Will the US become like Japan?

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flyninjasquirrel
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Will the US become like Japan?

Post by flyninjasquirrel » Sun May 24, 2020 9:51 pm

With interest rates set to stay near zero for the foreseeable future, the Fed instituting massive monetary easing for Treasuries and mortgage backed securities, entire industries being bailed out with government cash (i.e. airlines), and consumer confidence likely not to rebound any time soon due to high unemployment - are we destined for a Lost Decade (or more)?

Sorry if this has already been discussed - didn't find a thread in search.

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arcticpineapplecorp.
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Re: Will the US become like Japan?

Post by arcticpineapplecorp. » Sun May 24, 2020 9:53 pm

anything's possible. you know the US had a lost decade not so long ago, from 2000-2009, right?

source: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
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Re: Will the US become like Japan?

Post by Noobvestor » Sun May 24, 2020 9:56 pm

No one knows. Demographics look better for the US, but wouldn't count on those alone. International diversification is always a good idea IMHO.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Will the US become like Japan?

Post by runner3081 » Sun May 24, 2020 10:00 pm

With changes in the environment, including monster earthquakes and flooding, I suppose that we could become an island country one day :)

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Re: Will the US become like Japan?

Post by willthrill81 » Sun May 24, 2020 10:10 pm

flyninjasquirrel wrote:
Sun May 24, 2020 9:51 pm
With interest rates set to stay near zero for the foreseeable future, the Fed instituting massive monetary easing for Treasuries and mortgage backed securities, entire industries being bailed out with government cash (i.e. airlines), and consumer confidence likely not to rebound any time soon due to high unemployment - are we destined for a Lost Decade (or more)?
Japan's stock market has had negative returns over the last 30 years in large part because their market reached astronomic levels by the late 1980s. The CAPE ratio for Japan reached about 90 at its height. By comparison, U.S. stocks currently have a CAPE of about 28. Even at the height of the dot-com bubble, the CAPE ratio for U.S. stock peaked at about 44.

You could have said almost all of what you said in the above paragraph 11 years ago. And look what happened to stocks over the last 11 years.

The future could look different. But I wouldn't make a long-term bet against the U.S. economy or stock market.
Last edited by willthrill81 on Sun May 24, 2020 10:11 pm, edited 1 time in total.
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Leif
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Re: Will the US become like Japan?

Post by Leif » Sun May 24, 2020 10:11 pm

It's possible. Even before the virus, when the economy was running well, we were generating high fiscal deficits. Now, of course, that looks like child's play compared to the current deficits. Japan is also carrying a heavy debt load. IMO the economy will be slow for a long time following this episode.
Last edited by Leif on Sun May 24, 2020 10:14 pm, edited 1 time in total.

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Re: Will the US become like Japan?

Post by theorist » Sun May 24, 2020 10:12 pm

flyninjasquirrel wrote:
Sun May 24, 2020 9:51 pm
With interest rates set to stay near zero for the foreseeable future, the Fed instituting massive monetary easing for Treasuries and mortgage backed securities, entire industries being bailed out with government cash (i.e. airlines), and consumer confidence likely not to rebound any time soon due to high unemployment - are we destined for a Lost Decade (or more)?

Sorry if this has already been discussed - didn't find a thread in search.
Here are some projections from experts about equity returns in the coming years, made soon after the recent crash. Even with equities cheaper than they were in February, you see that GMO, Morningstar, and Research Affiliates are hardly bullish on US equity returns going forward a few years. Will they be right? Who knows.

https://www.morningstar.com/articles/97 ... is-edition

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willthrill81
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Re: Will the US become like Japan?

Post by willthrill81 » Sun May 24, 2020 10:13 pm

Leif wrote:
Sun May 24, 2020 10:11 pm
It's possible. Even before the virus, when the economy was running well, we were generating record fiscal deficits. Now, of course, that looks like child's play compared to the current deficits. Japan is also carrying a heavy debt load. IMO the economy will be slow for a long time following this episode.
Japan's debt to GDP back in 2018 was 238% (most recent data I can find). The U.S.'s was 107% last year. We're a very long ways off from Japan in that regard.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Will the US become like Japan?

Post by flyninjasquirrel » Sun May 24, 2020 10:25 pm

willthrill81 wrote:
Sun May 24, 2020 10:13 pm

Japan's debt to GDP back in 2018 was 238% (most recent data I can find). The U.S.'s was 107% last year. We're a very long ways off from Japan in that regard.
Enlightening facts. Thanks. I wonder where that number will be a few years from now.

