How the U.S. Financial Crisis Resembles Japan’s 'Lost Decade' - And How to Play It, Part II

A "Lost Decade" doesn’t have to translate into lost profit opportunities.

As the global financial crisis continues to escalate, the United States is increasingly facing the prospect of a long malaise that could easily eclipse Japan’s Lost Decade of the 1990s in both duration and depth.

And history shows that such periods can be the worst for investors to navigate - especially when they follow a record stock-market run, such as the all-time-highs that U.S. share prices reached last fall.

In the United States, for instance, the Dow Jones Industrial Average hit 381 on Sept. 3, 1929, a record pinnacle achieved in advance of both the Great Crash and the Great Depression that followed - and a level that wouldn’t be eclipsed again until November 1954 - more than 25 years later.

From the Great Crash, fast-forward 60 years, to 1989 Japan. On Dec. 29 of that year, the Nikkei 225 Index topped out at 38,957.44, before closing at 38,915.87. By the following September, stock prices had nearly been halved - and there was still much more bloodletting to go. (Despite several subsequent rallies up over the 20,000 threshold, the Nikkei ultimately bottomed at 7,830 in April 2003. It closed yesterday - Thursday - at 12,887.95, still down 67% from its trading high 19 years ago).

The fallout from Japan’s slow motion, stock-and-real-estate-market meltdowns was incredible. By early 2004, Japanese houses were selling at 1/10th their peak value, and commercial real estate was selling for less than 1/100th of its record highs. All told, an estimated $20 trillion in stock and real estate wealth was vaporized (although one could easily argue that the peak values weren’t real to start with).

That’s scary stuff, especially because many experts fear the U.S. version of the Lost Decade that’s to follow could be much worse. After all, the U.S. financial crisis is much, much bigger, and the resultant malaise is arguably going to take much longer to work through.

Let’s look at some of the some of the profit plays that will allow investors to sidestep a long U.S. slumber - and profit just the same.

1. Miss the Market Meltdown: The Dow closed at an all-time record high of 14,164.53 on Oct. 9 of last year. With yesterday’s 207-point rally, the Dow closed at 11,446.66 - leaving the 30-stock blue-chip index down 19% from the October record, leaving it right on the doorstep of a bear market.

But what if things were to get much worse? For the Dow to match the Nikkei’s wrenching decline of 67%, it would have to drop all the way down to 4,574.29 - an area it hasn’t seen since the first half of the 1990s.

Will the Dow drop that much? Probably not.

But it doesn’t hurt to hedge. That brings me to a key point: There’s a big difference between "diversification," which most individual investors equate with "protection," and actual "hedging," which is part of an investment-protection package that professional traders employ. If we believe a market poised for a real fall, we want to hedge and find an investment that’s going to go up in value while everything else is going down.

For us, that investment is the Rydex Inverse S&P 500 Strategy Fund [RYURX]. RYDEX URSA is a so-called "inverse fund" that’s designed to profit as the Standard & Poor’s 500 Index declines in value. In that way, it complements our other holdings by providing some portfolio stability.

As Money Morning Investment Director Keith Fitz-Gerald says, hedging is such a compelling strategy because financial studies demonstrate that "even though broad sections of the markets may decline over time and our portfolios with it, we need only have a small section permanently hedged at any given time. The reason is that, by having a small portion of our assets (5%-10% or less) earning above-average returns, our overall returns are far higher over time."

2. Gold Isn’t Just for Hedging Anymore: Mention the word "stagflation" to anyone who worked and invested during the 1970s, and I’ll bet you’ll actually see that person physically shudder at the memory. Stagflation - the double-whammy combination of stagnant economic growth and high inflation - was thought to be an impossibility, until it showed up during that decade, leaving ruin in its wake.

But for our purposes, no matter whether we’re looking at stagflation or inflation, one thing is clear - we’re looking at higher prices. And when prices are on the upswing, gold is the one investment you certainly want to own.

