Japanese style Deflation?

W

wutangfinancial

I think we might be entering a secular bear market. Which sucks for me (I'm long bias in my portfolio). And I'm generally bullish long term on equities, having been schooled on loss aversion, the equity risk premium puzzle, and a bunch of other academic crap.

But I'm scared. American wealth is seriously declining. Forget the short term consumer confidence, I'm talking wealth over the next decade. Japan is still in a bear market with cyclical bull rallies. How did a 20 yr bear market persist? Well, when people's net worth got chopped in half after the commercial real estate bubble popped.

If Commercial real estate starts to seriously correct (and its started to in the UK) we could be in for a lonnnnng bear market. In addition, we might end up in a liquidity trap, just like the Japanese.

The tech crash was helped by the increase in house prices, and aided by Greenspan's interest rate cuts, increasing wealth. But if were aggressively cutting rates and assets are still deflating, the long term picture is pretty grim. Not to mention, corporate profit margins are coming off an all time high, and likely to revert to the mean.

Anyhow, I think the value crowd is going to get killed, i.e. the time value of money will be neglected in holding "undervalued" positions.

My plan? I'm investing in emerging markets where there's evidence of decoupling, and tons of inefficiency. I'm looking at markets where volatility is so high, the risk premiums have to be solid and I'm diversifying. I'm talking Vietnam, Thailand, South Africa. Countries where I expect to have massive drawdowns in individual positions, but where the net expected value is very high....
Anyhow, I think this sort of top down analysis will be necessary for a long portfolio.

But I'm just a young dude...what do I know.
 
1. massive attempt in money supply & velocity of money to offset deflationary trends. Successful? Probably not without policy measures which are not yet working.
2. decoupling will not happen. read roubini.
3. cash is also an asset class.
4. there have been significant 20 year periods where equities underperformed fixed income.
 
daddy-o,
ya know I love ya but better to keep it in cash temporarily rather than buy some large cap value fund & see your capital be eroded.

stocks currently correlating poorly with money supply growth. (unless pm stocks)

better to wait a few mos & buy in cheaper than do the buy & hold thing. i'm just answering the op with my own opinions on the futility of being "100pct invested".
 
Lets see:

Holding cash = negative return in real terms of -2%

Holding equities = negative return in real terms of -6% YTD and growing.....

Holding debt = negative return in real terms of -50% and growing.....

Capital preservation is priority number one in the current economic and market conditions.

Ask any CEO of a financial institution what their priority is...I bet it is the same.

Cash is King.....but gold is better.
 
Quote from wutangfinancial:

I think we might be entering a secular bear market. Which sucks for me (I'm long bias in my portfolio). And I'm generally bullish long term on equities, having been schooled on loss aversion, the equity risk premium puzzle, and a bunch of other academic crap.

But I'm scared. American wealth is seriously declining. Forget the short term consumer confidence, I'm talking wealth over the next decade. Japan is still in a bear market with cyclical bull rallies. How did a 20 yr bear market persist? Well, when people's net worth got chopped in half after the commercial real estate bubble popped.

If Commercial real estate starts to seriously correct (and its started to in the UK) we could be in for a lonnnnng bear market. In addition, we might end up in a liquidity trap, just like the Japanese.

The tech crash was helped by the increase in house prices, and aided by Greenspan's interest rate cuts, increasing wealth. But if were aggressively cutting rates and assets are still deflating, the long term picture is pretty grim. Not to mention, corporate profit margins are coming off an all time high, and likely to revert to the mean.

Anyhow, I think the value crowd is going to get killed, i.e. the time value of money will be neglected in holding "undervalued" positions.

My plan? I'm investing in emerging markets where there's evidence of decoupling, and tons of inefficiency. I'm looking at markets where volatility is so high, the risk premiums have to be solid and I'm diversifying. I'm talking Vietnam, Thailand, South Africa. Countries where I expect to have massive drawdowns in individual positions, but where the net expected value is very high....
Anyhow, I think this sort of top down analysis will be necessary for a long portfolio.

But I'm just a young dude...what do I know.
More...

Two comments:

1. From what I've read, there is no solid statistical evidence for decoupling. (If you've read something different from someone credible, let me know.) That said, I find my trading style using non-US stocks does MUCH better. But so far we're seeing little evidence of decoupling as far as I know.
2. With the Fed continuing to pour money into the economy, I don't know of anyone worried about deflation. (If you've read something different from someone credible, let me know.) Stagflation is much more the concern. In fact, one could argue, we're already in a period of stagflation. Keep in mind, though, that from all I've read we don't yet have to worry about the extremely nasty kind of 70's style stagflation.

Btw, I've invested similar to you, although I have added US exporters which have done very well, into my mix and have beaten the SnP.
 
sorry, deflation should be better defined. Asset deflation and price inflation....i.e., a real decline in asset values and nominal price increases....
Really, really, not a good thing.
I know my folks use the equity in their home to make purchases. Less equity + higher prices will lead to shrinking margins for companies. So much of the record margins have been from gearing balance sheets, and customers gearing their balance sheets. That's gone, so it's reversion to the mean, probably a drawn out process. Thus, current multiples are still too high...as earnings are too high.

I'm not talking impending doom. Just negative real returns in U.S. equities for some time. And I'm sure their will be some sucker rallies. I'm looking long term.

oh, and decoupling has no solid evidence. It's conjecture, as is the evidence against decoupling. But BRIC is defintiely heading there...exports are less and less a % of GDP...growth rate differentials should remain intact.

China is overvalued, of course. But a lot of Latin America isn't. Thailand isn't. Vietnam, longterm, sure isn't. These are great places for risk preferring small investors who don't have to deal with size/liquidity issues. I'd rather have a lot of month to month volatility, not worrying about hanging on the indexes, and get a real return over 10% annum 10 yrs. from now...
 
The OP's main thesis/question I think is solid

I'm reading more and more about America's coming "lost decade"

For the veteran traders here, do you remember circa 1999 when several commentators did a side by side graph of the US equity market price action next to Japan's from a decade earlier? They are rolling those charts out again today.

Not looking so ridiculous any more.

We have an increasing dependency ratio, i.e. people recieving $ from the government relative to those working and paying taxes into the government just like Japan.

We have had 2 major asset bubbles within the last decade and the current one is a doozy. UBS just the other day puts the total debt write-offs at around $600 billion. So much for the Bernanke estimate of $50 billion that he made last year! These estimate turn out to be on the low side always!

A great point was made in the FT that China is under huge pressure to stamp down manufacturing activity in and around its major cities to get air pollution down in advance of the Olympics. What do you think that would do to commodies?

I could go on and on with more data but I aim not to bore.

If you know how to trade both long and short across different instruments and markets, it should be ok. I worry a bit about the populist tax them all mantra though.
 
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