A short study of the recent Japanese crisis

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paper200
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Re: A short study of the recent Japanese crisis

Post by paper200 » Thu Feb 09, 2017 10:42 am

siamond - very nice write up. Thank you. Should be linked to Wiki. The followup blog quote is very apt.

siamond says:
Maximizing the diversification of one’s asset allocation, and being flexible with portfolio withdrawals, seem to be strong requirements in order to be adaptive to an unpredictable future.
Having freedom, food and roof is being 90% lucky in life and so is index investing. So, don't let the remaining 10% bother you.

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siamond
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Re: A short study of the recent Japanese crisis

Post by siamond » Thu Feb 09, 2017 2:19 pm

jalbert wrote:Wade Pfau has studied SWR for US retirees with global diversification (50% US and 50% international):

https://www.advisorperspectives.com/art ... -rates.pdf
Thank you, Jalbert. Wade Pfau was two steps (years!) ahead of me... I still would like to redo part of such study while using monthly returns from MSCI (1970+) and using domestic bonds instead of global bonds. From what I have seen so far, I do agree with his conclusion that international diversification is not a universal panacea though, even if it does seem to improve outcomes in most cases. Plus picking winners in hindsight is easy, and yet impossible ex ante.

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siamond
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Re: A short study of the recent Japanese crisis

Post by siamond » Thu Feb 09, 2017 2:22 pm

paper200 wrote:siamond - very nice write up. Thank you. Should be linked to Wiki.
Welcome. Yes, it might make sense to link those two articles from the "Investing in Japan" wiki page if there is enough interest.

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Re: A short study of the recent Japanese crisis

Post by Northern Flicker » Thu Feb 09, 2017 3:45 pm

From what I have seen so far, I do agree with his conclusion that international diversification is not a universal panacea though, even if it does seem to improve outcomes in most cases. Plus picking winners in hindsight is easy, and yet impossible ex ante.
"Improving outcome" has to be defined in this context. Is it minimizing the probability of running out of funds at a particular withdrawal rate? Maximizing supported withdrawal rate? Maximizing estate value at time of death?

There is a logical pattern, however. US retirees who started retirement in the deflationary "gold standard" years of the early 20th century had failures of a 4% SWR with internationally diversified portfolios, whereas those who started retirement in the inflationary years of the 1970's had failures of a 4% SWR with a US-only portfolio.

Another question is how holding TIPs would have changed the outcomes.
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Re: A short study of the recent Japanese crisis

Post by siamond » Thu Feb 09, 2017 4:31 pm

jalbert wrote:"Improving outcome" has to be defined in this context. Is it minimizing the probability of running out of funds at a particular withdrawal rate? Maximizing supported withdrawal rate? Maximizing estate value at time of death?
Yes, for sure. I was mostly thinking to the SWR math for challenging starting years when making such statement, although this isn't an especially good criterion. I'll keep in mind to look at things with more angles. It's actually very easy to get monthly returns for major national markets since 1970 (MSCI) and not difficult to get exchange rates, but it is a bit more tricky to get (IT) bonds returns from public sources. Wade used the DMS dataset, I don't have such luxury (plus I have doubts about their ways to model bond funds anyway). Will work on it.
jalbert wrote:Another question is how holding TIPs would have changed the outcomes.
Yes, that is a one million dollar question. Trouble is we got stuck in trying to model TIPS before they existed, see this thread. The few research papers attempting to do so do not seem quite credible, nor did our own attempts at modeling. The fundamental problem is that TIPS pricing is actually rather unpredictable (as clearly illustrated by the known years, even with mild inflation). The sheer existence of TIPS might also have changed the dynamics of inflationary periods. I just don't know what to do about this. Would love to get new insights.

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Re: A short study of the recent Japanese crisis

Post by siamond » Fri Feb 10, 2017 5:25 pm

Here is an update of a comparison chart I included in the follow-up article to the original study. This displays the price index (growth chart) for the Japanese, UK and US markets, dividends NOT included (dividends data lost in history for Japan), in local currencies.