Then there’s also the whole "Lost Decade" outlook for the U.S. economy. In a misguided attempt to slowly deflate the asset bubbles it created with a years of overly expansive monetary policies, the U.S. Federal Reserve is now keeping interest rates at artificially low levels - gambling it will still be able to launch a successful counterattack on inflation later on. What’s more, the central bank also has made the ill-fated decision to diversify into the "bailout business" with its intervention in the Bear Stearns Cos. (BSC) and Fannie Mae (FNM) and Freddie Mac (FRE) debacles.

The artificially low interest rates will continue to punish the U.S. greenback, sending it lower and causing inflation to accelerate. And the trillions in debt the U.S. government’s balance sheet will take on from the Fannie and Freddie bailouts certainly won’t help.

In addition to the bleak-sounding inflation-case for gold, there’s also what I like to call the "wealth case" for the "yellow metal." As the consumer classes in China, India, Latin America and Emerging Europe grow in both breadth and depth, their ability to buy luxury goods will finally intersect with their desire. And gold will be a major beneficiary.

But how best to play it? There are mining companies, bullion, coins and even jewelry. Everybody has his or her preferences for gold investments, including us. We prefer the SPDR Gold Trust Exchange Traded Fund (GLD). There’s no delivery risk, it’s liquid, and you can buy and sell easily through any online brokerage.

Oxford Club Investment Director Alexander Green prefers the Market Vectors Gold Miners (GDX) ETF. Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment. 

Finally, there’s our favorite gold-mining stock: Barrick Gold Corp. (ABX). Barrick is a Toronto-based company with mostly North American production, though it also has properties in South America and Africa, and some copper and zinc add-ons. It has a $41.4 billion market capitalization, so there’s plenty of liquidity. By gold-mining standards, this company has a substantial presence, is reasonably valued, and has little political risk. The company also recently sent some very bullish signals to the market and reasserted its confidence in meeting its 2008 output target of up to 8.1 million ounces of gold.

3. Profit From the New Trading Blocs: A decade ago, professional traders would tell you that "when Wall Street sneezes, the rest of the world catches a cold." There’s one major difference between the world today and the one that existed back in the early 1990s when Japan skidded into its Lost Decade: Globalization has today finally taken hold, and isn’t just some concept to be talked or hypothesized about, as it was back when Japan’s overheated economy threw a rod back in 1989.

That will make a huge difference, for it means that global growth can continue - even if the U.S. economy stalls and falls into decade-long slumber. One of the biggest developments is the emergence of new trading blocs - that don’t include the United States. At the center of most of them: China. The biggest of these new blocs is undoubtedly China and Japan, an immensely powerful alliance that might develop into the United States’ military equal, in addition to its economic superior. It’s ironic that Japan - which suffered through its own Lost Decade - would be one of the antidotes for investors seeking to escape a looming U.S. downturn that has the potential to be equally as devastating.

Investors will want to uncover profit plays from this deepening relationship, and would do well to look at major Japanese companies that already are shifting production from their high-cost home market into lower-cost China. One such company is Japanese heavyweight Toshiba Corp. (TOSBF.PK).

This major manufacturer of computers, medical electronic equipment and telecommunications systems has developed a highly integrated manufacturing capability in China, enabling it to synergize its technical innovation with China’s highly skilled, low-cost workforce. Toshiba’s shares are trading at about 22 times earnings, reasonable for a high-tech company - especially one that’s poised to capitalize on such new-technology markets as flat-panel televisions and solar power.

For investors, one of the biggest profit opportunities will be with companies that are helping China build out its still-archaic infrastructure and build up its consumer sector, which is why such companies as solar-ceramics maker Kyocera Corp. (ADR: KYO), and trading giant and independent power plant developer Mitsui & Co. Ltd. (MITSY), are logical choices.

China also is establishing trading blocs with Africa and the Middle East.

For a broader exposure to the Chinese through a high-quality mutual fund, investors should carefully consider the China Region Opportunity Fund [USCOX], managed by the San Antonio, Tex.-based U.S. Global Investors (GROW), itself not a bad stock to consider.

4. Invest in the Global Infrastructure Boom: Global consultant Booz Allen Hamilton recently estimated that the world’s water, power and transportation systems would require an outlay of $40 trillion to bring them up to modern standards - an amount equal to the value of all the world’s stock markets combined.

