Great post, I actually said the exact same thing to my girlfriend two nights ago while trying to convince her to put some money in the stock market. If this market goes to 5000 or something ridiculous the whole country is ****ed, I'm just glad I got a paid off roof over my head. I got over half a million in the market and I'm having trouble trying to get my girlfriend to put 5000 in it. She says that her friends at work are telling her the market is terrible now, no one is looking at the long term fundamentals in this market right now its all emotion unfortunately, so it might be another year or so before we see people become bullish again. All the average joes out there see whats on cnbc and on cramer and no one cares how fundamentally undervalued these companies are, no one wants to buy. In the next couple of weeks I expect most of the everyday people that are scared will just sell what they have left and there will be no one but the traders left to sell. I already want to say the market will be bottoming in the next 6 months or so, I mean just look at the posts on the board, 2 or 3 weeks ago not many people were talking about buying like they are today. Looks like most everyone is buying now and planning on going down with the ship though.

I'm not saying this is necessarily the case with US stocks, but look at the history of the Nikkei:

What was the Nikkei's dividend yield during it's fall?
What was the Nikkei's PE at the top and the bottom?

I don't know, I just posted that as a discussion point in hopes that someone can explain why the same thing could or could not happen in US markets.

I don't understand why you post this if you said that you don't know the circumstances behind their fall from grace. It's not to say you shouldn't do that, but the circumstances are very different. The "it could happen here" argument based on that chart seems a bit illogical to me, as opposed to having a reason behind why you think it would happen.

My first point was that these graphs always ignore dividends. if the Nikkei was yielding over 1% at it's peak, it could have cut the loss from peak to trough by half, if dividends were reinvested and grew at a normal rate. So raw graphs that ignore dividends substantially over-state the losses that occured.

My second point is the risk of a substantial market decline is related to how overpriced it was at the beginning of the decline. I believe the Nikkei's PE peaked at 57. The S&P 500's PE peaked at around 35 during the bubble, and is now close to 12. The lowest PE for the S&P 500 in the last 60 years is in the range of 6-7, and given changes in tax laws that make corporate earnings more valuable to investors, it seems the current lower limit is probably a bit higher, maybe 8.

So I think a Nikkei style long term decline from now is extremely unlikely. If you start from the peak at the top of the bubble, maybe you'll get a more similar graph, but that was over 9 years ago and it's already rebounded to new highs. I think the S&P 500 downside from this point is much less dramatic than it was for the hugely over-valued Nikkei. And I doubt we'll try to hide our banking and real estate problems for most of a decade before finally resolving them like Japan did.

Some interesting comparisons to the Japanese situation from wikipedia:

http://en.wikipedia.org/wiki/Economic_history_of_Japan


"At the height of the bubble, real estate values were extremely over-valued."

"With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and Japanese manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral."

"The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid...Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called 'zombie businesses'."

Deflation

"Deflation in Japan started in the early 1990s. On March 19, 2001, the Bank of Japan and the Japanese government tried to eliminate deflation in the economy by reducing interest rates (part of their 'quantitative easing' policy). Despite having interest rates down near zero for a long period of time, this strategy did not succeed. Once the near-zero interest rates failed to stop deflation some economists, such as Paul Krugman, and some Japanese politicians, spoke of deliberately causing hyperinflation."

"
Systemic reasons for deflation in Japan can be said to include:

• Fallen asset prices. There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary.
• Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, many loans went unpaid. The banks could try to collect on the collateral (land), but due to reduced real estate values, this would not pay off the loan. Banks have delayed the decision to collect on the collateral, hoping asset prices would improve. These delays were allowed by national banking regulators. Some banks make even more loans to these companies that are used to service the debt they already have. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy.
• Insolvent banks: Banks with a large percentage of their loans which are "non-performing" (loans for which payments are not being made), but have not yet written them off. These banks cannot lend more money until they increase their cash reserves to cover the bad loans. Thus the quantity of loans are reduced and less funds are available for economic growth.
• Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. This likewise means the money is not available for lending and therefore economic growth. This means that the savings rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth, since it inflates land prices.

"

Take it all FWIW.

