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  • Alex Laan

Japan '89 vs US today #MACRO

Dear reader,


this post was originally posted October 2017, but is equally relevant today:


With all the posts in both social and financial media regarding the elevated pricing of many equity markets I felt the urge to jot down a few lines regarding primarily the US stock market today vs Japan during the late '80s.


Most of us are by now familiar with the extent of share buy backs in the US past decade and possible also aware of the lack of supply of new stocks / companies coming into the market. Are there any similarity with buy backs and the cross corporate ownership craze in Japan during the '80s?

What if we use CAPE as a pricing metric comparing the Nikkei stock market bubble of 1989 vs US equity markets of today?



Share holders in Japan

As you can see below from the CAPE graphs, there is still more to go in the US before it is equally as expensive as the Nikkei was in 1989. Japan peaked with a CAPE around 90 while the US today is priced around 30.So even if markets are priced fairly rich considering historical standards, there are still historical comparisons of even higher pricing.



Furthermore, the passive investment bubble gobbling up big caps without any sense of idea generating when investing, is also a contributor to asset inflation. According to FactSet, fully one-seventh of the nearly $4.2 trillion in global ETF assets are in funds tracking the benchmark U.S. equity index.


Interest rates also play a part, which may not be comparable, but still, they were low in Japan then (still low), and are low in the US today so no need to elaborate further on that subject here.


Back to share buy-backs which was my main point of writing: I would imagine passive long term investments through cross-shareholdings by Japanese companies during the 80’s extracted quite an amount of supply of stocks, similar today in the US are the massive corporate buy backs. Stocks purchased through buybacks are never coming back as they are deleted while the purchases through cross-shareholdings were held for a long duration of time. Very hard to find comparable numbers confirming my thoughts, so please bear with me. I'm sure the article misses out on many aspects to either make the historical comparison either more relevant or irrelevant.  The reason for me writing this down was simply to share some points, not do an in-depth article on something which most likely will not affect the daily P/L for anyone.


So to conclude, let the trend continue being your friend, we have no idea what so ever when this bull market finally runs out of steam. If stock markets around the world are to see a similar bubble of magnitude of the one in Japan late 80's there could still be significant upside before the balloon bursts. Mind you, if that happens, there will be severe corrections on the way up.


Any thoughts on this subject, please share.


Good luck with the markets!


Regards

Alex


More to read on corporate buybacks:

https://seekingalpha.com/article/724601-modeling-stock-buybacks-vs-dividends-book-value-is-lost-but-does-it-matter

https://hbr.org/2014/09/profits-without-prosperity

http://www.marketwatch.com/story/sp-500-companies-slash-share-buybacks-despite-record-cash-levels-2017-06-21

https://www.bloomberg.com/news/articles/2017-08-14/corporate-america-isn-t-buying-back-shares-the-way-it-used-to

https://www.forbes.com/sites/aalsin/2017/07/10/qa-nick-hanauer-believes-stock-buybacks-are-the-root-of-american-inequality/#468f2a1a31a1


Sources:

https://secure.marketwatch.com/story/passive-investing-is-changing-the-stock-market-in-ways-investors-dont-realize-2017-09-25

http://siblisresearch.com/data/japan-shiller-pe-cape/

The Felder Report by Jesse Felder; www.thefelderreport.com

http://www.economist.com/node/12564050 

http://www.frbsf.org/banking/files/August-2009-Japans-Cross-Shareholding-Legacy-the-Financial-Impact-on-Banks-august-09-FINAL.pdf  

http://www.artemiscm.com/  

Asker, Norway

+47 22 83 21 40

alexlaan@protonmail.com

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