USA involvement in crashing Japan's economy

Discussion in 'Japan' started by 99P, Jun 20, 2010.

  1. 99P

    99P Member

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    How much involvement is there on the collapse of the Japanese economy? The U.S. forced Japan to revalue the Yen, and since then, Japan has been in decline for 15 years. Anyone know the details?
     
  2. Kumaji

    Kumaji Member

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    I think its due to Korean and Chinese influence on US politicians mostly. American politicians are controlled by money and their lust for it as is obvious with Israel's undo influence over the US.

    Both China and Korea try to tear away at Japan's power and credibility as much as they can. I have family who are Japanese and this is what I hear a lot. Japan youth are becoming ore conservative, politically...and now with this Fukushima disaster and the foreigners fleeing, same ones who are demanding the right to vote, Japanese eyes are wide open and looking around at who is a good influence and who is not. I expect to see some radical changes this year and continuing.

    The current government, the slime who failed their people miserably due to their handlers back on mainland China and South Korea is already feeling the change with just having lost 50 seats in the Diet, the Japanese congress or parliament as it were.
     
  3. Mountain Valley Wolf

    Mountain Valley Wolf Senior Member

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    I was an analyst in Tokyo working for Shearson Lehman at the time. I saw it all unfold---in fact I predicted the crash of the Tokyo market----stating that the market would peak at the end of 1989 between 38000 to 40000 on the Nikkei (it peaked the last day of 1989 at 38,900, and crashed on the first trading day in 1990). I made this prediction during an interview with a reporter for the Toyo Keizai magazine in November of 1988. Of course most analysts were expecting the market to peak in 1989, and generally near the end of the year. I happened to be the luckiest in predicting the level. But in the last few months of 1989 everyone became very bullish---except for me----I knew that was the end.

    Did the US create that? They certainly manipulated the Japanese, and tried to play hardball---just as they are doing right now with the Chinese (Our government accuses China of manipulating their currency---but they are simply doing what countries have done for years---pegging their currency to another currency-----it is the US that is manipulating the currency, trying to push the dollar down to push US exports---we are the manipulators).

    Anyway, the US did force a major revaluation of the Yen. The real problem that they needed to address was the fact that US manufacturing had become too complacent in the 1960's and 70's. CEO's, when warned that the Japanese were investing heavily in plant investment and lowering their cost structures, actually responded that America was number 1 and that they therefore had nothing to worry about. Therefore in the 1980's we ended up with expensive and inefficient factories that put out shoddy goods.

    When Japanese took the US domestic markets by storm, the US responded that it was unfair. Even after the Yen was revalued, the Japanese continued to dominate the global markets. So the US continued to pressure Japan. They decided that the Japanese were working too hard, and so that must give them an unfair advantage. A common Japanese work week included 2 saturdays per month of half days. Many had shifts of full Saturdays. An official work day was 8 hours, but workers typically worked much longer than that. Japanese were working too hard, and America said that was too hard for their workers, and inhuman treatment of labor (translation: unfair and bad for America whose workers would never work so hard).

    My first job in Japan was for a Japanese brokerage firm---I saw first hand that the overworked Japanese were very inefficient. They accomplished less in a 10 - 12 hour day than Americans produced in a typical 8-hour day. Literally----much of their day was spent appearing to work. They spent a good part of the day out of the office 'visiting cutomers.' Most of this time was spent sitting in coffee shops and reading manga. They would even go see a movie or do something like that in the afternoon. Everything was about appearances---but the long hours meant they had to find ways to avoid being burnt out. America actually increased Japanese productivity by forcing the shorter work hours on Japan. And probably helped lower the incidence of strokes and other health problems the longer hours created. America did not understand this, and was hoping to lower productivity.

    The higher yen was a retardent to the economy but it didn't take long for the Japanese to overcome it. In the end, all of America's pressuring, and pushing, and complaining didn't really do much.

    My main impression of the Japanese economy while living n Japan throughout the 1980's was that it was like a finely tuned fast moving machine. Exports were the fuel, but the money of the domestic Japanese consumers was the oil. All through the 1980's Japan had easy money policies---low interest rates and plenty of practically free money----like the US before the credit crisis. Post World War II Japanese worked like dogs saving money in hopes to one day buy the three R's (Refrigerater, airconditioner (reikon in Japanese) and radio---or something like that---I forget the 3rd R, but it might have been a radio) but more importantly to one day buy their own home. through the 60's and 70's they worked and saved and got the three R's, but Japan only has so much land, and mai houmu (My Home) as it was referred to, never became attainable for many Japanese. But by the 1980's they had huge amounts of money saved, and started spending it. Japanese marketing had very effectively created a culture of consumers, with product life cycles that psychologically lasted 6 months. Consumers bought the latest TV's and stereos and 6 months later would replace them with the next generation. On the trash day of any neighborhood you could walk down the street and find relatvely new TVs, stereos, and other appliances, in good working condition, that had been thrown out. Consumers bought up designer brands, Rolexes, jewelry---you name it and it was big there. Japanese corporations were big spenders too. Salaries were low by American standards, but many workers had expense accounts and they spent big money on nightclubs and mistresses. While the corporations themselves spent huge amounts of money on F-1 race cars, overseas vacation houses, and real estate. Loans to corporations were easy to get, and plentiful. A lot of money was being made in the stock market and in real estate speculation. Much of the value in Japan, including the stock market, was based on the rising values of land.