Some of our favorites plays in this area include raw-materials suppliers, such as miners Rio Tinto PLC (ADR: RTP), BHP Billiton Ltd. PLC (ADR: BHP) and Companhia Vale do Rio Doce, now referred to only as Vale (ADR: RIO).

One of the very best plays may be ABB Ltd. (ADR: ABB), the Zurich-based giant that’s a leading global provider of power-generation systems and components. With a market value of roughly $63 billion, ABB is one of the real heavyweights in a sector that includes such rivals as America’s General Electric Co. (GE) and Germany’s Siemens AG (ADR: SI). Over the last several months, for example, ABB has announced deals of $233 million in Korea, $74 million in India, $170 million in the Sweden-Finland region, $53 million in Dubai, and $70 million in China, to name just a few.

Of course, you can also buy individual engineering and construction firms, or invest in the broad holdings of the PowerShares Dynamic Building & Construction ETF (PKB).

5. The Middle East Isn’t Just About Oil Anymore: Indeed, thanks to the petro-gusher dollars so many Middle Eastern countries were able to amass, and to the government-controlled sovereign wealth funds that now control that capital, these same nations have been able to transform themselves into major global financiers. There aren’t a plethora of plays here, yet, but there will be. For right now, consider the T. Rowe Price Africa & Middle East Fund [TRAMX], which carries a $2,500 minimum investment, and the SPDR Standard & Poor’s 500 Emerging Middle East and Africa (GAF) ETF, which tries to closely match the performance of the S&P®/Citigroup® BMI Middle East & Africa Index.

6. Head South of the Border When You Consider the BRICS: An acronym for Brazil, Russia, India and China, the BRICs are among the fastest-growing economies in the world. We’ve covered China, but Brazil bears more than a mere mention. The main play to look at here is Petroleo Brasilero SA (ADR: PBR). Latin America’s appetite for energy is nothing short of ravenous. As of now, three-fourths of the country’s electricity comes from hydroelectric power. That figure will be higher in 2012, when the region’s largest hydroelectric project, the Santo Antonio Dam, will begin producing electricity. Santo Antonio is the first of three Amazon River dams the government hopes will decrease Brazil’s need for fossil fuels. Until then, however, Brazil’s state-controlled oil-and-gas company, Petrobras, will continue to meet the demand.

Read Part I

Original post

Comments

[Emerald:]

As a long term investing strategy this article is ok. However, do not believe that Asia has decoupled from the U.S. and Europe. It's slowly changing, but all production, shipping, use of raw materials and finished products are intertwined in global trade. As the U.S. slows down dramatically, Europe, then Asia will surely follow. Caveat emptor!

2008 Jul 18 04:49 PM

[investor2:]

Mr.Patalon, interesting articles. But when comparing Japan's "lost decade" to our own situation at present, aren't you leaving out one very important difference? Technology. Last time I checked the US was still the leader in Tech. Who else even comes close? And that can make a big difference as it fosters dynamic innovation and advances in almost all areas and industries.

Of course, if we don't start exploiting our own bountiful natural resources PRONTO and start on the road to energy independence NOW, all bets are off. And your doomsday scenario may very well come to pass for the US. That would be a pity but I don't think our politicians get the urgency.

2008 Jul 18 06:38 PM

[fatcat:]

I would be concerned about the stability of the internet brokers to pay off in bad times.Some have already had troubles,if things got bad enough,your investments could evaporate on-line!

How would you protect physical gold? I have a really nice safe,but if someone had a gun in my face,I would open it....Take it to the bank and who knows....You tell me!

2008 Jul 18 07:59 PM

[Alex Filonov:]

That's not even funny. Great Depression was about deflation. Japanese Great Depression was about deflation. What does it have to to with inflation?
Global infrastructure boom? With US in depression? Wrong on both sides:
1. If US, a buyer of last resort, isn't buying much anymore, who is going to develop infrastructure?
2. If they still do, where are they going to buy heavy machinery? CAT, DE, and above mentioned GE are still American companies! As well as hundreds other names.
As for gold, it was, is and always will be a tool for hoarding. Has nothing to to with investment. And way too much dependent on demand from developing world. Still not clear how situation in Vietnam (ban on gold import) and India (drop of gold imports in the last several months) impacts gold market. BTW, India consumes, at average, 30% of gold.

