The Japanese Experience

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Automobiles
I don't know if people are aware of the story, but there is a particular reason Japanese auto imports grew to dominate the North American industry.  The single biggest reason, in my opinion, was product.  They made a better car for less, and targeted the entry level buyer.  Their target market was key, since they were limited by North American quotas at the time.  Why target the lower-priced entry level when they could have tried to go after the higher-end, more expensive category?  After all, that is what the North American car makers would do, and they did - SUV, gas guzzlers anyone?

Demographics
No, the Japanese were smarter than that, or were they?  The answer is yes, and no.  The Japanese learned from their own experience that customer loyalty was important.  Satisfied customers tended to buy again from the same company.  Not only did they buy from the same company, they tended to trade up, as well.  After paying off their first car, they tended to buy a more expensive one the next time.  If Japanese customers did so, what made them believe the U.S. customers would do the same?  Demographics, plain and simple.  With an older average Japanese population, it was expected the North American population would follow a pattern similar to that of the Japanese consumer.  And it did.  Brilliant, yes; original, no.

Same Old Same Old
Now, the question is, are we going to learn from the Japanese experience.  I don't mean their auto industry, but their economy.  Sure, there are some fundamental differences in the Japanese and U.S. economies, but let's take a look at Japan over the last two decades.  Their problems really began in the late 1980's.  There were a number of banks misbehaving, and a housing bubble that burst (sound familiar?)  For much of the last two decades, Japan has been trying to stimulate itself out of recession.  The central bank continues to buy government bonds to provide liquidity to the government, and the economy.

So?
Is it working?  By all accounts, Japan's economic course is unsustainable.  While growth has never  recovered, to any great extent, the government debt continues to rise.  The last data point in the chart above was 2008.  Their debt level as a percentage of GDP has only increased since then.

Again?
No, we have tried giving our money to the rich (one percent) with the expectation of jobs, in return.  Clearly that didn't work.  So whose idea do you think it was in the first place?  Now, we are being asked to believe that when it comes to governments, we can borrow our way around the trouble caused by, among other things, too much government debt from bailing out some of the richest corporations on the planet.  And whose idea do you think that was, and is?

Micro Economics
We need to do as they say, and not as they do.  We need to live within our means, and concentrate during these difficult times on reducing debt, and not just maintaining the status quo.  For you and I, reducing expenses is easier than increasing revenues, although we could all use some additional investment income.  The Japanese experience should teach us it is going to take a very long time before things actually begin to start to get a whole lot better!

Do you think we will learn from history?

Berman's (Recession) Call On BNN

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This video is a couple of weeks old, but the forecast is for 2012.  Based on the Economic Cycle Research Institute (ECRI) Weekly Leading Index, we (the U.S., specifically) are tipping back into recession.  The indicator has never been this low without a recession following.  For more on the indicator, please refer to this post by Doug Short regarding the ECRI.  Larry also thinks what we are about to experience has much to do with current demographics, as do I.  Think deleveraging!  (Funny, but in looking at the spelling of that word I noticed it has the word aging in it - demographics, aging, ...?).

Myself, I believe the markets can stay irrational longer than I can stay solvent, so I time my investments using charts to tell me what the market IS doing rather than what it is GOING to do.  Also, my horizon has decreased significantly over the past year, so I will not be investing in anything with the expectation of being in the market for more than weeks, rather than months.  

What would you say the odds are of us going back into a recession?

Corporate Balance Sheets

Sell-Side Analysts
The sell-side analysts are busy trying to calm the masses these days.  These are the people we see on TV all of the time giving their valuations for sectors and companies.  The thing we need to remember is their job is to make certain sectors and companies look attractive enough for retail investors to want to buy them.  Since it is unlikely analysts can follow the whole universe of companies all of the time, their recommendations will often be relative to the things they do follow. 

Buy, or Sell?
For example lets pretend I am one of these analysts, and I follow the telecom sector.  Since I have to have more buy recommendations than sell recommendations (people won't buy companies with a sell recommendation), it would be easy to recommend AT&T and Bell Canada.  Normally, energy, gold, and agricultural companies do better during this time of year.  Arguably, Suncor, and Potash are likely to do better over the next few months.  As an analyst my top picks come from those companies that I do follow, even though the other one's are likely to outperform, or have better valuations.