    Even as Japanese were spending money on new products and designer brands, those who did not own a condo or their own apartment, would have to spend so much money to buy them that they would get what was called a 2 or 3 generation loan----this meant that when the original debtor retired and no longer had an income, the loan would be taken over by his child, and grandchild in the case of the 3-generation loan.

    One problem that was beginning to develop----was the fact that the US, and West Germany (two major sources of innovation)--------had not produced significant numbers of new patents for a number of years. Japan had been leading in the number of new patents for much of the 80's. But Japan was not very good with creating brand new revolutionary products---it goes back to their education which is all based on a Confucianistic method of imitating and copying the master---rote---with everything fitting neatly into its box. So the Japanese were very good at taking a brand new revolutionary product, and turning it into something new, and making all kinds of innovations off of it. Give them a tape recorder, and they invent the Walkman, for example----but they didn't invent the tape recorder. The problem is that they began to run out of things to innovate. The West was failing them in this regard. In the late 80's new patents in Japan started dropping off. (New patents in the US and Germany started climbing again, as the Japanese dropped off, but it was too late for Japan).

    But even then, the Japanese economy was moving too fast for the Japanese to believe this would be a problem. My first clue to what was coming appeared in a small article tucked away on the 3rd or 4th page of the Nikkei shimbun (Japan's Wall Street Journal) in the late summer of 1988. It said that Japanese builders could not afford to miss out on bidding for land, because land available for development was becoming so scarce. But the price that land was now going for, meant that even after developing it, it was already too expensive for Japanese consumers to be able to afford the developed properties. But the builders knew that if they did not get the land---the next one would be all that more expensive. They 'had' to buy land for development that was now too expensive for them to develop and sell.

    I had argued with many Japanese---who had always believed that land will never drop in price---because Japan is an island. I always insisted that land was a market---and used Singapore---a very small island---as an example of what can happen----but Japanese just couldn't see it. Obviously now, things were reaching a breaking point.

    Then the government decided to deregulate the interest rates of bank time deposits. This meant that in 1989, those Japanese who had been receiving a slightly inflated rate of return on time deposits, would no longer get that---and would finally switch to the stockmarket----the last investors to come to the market always mark the end of the game---and it was this fact that made so many analysts decide that 1989 was the end of the Japanese bull.

    The next key point for me came at the end of 1988. Shearson put on a party for its institutional investors, particularly the insurance companies which were big movers in the Japanese market. At one point in the party, the heads of the Japanese insurance companies wanted to give a speech---I think they had been honored or something so they were all up on stage anyway---but they stood at the podium and said they wanted to let us know something---directing their comments to the research department---us analysts. Their speech was short, and basically said, "We know you analysts think the Japanese market will fall next year. But we are here to tell you, that we decide what the market will do. We control whether it goes up or goes down, and next year, and for the next several years, we want the market to go up, and so, it will go up."

    No one, and I mean no one, no matter how rich, how powerful or anything else, can make the market go up or down. If they have enough money and power, they can move it for a short period---but when people start believing that they can control it----the end is coming.

    1989 saw continued speculation in the stock and real estate markets. It was obvious that things were getting out of hand. In the fall of 1989, the Japanese government decided it had to act to stop the bubble. For the first time in about a decade, they raised interest rates. Normally, when interest rates get raised, a stockmarket will correct. But the Nikkei, surged forward. I warned everyone I knew that it was trying to make that 40,000 mark and they better get out before the year end. Rates were raised again, and the market surged higher. In december they were raised a third time. In the US we have an old market saying: 3 skips and a fall. This means that if interest rates are raised 3 times, the market will drop. But still the Japanese market surged higher. I continued to preach getting out before the year end. In fact I had left Shearson, and moved to the Philippines to watch it from afar (though I still maintained a residence in Japan). All the old analysts who had also thought the market would fall were now caught up in the buying frenzy----but that is the sign of a market top.

