3 Charts From SocGen On Why The "Japanese Scenario" Means Investors Should "Be Afraid, Be Very Afraid"

Some observations from SocGen, which presents us with three charts explaining why those who believe in the Japanese scenario should "be afraid, be very afraid - If we accept the idea of a three-stage crisis (taking as our starting points 2000/01 + 2007/08 + 2011), we have probably reached a situation similar to Japan’s lost decade of the 1990s. A Japanese-style scenario for the US could gain traction, particularly if there is no real estate recovery in the US, high unemployment levels persist, and economic sentiment remains depressed. Such a configuration would suggest that, in June 2011, we exit a bear market rally, which was fuelled by restocking and QE2. Another 20% drop in the equity indices could then be observed in the coming months if this scenario were to materialise."

Chart 1 on where developed market debt is headed:

SocGen Commentary:

As the debt situation worsens, rates must remain low


The US debt trajectory through 2016 is very  worrying, and explains the recent US rating downgrade from S&P from AAA to AA+. US debt bears little resemblance to the structure of German debt or even euro debt, even after the agreement reached in the US between Democrats and Republicans. Hence, we can affirm that the euro crisis is linked directly to the lack of a united front among European leaders rather than the debt situation itself as a whole. With progress (although laborious) being made on austerity plans, rates will probably remain very low for an exceptionally long period of time.


Conclusion 2: 10-year rates will remain low for major western countries

Chart 2


The threat of inflation vanishing in the short term


As expected (see Global Research Alert 2 May) the spectre of deflation has returned to the fore as western governments now focus on austerity measures as a means of restoring confidence. In the US, the property market remains the worrying part of the economy. Although still at 3.6% in the US and at 2.7% in Europe, inflation may drop in the coming months owing to the economic slowdown. Thus, with unemployment still at 9.1%, it seems illusory to expect inflation in the coming 12 months and hence there is no risk of bond yields climbing. The bond market suggests the real thing to worry about is deflation, again calling to mind Japan’s lost decade. This is clearly an extreme scenario but nevertheless a major threat for western economies.

And the chart kicker, which supports the lede paragraph is the following. It needs no elaboration.