2008 Jul 19 01:19 AM

[johngonole:]

I think his overall point is that we need to decouple from the dollar. Foreign investments, gold, etc will hedge us against a falling dollar. Also high monetary induce inflation can lead to stagflation or worse depression. Its like a standing wave. As time goes on the waves get larger and largers. We've been on the up wave as monetary supply increases but so have debts. As debts contract we will have deflation. His point is that the FED will try to avoid the impending massive quick deflation by inflating our currency further. This will continue to put pressure on commodity prices and will extend the amount of time it takes the country to move past this slow down. The new increase in monetary supply will most likely go into commodities or paying down debt...or banks recapitalizing. In the long run the monetary policies may work however the ups and downs are going to be more violent versus just letting the markets work because the FED can't control how the new dollars are spent or used. I'm not a pro when in comes to monetary policy but the whole thing stinks to high heaven if you ask me. We actually need a currency that super slowing gets more valuable. This will encourage good investment versus the investment environment we have today where everyone is taking on huge risky loans cause they know this is the way to play the system....bailouts, bankrupcy protection, etc...

We'd be better off without the Federal Reserve or fractional reserve banking. What good is a currency who's value fluctuates the way ours does or is doing now. Speculation is all that it left. Too many investments depend on ever diluted currency.

It seems to me that our monetary policy boils down to protecting the nation from deflation be ever increasing monetary debt. problem is interest must be paid on that debt. Most of the debt is increasing in the form of government. So we are socializing risk which results in more bad debts...and they cycle could go on till the taxpayers own nothing.

2008 Jul 19 03:47 AM

[SW Richmond:]

To All Gold Bashers:

Let's not confuse "commodity prices" with "dollar-denominated commodity prices." The unique aspect of the current situation is that the USD is the world's reserve currency and (currently) serves as a price gauge for oil etc. The pressure on the greenback is astronomical. Each mini-crisis we have seen (November Libor Lockup, Bear Stearns, Fannie/Freddie) have caused an observable crush of the dollar in real time until government intervened. If you are buying things will dollars, or holding assets in dollars, your future is dim, as the government is running out of ammo. USDX has been on life support since November. The coming wave of bank failures will kill it dead.

Was 70's "Stagflation" a dress rehearsal for an "Inflationary Depression"? Ask the British is they enjoyed their displacement of Sterling as the world's reserve. What events transpired during that transition?

Does the US have a unique opportunity as a technological leader? Absolutely. Will our brilliant political leaders get out of the way and let us take advantage of it? What do you think? And if it happens, who will own the companies that do it? Us? Or the SWF's?

Either the market is free, or it isn't. If decisions could be made in an environment free of regulatory cronyism we could thrive. US Government has become to large too allow genuine competition, which includes failure. A lost decade it is then.

At least.

2008 Jul 19 08:02 AM

[Edward Ulys...:]

The commentary and the comments are very well thought out and interesting. I'd just like to share some notes from the past:

If [further] Inflation Comes
by Roger W. Babson 1950 edition Copyrighted 1937

Quote [page 113]
If the country goes into radical inflation, with any shortage
of commodities, then commodities in storage for
speculation will be confiscated, the same as our gold was
confiscated in 1933.

Quote [page 114]
My inclinations are to follow the advice of a friend of mine,
who, on November 6, 1940, said as follows:
"Roger, the election yesterday has many meanings,
but one thing is certain; anyone who has a nickel
had better keep his mouth shut during the next four years!"

Quote [page 115]
NO INDUSTRY PROVIDES A SAFE INFLATION HEDGE.

Hope this is of some benefit.

2008 Jul 19 09:18 AM

[secmaven:]

There is only one way the massive debt of the US government can be liquidated....inflate it away by creating a worthless dollar. After which we have a 100:1 or maybe a 1000:1 reverse split on the old dollar into the new dollar.

