FFH = Interesting.

[JohnDoe700M]

Txlaw, great point / read of the chart.  Well taken.

 

My only concern is that the message of this quote -- from an obscure New Zealand paper:

 

"There is a level of fear and greed in the marketplace but you can't get yield elsewhere," he said.

 

Is such (Fed-induced) behavior investing or speculation?  Maybe it's neither: it's alchemy.

 

 

 

 

[JohnDoe700M]

I guess the trillion dollar question is where we are in the chart.

 

1996/1997/1998? 

 

Or:

 

2002/2003/2004?

 

This is the dreadful Slide 25, from 2006 Fairfax Presentation.

 

http://oi55.tinypic.com/4h426a.jpg

 

I love this slide, actually.

 

It shows that in a Japanese situation, when long term bond yields go really, really low, that's the best time to buy equities in terms of market pricing. 

 

Now, whether US equities will stay at this low level for the next five years is another question.  That's one reason why I like the idea of purchasing equities with high dividend yields.  You get a return of intrinsic value that can be used to cover underwriting losses in the P&L.  It's even better if the underlying businesses earn in a basket of currencies other than the US dollar, although the US dollar may very well be undervalued at the moment.

 

I am also part of the camp that believes that the US is different than Japan because M&A, our sophisticated bankruptcy system, and the adaptability of US business will cause realization of intrinsic value in equities in a more expedited manner than with Japan.

 

I should also note that my style of equity investing in my own portfolio is way different than what HWIC is practicing.  I am very concentrated and don't mind if my portfolio is well in the red at any given time, so long as I believe the intrinsic value is far in excess of my purchase price.

[ERICOPOLY]

I guess the trillion dollar question is where we are in the chart.

 

1996/1997/1998? 

 

Or:

 

2002/2003/2004?

 

None of the above.  We're on the US chart, only you don't know what that chart looks like -- time will tell us.

[jjsto]

I am also part of the camp that believes that the US is different than Japan because M&A, our sophisticated bankruptcy system, and the adaptability of US business will cause realization of intrinsic value in equities in a more expedited manner than with Japan.

 

I should also note that my style of equity investing in my own portfolio is way different than what HWIC is practicing.  I am very concentrated and don't mind if my portfolio is well in the red at any given time, so long as I believe the intrinsic value is far in excess of my purchase price.

 

I tend to believe the most significant difference between the US and Japan (as it relates to our ability to get out of a balance sheet recession) is demographics.  Our immigration policy/higher birth rate allows us to create households faster which should help reduce inventory and stabilize the housing price collapse at some point.  This, in turn, should both alleviate individual's balance sheets, and help bring back employment in construction.  Since it is, for the most part, the US consumer (and not US corporations) that have impaired balance sheets, at least there is some light at the end of the tunnel, even if it is a long tunnel...I am skeptical that US business are "inherently" more "adaptable" (than japanese counterparts) or that our "sophisticated" bankruptcy system will significantly aid the recovery process.

 

At the same time, my portfolio isnt hedged at all and looks nothing like FFH's.  I likewise have a very concentrated portfolio and don't mind running with unrealized losses when I believe the intrinsic value is unchanged.  I dont even calculate YTD returns (possibly because it is probably not too pretty this year.) I do have about 10% in FFH right now, because I like how they are positioned for a double-dip and/or lost decade...

[merkhet]

 

 

I guess the trillion dollar question is where we are in the chart.

 

1996/1997/1998? 

 

Or:

 

2002/2003/2004?

 

 

None of the above.  We're on the US chart, only you don't know what that chart looks like -- time will tell us.

 

 

Well, it depends on the politicians now...

 

http://static.businessinsider.com/image/4bc5bb587f8b9a9c28420700-590/slide-141.jpg

 

Notice that the dips in JohnDoe's chart parallel with the dips in Richard Koo's slide concerning austerity measures "fiscal reform"...

 

The perverse thing is that I think a lot of people think that the market is suffering because we're no longer triple-A (and Europe, etc.) and they also believe that solving the debt problem will "reverse" the slide that began with our triple-A woes.  So, oddly enough, I think we'd get an upswing in the markets if we took steps to reduce the deficit drastically (say, if the Republicans win and begin appeasing Tea Partiers) -- and that would be the moment to put on hedges for the cardiac arrest that's forthcoming...

 

(And that'll be the 2 minutes this year that I spend futilely prognosticating macro...)

[Uccmal]

I guess the trillion dollar question is where we are in the chart.

 

1996/1997/1998? 

 

Or:

 

2002/2003/2004?

 

None of the above.  We're on the US chart, only you don't know what that chart looks like -- time will tell us.

 

Hee, Heee.....that's great.  So, what your saying is who the f. knows.

[ERICOPOLY]

I am skeptical that US business are "inherently" more "adaptable" (than japanese counterparts) or that our "sophisticated" bankruptcy system will significantly aid the recovery process.

 

Look up the data since 1990.  At worst, their unemployment increased by 3% (from 2.2% roughly in 1990 to roughly 5.5%).

 

For as bad as people say they suffered...  that's nothing.

 

http://www.tradingeconomics.com/japan/unemployment-rate

 

Perhaps US corporations are more adaptable in that they fire excess labor at the first sign of bad news on the demand front, preserving profits to a greater degree.

[txlaw]

I am skeptical that US business are "inherently" more "adaptable" (than japanese counterparts) or that our "sophisticated" bankruptcy system will significantly aid the recovery process.