It is is really fascinating to see how the UK and the US follow a similar trajectory, going fairly steadily upwards (at a macro level!), while Japan really has a mind of its own... I wouldn't read too much into what happened before 1950 though, as the Japanese Yen has a really troubled history (see Wikipedia Yen). The Yen being systematically undervalued until 1971 may also explain a lot.

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Re: A short study of the recent Japanese crisis

Post by Dirghatamas » Wed Feb 15, 2017 4:06 pm

jalbert wrote:Wade Pfau has studied SWR for US retirees with global diversification (50% US and 50% international):

https://www.advisorperspectives.com/art ... -rates.pdf

Figure 1 on page 11 is interesting. Int'l diversification increased the supported SWR in most years, but most of the years in which a 4% SWR failed were internationally diversified portfolios in the early part of the 20th century.

In a few years in the 1970's, the 4% SWR failed for US-only portfolios and internationally diversified portfolios succeeded.
I have been out on a business trip so just getting back to this thread I was keenly interested in. I read the paper you linked.

While there is a lot of good data there, it doesn't really address many of our questions

1) The portfolio is 50/50 stocks/bonds. On top of that, each asset is further divided 50/50 (home/international). My questions have been around US/International STOCKS as diversifiers. Basically, my hypothesis is that long term, stocks are a better return asset class than bonds. Stocks have volatility but the long term tail risk is not that (volatility) but some long drawn low returns or negative returns (declining economy, depression, population decrease, war, natural disasters..). To mitigate against such tail riks IMO, global stocks are a better diversification.

To see if that is true or false, one should study the obvious portfolio (100% global stocks over the long run) and its SWR. Pfau (to my hurried reading of this paper) doesn't do that.

2) From what I could tell, he aggregated stocks by GDP rather than market cap. This to me is a no no. There are many reasons why GDP and stock capitalization are not the same. Stable countries like Switzerland, UK etc., tend to haev a disproportionate number of multinationals while countries like Germany although big economies are under represented in public stocks due to historical factors (more private and family companies). The credit Suisse yearbook data DOES have market cap weighted returns since 1900 so the source data exists. I just don't have access to the (expensive to get) underlying data.

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Re: A short study of the recent Japanese crisis

Post by Adonis » Tue Aug 13, 2019 2:50 pm

I couldn’t find an answer to my question from the short study article or on the forums, so I thought I’d revive the thread in hopes someone can help me find the answer or at the least go about figuring it out.

A little context as way of an explanation. I have been reading increasingly of fears that the global economy is looking like the Japan economy did pre-crisis (such fears may be overblown but they do raise an interesting question). Now diversification, siamond’s study showed, would have been excellent in mitigating the Japanese crisis, however if the global economy as a whole goes the way the Japanese economy did, then there is no diversification to help out. So what I would like to know is what would a 60/40 and a 80/20 portfolio look like in a Japanese scenario with the following assumptions (I’d be just as curious to see how other AAs look, but I think these are likely the two most common ones).

The portfolio is 1,000,000$ right before the crash, i.e. our retiree retires at the worst possible time. The withdrawal method used is VPW. There is no pension (I think it would be interesting to see what happens to the portfolio independently of what cushion a pension can provide). What would the median withdrawals look like, the highest and lowest annual withdrawal, and the annual balances for a 30-50 year time frame. Is there anywhere I could back test such a scenario? Sadly last I checked the VPW backtesting sheet only includes US and Canadian data.

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Re: A short study of the recent Japanese crisis

Post by siamond » Tue Aug 13, 2019 6:35 pm

Adonis wrote:
Tue Aug 13, 2019 2:50 pm
what I would like to know is what would a 60/40 and a 80/20 portfolio look like in a Japanese scenario with the following assumptions (I’d be just as curious to see how other AAs look, but I think these are likely the two most common ones).