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SimpleGift
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Re: Will the US become like Japan?

Post by SimpleGift » Sun May 24, 2020 10:45 pm

Even before the virus crisis, the problem of Japan was essentially an economy that, in the face of massive and sustained monetary stimulus, was still growing below potential — which means there was not enough demand. No matter how much credit a central bank provides, if no one comes to borrow, it doesn't flow into the real economy.

A similar lack of aggregate demand has been plaguing the Eurozone economies for at least a decade, despite negative interest rates and central bank stimulus. Chalk it up to collapsing birth rates, aging populations, shrinking workforce growth, a shift from goods to service industries, and other related causes.

Will the U.S. economy fall into a similar situation? It's possible at some point. With birth rates now below replacement level, future U.S. population growth will be dependent upon immigration. Workforce participation has been in a downward trend. GDP and productivity growth have been decelerating for several decades.

It's hard to say what the future holds, but the lesson of Japan is that central banks can't create economic demand.

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Re: Will the US become like Japan?

Post by willthrill81 » Sun May 24, 2020 10:55 pm

SimpleGift wrote:
Sun May 24, 2020 10:45 pm
Even before the virus crisis, the problem of Japan was essentially an economy that, in the face of massive and sustained monetary stimulus, was still growing below potential — which means there was not enough demand. No matter how much credit a central bank provides, if no one comes to borrow, it doesn't flow into the real economy.

A similar lack of aggregate demand has been plaguing the Eurozone economies for at least a decade, despite negative interest rates and central bank stimulus. Chalk it up to collapsing birth rates, aging populations, shrinking workforce growth, a shift from goods to service industries, and other related causes.

Will the U.S. economy fall into a similar situation? It's possible at some point. With birth rates now below replacement level, future U.S. population growth will be dependent upon immigration. Workforce participation has been in a downward trend. GDP and productivity growth have been decelerating for several decades.

It's hard to say what the future holds, but the lesson of Japan is that central banks can't create economic demand.
Very well said. The underlined is particularly important (and relevant to the current economic crisis in the U.S.).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Will the US become like Japan?

Post by dru808 » Sun May 24, 2020 11:23 pm

It’s the only reason I invest in international equities. The possibility of a single country catastrophe happening, I don’t want international due to its recent performance, I believe in American exceptionalism, I think 100% US investors will likely end up with better returns in 20 years. I’m not certain of that though, if international continues to underperform I’ll be ok, if I stuck to my original plan of 100% US and a Japan like scenario were to occur, I’d be screwd.
Last edited by dru808 on Mon May 25, 2020 12:01 am, edited 1 time in total.
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UpsetRaptor
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Re: Will the US become like Japan?

Post by UpsetRaptor » Sun May 24, 2020 11:48 pm

Everyone talks about Japan's downturn, but few mention the crazy run-up. Japan had CAGR > 20% over forty years heading into the 90s, and as willthrill mentioned, CAPE hit 94(!) in 1989. Ludicrous speed, go.

It's certainly possible that some factors - demographics, birth rates, sociopolitical trends, etc - impact the US growth negatively in the future compared to the past. Or they may not - People were asking this same question 10 years ago. But if we're talking about what's the floor, I would consider the last-decade-Europe-type of slower growth to be more of a realistic US floor than the multiple decades of negative/zilch from Japan. Japan was giving back gains from its hyper-bubble.

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Re: Will the US become like Japan?

Post by shelanman » Mon May 25, 2020 12:11 am

We won't be Japan, because it's always different.

We don't yet have Japan's debt. We currently have a more dynamic economy, and both a culture and a legal system that encourages that dynamism Inna way that Japan did not, with it's much more rigid social and economic structure.

We currently have a growing population, rather than a shrinking one, and have a general tendency to be more open to both outsiders and their ideas than Japan has historically been.

Our currency and our debt both are valued highly and sought after by other nations around the world, giving us a very different amount of financial influence. (Japan's currency is traded extremely broadly, but it isn't the same thing)

For these reasons, our economy probably won't take precisely the same path as Japan's.

We have more ability to get away with creating money without immediate consequence than did Japan, and our real economy probably won't shrivel up and shrink over a 40-year period in the same way, because our population is still growing and is much more accustomed to having to reskill and move to new fields over a career.