    At the very beginning of 1990, the market dropped like never before. Land prices plummeted as well. I believe it was March when I finally returned to Japan. The Japanese government was preaching to everyone, "Don't worry. Japan is an export based country. The crash in the financial and real estate markets will be contained to only those sectors of the economy. Everything is fine." I preached the opposite---because financial markets are the core of any economy. I warned everyone I knew that consumer spending would be the next thing to drop and that will mark coming disaster for the Japanese economy. I stressed that the government needed to act.

    But that did not happen. The Japanese Nikkei dropped to about the 25,000 level. For much of 1990 the Japanese believed everything would be ok. Things seemed to continue as normal, though not quite like it had been---but they believed their government. I continued to watch consumer spending, and it was dropping steadily. 1991 and the economic stresses were becoming too evident. Banks stopped lending, people stopped spending, the Nikkei hit 14,000, corporations were starting to go bankrupt. The government needed to act to shore up the economy---but they waited.

    In the late 1980's in the nightclub districts, anytime between 12:00 midnight and 4:00 am you would have to wait in long lines to get a taxi, it could take 30 minutes or more. After the middle of 1992, taxis would form long lines at the same spots waiting for customers. Even then, they would only take you if you were going to go for a long distance, because they didn't want to end up at the back of the line for a relatively small fare. Taxis would go the whole night without a customer. This is in a town where everyone takes taxis, especially after the trains shut down.

    Finally the Japanese government moved and started putting capital into the economy. But it was too late. The steps that really needed to be taken at that point, writing off bad bank debt and other extreme and severe measures, were largely unpopular, and no on wanted to be the one to force it. Japan went through one prime minister after another. Several times the economy started to improve, and the government took advantage of the growth to create consumption taxes and so forth---which immediately, and without surprise, killed the recovery.

    One of the key components of speculation in both the real estate and stock markets were the yakuza---the Japanese mafia. Banks had lent a tremendous amount of money to them. After the crash, the yakuza of course took huge losses. It wasn't until the mid to late 1990's that the banks tried to collect on the yakuza loans. Loan officers disappeared or turned up dead, others were threatened---being that the yakuza were an easy scapegoat, the Japanese started referring to the recession as the 'Yakuza recession.' But that was only partly correct.

    Japan experienced deflation in the 1990's. The only thing that saved the Japanese from depression was the fact that most of the conservative Japanese still had a huge amount of savings. But that was also something that contributed to the lack of any recovery---they stopped spending all together.

    The Nikkei continued to decay until hitting around 9,000 or so in the 2000's. Finally the economy started to recover. The strong Chinese economy, and overall strong global economy in the mid-2000's really helped them. But their economy was still frail. Unfortuantely, greed once again reared its head, and Japanese banks, like banks around the world, loaded up on America's high yielding mortgage-backed securities. When the credit crisis hit they too were hurt, and were quickly shoved back into the hole they had barely dug themselves out of. Finally you had the earthquake and tsunami that seriously hurt them, and as if that wasn't enough---especially to companies that had lost factories in the northeastern part of Japan----their Thai factories were then hit with debilitating flooding.

    There are more facets I could share with you----but ultimately it was pure hubris that struck Japan----greed, arrogance, followed by a government inexperienced in dealing with such a fast paced economy---and the governmen's continuous bungling throughout the 1990's that did Japan in.
     
  4. midgardsun

    midgardsun Senior Member

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    Thanks for those interesting infos.

    What do you think about the situation in the USA?
     
  5. Mountain Valley Wolf

    Mountain Valley Wolf Senior Member

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    Thank you for your comments. I will answer this in 2 parts---the first post will be about the events leading up to the current situation, and the second post will be what I see for the situation now and going forward.

    America? I was there. I saw it all unfold. (Just kidding---unfortunately the whole world saw it unfold).

    Let’s go back to the 1980’s. In the last post I explained how the arrogance of American corporations left us with old and very inefficient factories with very costly and inefficient production methods as we entered into that decade. Japan swooped in and took our markets by storm. But the problems were confined to the manufacturing sector. If you remember, America had a booming economy back then as well. It was the period of the yuppies, and the boom was connected to speculation in the financial markets, and a booming oil industry. The true yuppies were the hippies, like myself who followed the advice and example of Jerry Rubin (co-founder of the yippies), who said that true freedom could not be achieved without economic freedom. Baby boomers re-entered the establishment the same way they created a counter-culture----to the rallying cry of, ‘I want what I want, and I want it now.’ They weren’t going to start in the mailroom.

