The Year Was 1989...

Capitalist Exploits's picture

By Chris at www.CapitalistExploits.at

These folks were probably worth more than Justin Bieber.

And this guy was still alive... and even though dressed like a peacock, amazingly popular.

1989 was also the year the Japanese stock market topped out.

Background

Most economic crises are the result of an economic boom which leads to investors getting all giddy, bidding up assets to the point where they become completely disconnected with reality.

Japan in the 70's and 80's was no different. People are people, everywhere and always. Even if they do eat oodles of raw fish and seaweed.

In the 70's, after they'd nicked a lot of German ideas, Japan managed to produce the world's second-largest gross national product (GNP) after the US. And, get this: By the late 1980s, Japan ranked first in GNP per capita worldwide.

Record-low interest rates had fuelled a stock market and real estate speculative boom that sent valuations screaming throughout the 80's. In fact, at one point a piddly little 3-square meter piece of dirt (enough to stick a portaloo on) near the Imperial Palace sold for $600,000. The Imperial Palace itself was worth more than the entire state of California.

If it sounds crazy, it's because it was.

Upon realizing that the bubble was unsustainable and potentially destabilising for the economy, Japan's Finance Ministry ratcheted up interest rates to try and curb the rampant speculation.

It was all far too late, and the move quickly led to a stock market implosion and debt crisis as borrowers failed to make payments on debts, many of which were backed by assets which themselves had been bid up in a speculative frenzy and now worth a whole lot less.

In the bloodbath that ensued, Japanese investors lost their shirts kimonos, and the Imperial Palace could no longer be sold to buy George Clooney's Hollywood bathroom.

Fast forward to today and you'd be forgiven for thinking the place was about to be nuked by young Kim, who is more likely to have his shiny rocket wobble about in the sky for a bit before crashing... or not taking off properly at all.

The point is: If you were to run a poll today, you'd probably find that the the perception amongst money managers is that the only folks who've been buying Japanese equities, (which includes us) are ones who've taken a knock to the head or been dropped on their head at birth.

And that's not all.

Bloomberg recently pointed out that less than 10% of Japanese households own any equities. That's basically none. Zero. Zilch. Nada.

Marginal buyers

Which brings me neatly to another much loved thesis of mine. It was Mark Twain who said:

"Courage is not the absence of fear; it is acting in spite of it."

Well, I say, risk is not the absence of consensus; it is the deafening roar of it.

So what's the risk today? Well, risk is highest when your pool of marginal buyers are the smallest, and consequently the lowest when your pool of marginal buyers the greatest.

I always look for markets where marginal buyers are either exhausted (none left, everybody is already in) or they're sitting there at the train station watching the rain, just waiting for a reason to board the next train.

Bad News... Pffff

Something else.

I've always looked at turning points in markets and one of the best signs of a stealth bull market I've ever seen is a market which continues to rally on bad news.

And there's been a fair bit of that in the land of the rising sun.

Toshiba — Japan's answer to Enron:

Mitsubishi, after admitting to falsifying fuel efficiency data. Naughty, naughty!

Kobe Steel with their own scandal. Very naughty!

These follow scandals at Nissan, Toyota, and Takata Corp.

And the market? Rallying.

Who Leads?

Another thing I look at is small caps. Why?

Because small caps are like Mahatma Gandhi — they're natural leaders.

Here's the small caps:

One word. En fuego! (Ok, I lied... 2 words).

Not only that. They actually make money and pay shareholders. How unique!

In fact, if like me you're on the lookout for stuff like this you'll realise that this market actually got cheaper over the last decade...while it's gone up. How so?

Dividends grew faster (97.5%) than prices (29.2%), so on a price-to-dividend basis they're even cheaper today... all the while we've been making money.

And for you technical geeks out there, here's something to chew on.

The Nikkei 225 just broke a key 38.2 percent Fibonacci-retracement level. The next retracement of 50% stands at 22,981.49. Today, as I write this we trade at 22,539. Mmmm...

