Home > Markets, Uncertainty > Market reflections January 24, 2009

Market reflections January 24, 2009


1. The teaching is good in our new state-of-the-art college building at Fort Leavenworth. Everyday as I walk to the new building I go past the old building which is being demolished. I’ve been watching the wrecking ball taking apart beautiful building and I can’t help but noticing how quickly the heavy ball takes apart the work of many months of skilled craftsmen to put together the old building brick by brick.  It sure is coming down a lot faster than it went up. But these days, but times change quickly and we are adapting to the new educational requirements. The old rules no longer apply. But the same attention to detail and level of professional craftsmanship which enabled the first building to weather Kansas storms for 60 years went into the making of the new building from which I take a great deal of comfort when the tornadoes blow across the Kansas plains.

2. I can’t help but think as I listen to the news coming out of Washington DC a spending bill after spending bill commits our future stream of income into pursuits would not be supported by the free markets and pure capitalists. I still have the sinking feeling that the best case for us 20 to 30 years of zero real growth in the Japanese model at our current rate of mortgaging the future.

3. Meanwhile the market lurches along in their normal mode, volatility which had decreased from historic highs is slowly on the rise once more and oil has apparently found support and is quietly climbing northwards and only gold seems to have any kind of staying power is money off from sector to sector in search of temporary security. It is precisely at times like these that the discipline of daily and weekly review of technical indicators helps me keep my judgment calibrated in these unusual times. Keep your powder dry and your risk managed and your eyes on the prize.

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  1. January 25, 2009 at 2:37 am

    Ken, interesting post. With regard to the Japanese scenario, you may be interested to see Jeremy Grantham’s views in his latest quarterly update (Grantham has got most things right so far and i hold in very high esteem).

    “In this context, do not kid yourself that the Japanese did a
    terrible job in extricating themselves. Even the Japanese
    often express dismay at the costs they have paid due to
    their heroic level of public spending. I believe that this
    primarily refl ects their original failure to realize how
    deep their hole was. It can also be admitted that their
    program, while probably right in concept, was not highly
    effi cient. Bridges to nowhere have not been as stimulating
    or productive long term as a focus on energy conservation
    and oil and coal replacement technologies would have
    been. It was often said that the Japanese should have bitten
    the bullet as the U.S. did in its S&L crisis, taking a quick
    hit rather than dragging out the pain. How superfi cial
    and self-congratulatory those comments seem now. Faced
    with our own credit crisis, we discover there is no easy
    cure – the bullet turns out to be a grenade, which doesn’t
    fi t as easily into the mouth. At about 4 to 1, the Japanese
    corporate sector went into the 1989 crunch with much
    higher leverage than the U.S. had ever seen. Remember
    too that their stock market, at 65 times earnings, was over
    three times our market’s recent highs and their land was at
    several multiples of ours. In 1989, Tokyo’s land per square
    foot was around ten times the value of Manhattan’s! So
    they had higher write-offs confl icting with much higher
    corporate leverage. If they had rapidly marked their
    assets to market, the entire corporate Japan Inc. would
    have been under water. And since we know that around a
    quarter of Japan’s market – their Sonys and Toyotas – was
    solvent, we can deduce that the remaining three-quarters
    was shockingly under water, using the types of rules we
    are attempting to apply to ourselves now. As the years
    passed, a few Japanese companies failed, but the great
    mass in the middle painfully clawed their way back to
    solvency. Somehow or other, Japan absorbed the greatest
    deleveraging in human history without incurring a severe
    depression. I can only hope we do as well!”

    In other words, all things considered the Japanese did not do too badly. Certainly, not too many Japanese I know are complaining about their standard of living.

    His whole article is highly recommended: http://www.gmo.com/websitecontent/JGLetter_4Q08.pdf

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