    But the manufacturing sector did not have true business value to it. Stocks rose based on the fact that they were undervalued in terms of their landholdings, and the value of their assets. They were cheap (undervalued) because the stock market was largely stagnant throughout the 1970’s. Many of the stock prices in the 1980’s jumped on the basis that they could be acquired and broken apart for the underlying value. Many companies were bought up, shut down, everyone fired, and all the assets and land sold for a big profit to Wall Street. But many many more companies benefitted from the higher stock prices and issued new stock, raising their investable capital.

    Starting in the second half of the 1980’s American companies themselves started realizing the mistakes of their arrogance of the previous decades and began investing in technology, new factories and equipment, and improving their efficiencies. 1987 saw a bear market that bottomed out just as soon as it started, and created a short-lived recession, but as we entered into the 1990’s America, like Japan, fell into a more significant recession. Unlike Japan, it was a recession that had me excited, and told me that America would be the next super bull market. You might recall the new business terms that were coined then---the main one being ‘downsizing.’ American corporations, in the course of streamlining their structures, were laying off people. They were investing heavily into technology. They were becoming mean and lean. It was hard on Americans at the time, a lot of people lost jobs to downsizing, and the recession seemed to take forever to end---but it created an extremely competitive and efficient America.

    By 1993 America found itself in such a strong position, that for the first time ever, it was able to combine low interest rates, and low unemployment, without an increase in inflation. This was a condition that traditional economics said was impossible. I began writing a book at the time (actually about 1988), with the purpose of trying to figure out my own next investment strategy, and where I wanted to invest after Japan’s collapse (I later decided to publish the book, but unfortunately never had the time to finish it). In the book, I identified key economic eras that lasted roughly 60 years in the American economy. The eras were marked by the key factor that created manufacturing efficiency. The previous era had been coal, the era we were in was oil, and at around the end of the 1980’s the era of oil ended and we had moved into the era of silicon, as in breast implants (just kidding----as in chips). America had found a new level of efficiency due to technology. And the impact of innovation was just beginning. America was destined to lead the world into the 21st Century.

    Speculation in technology had gotten ahead of technology itself, and the stock market broke down in 2000. This end to the dotcom era created a recession, but the actual jump in creativity, and continued innovation that marked the dotcom era never ended, and this is an underlying fundamental momentum of strength in the US economy—even today. The recession lasted only a few years, and then the economy carried on through the 2000’s with a lot of continued strength.

    In addition to the 60-year eras, I identified a cyclical pattern in my book that affected the American economy: Every other decade the US goes through a speculation frenzy, and a Robber-Baron like rape of the unsuspecting: in the 1860’s it was the post Civil War speculation of the carpetbaggers who took advantage of the South; 1880’s saw the robber barons and their speculations and manipulations of the railroads and steamship companies; in the1900’s the second group of robber barons created their monopolistic merger mania; the 1920’s saw the speculation of stock pools leading up to the Great Crash; the 1940’s saw World War II, but after the war you had the massive build up as the victorious Americans switched factories from war time production to domestic production in order to suddenly meet the demands of a Consumer happy and demanding America; in the 1960’s it was the go-go markets, the 1980’s saw the take-over sharks and the risk arbitragers. Each of these eras climaxed in a massive bull top and a subsequent crash. SO the 2000’s promised to be interesting. (There was also a longer term cycle of wholesale inflation which contributed to this 2 decade cycle of speculation----together I called these the Anderson Wave).

    With the 2000 peak in the stock market, I had wondered if the speculation of this 2-Decade cycle had peaked early for the US---if the cycle had changed. But it is usually during the first decade of this cycle that the tools of speculation, and the speculation itself, start to gain momentum. Often times it is during the last year or two of the first decade that the object of speculation, or the actual speculation begins. The cycle of 1990 –2010 was no exception. I didn’t identify the significance at the time, but Enron, was the most obvious sign of that beginning. In the late 1990’s the law had changed allowing banks to get involved in the investment banking business, and visa versa. Enron amounted to an experiment in off-balance sheet financing and other debt manipulating techniques that they perfected in the 2000s.

    We could blame the credit crisis on Wall Street or the Fed---they played their parts. But it was fueled by all those people that bought real estate with low interest rate loans, and happily fudged their income statements to qualify for loans, or borrowed far more than they could in order to satisfy their lust for consumption. My wife’s nephew, for example, an immigrant from the Philippines, no college education, and very little money, went from pizza delivery to support his young wife and kid, to flipping houses. He bought a truck and a BMW and was spending money as if he had won the lottery. My son-in-law’s mother had always struggled with bills, and couldn’t make ends meet with a manager’s position at a cell phone company call center. But then she became a loan broker and started making money hand over fist, and bought a brand new home in a prestigious subdivision. I knew of, and heard about, plenty of others like them. This decade was obviously shaping up just like the 1980’s, 60’s, 40’s, 20’s, etc, and it wasn’t going to last. (Yes, both of these in-laws found themselves stuck in bad debt when the crisis hit, and lost much of what they had gotten. The son-in-law too is working two jobs to try to keep the home that he bought, that was realistically a little bit over his head). In other words, everyone who participated in the boom of the 2000’s is to blame in part. Life does not give you a free ride---the person who flipped houses, or the one who lied on his loan application, or sold fast loans for commissions, were all duped into the same false beliefs of guaranteed American prosperity as the Wall Street underwriter who didn’t check the quality of loans he was packaging---because someone else somewhere would do that anyway.