The portfolio is 1,000,000$ right before the crash, i.e. our retiree retires at the worst possible time. The withdrawal method used is VPW. [...]
Did you check the follow-up to the blog article that I posted here? This should address your questions.

Note that barely 30 years occurred since the beginning of the Japanese asset bubble crisis, which was very unique in the history of stock markets, so there is no way to backtest a 50 years period.

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Re: A short study of the recent Japanese crisis

Post by Adonis » Tue Aug 13, 2019 8:49 pm

siamond wrote:
Tue Aug 13, 2019 6:35 pm
Adonis wrote:
Tue Aug 13, 2019 2:50 pm
what I would like to know is what would a 60/40 and a 80/20 portfolio look like in a Japanese scenario with the following assumptions (I’d be just as curious to see how other AAs look, but I think these are likely the two most common ones).

The portfolio is 1,000,000$ right before the crash, i.e. our retiree retires at the worst possible time. The withdrawal method used is VPW. [...]
Did you check the follow-up to the blog article that I posted here? This should address your questions.

Note that barely 30 years occurred since the beginning of the Japanese asset bubble crisis, which was very unique in the history of stock markets, so there is no way to backtest a 50 years period.
Thanks for the reply siamond and the wealth of information you provided. I did have a look at the follow up, but it included a pension. I suppose I could just subtract it from the graph. Also, any chance you still have the table data that you could share?

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Re: A short study of the recent Japanese crisis

Post by randomguy » Wed Aug 14, 2019 12:51 am

siamond wrote:
Tue Aug 13, 2019 6:35 pm
Adonis wrote:
Tue Aug 13, 2019 2:50 pm
what I would like to know is what would a 60/40 and a 80/20 portfolio look like in a Japanese scenario with the following assumptions (I’d be just as curious to see how other AAs look, but I think these are likely the two most common ones).

The portfolio is 1,000,000$ right before the crash, i.e. our retiree retires at the worst possible time. The withdrawal method used is VPW. [...]
Did you check the follow-up to the blog article that I posted here? This should address your questions.

Note that barely 30 years occurred since the beginning of the Japanese asset bubble crisis, which was very unique in the history of stock markets, so there is no way to backtest a 50 years period.
You can't backrest a 50 year period. You can test what year 30 of that 50 year period looks like and see what the income has been like over the first 30 years. To some extent that is what the graph shows. Note things like starting age might not be exact. Eyeballing the data you have about a 50% reduction in money coming from the portfolio. That's a pretty grim outcome

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Re: A short study of the recent Japanese crisis

Post by siamond » Wed Aug 14, 2019 7:59 am

Adonis wrote:
Tue Aug 13, 2019 8:49 pm
Thanks for the reply siamond and the wealth of information you provided. I did have a look at the follow up, but it included a pension. I suppose I could just subtract it from the graph. Also, any chance you still have the table data that you could share?
I didn't keep the spreadsheet readily available. I mean, I could reconstruct it, but it would take some time and efforts... Yes, just subtracting the fixed income (50,000 Yens) from the numbers displayed on the graphs should address your questions. I just edited the blog article to allow to click on the pictures, so that you can display a larger version of the corresponding graph.

Please note that each deep crisis is very unique and will never repeat itself as it unfolded in the past. The next deep crisis will display another shape, that is the only thing quasi-certain about it. In other words, one shouldn't look for precision in those graphs, better simply look at rough numbers (e.g. unprecedented duration of the stock crisis; dizzying and long-lasting portfolio drop; large variations in portfolio withdrawals).

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Re: A short study of the recent Japanese crisis

Post by Valuethinker » Wed Aug 14, 2019 8:48 am

Kevin M wrote:
Tue Feb 07, 2017 9:16 pm
Clive wrote:"Safe" bonds - can look pretty scary <snip>
Nominal bonds really aren't safe in terms of meeting real liabilities, and the longer the term, the less safe they are. By contrast, long-term TIPS are quite safe in terms of meeting long-term real liabilities.

