magellan, he said he was at a business meeting in Japan and he was looking over some financial statements, and he said, "There's this one figure. I can't figure out what it is. Can somebody explain it to me?" And they said, "It's very simple. That’s the share price one year from now." So that's how controlled the markets were in Japan, and all of this fell apart and then they had their version of capitalism and their industrial policy and they had the government involved in the stock market. Then they had their "zombie banks," which really they were just keeping alive and they weren't really growing at all but just pumping money in to keep …
And then the real problem that Japan has is demographics. Japan is a very, very old country. It's really almost off the table as far as looking at the statistics. One out of four people in Japan are over the age of 65. In the United States, which is a country that’s getting older, our rate is half that. And this is even as some baby boomers have started retiring.
The problem when you have that is what's key to a country is what they call "the dependency ratio" -- how many people aren't working versus how many people are working. Every person who isn't working if they're out of a job or even they're retired, every single day they need to be housed, clothed, and fed, and that's all relied on the people who are working. And in Japan that balance is really, really getting out of whack and they just have a nation of retirees, and the fertility rate is plunging.
There was one story that came out; there was an island in Japan that has about 20,000 people and their single OB/GYN left. He no longer works there. And now the whole island doesn't have one because there are so few births. If somebody does need attention from the doctor they will helicopter them in. This is an island of 20,000 people. And that's how acute the age is.
America is a very, very dynamic society. Even the problems we have, we're always able to overcome in a much more resilient way. So even if we look at what we've gone through lately -- which certainly hasn't been good, it's one of the worst markets in 70 years.
Basically ballparked, the S&P 500 is going to earn about $105, $107 give or take per share for this year. We don't know exactly, it's still June, but it will be in that ballpark. Going back to the peak earnings year was 2006, and we made I think it was about $87 per share. So $87 to $106 or $105, that's about 20% in six years. That's not great growth, but we are growing. And that is what America is. Our system does work, as frustrating and as upsetting as it can be. Companies are out there every day and they're making profits, and the economy is growing. Certainly not what we'd like, but the idea of a three-decade slump … I think the odds are extremely low.