That doesn't mean we won't have a terrible depression and negative returns on equities for decades -- could happen. I think it won't right now, though we are in what I think is a long period of increased risk (due to the increasing likelihood that we fundamentally reshape our economy, losing the freewheeling dynamism that has allowed it to overcome even absurd challenges), but even if we do have a lifelong disaster, it will be a quite differently shaped one than Japan.

More importantly, though... honestly, if this were Japan in 1989, I don't know what actions you could realistically take to provide you with the necessary protection.

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Re: Will the US become like Japan?

Post by theorist » Mon May 25, 2020 12:34 am

shelanman wrote:
Mon May 25, 2020 12:11 am


More importantly, though... honestly, if this were Japan in 1989, I don't know what actions you could realistically take to provide you with the necessary protection.
In Japan 1989, you could invest broadly, with 50% or more of your holdings in the U.S., other developed markets, and emerging markets. Your returns would’ve been much better going forward. (Investing according to world cap would’ve adjusted your holdings in Japan down as time went on, for instance, with no thought on your part...).

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Re: Will the US become like Japan?

Post by Stef » Mon May 25, 2020 12:49 am

Are there other examples of countries with zero stock returns over long periods of time?

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Re: Will the US become like Japan?

Post by theorist » Mon May 25, 2020 12:59 am

Stef wrote:
Mon May 25, 2020 12:49 am
Are there other examples of countries with zero stock returns over long periods of time?
How long qualifies? I’ll leave out the time period starting around the Great Depression in the US, where breakeven took a long time. Moving on from that, US between 1966 and 1982 was also horrible, if you include inflation. See e.g. a nice discussion here:

https://awealthofcommonsense.com/2014/0 ... eally-bad/

The Dow was flat in absolute terms. The S&P 500 naively grew, but in fact with inflation factored in, real growth was 0.
On the other hand, as the discussion in the link shows, there was very healthy wage growth. That, at least, is something.

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Re: Will the US become like Japan?

Post by effigy98 » Mon May 25, 2020 2:24 am

Unemployement will have to hit 90% before the market will dip. V shaped recovery right after when unemployment drops to only 87%.

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Re: Will the US become like Japan?

Post by TheNightsToCome » Mon May 25, 2020 8:10 am

Stef wrote:
Mon May 25, 2020 12:49 am
Are there other examples of countries with zero stock returns over long periods of time?
If you are curious, you can look in Triumph of the Optimists, by Dimson, et al. The authors provide stock and bond returns for 16 developed nations over the last century.

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Re: Will the US become like Japan?

Post by columbia » Mon May 25, 2020 8:17 am

If it does, why would one think that the rest of the world - in the aggregate - would be immune from the same outcome?
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Re: Will the US become like Japan?

Post by UpsetRaptor » Mon May 25, 2020 8:25 am

If a country loses a major war, it’s stock market can take a major hit and even go to zero. An investment in Germany or Japan with any start date and an ending date of 1945 resulted in a complete wipeout. So if you search history you can find a number of instances beyond 80s Japan with negative results over multiple decades.

That’s not happening to the US anytime soon. Forever is a long time, but my investment horizon is my lifetime.

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Re: Will the US become like Japan?

Post by whereskyle » Mon May 25, 2020 8:33 am

willthrill81 wrote:
Sun May 24, 2020 10:10 pm
flyninjasquirrel wrote:
Sun May 24, 2020 9:51 pm
With interest rates set to stay near zero for the foreseeable future, the Fed instituting massive monetary easing for Treasuries and mortgage backed securities, entire industries being bailed out with government cash (i.e. airlines), and consumer confidence likely not to rebound any time soon due to high unemployment - are we destined for a Lost Decade (or more)?
Japan's stock market has had negative returns over the last 30 years in large part because their market reached astronomic levels by the late 1980s. The CAPE ratio for Japan reached about 90 at its height. By comparison, U.S. stocks currently have a CAPE of about 28. Even at the height of the dot-com bubble, the CAPE ratio for U.S. stock peaked at about 44.

You could have said almost all of what you said in the above paragraph 11 years ago. And look what happened to stocks over the last 11 years.

The future could look different. But I wouldn't make a long-term bet against the U.S. economy or stock market.
This is the only post you need to read on this thread. The answer is no. Better to think of Japan solely in terms of what happened in its stock market without trying to draw other parallels. The Japanese market in the 80s got way, way, way, way, way overpriced. High present returns generally indicate lower future returns. That is all. The US stock market is not nearly so overpriced and even before the worst downturn in recent memory, it was not nearly so overpriced. Every other point of comparison in my view is just sophistry.
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Re: Will the US become like Japan?