TIPS didn't exist during the big inflationary periods in the US--1940s and 1970s--don't know when inflation-linked bonds were introduced in the UK.
Early 1980s. Just as UK gilts (nominal) began a 40 year slide in yields ;-).
TIPS exist now, so the mechanism exists to avoid the kinds of real drawdowns shown in the chart--at least drawdowns that matter. I don't care much about any drawdown in the real value of a 30-year TIPS, due to an increase in real yields, if the purpose of the 30-year TIPS is to pay for living expenses 30 years from now.

But yeah, nominal bonds sucked in the US in the 1940s and 1970s. The 1940s were actually worse for shorter-term bonds, since interest controls fixed nominal rates at low levels, so you couldn't benefit from short-term nominal rates following inflation higher like you could in the 1970s.

Kevin
Tax was another factor. Marginal tax rates were a lot higher and there were not the opportunities to shelter retirement assets. We think in real returns but we pay tax in nominal terms.

If you were getting 10% on a bond with 8% inflation but paying 50% tax on that interest, you were losing 3% to inflation after tax.

Now you might get say 3% on a bond with 1% inflation (so same real return pre tax) but say pay 40% tax you are still 0.8% ahead of inflation (3.0% x (1-.4) = 1.8% v inflation of 1%). Unfortunately you can't get 3% on a bond in the UK without taking quite a lot of risk.

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Re: A short study of the recent Japanese crisis

Post by Adonis » Wed Aug 14, 2019 10:38 am

siamond wrote:
Wed Aug 14, 2019 7:59 am
Adonis wrote:
Tue Aug 13, 2019 8:49 pm
Thanks for the reply siamond and the wealth of information you provided. I did have a look at the follow up, but it included a pension. I suppose I could just subtract it from the graph. Also, any chance you still have the table data that you could share?
I didn't keep the spreadsheet readily available. I mean, I could reconstruct it, but it would take some time and efforts... Yes, just subtracting the fixed income (50,000 Yens) from the numbers displayed on the graphs should address your questions. I just edited the blog article to allow to click on the pictures, so that you can display a larger version of the corresponding graph.

Please note that each deep crisis is very unique and will never repeat itself as it unfolded in the past. The next deep crisis will display another shape, that is the only thing quasi-certain about it. In other words, one shouldn't look for precision in those graphs, better simply look at rough numbers (e.g. unprecedented duration of the stock crisis; dizzying and long-lasting portfolio drop; large variations in portfolio withdrawals).
Thanks that is very helpful, being able to click on the image. Don’t bother reconstructing the data, I was just being a little too curious with the details, losing the forest for the trees. I generally try to abide by that old mantra, expect the worst hope for the best. A strategy that could withstand a Japan crisis on a global scale is hopefully the worst we would see, but with the economy and the market one never knows. I think a strategy that could survive that though is probably good enough, maybe even overly cautious.

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Re: A short study of the recent Japanese crisis

Post by Karamatsu » Fri Aug 16, 2019 8:11 am

I have been reading increasingly of fears that the global economy is looking like the Japan economy did pre-crisis (such fears may be overblown but they do raise an interesting question)
Are you concerned about the economy or the financial markets? As far as the markets go, it was pretty much a straightforward asset bubble, enabled by certain finance/accounting rules combined with the way the banking sector was organized, so that could (and of course, has) happen anywhere. The economy -- in particular the failure of Japan's governing elites to act in response to the bursting of the bubble, leading to the decades of relative stagnation/stability -- is a rather unique political/social catastrophe that arises from Japan's history, culture, politics (as well as its relationship to the United States), and I don't think it would be possible for that to be replicated on a global scale unless Japanese politicians from the 1950's took over the world and recreated it in their image so... I doubt there is anything to worry about there.

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Re: A short study of the recent Japanese crisis

Post by cbeck » Fri Aug 16, 2019 9:01 pm

livesoft wrote:
Mon Feb 06, 2017 8:09 pm
Can I ask a question related to this please?