So marginal buyers are large. Bad news is being bought not sold. Technicals couldn't be better. Companies actually make money. And today you could buy much of the Japanese banking industry if you were to liquidate Elon's vanity project that incidentally incinerates cash and uses funky math.

Your choice...

- Chris

PS: We've been all over this like a fat kid on a cupcake for the last 12 months in Insider. You're always welcome to join us.

"Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." - John Templeton

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Dead Indiana Sky's picture

Freshman in college, best year of my life.  Never been poorer, or happier.

adr's picture

Bad news doesn't matter because the Bank of Japan will own 100% of the Japanese equity market in 2025.

Share prices don't matter if there are none to buy.

taketheredpill's picture

was cheap in 2010. not now.

 

A. Boaty's picture

Cost Of Living 1989:

Yearly Inflation Rate U.S.A. 4.83%
Year End Close Dow Jones Industrial Average 2753
Interest Rates Year End Federal Reserve 10.50%
Average Cost of new house $120,000.00
Average Income per year $27,450.00
Average Monthly Rent $420.00
Average Price for new car $15,3500.00
1 gallon of gas 97 cents

Below are some Prices for UK guides in Pounds Sterling:
FTSE 100 Average 2200
Average House Price 71,733
Gallon of Petrol 1.68
Yearly Inflation Rate UK 7.8%
Interest Rates Year End Bank of England 14.88%

More Examples of Prices:
US Postage Stamp 25 cents
BMW 325 $21,400
Ford Probe $12,695
Ham and Cheese Pizza $2.59
Rib Eye Steak Lb $3.79
Ritz Crackers $1.79
Barbie's Dancetime Shop $24.98
Ghostbusters Table-top Pinball $19.85

Placerville, California:
Country Home 1 acre 4 bedrooms wrap round porch Bay Windows $166,000

http://www.thepeoplehistory.com/1989.html

Honest Sam's picture

Anyone buying a ham and cheese pizza is up denial.  Some things should never have been invented, like Pineapple and ham pizza.  Any more than three toppings should automatically incur a 150% surcharge for havng horrible pizza etiquette. 

Yum on the Rib-eye, though.

And I'll bet there were no Tranny Barbies, nor homo lesbo Barbies either.

Life really was better, far better in the 50s than it is today.

Now I wonder how the fuck I will ever survive without a laptop and a blistering Internet connnection. 

Oh for a Bank of England 13 % CD.

Mementoil's picture

Suppose I buy your thesis of a stock market on a tear, what is the point of investing in shares denominated in a currency which I expect to depreciate due to rampant money printing?
Where you see a rally, I see inflation.

Griffin's picture

The first internet service provider was started in 1989, so you might say that this year was the dawn of a new era. 

The Berlin wall fell, and the cold war chill between the east and west faded, and eventually vanished.

I was in Berlin a few weeks ago, at the Brandenburg gate, during the festival of lights, looking at some phantoms and ghosts flying over the streets and on the walls of buildings. But those were much prettier and more romantic than the shadows you would have seen at night during the cold war.

And since you mention musicians, one of the finest American musicians was born in 1989.

https://www.youtube.com/watch?v=XJwE8Lg2fZk

 

RagaMuffin's picture

I'm waiting to hear that the run up in the Nikkei was the result of North Korea's central bank trying to short the damn thing

Dame Ednas Possum's picture

Well there’s 3 minutes of my life lost forever.

Did that article actually have a point, or is the author simply on meth and aimlessly rambling?

Perhaps he has simply lost his marbles after studying these ‘markets’ for too long?

Is he actually talking up the Nikkei or is it rampant sarcasm?

I don’t know any more.

Just keep stacking.

nmewn's picture

It was in the era of Freddie Mercury and AIDS.

It was in the era where you could crack a joke about one of Queens top songs and the death of its lead singer Freddie Mercury and not have a "hate crime" charge brought against you by the scowling perpetually offended SJW class.

Another One Bites The Dust...give me irony or give me death!...lol.

Personally I miss those days.

But today ain't so bad either what with modern technology 3D printers and stuff. Did you know you can modify the bayonet lug of an AR15 to accept a chainsaw?! ;-)