I thought it would be fun to look at how the Nikkei 225 fared the last 25 years and maybe give us some insight as to what could happen as we navigate through this depres... uh I mean recession. Below is a monthly chart of the Japanese Nikkei-225 index. A few points I want to make:

• Notice how it looks eerily similar if I didn't tell you it was a monthly chart: A very large decline followed by a big inverted head and shoulder. Hypothetically, we would be on that right shoulder, had it been a weekly chart but it's not ;)
• Note that the market eventually continued its decline, and we had many bull markets lasting 6-36 months all in the context of a true secular bear market.
• The high back in the last week of December 1989 was 38,957. The low to date is 6,995: a 82% decline. People who think the DJIA can't get to 4000 or 5000, the SPX to 400 or 500 or less are dead wrong. It is possible. Will it happen? Maybe, maybe not, I don't know. Don't think that it is impossible because it is, especially in a long protracted secular bear market.
  

Now, why am I showing this chart? Back in the summer of 2008, there was so much talk about avoiding the same mistakes that Japan did the last 20 years. How we, the mighty Americans have studied the Japanese recession at Ivy league schools like Harvard and Wharton and how we will not fall for the same trap and History will not repeat itself...

Let's go back in History first: As you can see, the chart starts in 1984 when the Japanese stock market just took off from Nikkei 10,000 to the all-time highs of 38,957 on December 29, 1989. Nearly 300%(not 400 dummies!) appreciation in only 5 years. Those were highly speculative time where assets of all sorts but most notably equities and real estate simply skyrocketed to levels not seen before or since, all of this due to the overabundance of easy credit. Japanese banks were lending money left and right to buy overvalued real estate, stocks, and worthless junk like Nintendos (light bulb moment?)

The beginning of the year 1990 marked the end of this speculative bubble. The stock market fell steeply before stabilizing near 50% from peak for a couple years. As the asset prices started to collapse back to reality, Japanese banks were left holding the bags. Literally, dozens of trillions of dollar evaporated leaving them with nothing but worthless piece of papers. (see a pattern here?) What did the Japanese government do?

• They tried to make credit even more abundant! The Bank of Japan effectively lended money at no interest for years to try to staunch off deflationary pressure. Now a whooping 0.10% call rate. Now, you can give money to the banks, but they might just keep it in their vault. This is what happened in Japan, and exactly what is happening now in the US
  
• Do you know where the term zombie bank comes from? Instead of nationalizing the viable banks and purging the worthless paper out, the Japanese government kept the banking system on life support, injecting capital as needed while the banks kept (and still keeping) their toxic assets on the book
• The Japanese loaned money to failing and poorly managed companies wasting more taxpayer money
  
• Trillions of dollars of massive spending and big stimulus packages to build infrastructure with lots of money wasted to pave lightly used rural roads, and build roads and bridges to nowhere among other inefficiencies.

What exactly were the consequences of these actions? The Nikkei continued to fall through a hole in the floor, again and again and again until it was only 18% of its peak. Even back in 2007, when it looked like there was light at the end of the tunnel, after an extended 3-yr bull market, the Nikkei managed to collapse and make a new low. To this day, there is no sign whatsoever that the Japanese nightmare has ended. The Japanese banking system as a whole is still a zombie. Whatever the Japanese went through the last 25 years, it will be nothing compared to the next generation which will be burdened with a public debt which reached 194% of total GDP in 2008. On a good note, approximately 90% of the public debt is owned by the Japanese themselves thanks to their high savings rate.

I won't insult your intelligence as you must have noticed by now, we are taking the exact same path that Japan traveled on through their lost decades: Allowing insolvent banks and auto-companies to stay alive at taxpayer expense, attempting to combat deflation with quantitative easing and ultra-low interest rates, and massive government spending. The Japanese had the advantage of a very high savings rate and relatively low unemployment rates, we obviously don't, as the savings rate was actually negative not so long ago and unemployment is already pushing 10%. Much like the Japanese, we are taking the path of least resistance. No one wants to take the fall: purging the economy would lead to instant pain for everyone. Big spike in unemployment, numerous bankruptcies, deflation, and a lot of pain across the country and the world but those are cyclical corrections that should not be feared as they work themselves out in relatively short periods of time. Nevertheless, it is human nature to seek self-preservation and I expect no less from the people in power: Congress, President Obama, Tim 'dufus' Geithner, Helico Bernanke et al.

Delaying the day of reckoning and hoping it never comes, but it always does and one only has to look at Japan whose stock market declined up to 82%, home prices declining 90% and more in Tokyo, economic stagnation for more than two decades, and no light at the end of the tunnel. They are taking their medicine over 25 years+ and what was initially a bad flu turned into a cancer. Will we live the same fate?