2008 Jul 19 10:51 AM

[andyn:]

I think OIL is the new gold. Even though its volatile, it is still in an uptrend for many years to come.
There are many factors to keep it going up:-
1. As the dollar value keeps depreciating due to the Fed's massive liquidity, both OIL and gold goes higher.
2. But oil is better since its a resource which is consumed and cannot be reclaimed unlike gold which has been accumulating over centuries.
3. Demand for oil is still increasing from the developing nations, whereas supplies are depreciating a fast rate. (Read "Twilight in the desert" about the issues with Saudi oil fields which supplies 25% of the world's oil)

The only thing that would break oil is some alternative energy source... but that is still way out in the future.

I think OIL stays high with occasional spikes and drops.
Buy USO as well as OIH and sit back and enjoy the ride.

2008 Jul 19 10:51 AM

[Norevenand:]

An amateurish article. At best.

Comparing a technological juggernaut like the U.S. to a technology follower like Japan is farcical. The U.S. military complex is also the largest on the planet. When something goes wrong somewhere in the world and battleships are needed, who ya gonna call? Japan? The whole basis of the article falls apart like a paper house in the face of a gale.

The USA is also still the largest marketplace in the world. No one even comes close. Everyone sells to the United States. When the U.S. stops buying, everyone suffers. Decoupling isn't even close to coming about in the next 5 decades so forget about the USA becoming an afterthought any time soon.

Know this: The U.S. will go through a slowdown for the next 3 years. It's inevitable and unavoidable. There will be at least two major bank consolidations in the next 18 months. The financial system won't be allowed to fail and U.S. financial institutions will get to raise even more capital from global investors. You know why?

The world can't afford to allow the U.S. to fail. Without the U.S., the world becomes a more dangerous and unstable place. Everyone and I do mean everyone needs the U.S. to remain stable and steady.

2008 Jul 19 11:04 AM

[Kelly Liebe...:]

The biggest problem I see is that the man in the street who has their money in the market or carelessly leaves it sitting in the bank, or lives paycheck to paycheck for the most part, are the true drivers of the economy in the long run.
All the manipulation of markets, printing of new dollars, charts and forecasts will fail when that regular guy gets nervous. When he has spent his credit limit and can no longer afford to fill up his Toyota, or pay his sub prime mortgage or pay for food for his 2.4 kids - this gig is up.
That time is here. Look out the window, take a drive to the suburbs.. Not the ones we live in... the one a few miles away. That is the pulse of this country and we are about to have a heart attack.
The average Joe isn't going to make it. They won't be buying oil, or food or clothes unless it is with some new fangled food stamps. The slightly more than average Joe who may have some retirement money left in the market or in the bank will bail and buy the only thing he knows. Gold.
Most of the world just doesn't read this stuff....that's what you have to remember when making your own play....

2008 Jul 19 11:16 AM

[Leif Peterson:]

This is wholly true. However, there is really no safe haven for hedging and being *totally* removed from the ever-reaching tentacles of the dollar. Worst case is that having a cache of gold at home would be confiscated (remember, I said "worst case"). In the 1930's, the US monopolized the gold price and set it at something like $23/Oz. Certainly, if you think you are fully hedged in gold and the price will sky rocket, and 2-3 years from now you can cash in and will be on "easy street," you are probably making bad assumptions. If things get really bad, there will be frag everywhere, and you will need to be able to side-step a lot of landmines. Developing a good strategy for gaining financial and economic intel (self-study) will go a long way, and in spite of the above being in gold now at the 20-30% level is a very good idea.

Investing in European equities (e.g. growth stocks) will be profitable, as well as in Brazil and/or Japan. It is possible that telecom companies (cellular providers) in Japan (DCM, NTT) and EU (DT, TEF, ERIC, NOK, VOD) will do well due to explosive population growth, popularity of cell phone usage, and little dependence on oil. (For example, it is not expected that Verizon has huge transportation costs requiring gas/oil expenses, of for buying construction/building materials -- all of which are hinged to commodities whose prices are up 50-78% in the last year).

Regarding a free economy (free commerce), it would be logical that the markets operate perfectly like a well-greased machine. In addition, you would expect that each new day, on average, brings growth to a variety of sectors. But we now find ourselves amidst a system where there is lost trust where there are players who care and those who just don't care. The Fed is almost at the point of saying "uncle," so you need to do you own due diligence on what to play next.

