Japan Faces Potential Nuclear Disaster; Nikkei Down Over 16% in 2 Days

The NYT reports Japan Faces Potential Nuclear Disaster as Radiation Levels Rise:

The No. 3 reactor building of the Fukushima Daiichi nuclear plant burned Monday after a blast following an earthquake and tsunami in this satellite image.

Japan’s nuclear crisis verged toward catastrophe on Tuesday after an explosion damaged the vessel containing the nuclear core at one reactor and a fire at another spewed large amounts of radioactive material into the air, according to the statements of Japanese government and industry officials.

In a brief address to the nation at 11 a.m. Tokyo time, Prime Minister Naoto Kan pleaded for calm, but warned that radiation had already spread from the crippled reactors and there was “a very high risk” of further leakage. Fortunately, the prevailing winds were sweeping most of the plume of radioactivity out into the Pacific Ocean, rather than over populated areas.

The sudden turn of events, after an explosion Monday at one reactor and then an early-morning explosion Tuesday at yet another — the third in four days at the plant — already made the crisis at the Fukushima Daiichi Nuclear Power Station the worst nuclear accident since the Chernobyl reactor disaster a quarter century ago.

Right now the Nikkei is down 10.5 percent after already having dropped over 6 percent yesterday …

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S&P 500 Now vs. Nikkei in 1989; How Low Can We Go From Here?

I have often compared the current situation in the US to Japan in the 90s. Indeed, a lot of the characteristics of the current contraction match what went on in Japan back then.

Since 1989, the Nikkei index has dropped from just below 40000 to now around 9000. It is conceivable that US stocks will see similar declines over the next decades, along with spectacular counter trend rallies from time to time.

Below I put together a chart that shows how the Nikkei has fared since the bust of the Japanese credit bubble in 89 vs. the development of equities in the US (S&P 500) since the bust of the US credit bubble in 2007:


As you can see, since the crash, both charts have behaved rather similar. Immediately after the crash, the Nikkei, too, staged a phenomenal 35% rally from around 20000 to around 27000. If US equities continue mimic the events two decades ago in Japan, it is indeed conceivable that we may see an S&P 500 in the 200s or 300s in ten years or so.

Along with that would come several periods of renewed optimism and spectacular rallies. Just as an example, look at the Nikkei’s rally from 1998 through 2001, a 140% increase!

All this would be consistent with my long term outlook for the US economy:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Just for fun, I attempted an Elliot Wave count of the indexes above because I think that the EWave formation really screams at you in this case:


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