Post by Robot Monster » Mon May 25, 2020 8:52 am

whereskyle wrote:
Mon May 25, 2020 8:33 am
willthrill81 wrote:
Sun May 24, 2020 10:10 pm
flyninjasquirrel wrote:
Sun May 24, 2020 9:51 pm
With interest rates set to stay near zero for the foreseeable future, the Fed instituting massive monetary easing for Treasuries and mortgage backed securities, entire industries being bailed out with government cash (i.e. airlines), and consumer confidence likely not to rebound any time soon due to high unemployment - are we destined for a Lost Decade (or more)?
Japan's stock market has had negative returns over the last 30 years in large part because their market reached astronomic levels by the late 1980s. The CAPE ratio for Japan reached about 90 at its height. By comparison, U.S. stocks currently have a CAPE of about 28. Even at the height of the dot-com bubble, the CAPE ratio for U.S. stock peaked at about 44.

You could have said almost all of what you said in the above paragraph 11 years ago. And look what happened to stocks over the last 11 years.

The future could look different. But I wouldn't make a long-term bet against the U.S. economy or stock market.
This is the only post you need to read on this thread. The answer is no. Better to think of Japan solely in terms of what happened in its stock market without trying to draw other parallels. The Japanese market in the 80s got way, way, way, way, way overpriced. High present returns generally indicate lower future returns. That is all. The US stock market is not nearly so overpriced and even before the worst downturn in recent memory, it was not nearly so overpriced. Every other point of comparison in my view is just sophistry.
When you think about a reasonable worst case scenario for the U.S., what is it? How about this scenario: The U.S. cape ratio, which is currently 27.78, reverts back to its historical mean of 16.71, and stays there for 40 years. Does this go too far? Not far enough? (I'm asking about a reasonable tail risk, not the zombie apocalypse.)
We are in a permanent and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

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Re: Will the US become like Japan?

Post by 22twain » Mon May 25, 2020 9:01 am

Stef wrote:
Mon May 25, 2020 12:49 am
Are there other examples of countries with zero stock returns over long periods of time?
Russia after 1917? :twisted:

(until, uh... 1995?)
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Re: Will the US become like Japan?

Post by JoMoney » Mon May 25, 2020 9:06 am

Robot Monster wrote:
Mon May 25, 2020 8:52 am
...
When you think about a reasonable worst case scenario for the U.S., what is it? How about this scenario: The U.S. cape ratio, which is currently 27.78, reverts back to its historical mean of 16.71, and stays there for 40 years. Does this go too far? Not far enough? (I'm asking about a reasonable tail risk, not the zombie apocalypse.)
"A reasonable worst case scenario" :D That's funny.
Do you want something that's "worst case", or "reasonable" ? And reasonable based on what? The great thing about being reasonable is you can find or make a reason for whatever you want.
If you used a historical 10% annualized return for stocks, and if the only factor that changed was a price multiple going from 27.78 to 16.71, that implies a change of -1.3% annualized across a 40 year period. So it might take the return to 8.7%
... but keep in mind people buying at the lower multiple would have higher expected returns, and the 'duration' like effect from reinvesting dividends and new investments would average it higher...
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Re: Will the US become like Japan?

Post by TheTimeLord » Mon May 25, 2020 9:08 am

Robot Monster wrote:
Mon May 25, 2020 8:52 am
When you think about a reasonable worst case scenario for the U.S., what is it? How about this scenario: The U.S. cape ratio, which is currently 27.78, reverts back to its historical mean of 16.71, and stays there for 40 years. Does this go too far? Not far enough? (I'm asking about a reasonable tail risk, not the zombie apocalypse.)
So how are you investing for this "reasonable" worst case scenario? Is it actionable and if so what actions should be taken?
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Re: Will the US become like Japan?

Post by willthrill81 » Mon May 25, 2020 9:10 am

Robot Monster wrote:
Mon May 25, 2020 8:52 am
whereskyle wrote:
Mon May 25, 2020 8:33 am
willthrill81 wrote:
Sun May 24, 2020 10:10 pm
flyninjasquirrel wrote:
Sun May 24, 2020 9:51 pm
With interest rates set to stay near zero for the foreseeable future, the Fed instituting massive monetary easing for Treasuries and mortgage backed securities, entire industries being bailed out with government cash (i.e. airlines), and consumer confidence likely not to rebound any time soon due to high unemployment - are we destined for a Lost Decade (or more)?
Japan's stock market has had negative returns over the last 30 years in large part because their market reached astronomic levels by the late 1980s. The CAPE ratio for Japan reached about 90 at its height. By comparison, U.S. stocks currently have a CAPE of about 28. Even at the height of the dot-com bubble, the CAPE ratio for U.S. stock peaked at about 44.