    In July of 2007 the market corrected sharply----the credit crisis had become apparent to Wall Street. Everyone was surprised, but they shouldn’t have been—the yield curve, a graph that shows the interest rates on treasury bills from shortest to longest maturities, had been inverted for about a year---signaling trouble. The market dropped to a long term trend line that went back to the 2002 market bottom, and bounced off of it in a classic capitulation. For technical reasons (technical refers to using charts as opposed to fundamental which is based on economics, balance sheets, etc.) I knew the market would still push higher. But the seriousness of the credit crisis meant that this was the last move for the bull. The Dow, S&P, and the Nasdaq all had the same long term trend line, and it was very clear that when this line is broken, the market will crash. That happened close to the very top during the first week of 2008. That was the time to sell, and I told everyone I knew to get out. In fact, as Financial Advisors told clients to hold on for the long term, I told them that there was a lot of downside, and they would be better off selling and buying after it bottoms.

    This was not a run of the mill recession----this was the worst kind of economic crisis---a credit crisis. It shared many parallels to 1929 and the 1930’s. But the America public was oblivious to how serious it really was. When the tarp discussions came up—Americans got angry and didn’t want to ‘bail out Wall Street.’ I on the other hand was very vocal about the necessity of tarp. I did not want the US to follow the same path as Japan. You read how the Japanese ignored their problems and what it did to them in my last post. I argued this point with my clients, with coworkers, I sent out e-mails, even explained it to people at Starbucks. Unfortunately, our legislators listened to people who really didn’t understand, and the whole tarp problem became a mismanaged screw up.

    This is what happened: The market was set to bounce up at the beginning of September 2008, just as it had done in October 2002. We had hit a significant bottom in July ‘08, during which many stocks, including the market bell weather, Apple Computer, had bottomed and were actually recovering. The market itself had fallen to new levels of support and had hit a capitulatory bottom; like I said, it was ready to start climbing as the Tarp Bill went to vote at the beginning of September 2008. On a Friday, bowing to misinformed public sentiment; the nation’s lawmakers voted it down. The market dropped sharply. The biggest impact of the tarp was not the money itself---it was the psychological impact that it would have had on the markets at that particular time. The following Monday---the shit hit the fans. The first news article that the American people woke up to was that car dealers could no longer get the loans they needed for people to be able to buy cars. All week long news continued to break out on the economy---the American people suddenly realized, “We’re screwed.”

    I know financial markets, and I know market psychology. If the bill had been voted in that previous Friday---the markets would have had a strong rally, and the following Monday plenty of the American public would have responded, “Damn, that was close—good thing we voted that in,” rather the actual, “Damn we’re screwed!” And the idiots at AIG wouldn’t have yet had time to party on what seems to have been Tarp funds.

    Time was of the essence, and our government screwed around, and took a whole month to finally push it through---but with a whole collection of riders that were so ridiculous it seemed more like a circus act than a serious attempt to save the economy. After its passage, the market dropped sharply. I sent out an intra-office e-mail informing everyone that the cliff the market fell off of looked more like a drop from a market peak than a sell off near a bottom. I then explained that Wall Street’s message to Washington was clear: ‘It’s too late—you guys screwed us royal.” I seriously believe that had the tarp been passed at the beginning of September, that not only would the market have rallied off the bottom, but that we would have spent FAR LESS money in supporting the economy, that the credit crisis would have been shorter lived, that we would not find ourselves so deep in debt as we are today, that we would have seen a stronger recovery, and that we probably would have avoided the next blunder that our government made (I’ll touch on that later).

    Why can I say that? Because the biggest problem with a credit crisis is psychological. After that first week in September, and all the bad news, and the rapid spread of the crisis around the world, the subsequent psychological impact on both American consumers and businesses was like hands to the throat to our economy. In 2009 I talked to a lot of employees in various businesses around America, and heard over and over how their company was unable to meet pending orders, because the company was cutting back due to the economy, and the expected collapse. In other words, they had buyers for goods, but they wouldn’t sell to them, because business was ‘supposedly getting bad.’ The fact is, the economy still had that same momentum that had built up in the 1990’s and all through the 2000’s. These companies were losing money, because psychologically, they believed they were going to lose money. Consumers too were given free money to spend (remember the stimulus tax rebate?), because the economy desperately needed spenders, but people didn’t spend. Banks were given cheap money to lend, but they didn’t want to risk lending---that is the psychology of a credit crisis.

