“History Doesn't Repeat Itself, But It Rhymes”
The above quote, attributed to Mark Twain, has been used and misused to explain many things that did or did not occur and did or did not unfold according to historical precedent. A current favorite is to point out the similarities noted, thus far anyway, by superimposing the current US and European markets, beginning in 1990, with the Japanese market beginning in 1979 – the implication being that we are doomed to repeat Japan’s mistakes and follow Japan’s wayward path.
Confusing correlation for some arbitrary period of time with fact is an offshoot of what we all learned in Philosophy 101 (or if you are an economist working for the government, just this morning) as “confirmation bias” -- if you look hard enough for data that confirms your existing biases and preconceptions, you will find it in places both logical and illogical.
I’ve seen a number of these charts. The one I’ve selected I found via a Google link to surlytrader.com where the author of the article that accompanies the chart shares my skepticism for too-easy answers that lead one down the path of aping rather than critical thinking. It’s a great departure point for analysis. Click to enlarge:
Pretty compelling “evidence,” isn’t it? However, all charts are subject to “lies, damn lies and statistics.” Miscalculations and all can be designed to look better, worse or different depending upon what sort of scale one uses.
Those facile enough to base decisions on such evidence often do so just at the point at which the two begin an irrevocable divergence. And there are numerous underlying differences in the three regions: Japan was a nation of savers, while Europe’s and America’s travails were brought on by a generation of spenders. Japan’s economy was export-driven while the other two were driven by consumers importing goods and services. Japan is a homogeneous collective society, Europe and the US anything but homogeneous and only collective to varying degrees.
But there is one area in which I see a dangerous parallel. The Japanese economy, prior to and during World War II, was dominated by the zaibatsu, huge vertically-integrated monopolies controlled by Japan’s most powerful families.
The American economic consultants brought in by MacArthur effectively disbanded the most powerful of these after the war, but shortly after the occupation ended these dispersed corporations were linked back together, via mutual share purchases, to form horizontally-integrated alliances across many industries. These keiretsu companies would then supply one another, making the alliances once again vertically integrated as well. Further, in the period after the US occupation ended, the Japanese government bestowed its citizens largess upon the biggest of the big trading companies so Japan could better compete in world trade.
The major keiretsu of this post-war generation centered around one large bank, which then financed the keiretsu's member companies and held equity positions in them in exchange. One effect of this structure was to render these keiretsu too big to fail, so they looked strong. (Remember when Japan Inc. was the subject of some particularly shallow books predicting that Japan would be the world’s #1 economy by 2000?) These keiretsu became the tail that wagged the Japanese dog. Sound familiar?
In the US and Europe, the large banks didn’t need member companies to form their keiretsu; they had government regulators, bureaucrats and politicians in their back pocket instead. They could make any stupid mistake they chose to and the taxpayers were ordered to bail them out, as the average citizen effectively became members of the bank’s keiretsu -- without the benefits.
Japan still has an economy dominated by keiretsu and will have to decide whether an economy that fosters entrepreneurialism only within each keiretsu will work going forward. Certainly much innovation has come from those narrow boundaries in Japan over the years. But my money is on the far messier form of entrepreneuring found in the USA -- if only we have the courage to remove the shackles of over-regulation on small businesses as if they were exactly the same size as GE or B of A (NYSE:BAC).
Speaking of which… Who knows, maybe we have begun to catch on. The Feds recently announced that they may finally be doing what they should have done 3 years ago, prosecuting and/or suing to get some of the bankster’s ill-gotten gains, rather than throwing more taxpayers’ savings at them. Goldman Sachs (NYSE:GS) et al were shocked, shocked (!) last year when Goldman, JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), and Bank of America were chastised for using fake robosigned signatures and rubber-stamping unread documents to issue NINJA mortgages.
Now they are in mock shock yet again to hear that those of us out here in the hinterlands west of Wall and Broad might also consider it a breach of integrity to utilize robosigning to speed up the newly-profitable business of processing foreclosures without ever reading the paperwork! (Their lawyers are maintaining the previous hand-slap didn’t specifically say they couldn’t robosign foreclosures. Tell that to the folks tossed out of their homes so some banker could build a heli-pad on his back lawn.)
Looking for more evidence of a too-cozy keiretsu-type arrangement? While it is heresy for a value investor like me to even hint that Warren Buffett might be part of the Beltway In-Crowd, rather than exclusively a folksy wit from Omaha, how come our government didn’t offer us, collectively, a sweetheart 10% annual yield on GE and Goldman in 2008? Unlike Buffett, investors in the common of both companies have yet to see those 2008 stock prices and they’ve received way less than 10% a year. GE, in fact, while paying Mr. Buffett 10% a year, cut its dividend to “normal” shareholders by two-thirds -- less than six months after Mr. Buffett’s investment! And Goldman paid off its Berkshire investment this year, at a shareholders cost of $1.7 billion, including a special “early payoff fee” of $500 million.
And the beat goes on: B of A is now going to pay Mr. Buffett 6% interest (about $300 million a year) while its regular-people shareholders get 0.5%. Then there’s Administration favorite George Soros who sees US sovereign investment magically appear on his Brazilian oil properties while the same regulators that like Brazilian oil berate any US firm that tries to help wean us from foreign oil. And on and on.
My wife and I just visited some companies I follow, as well as some clients and friends in the Pacific Northwest. Along the way, we eschewed the Interstates and wound our way through rural towns all across northern California, Oregon and Washington.
Here’s a flash for any decision-makers in DC who are still getting pay increases and benefiting from a high-year-tenure policy that is every bit as egregious as corporate CEOs' golden parachutes: it’s hell out here. Boarded-up businesses, failed restaurants, whole towns devastated by hi-jinks beyond their pale and control. But these are Americans. Rough times bring out the best in Americans. Americans have been knocked down but are not knocked out. Businesses will be re-started as soon as people see a reason to believe the deck isn’t stacked against them.
We’re a resourceful bunch and quite capable of saying, “We made a mistake electing this bunch of losers” and changing the direction in which the pendulum is swinging. That’s why I see optimism returning as November 2012 comes into clearer focus -- with Americans rolling up their sleeves and starting new businesses.
As for our investment suggestions? Well, we don’t try to catch every week’s terrifying descent or nosebleed ascent. Rather, we simply re-position as needed, most often by stair-stepping in and stair-stepping out, buying or selling only part of our position each time. We look for the primary trend in the coming months and try to be on that side of the market. We are unswayed by one week’s 1000-point whipsaw in one direction or the other. This is disconcerting to some people who think they “missed” a 1000-point move. What they missed was the nail-biting fear and short-lived euphoria that comes from this kind of trading.
Now is the time to decide what you want to own for the next leg up. If you aren’t yet comfortable looking at the individual companies in our most recent articles, you can always stick a toe in the water with broad-brush ETFs like VWO for emerging markets, EFG for developed markets outside North America, SPY or RSP for the S&P 500, IWM for smaller-cap U.S. growth companies, or RWX if you believe global real estate is likely near a bottom. We believe all are worthwhile themes to pursue...
Disclosure: We, and/or those clients for whom it is appropriate, are long VWO, EFG, RSP, and RWX.
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