For gold, you can always purchase bullion on line with a credit card from the Perth Mint, in Australia -- if you don't have a way to purchase via your brokerage account or transfer funds electronically . Perth is owned and backed up 100% by the Australian government, and gold owned there can't be confiscated. (I actually have never purchased at Perth -- but it is a hip-pocket move that I know of if I see things going poorly). There are risks with owning bullion through etf's or at home, so be aware of the Perth route. Don't store gold in a bank safety deposit box, since the banks took ownership of boxes when gold was confiscated by Presidential Act in 1933 (www.the-privateer.com/...). You can own gold in the form of historical coins (Eagles, Canadian Maple Leafs, Austrian Philharminics) and these *likely* would survive , but watch out for Krueggerands, since I believe they're not protected. Last, there is no law that states you can own gold bullion in the US, since owning gold is a privilege, not a right. You can gain some extra insurance by owning pre-1964 silver coins ("poor-mans gold") if you need to barter for something using US currency. At this point, paper dollars wouldn't be worth much. All of the above regarding gold and the extreme doom & gloom is anyone's guess on what might happen in the future. As you retire, and bring your off-shore profits back into the US, you will be supporting your local economy -- so *anything* you do for asset protection will be meritorious service.

2008 Jul 19 12:31 PM

[JOSEPH FOSTER:]

I DO NOT AGREE WITH THE COMPARSION OF JAPAN AND USA RECESSION.
THE US HAS VAST RESOURCES OF COMMODITIES, OIL, GAS, FOOD,
ETC ETC. FOREIGNERS HOLDING LARGE SUMS OF DOLLARS ARE ABLE TO EXCHANGE THESE DOLLARS FOR A VAST ARRAY OF GOODS AND SERVICES THAT IS PLENTFULLY AVILABLE IN THE US.
AS TO DEFACING OF THE DOLLAR, ALL COUNTRIES OF THE WORLD DO THE SAME, UK, EUROPE, RUSSIA, ETC ETC.
AN EXAMPLE I BOUGHT A HOME IN CALIFORNIA IN 1974 FOR $125,000 TO DAY PRICE $2,000,000 WITH CURRENT CORRECTION IN PROPERTY VALUES LET SAY IT IS NOW 1.7 MILLION.
I DO NOT OWN THE HOME NOW AND HAVE LONG AGO SOLD THE HOME.
I AM NOT AN ECONOMIST, THE INCREASE IN THE PRICE SETTING ASIDE THE SUPPLY AND DEMAND CONCEPT IS DUE TO THE DOLLAR LOOSING ITS PURCHASING POWER.
THE SAME HOLDS TRUE WEITHER THE HOME IS IN THE UK, FRANCE, GERMANEY OR ANY OF THE DEVELOPED COUNTRIES.
THE SMART INVESTOR CANNOT CHANGE WHAT THE POLOTICIAN MAY DO OR NOT DO AT BEST HE MUST ADAPT HIS INVESTMENT
TO THE DIRECTION OF THE TREND, TO DAY IT IS OIL AND GAS.
REAL ESTATE WILL ALSO REMAIN THE BEST INVETMENT FOR THE LONG TERM.
WHEN THE DUST AND STORM BLOWS AWAY MANY SMART INVETORS THAT ARE BUYING AMEICAN COMPANIES ON SALE WILL
MAKE A FORTUNE.
JOSEPH FOSTER A GLOBAL TRAVELLER AND INVESTOR.

2008 Jul 19 01:10 PM

[Kunst:]

investor2: "Last time I checked the US was still the leader in Tech."

Keep a careful eye on that. We have outsourced our manufacturing, at increasingly higher levels (e.g., design). Along with that goes a lot of technology. Add our educational crisis (more than half of US engineering/computer science graduate students are foreign nationals) and the blithe assumption that we will always be the tech leader is very risky.

secmaven: "There is only one way the massive debt of the US government can be liquidated....inflate it away by creating a worthless dollar."

Sad but true. If we were ever going to really pay off this debt, we would never have let it get so large. We are like the person who knows bankruptcy looms and figures why not party until the hammer comes down.

