Are Jim Rogers and Marc Faber right?

I've been constantly thinking whether Jim Rogers and Marc Faber are right - criticizing heavily on the US government interventions to save troubled banks. They always say take the Japanese lessons - saving zoombie banks will not help anybody. Throwing money trying to inflate asset markets will not work.

I was arguing with myself American and Japanese are very different. Can we count on Americans?

You can always count on Americans to do the right thing, after all other options have been exhausted.

Winston Churchill

Unlike Japanese who are very consensus driven and slow, Americans are very pragmatic and moving very fast. A Japanese economist, Takeo Hoshi, writes this:

Now the TARP (Troubled Assets Relief Program) has been transformed from a program that primarily buys troubled assets at financial institutions (as the name suggests) to a program that focuses on injecting public funds to supposedly healthy banks to recapitalize them. The program with the new emphasis, which I call the TARP II, is better than the original TARP in that it directly addresses the issue of capital shortage that is at the center of the current financial crisis, as many have argued.

As I discussed in my paper with Anil Kashyap, Japan eventually shifted from the policy that primarily focuses on purchasing problem bank assets to the one that uses public funds to recapitalize major banks, too. In this sense, the U.S. response is going through the same changes that the Japanese policy went through, although the U.S. is now moving much quicker than Japan did. It took about five years for Japan to move from the bad assets purchases to capital injection. It took the U.S. only five days or so.

I was thinking that's very impressive, it took American 5 days rather than 5 years to realize their mistake. So, I ran a chart on Nikkei 225.


(click for larger chart)

You can see the volatility during the period of Japanese attacking the problem by buying troubled assets. Nice trading range actually for 5 years but the big decline happened when they start to do the recapitalization. It was not the recapitalization failure but the Asian financial crisis and followed by Dot.com bust! It was a huge decline of 60%, dip buyers must have gotten burnt very badly after they trusted their timing buy on 30% pull back. Then the Japanese stock market had a huge recovery - 120% run up which benefited from the solid world economy expansion but never able to get back to where it was, never breakthrough 21000.

Nikkei 225 is still very expensive selling for 12 times PE, 2% dividend yield at 7,000 - 8,000. If we were to expect it to go back to 40,000 selling for 60 times PE will be unrealistic. To equate recapitalization program failure to not able to go back to Nikkei 40,000 will be too harsh.

I agree with them on one point though, beyond betting on oversold(risk-reward no longer attractive after 100% rebound in some cases), buy and hold on the US financial firms will test your patience to the limit.

Only one question on my mind now, will Americans start spending again? If not, this will be very similar to Japanese. The Japanese economy which is not consumption led was at the mercy of the world economy.