DecisionPoint - Ignoring problems doesn't work.
The Japanese Nikkei has fallen to 20-year lows (down 80% from the 1989 top) in
an ongoing secular bear market that has lasted for 13 years. The pundits keep
telling us that the U.S. is not like Japan, and they give us no end of
irrelevant statistics that "prove" the Japan is different; however, the
similarity isn't in the minutiae, it is in the big picture. Japan's economy
was destroyed by the frenzy of running stocks and real estate into enormous
bubbles, and they have been suffering for 13 years because the government
thought that worthless stocks and real estate could have their values restored
by driving interest rates into a crater and "inflating the blues away". Of
course it didn't work, and the basic work of flushing excesses out of the
system still remains. This has to be done the old fashioned way -- with a
great deal of pain.
Japanese banks and corporations have assets on their books that are worth a
fraction of their book value. If the true values were recognized with a "one-
time charge" so popular with U.S. companies, they would be insolvent. They
are, in fact, insolvent, and everybody knows it. What is not know is the exact
extent of the damage, and this is not likely to be known any time soon because
of the persistent dream that the problem will one day be miraculously cured by
everyone keeping their head in the sand -- or some other place where the moon
doesn't shine.
One has to wonder where the Japanese, who are world-class savers, are keeping
their money. In Japanese banks? They should remember that the banks don't
actually have stacks of money neatly stored in bins labeled with each saver's
name. No, the banks invest their depositor's savings in things like, you know,
real estate, securities . . . uh oh.
The Fed is nearly out of ammunition in the interest rate area, so they are
going to embark on more radical means of creating inflation so that people who
have invested and borrowed stupidly will not have to feel any pain. They will
do this by transferring the burden to savers and lenders. Here's what I don't
understand is how this will really solve anything. If you have cancer, does
the problem go away if you simply move the cancer to another part of the body?
If the problem is so bad that there is danger of a deflationary collapse, then
trying to fight it with inflation creates the danger of an inflationary
collapse.
Not more than a year ago I suggested that "investing in cash" would be a good
idea until stock prices got back to bargain basement levels. The idea that I
was trying to convey was that we should not get in a hurry to get into stocks
until valuations were attractive, but to suggest that cash would be a good
thing to hold in the meantime was completely idiotic. What was I thinking?!
The Fed is determined to destroy the value of the dollar.
But where do we put our assets while we wait for the bottom? This is usually
where the pitch for buying gold comes into the conversation. On the up side,
gold could increase many, many times in value as global currencies continue to
be debased. On the down side, gold, for reasons we don't know about, may not
hold its value, or the government may confiscate all the gold or make it
illegal to own gold. It's happened before. So we probably want to own some
gold, but we don't want to put all our golden eggs in one basket.
In general, I think that owning things outright is a good idea. Own your
house. Own a profitable, depression-proof business. Plan for the worst. I
certainly hope and pray that things don't get a bad as the 1930s, but the
bubble excesses must be discharged, and that process has historically been one
of an excess reaction in opposite direction. If you think the problems will
just quietly go away, take a look at a 20-year chart of the Nikkei. And keep
in mind that the 13-year bear market took place during what was probably the
greatest global economic expansion in history.
Carl Swenlin
April 12, 2003
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