    The next blunder that our government did was with Lehman Brothers. After the AIG fiasco, and bowing to public pressure, the government decided to let things run their course with Lehman Brothers. They had already been arguing whether or not a company was too big to fail, and had already stopped the collapse of Goldman (I think it was). So with Lehman Brothers, they decided to see what would happen, if the investment bank couldn’t come up with its own deal. The other problem was that Lehman’s CEO, Dick Fuld, was an arrogant asshole, and was too egotistical to really make a fair deal happen. So, after a long busy weekend of trying to cut deals each of which collapsed, and buyers in the wings disappearing, the government let Lehman Brothers fail. But Lehman Brothers was a major player in the credit markets and their collapse completely shut down the 7-day yield auction market, which had become a new way for all kinds of debtors to issue long term debt, at a fluctuating cost that was closer to short term debt. This was an important source of finance for the many companies that could not issue commercial paper. Now they could no longer do that. Investors were able to hold short- term securities at higher yields with this 7-Day market than other short term instruments. Now they were stuck holding debt of unknown quality that wouldn’t mature for 25 - 50 years or more, and they had no way to get out of it. The Commercial Paper market and other debt markets were hit too, and the shock waves went around the world. The resulting impact to the economy cost the government many billions more in tarp payments. If the tarp funds had gone through at the beginning of September, the rally in the stock market would have shored up Lehman’s stock price making any one of the deals more likely to occur, and Lehman probably would have been saved. Or, having screwed the tarp bill, even if they would have supported Lehman Brothers, it would have saved the credit markets, we would have again seen a stronger recovery sooner, and saved billions in stimulus spending.

    (Based on the recent research of a Swiss economics institute, today there are about 173 multinational companies that are too big to fail. The time to deal with that question was probably at the beginning of the 2000’s. It is too late now. These companies, which are tightly knit together through cross-shareholdings, have ownership, directly or indirectly, in over 80% of the revenues of the global economy.)

    The market did finally hit a bottom in March 2009. It was a fairly typical market bottom. I could say I spotted it, but then I am a contrarian and buy on every panic sell off bottom. But there was something different this time, and I sent out an e-mail that night saying that this one might finally be the bottom. And unlike the previous panic sell offs since the beginning of 2008, I did not sell and take profits as soon as we hit resistance. (Actually I stupidly held on too long in September ‘08 thinking that, surely our government was smart enough to move quickly on such an important issue. Unfortunately I lost a good portion of the gains I had made in 2008 due to that mistake). But after buying in March, I held on till late January of 2010, when the market finally became overbought.

    A lot of critics say that all the government spending to stimulate the economy has been for not. That we have nothing to show for it. They don’t seem to understand how serious of a crisis we actually went through, and that the road to recovery from a credit crisis is never easy. On the other hand, our overall debt situation was getting out of hand even in late 2009. Washington was now on the spending spree that the rest of the country had been in heading into the financial crisis. One big factor was the war in the Middle East. We just could not afford it—plain and simple. We should never have been there.

    I closely monitored the treasury issues. Had this happened at another time, it would have been disastrous for the US. But fortunately for us, the whole world practically was in the same boat. Countries around the world did massive deficit spending to shore up their own economies, and had huge debt loads. But we should have been working to cut back our spending in 2009. The government just ignored it.

    In early 2010, Geithner and the other idiots at the treasury actually started playing with fire---they went after China for pegging the Yuan to the Dollar. I couldn’t believe it. Most of the Tarp money and the other debt we accrued in 2008 and 2009 was in short term treasuries that were about to mature. Much of the Chinese treasury purchases were made to support their Yuan-Dollar peg. And the peg, in fact, was hurting them more than it hurt us---it was very inflationary for China. If the Chinese started selling US treasuries, it would push up our rates, which were already on the rise anyway, at a key time when we needed to start refinancing US debt. It was idiocy. With our huge debt, the last thing we want is a sell off of treasuries. Bond yields and prices work in the inverse, as the price drops, the yield rises. After the losses of 2008 – 2009, global investors had jumped into US treasuries to avoid risk----if these prices too start falling, you can imagine the selling (Though not everyone would sell, assuming that they continued to believe that at maturity they would get back their principal). With a large enough sell off in treasuries we could potentially end up spending our total GDP just to make interest payments. Fortunately the Chinese did not budge.

    Then along came the Euro-crisis, starting in March 2010, and a new surge in fear-inspired treasury buying pushed yields back down. The Euro crisis has actually been a godsend for the US in many ways, low interest rates being one of them.

