The picture is from an article titled "Buy Japan" from the
April/May 1992 issue of Worth Magazine. At the time of its
writing, the Nikkei had seen 2-1/2 years of declines, and
was down about 42% from its peak of 38,000, resting near 22,000.
The article begins, "The Japanese Market has been a disaster
over the last couple of years - and that's exactly why it's
Paraphrasing the highlights of the two page article: "Japanese
stocks are quite attractive on a value basis, presenting a
rare buying opportunity….Japan has seen a lot of scandals
and other bad news recently. That's good, not bad…Japanese
company earnings are weak, but that, particularly when other
news seems dismal, is just when one should buy…Japanese banks'
troubles won't be a hopeless drag on the earnings of Japanese
And the article ends, "Should the market go even lower at
some point, don't panic. Buy a bit more."
It is disgusting what passes for financial journalism today.
The article was published when the Nikkei was at about 22,000,
and 10 years later, it rests at just over 9,000, a further
60% drop. If you had taken the advice of the article, you
would have seen your investment decline by over 60%. Had you
taken their further advice to buy more on dips, you would
have really been screwed!
Keep this in mind the next time you hear an analyst on TV
say something like, "The Nasdaq is down 60%, so we think it
has found the bottom." Every "point" made in the above article
can and will be rolled out by every glossy business magazine
and news show as justification to buy the American market.
Don't buy the hype. Beware of articles containing neither
analysis nor evidence, but only platitudes, rules of thumb
and intellectual acrobatics done to justify the point of buying.
Our SPX is currently trading at a 27 P/E, near the highest
ever from historical standards. The trend for earnings over
the next few years will be down. Not only will the economic
slowdown will take its toll, but tighter accounting standards
and the reining in of phony Enron-style accounting will also
take their toll on inflated earnings. And if Senators John
McCain and Carl Levin have their way, companies would be forced
to count stock options as an expense against profits. Currently,
companies have it both ways, getting a tax deduction for the
options but not counting them as an expense, even though they
dilute the stakes of their shareholders. Enron received $625
million in tax deductions from stock options from 1996 to
2000. Other companies such as Microsoft, Cisco, and Dell have
been heavy users of this accounting technique, erasing tax
liabilities and juicing earnings.
Bull markets start when prices are low. P/E's of 6-10 represent
value and are common at bear market bottoms. Current P/Es,
based on inflated earnings represent no such thing as value.
Falling Yen, Public Mismanagement
The Japanese currency is down 15% this year. A falling
currency means imports are suddenly 15% more expensive for
the Japanese, and Japan is nowhere near self-sufficient in
energy or food. This means inflation for Japan, on top of
an already stagnating economy.
The falling yen will be of no help in repaying the public
debt. As stated above, yields are rising on Japan's $5 trillion
in public debt. In order to pay it back, more debt will be
issued, at higher prices, thus increasing the overall debt.
If rates rise higher quickly, the situation could easily spiral
out of control, leading ultimately to default. It is a hopeless
situation, one utterly destructive to wealth. This is where
Japan finds itself: depressed and in a debt trap, with no
easy way out.
While investors are dumping Japan's long term bonds, they
are pig-piling into short notes. When the government auctioned
2.1 trillion yen ($15.8 billion) worth of six month Treasury
bills last Tuesday, it received bids to by an astonishing
142 times the number it planned to sell. Ordinarily, such
auctions are oversubscribed by two or three times.
While "flocking" may be an overstatement, it is a growing
In the next issue, we will discuss Tamisuke Matsufuji, a former
Salomon Brothers bond trader who wants to blow the lid off
the gold price and how he plans to do it.
The Japanese economy, once the envy of the world, has stumbled
for 12 years, and now appears to be falling down. In its glory
days, the Nikkei was worth more than the rest of the world's
equity markets combined. It has been a stunning reversal of
fortune for the second largest economy in the world, and it
foreshadows what could be in store for the United States.
If Japan falls far enough, it could easily take the rest of
the world financial system with it. America is walking in
Japan's footsteps, and great caution is warranted. Now is
not the time to buy stocks. It is the time to plan an exit
strategy for real estate, dollar denominated investments,
and ultimately the dollar itself. Stay tuned for further updates
on the unfolding of the second great depression.
- this is a test draft published using Macromedia