Yeah, he picked the day the VIX hit an extreme level that it's only hit a few times since it's been tracked.

Yes I lived through that debacle (some of it) in JAPAN and

yes the model here is very similar

overexuberance
real estate bubble
negative real interest rates

BUT at least in JAPAN they had trillions in savings, we have trillions in debt

not a good recipe for asset values LONG TERM in USA

Again, they also had much more extreme bubble, and refused to recognise bad debts, keeping insolvent banks alive but not really functioning for years. Despite all those savings, their policies kept their problems from resolutions for a decade.

Now, I've argued that Paulson's plan has some stunning similarities to Japan's policies, he's going to subsidize bad banks to keep them alive, but this won't mean they'll start financing real estate transactions again. But given our strong two party system, I'm sure as the recession hits full stride our problems won't be buried by government bureaucracies, they'll be subject to much debate and blame from one side to the other, and we'll do something else if Paulson's plan fails.

So the Republicans will blame the Clinton Administration in 1999 for the Fannie pressure and Graham Leach Bliley Act, then the Democrats blame them for being laissez-faire? It is so unfortunate this is playing out during election time.

Yes desertcat you are right but also remember the savings mentality there.... by lowering rates to zero in 94-95 they actually accentuated problems because savers got no return, I hope here they do NOT cut rates and leave them low because retiress (already pressured) will get screwed..

The Japanese refused to address problems. I lived across the road from a new condo development that SUMITOMO left empty because if they sold properties "at market" they would have had to realise massive losses, ad infinitum

However, here this concept that "we have to improve housing prices" by some artificial mechanism is a joke

If there are too many overpriced properties and assets they will eventually go to fair levels where supply/demand meet

Overall, despite the debacles we all created here at least the USA is trying its best to get out of this........ The FED moves have been amazing, flooding the place with liquidity, doing CP to 3 months, doing UNSECURED transactions, gotta give Bernanke props... he is a doer

Another thing the Japanese would do is give new "bridge" loans to broke borrowers for the sole purpose of making the payments on the old loans. Both loans were bad, the "bridge" loan was fictitious, but again it allowed them to avoid writing down the loans on their balance sheet and admitting how bad things were.

In the U.S. today this is fraud, and I doubt banks are able to do much of it. If I'm wrong it's another reason our problems will persist longer.

This is why it's hard to tell exactly how this will all play out.

You have the fed trying to create inflation by using the printing press and propping up the housing market. However, the real market forces: an overextended consumer, and a busted housing bubble, point to deflation.

Disclaimer: These are my opinions and could be terribly wrong. I studied public policy

Japan has trillions in debt to match that trillions in savings. Think last I saw it was 170% of GDP. I googled Japan debt clock and first link is this. http://widgets.opera.com/widget/5403/. Shows public debt at ~$9 trillion USD in 2006. Also check out the factbook https://www.cia.gov/library/publicat.../2186rank.html. I think ours just went from 60% GDP to ~85% putting us in the top 15 easily.

The US also had plenty of money problems in the 1790s as well. We even defaulted to the French (might have been another country but I think I'm right) and only the Dutch would help us. I understand this was many moons ago and may not even be relevant now but I don't think many ppl are aware we have defaulted before. Also USA has never not been in debt. Andrew Jackson came close to eliminating it but he failed short by ~$18k. The fun part is comparing it to GDP over the same time period. I really hope we turn the debt train around but judging from how my family and friends are acting even in the face of hard times, it won't happen. I think the best we can hope for is to drop it in relation to GDP. As long as we stave off the cycle of borrowing to pay the interest on what's borrowed I think we still have a chance, if that isn't already happening.

This was an interesting read too. Nouriel Roubini (http://www.rgemonitor.com/blog/roubini/) put this up in Feb 08 about 12 steps to meltdown. http://media.rgemonitor.com/papers/0/12_steps_NR. Looks like we are in step 11?

Disclaimer: These are my opinions and could be terribly wrong. I'm a govman not a businessman.

Mr Pathetic, I think they are talking about private debt more than public debt.

