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Are We Imitating Japan?
The graph below shows the super bear market in Japan that began in 1989. What is the relevance of Japan's
stock market to the U.S. stock market? The nations of the developed world had dramatic increases in births
around the time of World War II, aka baby booms. The baby booms were followed by dramatic declines in
births. Japan's baby boom was first, followed by the U.S. and then Europe. Japan experienced a super bull
market in stocks and real estate followed by a financial catastrophe. Sound familiar? As the nation's largest
generation retires, their earnings decline, they decrease spending, pay less taxes, invest less and file for social
security... all negatives for the economy. According to the International Monetary Fund, Japan will have one elderly
person for every two persons of working age by the year 2025. Japan's government debt is currently more than
double the U.S. government's debt (as a percent of GDP). Japan was the first to enter the declining phase of
its baby boom era. The U.S. is next in line. Therefore, Japan's stock market performance during the declining
phase may be instructive. Japan's Nikkei 225 peaked at 38916 in 1989. The Nikkei 225 made a new Japanese
Bear Market low of 7162 on 10/21/08. That is an 82% decline over 19 years and a 26 year low.
1985 1990 1995 2000 2005 2010
|Japanese Stock Market - Nikkei 225 1984-2008
U.S. Stock Performance
The DJIA (Dow Jones Industrial Average) began in 1896. The worst performance during an election year was
-33% in 1920. However, the Dow fell 38% from 12/31/2007 through 11/19/08. The largest two historical calendar
year losses for the Dow were 34% in 1930 and 53% in 1931. If the Dow doesn't gain ground by year end, it will
achieve the second largest calendar year loss in the history of the DJIA.
Blunders from the Capital
If the laws enacted as a result of the Great Depression had remained intact, we would not be facing the financial
calamity that is presently before us. The 1999 repeal of the Glass Steagal act of 1933 prohibited many of the
activities that resulted in serious losses by our nation's banks. This act was repealed by a sound majority of both
parties and signed by President Clinton. Allowing 100% loans was another culprit. Banks are protected from loss
by receiving sufficient collateral for the loans they make. To summarize; Huge losses were caused by activities
that had been illegal. The government changed the laws. The fault lies squarely in the lap of our politicians.
Before we rush to judgement, remember what it was like in 1999. Twenty years of the super bull market had
convinced most that the good times would never end... that our knowledge and technology had evolved to the point
that we were invincible. The politicians made the same mistakes that we often make. They made decisions
based on the experience of the recent past instead of considering all of the financial history that was
The super bull market of the 80's and 90's proved that our government will spend more than it receives even when
the economy is growing strong. It should have been paying down the debt during good times to accumulate a
surplus for the bad times.
How Can I Use this Information
In making decisions regarding the governance of a people, the design of a portfolio, the choice of a lifestyle or
code of conduct... the whole spectrum of history and facts must be continually set before us. It is foolishness to
assume that current trends will continue forever. It was foolish in the super bull market. It is foolish in the current
man-made financial disaster. This too will pass.
How bad can it get? The worst Bear market in the history of the Dow resulted in an 89% loss from 9/3/1929
through 7/8/1932. Where was the silver lining? During the year that followed the 7/8/1932 low, the Dow gained
Our elected representatives actually went to Washington and DISMANTLED the laws that were already in place...
laws designed to protect our financial system from such injury. Don't expect the government to do something
smart. Don't put your trust in them. Don't expect social security to be there for you. Do your own
homework. Live within your means. Spend less than you make and get out of debt. Ask all the questions.
If your broker doesn't answer them, get another broker.
Where is the U.S. going from here? We have been following in the footsteps of Japan. We see no evidence to
indicate that we will turn from that path. For the long term, expect huge deficits and a stock market that
soars and plummets. If you have watched the Wall Street carnage from the sidelines, be thankful and prepare to
invest at an opportune and possibly fearful time.
SignalTrend's unemotional computer timing system is currently bearish, but it may change its buy / sell
signal in the near future. If that happens, SignalTrend will notify you by email. Remember, SignalTrend's
stock market timing system was backtested 100 years with excellent results!
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