What if we get a Japan scenario?

[brighteye]

I heard repeatedly that we* could expect a similar outcome like Japan has experienced, Mark Yusko says the US is 11 years behind, see here in this great summary of Steve Blumenthal of one of his presentations:
https://www.advisorperspectives.com/com ... sic-part-3

Now for what I understand,the stock market is overvalued, we have a bubble in the bond market, low interest rates are "bad", index investing will not work going into the future and if we "become" Japan, we are in for a long down market.

Yeah ok I get it. Now what to do with this information?? This is where I struggle.

What would have worked for an Japanese investor going into their recession?
Shorting the stock market (not for non-experts like me)?
Buying commodities? Gold? Just staying in cash? Abandoning the developed markets and invest in Russia, India, China?
If I want say a Permanent Portfolio or Ray Dalio's All Weather Portfolio, how to implement it if starting now? I cannot bring myself to buying into the (US/EU) stock market now, even if that means that I am "timing the market".

*I am in Europe but if I say "we", I mean markets in developed countries

[wood]

One thing that comes to mind is active stock investing as opposed to passive (index investing). Even if the market as a whole is flat or trending down you can still pick individual stocks or sectors that will perform. You can do this yourself or pay a professional to do it for you.

[Seppia]

Also, unless one invested only between 1987 and 1992-3, things would not be so dire.
Keep in mind Japan has had zero inflation since the late eighties/early nineties, so even in a flat nikkei all the dividends represent 100% real returns.
Plus, as high as the US stock market is right now, it would almost have to triple for it to reach the same CAPE that Japan experienced at the peak.
I would imagine some elements of the Japanese last 30 years could show in the future of Europe/USA (low growth, population decline, zero inflation, permanently low interest rates), but I would not see it as a dramatic issue

[IlliniDave]

Plus, as high as the US stock market is right now, it would almost have to triple for it to reach the same CAPE that Japan experienced at the peak.

This is why I don't take a lot of stock in the gloomy "we're a replay of Japan waiting to happen" speculation. Yet. I do have some PE triggers to change my AA incrementally. Should the PE get up to 80 or 90 and earnings not tumble to a fraction of what they are now, by then I will have divested most of my stock holding for large gains and rolled them into bonds. I'll just have to put up with weak coupon rates going forward from there.

[brighteye]

One thing that comes to mind is active stock investing as opposed to passive (index investing). Even if the market as a whole is flat or trending down you can still pick individual stocks or sectors that will perform. You can do this yourself or pay a professional to do it for you.

Agreed, picking individual companies (ones that also pay a dividend) probably is the way to go. When it comes to "sectors that will perform" I would love to hear if someone knows what worked in Japan. I couldn't find any information myself. Or just point me in the direction of research. To me, it usually seems obvious what the future trends are, but not how to act on them.

[wood]

When it comes to "sectors that will perform" I would love to hear if someone knows what worked in Japan. I couldn't find any information myself. Or just point me in the direction of research. To me, it usually seems obvious what the future trends are, but not how to act on them.

I can't speak much for Japan, but what strikes me as a good idea is to study and understand different business sectors and how they might operate in cycles. If you understand cycles it might get easier to act on different trends.

For example, in my local region, I know that real estate and infrastructure is on a high while shipping and oil is on a low. This doesn't mean I automatically buy oil and shipping companies, but I stay on alert and keep educating myself on the different companies in those sectors. It seems to me the more I dig, the more opportunities I find for something reasonable to invest in.

I guess one can attack this from a number of angles. If you feel unsure about fundamental analysis, I'd start there, as it will put you in a position to analyse individual companies which is what you want anyway if you're a stock picker. If you then choose a sector you want to study, simply analysing several companies within the same sector will teach you a lot because quarterly and annual reports are packed with useful information relevant to their sector. Following sector relevant news is a natural next step.

Anyway. Even without much sector knowledge, you can still make good investments by simply doing good analysis of individual companies. Stick to the basics would be my main advice.

[Smashter]

OP, I've been wondering something similar. From a recent Hussman article https://www.hussmanfunds.com/wmc/wmc170925.htm

"What investors presently take as a comfortable environment of pleasant market returns and mild volatility is actually, quietly, the single most overvalued point in the history of the U.S. stock market."

