“I’ve abandoned free market principles to save the free market.”
That’s what President Bush said in December 2008.
The statement came after the disclosure of $8.5 trillion in various bailout schemes were deployed throughout the U.S. economy.
The problem, however, is that didn’t save the free market.
It was never intended to save the free market.
The bailouts were meant to preserve the status quo, regardless of the costs.
Since then, stocks have risen steadily, credit markets are flowing, and the party is well into it’s eighth year.
But as stocks hit new highs and investors become more confident, the risks of a significant correction or crash rise proportionally.
Here’s what we expect to happen when it does come.
Coming To A Market Near You
If you want to see what the U.S. economy will look like five, ten, or 20 years from now, all you have to do is look at is Japan.
As we wrote earlier this month:
The perfect example of what the U.S. economy has been in and where it’s headed is Japan.
The Japanese mega-bubble blew up at the end of the 1980s.
The central bank of Japan’s response was to slash interest rates.
Japan cut rates down to near zero in the in the 80s and they haven’t budged since.
Nearly 30 years later all Japan has to show for it is about three decades of annual GDP growth around 1%.
The U.S. has done the exact same thing since 2008 and has the exact same result.
That’s where we’re headed economically.
Today though, we’re talking stocks and some major news out of Japan.
Back in 2013 the Bank of Japan launched its eighth or ninth major “stimulus” program of the last three decades.
It said the program would consist of $1.4 trillion of spending on all sorts of government projects and handouts.
This one had a bit of a twist though.
The package included 1 trillion yen (about $10 billion) billion of cash earmarked to invest in stocks through broad market ETFs.
Did it work?
Well, if it’s goal was to increase genuine economic growth, the answer is no. Japan is still mired in anemic growth quagmire it has been for nearly 30 years now.
If it’s goal, however, was to increase stock prices, it was a smashing success. The Nikkei rose about 50% in the three years since the stock buying program kicked off.
Undeterred by the failure, Japan’s set to do it all over again.
A few weeks ago Japan’s central bank announced it was going to buy more stocks.
It now owns more than $80 billion in total of stocks through ETFs which is more than half of Japan’s ETF market.
After the aggressive buying, Japan’s central bank is now the largest stockholder in 55 of the Nikkei 225 (the Japanese equivalent of the S&P 500).
Even more buying from the the limitless treasury could push Japanese stocks even higher.
As for the U.S., it’s clear now the Federal Reserve and U.S. government see Japan as more of a roadmap than a warning.
In the long run, it’s a terrible idea and will have a massive price to pay when it all unravels.
However, Japan has proven it can last for years and, for investors watching closely, lead to plenty of great opportunities along the way.