Norevand: Such fatuous nonsense is amazing. Do you really think the $1 trillion we spend annually on "defense" is a good investment? A lot of the world thinks the US makes the world "a more dangerous and unstable place."

"The world can't afford to allow the U.S. to fail." We'll see about that. Maybe the world is getting tired of propping up the U.S.

2008 Jul 19 01:20 PM

[Pauly B:]

When I see people like Warren Buffet in the headlines buying companies in times like these that is telling me something.

Sometimes one has to get the stock price out of ones head and look at the intrinsic value, earning power, and who is running the company. One also has to get the political, CNBC noise out too.

When you look at a stock chart 3 years from now and say gee, I wished I bought it down there, guess what, people like Warren did.

If you pull up a chart on the S&P from 1930 on I think one would see that that S&P outperformed gold.

I bet Warren looks at that long term chart too and says the risk reward isnt too bad in times like these to make investments in companies he is interested in. Maybe thats why he has outperformed so many investors.

2008 Jul 19 03:26 PM

[Mark McHugh:]

JOSEPH FOSTER - Caps lock off, spell check on, please.

2008 Jul 19 08:11 PM

[Ray Lopez:]

One thing about Japan-- it is not like the USA because they don't have a consumer culture (though, strangely, their percent of the economy that is services is still pretty high). What this means is this: as interest rates drop in Japan, people save more, not less, the opposite of the USA. That's why interest rates can go to zero and people still give their money to banks in Japan, and don't invest in stocks nor consume their savings. A big problem that has been remarked about in the past by academics. So I don't think Japan = USA.

2008 Jul 20 03:06 PM

[beans:]

I see so many dire predictions lately that it leads me to believe many people actually want these horrible things to happen.....then again FEAR is a great selling tool....especially in the online editorial market!

Be careful what you wish for....it may come true.

2008 Jul 20 03:09 PM

[Kint:]

I don't follow.. in the article referenced, it says: 'Japan did nothing. It refused to acknowledge the breadth and depth of its problems' But when talking about the US, it says: 'This time around in the United States, the Fed opted for the "prop it up" pathway instead of the decisive route' I'm not following this at all.. so by propping up Bear Stearns et al, the Fed isn't acting decisively?? Clearly, the Fed is acting decisively, by keeping interest rates low. You may not agree with their methods, but they are acting decisively, unlike Japan, which didn't act decisively. In fact, Japan did nothing. Your article makes no sense. You're suggesting that the US gov. should do nothing, and let the big banks fail, which would, in fact, create a 'lost decade.'

2008 Jul 20 06:26 PM

[Puddle Jumping:]

Hee Hee! You almost had me. I was almost a believer, and then I read the article. If I understand this correctly, your solution for Japanese investors in 1989 was to buy gold, foreign assets, and hold them until the year 2003? While they would have lost less money this way, they would have watched gold prices fall below $440 an oz and stay below $440 an oz until 2003. Considering that gold is not money, has no properties of money, and is classified as a commodity, it would have been much wiser for Japanese investors to place their money in the bank and earn a 1% dividend each year. At least they were beating deflation that way (sounds like a rigged match up to me).

OK, so Japanese investors decided not to buy gold, but to invest their money overseas in other developing markets instead of their own (come to think of it, that is how the carry trade started). If we go back and look at the IMF reports showing growth in money supply in many developing markets, it is often far quicker than developed markets. Inflation is also higher in such markets. Cherry picking winners with perfect hindsight is far easier than predicting winners over the next 15 years. However the carry trade idea is viable under such conditions.

By far, my favorite quote comes from the comments section, lep July 19th.
"Investing in European equities (e.g. growth stocks) will be profitable, as well as in Brazil and/or Japan. It is possible that telecom companies (cellular providers) in Japan (DCM, NTT) and EU (DT, TEF, ERIC, NOK, VOD) will do well <<<due to explosive population growth>>>, popularity of cell phone usage, and little dependence on oil."
Demographic reports over the past decade or two have been discussing how Japan and developed Europe have birth rates below sustainability indicating population decline over the next several decades.

