We could easily be Japan now. We weren't before, but many things have changed, and we have events that have never happened in history and have no basis of reference for the future. The reason Japan has stayed in a depression comes down to one end cause. No one there is spending, everyone is saving. Historically here we are a nation of spenders, not savers. We can't wait to have that new gadget or SUV, so we spend even with money we don't have. Never before has there been a credit bubble like the kind we have seen on both the corporate and consumer level. For the first time in history teenagers have credit cards. People refinancing their homes for more than they're worth for extra spending cash. The most aggressive rate cutting in history, and the market and economy is worse than when the cuts began. The Fed has never been so aggressive with nothing to show for it a year later. Then there is the global picture. Historically when the U.S. economy was weak, another major part of the world was strong and helped pull us out and vice versa. Now everywhere in the world is weak. Brazil and Argentina are on the brink of economic catastophe, we know about Japan, Germany is in a near recession, on and on. Everyone is weak at the same time, and there is no beacon in the world to prop us up or kick start everyone. Then there's September 11. Up until then we were one of the only nations that had never had a major foreign attack on home soil (Pearl Harbor was a military target, not civilian). That's over, and Americans are now scared for their own safety and everyday way of life. As the final bubble here (the real estate bubble) bursts, those people who refinanced extra money will be trapped in mortgages for more than their homes are worth. Add it all up, and we have the very real possibility of seeing Americans become very historically un-American--namely a nation of savers. And if that happens, then yes, we can be like Japan. So as a trader, what to do? Well I personally have switched my long term account from stocks to 30 year T-bonds, which have appreciated nicely over the past 8 months. If all these factors come to bear and continue as I believe it will, bonds will rise sharply over the next year to two years. Historically the Dow is very overextended. If you look at a 10 year chart for the Dow, you'll see that it has run up considerably, from under 3000 to almost 12,000 in a 10 year period. Crazy when you consider that it took the Dow almost 100 years to go from 0 to 3000 and only 10 years to go from 3000 to 12000. Much of it was due to the massive overextension of credit and the massive spending that ensued in the 90's. Now that it's unraveling, and just looking at the Dow 10 year chart, it is easy to see it retracing back to the 6000 level or lower. Put LEAPs on the Dow and S&P would be quite profitable in this scenario. A break below the Sept. lows would trigger my entry. If all this does come to pass, the good news is that for those who still have money after it's all over will be presented with the buying opportunity of everyone's lifetime, in both equities and real estate. As someone who doesn't want to see other people suffer, I would rather all this doesn't come to pass, but I fear that it is a distinct possibility.
that was a good post. how soon could this happen and how long might it last? say this scenario does take place, what are some ways to know when the worst is over? for example, if real estate prices drop and you want to buy a house. how would you know when to buy without jumping the gun? thanks
I have a decent view of a "depression" since No Cal is in one. I don't know how are other places but I work in Sacramento area, area much dependent on Ca gov. and spillover from sillicon valley,Bay Area economy. A house in a Sac suburb can be had for around 130k-150k. However the earning power of an average Sacramento area resident is maybe 60k (two people working) now I would say if we have the worst next year (and I don't know if this will happen or not) a real worth of such a house is maybe half. 65-70k. i.e. re prices are still way overpriced like a lagging indicator of nazdaq. more and more houses are coming onto market and there are no buyers. Many are leaving CA and the area..
To anyone who is interested in this macro analysis I would recommend reading "The Hedge Fund Edge" by Mark Boucher. Don't let the title throw you off, this is a gem of a book which is overlooked by many. His discussion of the Austrian school of economics is wonderful. Coupled with the liquidity cycle, it explains why things happened and also gives you a very good framework for seeing how they will unfold in the future. Going back to someones comments re Japan and us specifically, there is something to be said for cultural differences. The Japanese are rather different. They HATE to acknowledge mistakes as this means 'losing face' in their culture. They have continued in the charade for many years now hoping that if they ignore the banking problems, they will go away. Actually it is about the get worse as the banks assets will be marked to market (due to a new law enacted recently). Suddenly many banks will simply not be solvent. That would never happen in the US. The SL experience of the US proves that. This might be of some interest to those interested in Japanese economics (Page 4 of pdf document): http://www.friedberg.com/newsletter/FCCC_03_01.pdf
"so the basis of your analysis that we'll do better than the Japanese is that we are culturally superior? Forget prejudice, that's just one hell of a burden on rational trading.... " JS11374 You might be politically correct but I think you misunderstood Stockoptionist. What he meant, in my opinion, was that Japanese have the structural problems we don't (relatively speaking). And personally, I am convinced we are economically superior to Japan. There is always somebody superior or inferior to the other no matter what the professors at universities tell you.If you really want to think rationally on this subject read Gustave Le Bon's books.
"Going back to someones comments re Japan and us specifically, there is something to be said for cultural differences. The Japanese are rather different. They HATE to acknowledge mistakes as this means 'losing face' in their culture. They have continued in the charade for many years now hoping that if they ignore the banking problems, they will go away. " Absolutely correct statement by Babak.
being broke or close to it a "structural problem" ????? Cesco, the problem is that the US consumer has been bailing out the US economy for too long. 2/3 of our gdp is consumer related. Now (a little focused item) bancrupcy laws have changed. untill now you could just start over (move to Mexico) and come back in a few years, no biggie. Now it's gone. The average public does not even know what hit him. Hell I hope we have a recession and bounce back in a few months Hoping however will not make it so.
One more thing. Since I came to America 15 years ago I keep hearing about the U.S. going to hell (economically), about low savings rate etc. I guess I will be hearing it for the next 15 years as well. I wonder why I have more faith in America (with all its faults) than Americans.
Babak and Cesko, I just didn't bother to defend my argument about the superiority of the U. S. economy to Japan's as a whole, but I 'm glad that you guys did that on my behalf. Yes, in this age of political correctness, we've often learnt to censor ourselves when it comes to passing evaluative judgments on other cultures, economic or political systems. (Thus Bill Maher's "Politically Incorrect" got killed because he said something distasteful in the wake of the terrorist attack.) Stockoptionist