Bill Bonner, reckoning today from Youghal, Ireland...
The big news last week, The Financial Times:
Nikkei breaks through 1989 high
…this week, the Nikkei 225 finally broke through that peak…
after a 34 year wait.
Few Dear Readers will recall our first great ‘call.’ Our goal is to avoid the Big Loss. And in 1988, we noticed it shaping up in Tokyo. The sun was about to set on the Japanese Miracle, we guessed.
In the late ‘80s, nearly everybody was convinced that ‘Japan, Inc.’ – from a bombed out post-WWII shell…to export powerhouse – would go on to greater and greater glory. US business schools taught Japanese management techniques. Japanese terms, such as kaizen (continuous improvement), were worked into Wall Street analysts’ reports. Trendy high schools replaced Latin and French with ‘Nihongo’ (Japanese).
Our own son, then 6 years old, when asked what he wanted to be when he grew up, replied: ‘I want to be Japanese.’
Time to Duck
By the end of the ‘80s the Nikkei Dow was trading at a P/E over 70. Individual growth companies occasionally merit such high prices. But for an entire stock market, it was…well…irrational exuberance.
And the rationale for such fantasy was that Japan had more central planners than the US, with MITI (Ministry of International Trade and Industry) credited with guiding the economy to strategic success.
We knew nothing about Japan then. And nothing about it now. But we knew that a P/E over 20 is probably a bubble-in-the-making. Over 70, it’s time to duck.
We also knew that MITI was not responsible for Japan’s success. Major exporters (auto companies) ignored MITI’s advice when they entered the US market. And involvement by central planners, no matter where they are or what language they speak, always causes trouble.
In the event, the planners that caused most mischief were in the US, not in Japan. US trade warriors pressured Japan to limit the number of cars it could bring into the US. So, Honda and Toyota switched to higher priced, higher quality models…and soon dominated the entire world auto market. The New York Times explained:
“In 1945, Japan was decimated,” said Jon Ikeda, the vice president and brand officer of Acura. “And then in ’64 they were showing the bullet train and hosting the Olympics.” But in just two decades, “you’re talking an all-aluminum-body NSX and Honda is winning Formula 1 races,” he continued. “Acura got caught up in that energy — we wanted to show the world that Japan could build amazing products.”
One significant factor that aided the new nameplates was a 1981 voluntary trade agreement that limited Japanese auto imports to the United States. The restrictions on imports, which stretched into the early 1990s, and the subsequent loss of sales motivated the Japanese to create higher-priced vehicles to boost their profits.
Our Best Book
We got onto the case (Japan’s imminent crash) a little early, as we are wont to do. And by the late ‘80s, other financial writers were making fun of us for our persistent bearishness on Japan. Colleague Mark Skousen made a joke of it at an investment conference, awarding us a book that we didn’t write (with empty pages) – “How I Called the Crash in Japan” by Bill Bonner.
It turned out to be our best book! A few months later, Japan did crash.
Then, as now, the popular refrain was to: Buy the Dip. The Japanese were geniuses, investors told themselves. They’ll bounce back quickly.
But they didn’t bounce back at all. Investment managers had to apologize to their clients for the next 34 years. Japan, Inc. just couldn’t sustain a rally. Six times the Nikkei tried to get to its feet. Six times Mr. Market floored it once again. In 2012 – 22 years after the crash – the market was still down more than 80%.
Pity the poor investors! Their savings destroyed, they shuffled to their computer screen each morning…checking on their portfolios…disappointed again and again. Plans for vacations…second homes…retirement – delayed…and delayed again. They went broke. They went insane. Investors over 60 at the time of the crash said goodbye to their money and never saw it again. Many died penniless, cursing the day they ever decided to buy stocks.
Generational Losses
Even we took the bait in 2010. After 20 years, we figured it was time for a real bull market in Japan. We figured too that all the debt and money-printing by the Bank of Japan – in a misguided effort to stimulate the economy -- was bound to reduce the real value of Japanese government bonds. Either the bonds would fall or the stocks would rise; our trade of the decade – Buy Japanese stocks; sell Japanese bonds – was sure to be a winner.
It was not a bad trade. We made money. But we were early. Had we announced that 10-year trade 4 years later, we would have made a lot of money.
And now that the Nikkei stocks have gone back to the future of 1989, finally stocks are paying off. Or maybe not. Have investors been made whole? Nope. They’re still down about 20%, after inflation…after an entire generation of losses.
That’s a big loss.
Regards,
Bill Bonner