If you think what happened is happening in Japan can’t happen here, think again. We are already one decade in, the US has already experienced a lost decade. The question is, will there be more than one? If you compare both at their peak (Japan early 90s and US ’07) there are some similarities and some differences. Both had nice appreciation in real estate (Japan’s was higher), both had stock market gains, both had high debt (Japan more corporate, US more household). Savings was(is) higher in Japan, their current account and unemployment was better, the US has more population growth, and the US was more proactive in policy intervention.
Regardless, both have had some nice rallies along with some nasty bear markets. Most importantly, is your portfolio prepared for the possibility (no matter how remote) of stocks being down 75% from their peak in another 10 years? Regardless of your opinion, you at least need to consider it. Charts below, Japan 7 years leading up to peak, then to present. US 7 years up to peak and to present. Both aligned with peaks.
And to answer the question in the comments about how the simple timing model would work over this period – it beats buy and hold by over 5% a year. More importantly it reduces volatility and drawdown by roughly half.
(Interestingly enough, Japan was one of my 5 Ideas for 2009. While it has done fine on an absolute basis, on a relative basis it has underperformed almost all other countries. I’ll take a look at the bullish case for Japan in January. Sentiment is TERRIBLE on Japan but valuations are low. More later.)
What's even more telling and paints the current US picture much worse than what you've shown is adjusting for inflation so it shows that the 2007 peak on a real (constant) dollar basis is actually lower than the 2000 peak, even though the 2007 peak is higher in nominal value.
The buy-and-hold are gonna love this range-bound bouncing, if they don't already.
Meb,
The obvious follow up question is how did your timing model work when applied to the Japanese market from the 1990 peak?
I have liked that Japan analogy for a few years… And it has proven very true so far..
And I love your tactical asset allocation model as it shows that there are “relatively” simple options for investors to develop market-beating, mechanical strategies, without having to delve into the dark side of highy mathematical quant modelling.
The other Faber also likes Japan — as a contrarian play. http://www.anirudhsethireport.com/marc-fabers-p...
Bubbles tend to ultimately find support at the initial inflection point that marked the beginning of the “new era” thinking. Roughly 1995 for the US, which is a long way down from here.
There are still too many mutual funds, hedge funds, day traders, leveraged banks, real estate shows on TV, and way too much of a risk trade that appears at the drop of a hat for it to be anywhere near an end. It's more indicative of desperation, the mad scramble for a high return life boat, than the next wave of prosperity.
Mebane, I made a similar comment over at Abnormal Returns today. I will repeat it:
Too many people think we couldn't have another negative decade in the 2010s. I don't think it is likely, but opinion is too universal there. After all, consider Japan — it has had two lost decades in a row, and we are following something close to their monetary and fiscal policies, minus the fact that Japan at present self-funds their debt and we don't.
Mebane, I made a similar comment over at Abnormal Returns today. I will repeat it:
Too many people think we couldn't have another negative decade in the 2010s. I don't think it is likely, but opinion is too universal there. After all, consider Japan — it has had two lost decades in a row, and we are following something close to their monetary and fiscal policies, minus the fact that Japan at present self-funds their debt and we don't.