Whoa. Maybe it's time to hop over to the MMM forums and read about how everything is going to be just fine

[Seppia]

in all fairness, John has been spectacularly wrong for almost a decade now.
He's going to be right eventually, but he sure cost a lot of money to thise who stuck around with him since 2008.
I follow him because I like to hear a contrarian view, but it's not exactly the holy gospel

[Dream of Freedom]

I posted this on another thread recently but I think it would help you understand this a lot better.
https://www.youtube.com/watch?v=PHe0bXAIuk0


My answer though is yes, we're turning Japanese. I think we're turning Japanese. I really think so. The Japanese had to try to counterbalance lowering private market debt by issuing public debt the same as us. This isn't really as bad as the alternative. A deflationary death spiral or slow growth for a while, that's a tough decision. Keep in mind that we do have an advantage over Japan in that our population is growing faster which should help to increase nominal GDP.

[Laura Ingalls]

@ Dreams of Freedom. You made me relisten to the Vapors song

[Eureka]

What would have worked for an Japanese investor going into their recession?

To have had a globaly diversified portfolio instead of only investing in one country.

There have also been bursting Chinese stock bubbles over the years and where people solely invested in China have been wiped out while the rest of us barely noticed.

[Farm_or]

in all fairness, John has been spectacularly wrong for almost a decade now.
He's going to be right eventually, but he sure cost a lot of money to thise who stuck around with him since 2008.
I follow him because I like to hear a contrarian view, but it's not exactly the holy gospel

I don't get your angle on how he's been wrong for a decade and nor do I consider his views as contrarian.

He's a mathematician. Numbers and charts are supposed to give an objective viewpoint. It's hardly gospel to expect history to repeat itself.

Personally, I view it as weighing the risk to reward ratio. How much of your portfolio do you want to bet that the market will continue paying with record high valuations? Historically, such scenarios have been poor bets.

It reminds me of an analyst on television commenting on Buffet. "Sometimes his greatest play is doing nothing. One of his strengths is doing nothing for long periods until events tip the scales in his favor."

[jacob]

I don't know if it's still the case, but Buffett has traditionally valuated Berkshire based on its bookvalue. Since bookvalue can in principle mean anything, I prefer to evaluate portfolios in earnings---which of course is also something that can mean anything. However, both are much less subject to market euphoria or central bank manipulation.

So without further ado, here's how well inflation-adjusted earnings are doing.

http://www.multpl.com/s-p-500-earnings/

As seen from the chart, earnings have only recently made it back to 2007 level. IOW, the "great recession" moniker is well-deserved. And performance over the past decade has actually been shite unless one has relied on the "greater fool"(*) theory of investing. Also seen from the chart is that anyone who has done the majority of their "investing" since 2009 has gotten somewhat of a lifetime two-sigma ride not experienced since year 1921. This kind of market behavior is not normal!

(*) The presumption that market prices will be higher in the future and yet still attract new buyers.

Compare to inflation-adjusted market pricing,

http://www.multpl.com/inflation-adjusted-s-p-500

As seen, the price of buying earnings is now somewhat 40% higher than they were in 2007. But people are still buying!

This, I believe, is what is "killing" number-based historical analysis. There's no actual law that determines what number anything should revert to. There's no reason it needs to be the historical mean. One doesn't even need to invoke "new era"-talk. The long term average could simply be a moving average. Specifically, if everybody collectively agrees that earnings don't matter (completely with CB support) and all that fake-money is NOT spilling into the greater economy (nor getting invested in foolhardy projects like McMansions or shale-fields) but simply sits in accounts that allow their owners to feel rich, all the stock market really does is to differentiate between the haves (like us) and the have-nots (like the perma-underemployed). Historically, once that difference becomes apparent to the latter, it begets political implications that don't end well.

[Seppia]

in all fairness, John has been spectacularly wrong for almost a decade now.
He's going to be right eventually, but he sure cost a lot of money to thise who stuck around with him since 2008.
I follow him because I like to hear a contrarian view, but it's not exactly the holy gospel

I don't get your angle on how he's been wrong for a decade and nor do I consider his views as contrarian.

I love John, otherwise I would not follow his letters weekly.
I think he has a great point of view, and would probably pick him to beat a cap weighted USA index over the next 10 years, but one thing is 4000% sure: he has been spectacularly wrong in the last decade.
Either that, or he's masochistic.

