The Equity View of Two Bubbles

While debt levels in both Japan and the US got to comparable heights, it is interesting that it would be very difficult to pick out the US housing bubble from a chart of their relative nominal USD equity market returns.

Source: Palantir Finance

There are a few possible reasons as to why this might be the case.

  1. A larger fraction of the profits in the United State’s bubble went directly to highly paid individuals rather than corporations.  This would be more likely if corporate profits didn’t reach 12% of GDP in 2006, levels not seen since the 1960’s.
  2. The US housing bubble was focused on the leverage in housing, which was residential in nature. Japan’s financial bubble was also to a degree about the real estate, but a lot more of this real estate was owned by companies who were on a whole more directly involved in their bubble.
  3. The technology bubble of the late 1990’s prevented the valuation of US equities from getting too disconnected from their earnings so soon after the last bubble.
  4. The United States’ bubble drove equity markets all around the world while Japan’s bubble was focused on Japan.
  5. Japan was benefiting from China driven growth the same time US assets were benefiting from the housing bubble.

Number 5 could be a coincidence or it could be seen as similar to #4 if the theory is that US consumers helped China’s exporters who created demand for Japanese imports.