    The Chinese are also a key part in maintaining the US dollar as a key global reserve currency. The truth be told, China is unhappy with how we are managing our economy, and they would love to find a different reserve currency or even develop a stable basket of currencies. But try as they may, the Dollar is still the currency of choice for transactions around the world---and we don’t want that to change. It would suddenly mean oil and commodities are far more expensive to US consumers, and it would be an end to the world we have become accustomed to. Right now the second choice for a reserve currency is the Euro---but even in the 1980’s I predicted that the Euro could not last long term without one day seeing a unification of Europe. It is too hard to maintain a currency across multiple economies each one with its own monetary policy. And that is the situation they are in today---resisting unification, yet trying to keep a common currency with German and French taxpayers now having to support the others who stupidly partied and spent too much money.

    Overall though, the economy has improved since 2009. It may not feel like it---just like the recovery in 1991 – 1992. 2011 would have seen even better economic growth had it not been for the Euro-crisis. Despite the benefits we gain from a weak Europe, it also weighs on our economy, and the whole world by creating volatility and dampening our exports. But the US numbers are still improving bit by bit.
     
  6. Mountain Valley Wolf

    Mountain Valley Wolf Senior Member

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    Here is the Second part---where we are going from here.

    We’re not completely out of the woods yet. Unemployment will continue to be a sticky issue. And our debt crisis is a very big problem that seriously needs to be dealt with. We should not be complacent with the fact that our Credit Score has been lowered from a AAA to an AA-. As issuers of what is deemed by global investors to be the risk-free asset of the world (US Treasuries), we have to fix the problem and return to a AAA status.

    Obama has not done that bad in steering the economy. He certainly could have done worse. Yes, he certainly could have done better too. Unfortunately he is dealing with a Congress and Senate that would rather bicker and fight over partisan issues, then get together and solve the crisis. He should have been a stronger leader, but he was inexperienced, and so on and so forth------the truth is, presidents really don’t have that much immediate impact on the economy---they are subject to bigger forces and cycles at work than they could ever manipulate, just like the rest of us, and are just lucky or unlucky depending on when they are in office. However, their policies can impact our debt—and Obama simply inherited a fast growing deficit from Bush. Obama’s healthcare plan was not smart, especially at the current time, but…

    The Federal Reserve has the most immediate impact of anyone on the economy. We can argue that they kept interest rates too low for too long, and thereby created the credit crisis. But the fact is, as I explained in the previous post, we were in a low unemployment - low interest rate – low inflationary environment. Neither the Fed, nor anyone else, had ever encountered that before. The Fed’s focus has always been on inflationary expectations, not financial chicanery, and as long as inflation was not expected, they could see no reason to slow the economy. The Fed is an easy target—they try to caution people that the markets are becoming too speculative, and they get a bad rap, they stimulate the economy and they get a bad rap. They raise rates when inflation risks appear they get a bad rap. But take a look at a chart of US inflation going back to the 1700’s and you will be surprised at how effective the Fed has been. Before the Fed was created in 1913, and going all the way back to the 1700’s, you will notice large swings above the zero line (inflation) and large swings below the zero line (deflation). The original intent of the Fed was to prevent deflation----which is very debilitating to a country and its people. It is not a good thing at all, as Ron Paul suggests. The only case of deflation after the creation of the Fed, was during the Great Depression, and that was fairly mild compared to the depressions before 1913. But inflation as well, after the creation of the Fed, became much less volatile, and less severe, including the stagflation of the late 70’s and early 80’s. Such a chart certainly shows the stability the Fed has brought to the American economy.

    The Federal Reserve has done a very fine job through out the credit crisis too—they have prevented a deflationary spiral, and kept the economy relatively stable despite the many failed banks, and the seriousness of the crisis. They have also worked to maintain stability in Europe as well. But what they cannot control is the spending in Washington, so they are doing the best with what they can do. Why Ron Paul and others want to end the Fed, is ridiculously stupid. I gave Ron Paul a chance, and read his book to see if he had a viable alternative. He does not, and in a crazy way, acknowledges the economic problems before the Fed, yet fails to connect them to his own proposals.

    Washington is buried in a culture of greed right now. Lawmakers have come to expect a steady flow of money from lobbyists and anyone else rich enough to make their own self-interests into law. It is hard to expect lawmakers who are so wrapped up in greed to come together to solve our current economic problems, or to effectively cut back our spending—particularly in a fair manner that does not cut back on much needed social services. Unfortunately they also think nothing of stepping on our constitutional rights. I would love to vote every last one of them out of office. Fortunately, the public is becoming more aware and upset over this.