Fear-monger reports like these are fun to dissect. The authors clearly have not done their homework and have cherry-picked their supporting arguments. It is best to investigate the 'science' behind any such bold claims. Are there any other fixes to higher prices besides higher prices? Substitution effects are real and substantial over time.

2008 Jul 20 06:29 PM

[Did U Think...:]

We all know the US markets are going to crash. It may be that no one solution works for all cases. Own physical metal in case we replay Weimar (and we are going in that direction quickly with the likely nationalization of fannie and freddie). At the same time, short the market and by deep out of the money puts in case they save the USD and "just" end up with a deflationary crash like 1929. If we get a deflationary depression as some suggest, you win coming and going with this strategy.

But I would not go long foreign anything right now. We own the worlds reserve currency. As we crash, they crash by association until everyone cuts the USD out of their lives. We are everywhere in everything so that could take a lot longer to happen than most people think.

2008 Jul 21 02:00 AM

[drpaul1139:]

Warren Buffet does not know everything. Everything that Warren Buffet knows is based an outdated corporate model of greed. Yes he may be able to shift faster than most to the new corporate model when it comes. But he does not know what this new model is and the impact that it will have in the short term on his holdings. All he will know is that his holdings and the US corporations, as he knew them are disappearing under his nose.

What the readers need to be aware us as the someone said above is that the US is not producing the counting talent and others such as the BRIC are poised to combine against the US, UK and Europe with better designed corporate structures better designed mortgages instruments, and totally elimination of the credit card! No one in academia is challenging the fact that these base financial instruments are flawed in favor of the few.

Have you seen that corporate and commuter jet that Brazil produces for example? When was the last time that you saw an advertisement from Brazil asking for US investments or help never because they do not need the US. Have you seen the laws in the US that protect the few entrenched with such terms as qualified and unqualified investors? Have you seen a justice department that virtually put out of business about 500 US corporations since 2002 and lock up about 1,500 risk takers for 5 to 100 years based on things that do not even exist in Japan, German, and even the UK? Ok yes we are a country of laws but whose laws?

Spending $1 trillion on hard defense is not the solution! When the soft defense of education is lacking! Do you not think that there is something strange about a mortgage instruments where so must goes to interest in the short terms? Where credit cards charge over 20% routinely? The laws of physics are not for physics alone! These laws can be applied to the business world as well and they have in a few labs.

The amount that a country spends on defense is proportional to its fear? We are afraid of a paper tiger. Not to say that villain’s are not in the world and they are. But not proportional to $1 trillion while the mortgage market goes to hell in a hand basket!

Do you know that there are more fearful people in the USA than in the rest of the world combined? The fear of losing my house and the fear of losing my job…$1 trillion in defense is not going to eliminate this fear!

Only the simple redesign of just three financial tools (hopefully from the US) will change this…

2008 Jul 21 05:13 AM

[Kunst:]

beans: "I see so many dire predictions lately that it leads me to believe many people actually want these horrible things to happen"

When you tell a friend that out-of-control spending is going to wreck his life, does that mean you want it to happen?

2008 Jul 21 04:09 PM

[huskerbob:]

Puddle Jumping- Gold is not money? Maybe you should read the constitution. The U.S. of A. still mints gold and silver coins. If you haven't noticed, these are much more effective as a store of value (one of the traditional definitions of money) than our federal reserve notes. You can fill your gas tank with the same number of silver coins as you could 10 years ago. Try doing that with federal reserve notes!
The author's recommendations seem to make sense: gold as an inflation hedge and investment, and try to find investments which will grow along with the economies in other parts of the world, as the U.S. economy could be stagnant for some time.
Is that fear mongering or prudent advice? As we have finished with the biggest economic boom and longest bull run in our history, is it fear mongering to believe that we may have a lengthy cooling-off period?
Hasn't consumer spending been the engine of our economy? What are consumers going to spend now that credit is contracting, and with our savings rate less than zero?
As for gold, about 1.5% of investment dollars are in gold right now. At the height of the ugliness in the late 70's, gold had captured closer to 25% of investment dollars. This could happen again because people recognize gold as a store of value, the definition of money.

2008 Jul 21 07:17 PM