Japan - Leading Us Into the Abyss?

Japan is providing a fine script on what governments should NOT do when there is a debt crisis. They have piled on the government debt year after year, tried to hide the banking losses from their real estate and stock market crashes that began in 1990, and think quantitative easing is a good multi-year policy. In other words, they are a basket case and a financial and currency accident waiting to happen. Japan led the world into the current global stock bear market, which is not over, and look set to lead us into the next leg down.

Those calling for a collapse in the U.S. Dollar need to realize that governments like Japan and the UK are equally if not more likely to see an out and out currency collapse before the United States. I am not a bull on any currency right now besides Gold, but to say the U.S. Dollar can't have a few rallies against the Yen or the Pound is just silly in my opinion. All currencies are declining together at different rates and all are declining relative to Gold.

Here is a 4 year look at the Nikkei stock index ($NIKK), using a log scale candlestick chart:



And here's a 1 year daily plot of the $NIKK:



Whether you subscribe to the deflation or inflation thesis or don't care about either one, you shouldn't be lulled into complacency or think that the worst is behind us in financial markets. The absolute most bullish scenario I can envision for the U.S. stock markets is a successful re-test of the prior March 2009 lows and the lows hold. This is the inflationary poop storm scenario where Gold goes to $5000 and potentially far beyond. I think the March 2009 lows fail to hold on the next bear market leg down and we make lower lows. The only question in my mind is the timing, which I haven't proved particularly adept at nailing over these past several months.

I do think that Japan is leading us down in the general stock markets and the recent failures of several U.S. sectors/indices to make new highs with the Dow and S&P 500 is also highly suggestive. The following indices did not made new highs with the Dow and S&P 500 over the past 2 weeks:

Russell 2000 ($RUT)
Dow Transports ($TRAN)
Dow Utilities ($UTIL)
Semiconductors ($SOX)
Insurance ($DJUSIR)
Banks ($BKX and $KRX, the latter having topped in early MAY)
Homebuilders ($DJUSHB)
Commercial Real Estate ($DJUSRE)
CRB Commodities Index ($CRB)

Of course, this could change and each of these sectors could make new highs over the next few weeks. Only Mr. Market knows for sure...