Japan Now Outperforming Emerging Markets

• One year and five months after the 2008 financial crisis, the global financial system and the world's economies are still suffering from the effects of this crisis. Public debt has soared and is set to soar even further, potential economic growth rates have been lowered and could be relatively tepid for the foreseeable future, and the global financial system is still fragile.
• In the 83% gain in the S&P 500 from March 2009 to 1,219.80 in late April, market momentum temporarily masked this, but the steady outperformance of gold versus essentially all major fiat currencies reflects continued fund flows into the yellow metal to hedge the rapid increase in government debt used to kick-start deeply wounded economies.
  
• The economic news from the US, Japan and even Euroland remains largely positive and is giving signs that the global economic recovery is moving beyond the boost provided by fiscal stimulus. But here is where it gets tricky, even without the backdrop of a Euro crisis. The bear market in the Shanghai composite shows what happens to stock prices when monetary authorities seriously begin withdrawing monetary stimulus.
  
• Foreign investor fund flows into Japanese equities (net buying) show that they in aggregate still subscribe to the cyclical recovery story for Japanese equities, which in the very least represent less risk than Euroland. In addition, Japanese equities are now outperforming China and other emerging markets, helping to draw back investment funds lost to these markets. But there are no illusions that this is anything more than a cyclical relative performance play.
  
• Technically, the Nikkei 225 index is holding up better than its developed nation's peers (i.e., vis-a-vis the US flash crash, Euro collapse and China bubble trouble), but gross debt which the IMF now estimates will be 250% of Japan's GDP by 2015 is a huge burden that is strangling Japan's economic growth potential and preventing any major revaluation of growth potential that ostensibly could drive a secular as opposed to a cyclical recovery.
  

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