Buy & Sell Strategies
That is how, in 2008, we went from everybody telling us not to sell, to everybody telling us it was too late to sell, practically overnight.  Now I am not saying that what we are currently experiencing is on a par with the last financial crisis, but I don't look to the analysts to tell me when to sell.  I have a buying strategy, and I have a selling strategy, and I follow them as the markets gyrate up and down.  My strategies allow me to make money even in down markets, and they also allow me to sleep at night.
   
Recession, What Recession?
I am not sitting in judgement of the analysts, just saying that is what they do.  So when we hear them saying there is no risk of a double-dip recession, and they are all saying it, I start to get cautious.  First, when everybody seems to be taking the same side of the argument, that is a caution sign.  Second, when they say the reason we can't be headed into recession, again, is because of the pristine balance sheets for almost every company across North America, my intuition kicks in.

Spending
Around seventy percent of the U.S. economy depends on consumer spending.  Just over 10 percent comes from corporate investment.  That would imply that for every dollar consumers don't spend (because they can't spend what they don't have), corporations would have to increase their spending by seven!  Why would companies do that in the current environment?  Given the uncertainty, the lack of consumption, and the difficult economic environment, what would cause U.S. companies to go on that much of a spending spree?

China
While China is seen as saving the world economy, the U.S. imports almost four times as much from China as it exports to China.  How are U.S. companies going to make up for the lack of sales of imports (i.e.: lack of consumer spending)?  China, basically, imports from other Asian economies, and exports to the U.S..  Reversing that flow isn't suddenly going to happen.

Advanced Planning
I try to keep in mind that most of what we hear in the media is "sales talk".  I should determine, in advance, the conditions under which I should buy and those under which I should sell.  That will prevent me from being at the mercy of the sales pitches and the obvious but irrelevant arguments constantly playing out in the media.

Have you formulated your buy and sell strategies in advance?

         

BEAR Markets

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I mentioned in my previous post that I did not believe we have started another bull market.  There are a couple of reasons for this.  I posted a while ago about Mr. Craig Alexander's (Senior VP and Chief Economist at TD Bank) take on the economy.  During his presentation, he said something I found of great interest.  He said in assessing our recovery we had to compare it,  not to other recessions, but to other financial events of the past.  In that regard he felt we were on track as far as a recovery from that type of event was concerned.  Whether we are or not, it made me realize there is a difference between what we should expect during this recovery and one that follows a normal bear market. 

Incidentally, research has shown bear markets occur on average every four years and last for an average of one year.  If you look at the data, however, you will see the frequencies and durations for bear markets are all over the map.  They can be only a couple of years apart, or they can be ten years apart.  They can last for a few months, or they can go on for years.

If Mr. Alexander is correct, and we are not looking at the average recovery after an average bear market, with which I would have to agree, the above chart becomes rather fascinating.  What makes it particularly interesting is the fact the percentage in change in weekly index values is derived from inflation adjusted numbers.  What that means is the recent markets peaked in the year 2000, and not 2007, as we might otherwise believe in observing unadjusted charts.

While not the same indexes each time, two of the three indexes combine to create definite up and downward trends.  If that continues, then most of the next two years in the stock markets, starting almost any time now, will be lower, rather than higher, as most of the academics and vendors of equities would have us believe.       

Do I think we are headed lower?  In the short term, yes.  It doesn't make a whole lot of difference in my case.  I play a trend until it ceases to be one.  So, even while the longer term trend may be down, there could be opportunities for me to take advantage of a shorter up trend.  For people with a longer term investing horizon, the decision as to what to do is more complicated.  In 1998 I had a rather large (for me) pension adjustment which I wanted to invest.  I put the whole thing into a good mutual fund at the beginning of the year.  By the fall I had lost almost one third of my investment.  Nobody had suggested to me that was even a remote possibility!

Based on my experience, I would not invest any of my money in mutual funds today.  Mutual fund managers will try to minimize losses in a down market, but they cannot avoid them.  For the longer term, I would only invest in a broad index based Exchange Traded Fund (ETF) like XIU and watch it very closely.  I would set a maximum daily, weekly, and monthly loss limit and sell if I attained any one of them.  I would only try to reenter the market once the market direction regained an upward trend.  The problem with this approach is my portfolio could end up dying a death of a thousand cuts - enter the market, lose, sell, enter the market, lose, sell... .  Since I have little faith in the longer term, what I would most likely do is shorten my investing horizon to a much shorter term.

I am not an investment professional, so I cannot advise you in what to do with your money.  What I would recommend is being very careful.  History would seem to indicate things could get a lot more worse before they get a lot more better.

Do you think we are currently in a new bull market?