He completely owns this, as his failures are 100% on display (another reason why I respect him).

In the last 10 years, excluding dividends, the S&P has yielded approximately 60% cumulated:
http://www.macrotrends.net/2488/sp500-1 ... aily-chart

His fund has lost 6.7% annually, which means if you had invested $1000 you would now have $499
https://www.hussmanfunds.com/theFunds.html

So if tomorrow the S&P lost 70%, and his fund stayed flat, he would still be short the dividends over the last decade.

[Seppia]

@jacob
That's another big point: market history is so short (relatively speaking) that it's hardly an exact science.
Small sample size.
Now: I have about 2.5% of all my equities in American stocks, and have a higher liquidity % than usual, so I agree that's there's a big chance we have a valuation issue.
Im just not willing to "bet the house" on it.

My general strategy is to buy stuff I like and rarely (almost never) sell it.
Just as an example, I bought my first Royal Dutch stocks in 2006, and never sold any.
I'm happy with the returns in spite of the turmoil. Sometimes a long term perspective does pay off

[Farm_or]

@seppia Thanks for clarifying your point. The bottom line being the action of his fund is hard to argue. His application of his analysis has been less than satisfactory, but I wouldn't throw out the past decade of analysis.

I still have trouble understanding the contrarian tag. Instead of recommending buying high, it seems to me the purpose of of his recent analysis is to avoid that and do the opposite?

You can call me chicken little, but I can remember all of the euphoria and compounding debt in 2007. That four letter word for economics doesn't make enough press "debt".

We can revisit this conversation a year from now. Will I be feeling elated that I rode the wave all the way up or will I be depressed because of all the paper money lost? Which scenario is more likely?

[slowtraveler]

We are nowhere near valuations Japan reached.

Also, isn't that the whole point of international diversification?

[Sclass]

The analogy falls apart when you consider the US role as the worlds reserve currency in the late 80s. I argue the cause of the Japanese bubble burst with my friend, a Yen trader of that era. Something I think that is commonly overlooked was a major change in reserve requirements for Japan at the time...by it's fellow Monopoly players.

What does this mean for the current US situation? We don't exactly have a gold plated reserve to take refuge in. It may get ugly for everyone. Maybe that is why Soros is buying gold. He did pretty well when Asia melted down. Scary stuff.

The high prices of return feels to me like inflation. When I could buy cheaper yields I didn't have much cash. Funny how that works.

[jacob]

@Felipe - Valuations are a ratio and they shoot up more because the denominator(e.g. earnings) -> 0 than because the nominator (typically price) shoots for the moon. More importantly, there's no rule that a ratio must exceed the largest historical value or even get close to it think of it as a symptom) in order for the system to be overvalued (think of it as the disease). Keep in mind that peaks are typically reached on very thin volume as the last few buyers pick up the last few stocks at top prices before nobody wants to buy anymore/everybody then wants to sell. Then prices fall off a cliff.

If you want to understand market dynamics, a 3D graph of price, volume, and time is much better than a simple graph of price and time.

Diversification will help against economic problems to some extent insofar that countries are not financially linked. E.g. when the Chinese economy does poorly, the Australian economy tends to be poorly (because AU exports resources to CH). Whereas, say the Russian economy can do poorly while the US economy is doing great and vice versa or both at the same time either way.

Financially, though, all major economies are quite interlinked. When someone needs cash to cover their margin calls because the US markets are dropping, they will sell whatever they have that has performed well (still have margin) in order to cover. This puts selling pressure on the good performers. Mathematically this increases correlations during a crisis. This is what we saw in late 2008 (gold dropped in particular because it had been such a good performer) and why even quality investments were on sale allowing those with cash to buy them. This is the hot money that really drives this ocean. Ordinary people are just little boats on the surface. If the weather is calm, one can sail pretty much any boat from San Francisco to Hawaii in about a week.

[The Old Man]

Ordinary people are just little boats on the surface. If the weather is calm, one can sail pretty much any boat from San Francisco to Hawaii in about a week.

Interesting metaphor. Investors using index funds are like little boats without a skipper that hope their boat (asset allocation, fund selection) is not the Titanic. Investors relying on active methods are like little boats with a skipper that think they can sail into a hurricane and be OK.