Japan - Is It Happening Here?

[Bill Lussenheide]

The Japanese stock market and economy have been sidetracked for well over 13
years. After hitting a high of 38,915 on December 29, 1989 the Nikkei 225
average has slipped to just over 8000 today. This represents a loss of close
to 80%. Many privately and publicly wonder, if this is the long term
destiny for the United States stock markets as well. I am of the reasoned
opinion that we are not!

A little bit of history will help us decipher the events and see the
dissimilarity to our own markets. The Nikkei 225 stood at its alltime low
of 85.25 in July of 1950. From there it had a tremendous 39 year bullish
trend returning on average a 17% compounded return annually just from
capital appreciation alone. If one were to include dividends, the return was
close to 20% per year! The Price/Earnings ratio of Japan's bluest bluechips
was near 50! This represents one of the most incredible bull runs ever in
both size and duration in history. The United States has never come close to
such irrational exuberance. Obviously, this type of return was a bubble and
was bound to burst.

Through an unhealthy tight alliance of trade protectionism, government,
business consortiums and bizarre accounting techniques, the Japanese created
the illusion of an economic juggernaut. It is not unfair to say that the
Japanese market was sort of an Enron, but on a national scale! The Japanese
took a huge market share of the world's steel industry through the help of
government subsidies, yet only ever produced a return of 1% annually on this
huge investment. Protectionism encouraged lack of innovation and change
within domestic industries. Because of cross relationships between the
banks and corporations, bad news was secreted away with unacceptable
accounting practices and lack of disclosure on a massive scale. All towers
built on sand eventually fall, but the truth of their predicament was denied
constantly as its market and currency fell thru the 1990s. Cultural bias
against admitting to failure further exacerbated the situation. Today,13
years later, with the Nikkei at 8000, the overall return since 1950 works
out to 9% annually. This is in line with most other stock market returns
over the same period of time. Market P/Es are now much more reasonable in
the lower 20s and interest rates are virtually zero. In fact Japan has
probably found its feet and better days are ahead, but it took this 13 year
period of suffering to get here.

Can it happen here too? In a word...No! Although we have experienced a
large drawdown over recent years, our system is the most self cleansing of
any stock market and economy in the world. We do not have a general
practice of trade protectionism, and in spite of scandals like Enron, our
accounting is for the most part, very much above board. There is a healthy
enough distance between lenders, government and investors, that we will
allow for failure quickly rather than slowly. In fact, it can be argued that
the best thing about the American free enterprise system is that it allows
for failure faster than any other system. This constant reengineering and
creative destruction of our business order allows for capital to flow to the
most efficient places within it. What has taken Japan 14 years of pain to
accomplish we have been able to do in 3. Although it may take a bit more
time for the market averages to reflect it, the United States continues to
be an excellent place for economic success in the future. Count on it!

Bill Lussenheide- An Invitation To Learn More
http://www.InvestmentWarrior.com

[Snoot]

Here's an interesting look at an opposing view,
http://www.ess.ucla.edu/faculty/sornette/prediction/index.asp#prediction.

Regards,
Brian K. Lee
www.hitech-analytics.com