TLDR: The market is about to likely crash, in a much needed and healthy correction of capital placement in various industries and businesses. Why? Look no further than the Japanese Stock Crash of 1989, and see its similarities.
In 1988, Japan was on the verge of becoming one of the worlds greatest economic super powers. Its monetary policy had allowed for historically low interest rates and investors had created a housing bubble caused by liquidity. Japan's economy was a prosperous tank, and nothing seemed to be slowing it down any time soon (despite cries from numerous, increasingly impatient market gurus that the opposite was true.) Companies grew, exponentially, without the innovation or competition to match such growth. Inflation was at an all time high, and the housing market was completely inaccessible to young people (sound familiar?) In fact, the economy was so well, that Japans index, Nikkei, saw gains of ~ 30% year after year -- 5 years in a row (A total of 900% in the previous 15 years!) At this point in history, Japan was the leading manufacturer for new innovations in the tech world (Walkman, VHS, CD's, DVD's, INSTANT NOODLES, all from Japan). This boom in emerging new tech was clearly reflected in the markets. In fact, at its peak in 1989, Sony casted one of the largest acquisitions ever! The company paid $3.4 Billion for Colombia Pictures, despite have little earnings. This was move was out fear and speculation, as Sony wanted an edge on its competitors in the film tech world (Comparable to the historic Microsoft/ Activision acquisition perhaps?)
History shows that inflation is great for equities, until the government is cornered and has to take it seriously!
That is exactly what happened. This story was short lived, as it all came crashing down in 1989 and 1990. In 1989, Japan had elections and switched its form of power. A new political and economic policy entered, and when this new administration began tightening its policy to a more conservative standard (to fight ever rising inflation), the markets felt it. In just two short years, Japans speculative Nikkei market came crashing down 60% (it still hasn't fully recovered at 40% from its all time high, 30 years later.) Investment firms and corporations who used their capital to speculate in investments (which the public assumed would not lose their value) were forced to exit their equity exposure and risk at much lower prices.
Simply put, shareholders and venture capitalists had too much faith in these emerging markets and newer systems. Who could blame them? The past several years, the market was outperforming any investment in recent times. However, they were so comfortable and prideful, they had forgotten the risk of high rising equities and investments (this risk was compounded by greed, causing excessive and easy margin borrowing. We'll get more into this later, in another post.)
So, what is the lesson and how can we learn from this to prepare?
Just ask the Japanese. In 1998, Japanese technology was booming so much, it caused a surge of euphoria that investors did not want to miss out on. This euphoria compounds until it can no longer be maintained, confidence dwindles, and the market is hit. They've learned the lesson that in times of high deviation from the mean, it's important to exercise a healthy level of caution. This can be done by investing in real cash-flowing investments that have stood the test of time (commodities, land, gold, to name a few) and by sitting on a nice stash of cash (although, be careful, INFLATION!) This way, you can deploy your cash when the market is at a discount and become a gazillionaire. (I'll touch base on other ways you can make outstanding profit in a potentially bearish economy, in another post.)
As always, this is just a historical example. History never repeats itself, but it often rhymes like a rapper. The conditions we are in today are different in many ways, but by finding the similarities and drawing parallels, maybe we can prevent ourselves from being turkeys. (More on turkeys in a future post)
In 1988, Japan was on the verge of becoming one of the worlds greatest economic super powers. Its monetary policy had allowed for historically low interest rates and investors had created a housing bubble caused by liquidity. Japan's economy was a prosperous tank, and nothing seemed to be slowing it down any time soon (despite cries from numerous, increasingly impatient market gurus that the opposite was true.) Companies grew, exponentially, without the innovation or competition to match such growth. Inflation was at an all time high, and the housing market was completely inaccessible to young people (sound familiar?) In fact, the economy was so well, that Japans index, Nikkei, saw gains of ~ 30% year after year -- 5 years in a row (A total of 900% in the previous 15 years!) At this point in history, Japan was the leading manufacturer for new innovations in the tech world (Walkman, VHS, CD's, DVD's, INSTANT NOODLES, all from Japan). This boom in emerging new tech was clearly reflected in the markets. In fact, at its peak in 1989, Sony casted one of the largest acquisitions ever! The company paid $3.4 Billion for Colombia Pictures, despite have little earnings. This was move was out fear and speculation, as Sony wanted an edge on its competitors in the film tech world (Comparable to the historic Microsoft/ Activision acquisition perhaps?)
History shows that inflation is great for equities, until the government is cornered and has to take it seriously!
That is exactly what happened. This story was short lived, as it all came crashing down in 1989 and 1990. In 1989, Japan had elections and switched its form of power. A new political and economic policy entered, and when this new administration began tightening its policy to a more conservative standard (to fight ever rising inflation), the markets felt it. In just two short years, Japans speculative Nikkei market came crashing down 60% (it still hasn't fully recovered at 40% from its all time high, 30 years later.) Investment firms and corporations who used their capital to speculate in investments (which the public assumed would not lose their value) were forced to exit their equity exposure and risk at much lower prices.
Simply put, shareholders and venture capitalists had too much faith in these emerging markets and newer systems. Who could blame them? The past several years, the market was outperforming any investment in recent times. However, they were so comfortable and prideful, they had forgotten the risk of high rising equities and investments (this risk was compounded by greed, causing excessive and easy margin borrowing. We'll get more into this later, in another post.)
So, what is the lesson and how can we learn from this to prepare?
Just ask the Japanese. In 1998, Japanese technology was booming so much, it caused a surge of euphoria that investors did not want to miss out on. This euphoria compounds until it can no longer be maintained, confidence dwindles, and the market is hit. They've learned the lesson that in times of high deviation from the mean, it's important to exercise a healthy level of caution. This can be done by investing in real cash-flowing investments that have stood the test of time (commodities, land, gold, to name a few) and by sitting on a nice stash of cash (although, be careful, INFLATION!) This way, you can deploy your cash when the market is at a discount and become a gazillionaire. (I'll touch base on other ways you can make outstanding profit in a potentially bearish economy, in another post.)
As always, this is just a historical example. History never repeats itself, but it often rhymes like a rapper. The conditions we are in today are different in many ways, but by finding the similarities and drawing parallels, maybe we can prevent ourselves from being turkeys. (More on turkeys in a future post)
評論:
Last but not least, 600% growth in SPY (the U.S version of Nikkei) in the last 13 years.
-A market full of investors and lenders, almost certain that the FED can bail us out of any financial crisis.
-Highest inflation in years (and rising).
-Lowest interest rates, EVER.
-Frenzied investor spending and the exponential growth of speculation stocks based on potential earnings, not proven value.
-The tightening of monetary policy immediately after a period of unprecedented government spending.