My impression from having many Japanese friends is that "a Japanese passive investor" has never invested that much in the stock market. They are simply less concerned about what happened to the Japanese stock market than Americans are concerned about the Japanese stock market. They have virtually lifetime employment and retirement plans backed by bonds, so stocks never figured much into their thoughts. They do have concern about real estate prices, but not stock prices.

Is that a good impression? Because that's the one I have.
Impressions are usually not very reliable, as in this case. The "lifetime employment" situation never covered more than 40% of the workforce. The smaller companies that were suppliers to the well-known brand names in all industries, never had employment guarantees and regularly laid workers off in down times. In the last few years even the social contract that the large companies honored has been disappearing.

The bursting of the housing bubble that occurred simultaneously with the Japanese stock market crash destroyed a lot of family wealth. Japanese mortgagees, unlike their American counterparts, cannot simply send the keys to the bank and walk away from a house that is under-water on the mortgage. Those owners are still paying off underwater mortgages as far as I know.

I don't know how Japanese fund retirements, but apparently it's not through corporate pension plans.

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Re: A short study of the recent Japanese crisis

Post by Karamatsu » Sat Aug 17, 2019 3:30 am

My impression from having many Japanese friends is that "a Japanese passive investor" has never invested that much in the stock market. They are simply less concerned about what happened to the Japanese stock market than Americans are concerned about the Japanese stock market.
I think that part is quite accurate. Japanese tend to have a very dim view of the stock market, seeing it as (a) rigged against small investors, and (b) little more than a place for gamblers. There is truth to both of those assertions, though from different angles, but from the perspective of the ordinary Japanese person, the implosion of the stock market was irrelevant: like a casino in Las Vegas going bust. Who cares? And at first there was very little reason to care. With a few exceptions, nothing happened. Nothing changed. For those not involved in the mania, banks, companies, and everything else pretty much just kept doing what they'd always done. At least for a time.

Unfortunately, the stock market game and the real estate game were just canaries in the mine, and the real problems were systemic. Long-term they go back to the way the Japanese economy was structured in the decades after the end of the war. Short-term it went back to the government's response to the Plaza Accord, and when the smoke cleared we discovered that most of the banks and companies involved in strategic industries were bankrupt. They'd gone into debt assuming that, with constantly rising asset prices, anything they borrowed could be paid back later. If that sounds familiar, it's because it is. But in the aftermath, we were told to simply pay no attention, and just look the other way. So for the next 20+ years, we waited, while banks and companies dug themselves out of debt. In the meantime (and obviously here I'm exaggerating a bit), nobody started new businesses, nobody did R&D, nobody hired new people... everything just sat still, stagnating, waiting. Then just as things were starting to recover, the dot coms imploded, the US financial crisis hit, and in 2011 we had the earthquake/tsunami and Fukushima catastrophe. It made you wonder if the universe has it out for Japan, or at least the finance industry.

As for retirement, in the past people counted mainly on the government pension, national health insurance, and on the traditional extended family. All these, as well as the general social order, are breaking down now, and recent reports from the government Financial Services Agency showed that the current benefits will not be enough to sustain people's lives after they retire. This was very bad news, especially for the government, which has been busy reducing benefits, instituting regressive taxes, and has plans to do more of that in order to prove... I don't know... that they don't care about people? So after receiving the report, they leapt into action, and buried it, saying (with remarkable honesty) that the truth was politically inconvenient, so it's not allowed to be true. As a result, I'm not sure what people are going to do at this point. Something is going to break.

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Re: A short study of the recent Japanese crisis

Post by sperry8 » Sat Aug 17, 2019 2:13 pm

Adonis wrote:
Tue Aug 13, 2019 2:50 pm
I couldn’t find an answer to my question from the short study article or on the forums, so I thought I’d revive the thread in hopes someone can help me find the answer or at the least go about figuring it out.