Farmland values soar as stocks and other real estate tanks

By Dien Judge 10/04/08 12:36 PM

As real estate values continue to decline nationwide, Iowa farmland is becoming more valuable every day.
A survey released this month by the Iowa chapter of the Realtors Land Institute (RLI) showed a 6.6 percent increase in farmland values in just the last six months. Farmland values rose 17.6 percent in Iowa throughout the course of the last year, and an incredible 70 percent over the last five years.

The increase in land values has affected much of Iowa.

RLI consultant Troy Louwagie conducted the survey. In an interview with the Iowa Independent, Louwagie said, “The number one factor is high commodity prices.”

“We have $5 corn and $12 beans, and that has pushed up farm profitability levels. Farmers have made money the last couple of years and cash rents have gone up,” he said.

The report also says that expansion of the renewable fuels industry, good crop yields, and “positive attitudes about agriculture” have also helped boost land values.

But the report also warns that certain factors could negatively affect farmland values in the future. Such factors include an increase in fuel and fertilizer costs and decreasing returns in the livestock industry.

The RLI report shows a continuation of a trend toward higher farmland values that has been ongoing for the last few years. Iowa State University’s 2007 land value report, released last December, showed an average increase in value of approximately $700 per acre for Iowa farmland last year.

Louwagie said that a lot of the sales have involved large farms getting larger rather than small farms simply changing hands.

Farmland values have remained high despite an all-out crisis in other real estate markets — particularly housing — across the country. CNN reported last week that the pace of new home sales nationwide fell to a 17-year low in August. And that decline in sales continued despite a drop in average home prices.

Ah OK. When I read trillions in debt I just assumed all.

I don't need my money for 20 years, but I put my 401k in cash/bonds at DOW 13k. Yeah, I run good at something for once. I will consider putting it back the first time a president says we are in a recession. But I'd like to think we at least know what most of the bad news is before I'll really step in. Cramer changes his mind every second, you just can't use him as a canary for anything.

Cramer always talks in a sleazy double-speak way.

What exactly is he saying? That you should take five years of living expenses out of the market? What percentage of the population even has that kind of money in the market? I would guess less than 10%.

Also, money you NEED, shouldn't even be in the market in the first place. I'm talking about your emergency money.

And does this mean he's not going to be recommending stocks anymore on his show, since he believes that there aren't gonna be any good buys for the next five years? I strongly doubt it.

In summary, Cramer is a hideous creature of the financial establishment whose primary purpose is leading investors to financial ruin.

Can someone explain to me how the stock market isn't just a legalized pyramid scheme to steal money from the stupid? The stock market means something to players like Buffett, Icahn, and KKR because they have enough cash/leverage to buy entire companies, but we're not them and we're just people holding pieces of paper hoping it will go up.

Sounds like people are just trying to time the market right so that they can buy at the bottom of the ponzi scheme and wait until the suckers pile back in before they realize their gains and wait for the next pyramid to emerge and do it all over again.

Buffett is holding A LOT of pieces of paper too you know.

So is Berkshire.


Yes, I am making the distinction.

Buffett is different because he either likes to buy enough paper to take a controlling ownership of entire companies/or gets enough shares to have a direct say on the business, prolly through a seat on the board/or gets in on special deals of preferred stock and gtd returns because he's Buffet and you're not.

Sure you might throw me an example of where Buffett owns only an X amount of one company and I'm wrong but I think my overall thesis is not. Also, I am referring to stocks that do not pay a good dividend.

ty for answering the question i was going to ask. does this mean that the market has finally corrected itself wrt the inflated PE ratios we were seeing earlier? if the historical floor is 6-7, PEs of 10 or so will be the norm going forward? that seems a little high to me, but given how leverage seems to be such a big factor in today's market, maybe prices 10x earnings is ok -- and of course, i don't really know much at all.

from all the stuff i've been reading over the last few weeks, it just really looks like there's too little underlying real value in the financial world. perhaps i'm understanding the term wrong -- i'm describing real value as actual land, contracts, goods and services (and the reasonably projected revenues derived from them), etc.

also, can someone tell me where would i find data like this?

er.

He doesn't "like" to do that, he basically has no choice. You know why, right?