 

Look up the data since 1990.  At worst, their unemployment increased by 3% (from 2.2% roughly in 1990 to roughly 5.5%).

 

For as bad as people say they suffered...  that's nothing.

 

http://www.tradingeconomics.com/japan/unemployment-rate

 

Perhaps US corporations are more adaptable in that they fire excess labor at the first sign of bad news on the demand front, preserving profits to a greater degree.

 

Y'all are assuming I'm talking about large to medium size corporations.  I just mean US business in general -- i.e., the entrepreneurial vigor that allows people to adapt to this business environment. 

 

Our bankruptcy system clearly has had an impact on a potential recovery.  Everyone agrees that a lot of debt needed to be either paid down or converted to equity, and the US BK process has speeded this up.  That's why, in large part, the corporate sector is better off from a balance sheet perspective.

 

I agree with Eric, though, that the Japanese lost decade was a victory in many respects when you take into account how low unemployment stayed.  The demographics suck, but mostly with respect to their issues with debt.  However, they can still print their way out of it . . .

[ERICOPOLY]

It just seems to me like in Japan the profits are thrown under the bus to save the workers.  In the US the workers are thrown under the bus to save the profits.  Maybe I'd rather work in Japan but invest in the US.  Future generations in the US will pay for the unemployment benefits of today's laid off workers, whereas in Japan the corporations just seem to keep them around and bear those costs directly.

 

I am surprised to see a Shiller PE10 in excess of 30 for Japan (two year chart going back to mid-2009):

http://seekingalpha.com/article/275194-world-equity-valuations-by-the-shiller-pe-ratio

 

 

 

[txlaw]

It just seems to me like in Japan the profits are thrown under the bus to save the workers.  In the US the workers are thrown under the bus to save the profits.  Maybe I'd rather work in Japan but invest in the US.  Future generations in the US will pay for the unemployment benefits of today's laid off workers, whereas in Japan the corporations just seem to keep them around and bear those costs directly.

 

I am surprised to see a Shiller PE10 in excess of 30 for Japan (two year chart going back to mid-2009):

http://seekingalpha.com/article/275194-world-equity-valuations-by-the-shiller-pe-ratio

 

Absolutely.  Sometimes they call it the Paradox of Thrift.  But you could just as easily call it the Paradox of Profit Preservation.

 

That's why I believe that a fully funded and not pay-go social insurance program could be a huge strength if you could prevent people from gaming the system.  You'd have a safety net that would keep people from being rolled by the economy and by bad luck (e.g., health problems), but that would eventually get those people transitioned to productive uses again.

 

That's pie in the sky thinking, of course.  Don't know how you implement such a system in the US.

 

Not sure why Japanese corporations are so willing to keep on employees who could probably be cut.  Is it just different business ethics?  Does the homogeneity of the society have something to do with?  Anyone have any insights?

[biaggio]

"Not sure why Japanese corporations are so willing to keep on employees who could probably be cut.  Is it just different business ethics?  Does the homogeneity of the society have something to do with?  Anyone have any insights?"

 

Many years ago I read the book The Machine-That-Changed-World-

 

http://www.amazon.com/Machine-That-Changed-World-Production/dp/0060974176

 

Good book by the way

 

Book based on the Massachusetts Institute of Technology's $5 million, five-year study on the Japanese Auto industry in the 70's + 80's I be;ieve.

 

If I remember correctly it is a basic premise of how they set up their businesses = workers, managers, corporation work together for greater good, and profit + loss. Workers are encouraged to share their best ideas to save money, make better products etc in return the worker is promised not to get fired because his job is made obsolete by theirs or others ideas.

 

Local japanese owned steel company as a example has  never layed off workers because of decreased demand for product-instead from the start of the business they have been promised + agreed to work overtime + work hard when times are busy (they get bonuses/profit sharing)...when times are slow they take extra time off, work shorter work week (3  day work week) etc.

[ERICOPOLY]

Alright, so how much of the Nikkei's malaise has to do with the fact that it started at a P/E north of 60x, and is the rest largely explained by their excess labor costs crushing margins (due to their not firing excess labor).

[jjsto]

 

Y'all are assuming I'm talking about large to medium size corporations.  I just mean US business in general -- i.e., the entrepreneurial vigor that allows people to adapt to this business environment. 

 

Our bankruptcy system clearly has had an impact on a potential recovery.  Everyone agrees that a lot of debt needed to be either paid down or converted to equity, and the US BK process has speeded this up.  That's why, in large part, the corporate sector is better off from a balance sheet perspective.

 

I agree with Eric, though, that the Japanese lost decade was a victory in many respects when you take into account how low unemployment stayed.  The demographics suck, but mostly with respect to their issues with debt.  However, they can still print their way out of it . . .

 

Yeah, I did assume you were talking about large corporations.  I do agree the US has a better system for the small/entrepreneurial companies.  And, according to Mauldin, that is where a lot of job creation comes from.  I was thinking about the bankruptcy process only in terms of households.  It is easier in the US for corporate bankruptcy, but it is also a different starting point since most Japanese companies were more heavily levered at the beginning of the crisis and had a lot more inter-company share holdings.  US corporations are already in far better financial shape than their japanese counterparts at the same t+3yr into the collapse.

 

I agree that the Japanese "lost decade" was in some ways a victory if you just look at unemployment figures and probably also household net worth.  However, it has yet to be seen if Japan will be able to find a non-painful way out of their debt....Nevertheless, had the US experienced the same severity of crisis that Japan experienced I dont think the US would have done as well as the Japanese did...