A little context as way of an explanation. I have been reading increasingly of fears that the global economy is looking like the Japan economy did pre-crisis (such fears may be overblown but they do raise an interesting question). Now diversification, siamond’s study showed, would have been excellent in mitigating the Japanese crisis, however if the global economy as a whole goes the way the Japanese economy did, then there is no diversification to help out. So what I would like to know is what would a 60/40 and a 80/20 portfolio look like in a Japanese scenario with the following assumptions (I’d be just as curious to see how other AAs look, but I think these are likely the two most common ones).

The portfolio is 1,000,000$ right before the crash, i.e. our retiree retires at the worst possible time. The withdrawal method used is VPW. There is no pension (I think it would be interesting to see what happens to the portfolio independently of what cushion a pension can provide). What would the median withdrawals look like, the highest and lowest annual withdrawal, and the annual balances for a 30-50 year time frame. Is there anywhere I could back test such a scenario? Sadly last I checked the VPW backtesting sheet only includes US and Canadian data.
It's an interesting question and the fear based media (and people who subscribe to these black swan events being more common than they are) have us always wondering "but what if Japan happens here in the US"? Basically here is how I think about it... let's assume the market drops 50% and never comes back (just stays down 50%, similar to, but not exactly like Japan). What would this mean for US investors? So let's take your 60/40 scenario... Your 60 would be cut in half to 30 and your 40 would remain leaving your portfolio 70% of its prior size. Using the same math your 80/20 portfolio would be 60% of its prior size. So averaging these... basically one could assume that IF the US market dropped in 1/2 AND never came back (at least for a generation) you'd be left with ~ 2/3 of your portfolio (assuming an average of 70/30 stocks/bonds). One can also assume you'd be diversified so this 50% drop would have to occur across sectors, sizes, and countries (i.e., a global 50% crash that never comes back). And still you're left with 2/3 of what you had.

Then we should place odds on this happening. It's only happened 1x, in 1 country. And here we are describing the world and a generation. Surely a black swan event and so whatever odds you want to place on it would likely be small. Once you come up with those odds you can decide how best to proceed with your AA. Now of course this is a personal decision and each person has to look at their odds and the upside to "continue" playing the game.

Here are my (personal) thoughts. I'd assume the black swan event to be small although not minuscule (<5% chance). I always like to hedge to even if I'm off the odds are greatly in favor of the market being flat (or positive) over a generation rather than down 50%. As such, I keep my money invested in a 70/30 portfolio knowing that if I'm wrong and the black swan even occurs I'm still left with 2/3 of my nest egg. For me as a retiree it would be tough - but I could tighten spend and still live quite a nice life. Plus one would assume that in this scenario asset prices would drop substantively (since globally stocks have dropped in half and money is less prevalent than it was prior).
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Re: A short study of the recent Japanese crisis

Post by arcticpineapplecorp. » Sat Aug 17, 2019 2:35 pm

Siamond, can you clarify this graph:
https://blbarnitz4.files.wordpress.com/ ... otlk2h.jpg

The right side of the page (legend?) has 6 categories: total market, small, small value, midvalue, bonds and inflation...

but the graph only has 5 lines (there is one blue line, can't tell which one) missing. Unless midvalue and bonds were so close as to overlap completely (doubtful).

thanks.
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Re: A short study of the recent Japanese crisis

Post by siamond » Sat Aug 17, 2019 6:29 pm

arcticpineapplecorp. wrote:
Sat Aug 17, 2019 2:35 pm
Siamond, can you clarify this graph:
https://blbarnitz4.files.wordpress.com/ ... otlk2h.jpg

The right side of the page (legend?) has 6 categories: total market, small, small value, midvalue, bonds and inflation...

but the graph only has 5 lines (there is one blue line, can't tell which one) missing. Unless midvalue and bonds were so close as to overlap completely (doubtful).
As indicated in the commentary below the graph:

Note that the Mid Value display was disabled from the chart for clarity, its trajectory being very similar to Small Value.

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Re: A short study of the recent Japanese crisis

Post by arcticpineapplecorp. » Sat Aug 17, 2019 9:31 pm

thanks. missed that. that explains it.
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