    I am bullish on the markets though for the medium term. I have been bullish since March of 2009, except for the brief periods when it gets too overbought. There was a lot of volatility from August and through the fall due to the Euro crisis, but the market was range bound between key supports and resistance and was a great opportunity to trade. The tech sector is still a key part of the market’s growth, and as long as it holds up I am bullish. One indicator I like to look at is the QQQ. I watch both a daily and weekly chart using 20-, 50-, and 120-Day moving averages. The QQQ is an Exchange Traded Index Fund that mimics the Nasdaq 100 Index. This index is heavy with technology stocks, and I like to see the Weekly chart especially hold above its moving averages as a sign of the markets strength. Short term we are becoming overbought, and I expect a correction to play out. I am currently in the market, but at the first turn I will be out faster than a dog onto vomit. I would expect us to hit the bottom of the correction within a week or two, a month at most.

    There is another cycle that is critical to the market---a cycle of 4 year bottoms. Market timers tend to not be aware of this cycle and are always trying to time market tops. But there is no consistency in market tops. But there is a very significant cycle in bottoms. I have used 5-year charts and have gone back as far as I could---1920. I found that there were only 3 exceptions to this cycle: 1932, 1987, and 2009. Those were each late bottoms. But what is interesting, is that after these late bottoms, the cycle reverted back to the original cycle. For example, the market should have bottomed in 1930, but it didn’t till 1932, however it still bottomed in 1934, 1986 should have been a bottom also, but it did bottom in 1990. The flash crash (May 2010) appears, based on various indicators, to be the 2010 bottom based on the cycle. But there is risk that this cycle has changed. If we hit a bottom in 2014, then we know for sure that the cycle is still intact.

    I therefore expect that the market will peak this year or next year. If you see a lot of buying activity, and the market moving up too quickly and well above its moving averages, that could possibly be the time----market tops do have a certain feel to them, and if you learn to recognize it----you can easily spot it. 2007, and 2010 were not typical tops however, and should not be your guide. If you can remember how the market felt in February and March of 2000----that is the feeling. The yield curve could also signal the market peak---if it flattens or tilts downward (as you look from left to right of the curve), that is a sure sign that trouble is coming.

    Europe is the big threat out there right now. I am optimistic they will resolve their issues---it may take time, but they should continue to limp along. However if they do collapse that could very well knock the US over. As I have said numerous times---we have way too much debt and we need to deal with it---yesterday! A European collapse could certainly spook investors on the growing US debt as well. A massive sell off of US treasuries could be the end of not only the US economy, but the global economy as well. But it is a scenario that is very difficult to predict. Investors could just as easily run for American assets, pushing treasury prices even higher (and yields lower). In this case, as long as we can keep opinion in our favor, we may very well be the savior that will keep the global economy from going completely down the toilet. (If you look to China to be the strong one, think again, they are a fast growing economy, but fragile just the same. Their government has studied and tried to learn from the mistakes of Japan, but they are relatively inexperienced in managing such an economy. There are a lot internal stresses, particularly inflation, and the recent issues within Foxconn have clued us into the plight of the Chinese laborer). Sooner or later though, Europe will have to deal with the question of unification, in order to save their currency. You can understand their issues when you consider that the two front runners for control of a unified Europe, France and Germany, both tried conquering Europe through military means in a not too distant past. (In case you forgot, in the case of France it was under Napolean).

    I would expect a future sell off in treasuries---but barring any sovereign debt crisis, I would expect it to be an orderly sell off of the inflated prices, with capital most likely moving into equities, benefitting the stock market. We are already seeing short-term rates rise, but this is in part due to the Fed’s latest strategy, which should help shift short-term debt into medium term maturities.

    Gold is overvalued based on fundamentals. It recently provided a great opportunity to short, but that opportunity is over for now and as long as it continues higher and holds onto support, now is the time to hold gold. If you think gold is going to climb while all the other markets collapse---don’t count on it. The best scenario for gold is if Europe got back on its feet, and the dollar was toppled as a reserve currency. The people that are extremely bullish on gold are forgetting that it is a market too----just like land was a market in Japan during the 1980’s.

    When I have time I will write about my longer-term expectations for America. We are heading towards some major changes. The Occupy Wall Street Movement is a reaction to these changes, and if they don’t do their job, we may not like where capitalism is evolving too. Unless of course our debt gets the better of us—that may very well be the end of capitalism.
     
  7. midgardsun

    midgardsun Senior Member

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    Thanks for this, Ill finish reading later:)
     
  8. Dude111

    Dude111 An Awesome Dude HipForums Supporter

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    I have no doubt that VERY MUCH they are involved! (Like they try and control the whole world,its quite sad and disgusting)
     

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