You could have said almost all of what you said in the above paragraph 11 years ago. And look what happened to stocks over the last 11 years.

The future could look different. But I wouldn't make a long-term bet against the U.S. economy or stock market.
This is the only post you need to read on this thread. The answer is no. Better to think of Japan solely in terms of what happened in its stock market without trying to draw other parallels. The Japanese market in the 80s got way, way, way, way, way overpriced. High present returns generally indicate lower future returns. That is all. The US stock market is not nearly so overpriced and even before the worst downturn in recent memory, it was not nearly so overpriced. Every other point of comparison in my view is just sophistry.
When you think about a reasonable worst case scenario for the U.S., what is it? How about this scenario: The U.S. cape ratio, which is currently 27.78, reverts back to its historical mean of 16.71, and stays there for 40 years. Does this go too far? Not far enough? (I'm asking about a reasonable tail risk, not the zombie apocalypse.)
First of all, why would you assume that the market cares at all about the historic CAPE mean of about 17? Why is it something that should be reverted to? U.S. stocks have been above that level almost continuously since 1992, nearly 30 years. The only time it dropped below that level was a few months spanning late 2008 to early 2009, after which time it quickly rose above that level. If a global financial crisis of that magnitude wasn't enough to cause CAPE to revert to its historic mean, I don't really know what would, short of an existential threat to the whole system. So yes, I'd say that goes too far.

This excellent post below from SimpleGift illustrates another problem with the 'CAPE mean-reversion hypothesis'.
SimpleGift wrote:
Tue Apr 17, 2018 5:03 pm
willthrill81 wrote:
Tue Apr 17, 2018 12:12 pm
As noted above, valuations are not reliably mean reverting.
Amen. It's puzzling why folks would think that there's a golden mean value at which stocks are destined to trade. I'm not aware of any economic or financial theory that would support this idea. Clearly, from the historical record, folks are willing to pay a different amount for the same dollar of earnings in different time periods (chart below) — based on the prevailing interest rates, plus investors' preferences, demand and risk expectations.
  • Image
    Note: The full data series is divided into four 35-year periods, with their means in red.
    Source: Shiller Data
Even if one believed stock valuations were mean reverting, which mean above would they be reverting back toward?
That said, U.S. stocks have already gone 20 years with a real return of about zero (-.2% actually), so I'd say that something similar could certainly happen again.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Will the US become like Japan?

Post by wootwoot » Mon May 25, 2020 9:11 am

In a word, no.

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Re: Will the US become like Japan?

Post by willthrill81 » Mon May 25, 2020 9:12 am

22twain wrote:
Mon May 25, 2020 9:01 am
Stef wrote:
Mon May 25, 2020 12:49 am
Are there other examples of countries with zero stock returns over long periods of time?
Russia after 1917? :twisted:

(until, uh... 1995?)
China after 1949 (approximately) is another.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Will the US become like Japan?

Post by Robot Monster » Mon May 25, 2020 9:22 am

JoMoney wrote:
Mon May 25, 2020 9:06 am
Robot Monster wrote:
Mon May 25, 2020 8:52 am
...
When you think about a reasonable worst case scenario for the U.S., what is it? How about this scenario: The U.S. cape ratio, which is currently 27.78, reverts back to its historical mean of 16.71, and stays there for 40 years. Does this go too far? Not far enough? (I'm asking about a reasonable tail risk, not the zombie apocalypse.)
"A reasonable worst case scenario" :D That's funny.
Do you want something that's "worst case", or "reasonable" ? And reasonable based on what? The great thing about being reasonable is you can find or make a reason for whatever you want.
If you used a historical 10% annualized return for stocks, and if the only factor that changed was a price multiple going from 27.78 to 16.71, that implies a change of -1.3% annualized across a 40 year period. So it might take the return to 8.7%
... but keep in mind people buying at the lower multiple would have higher expected returns, and the 'duration' like effect from reinvesting dividends and new investments would average it higher...
I used the word reasonable so people wouldn't start talking about extreme events like nuclear catastrophe. I guess I'm asking about the worst case scenario a person should consider when investing, that's all. The person might say to himself, "I don't expect such-and-such to happen, but I'm going to arrange my portfolio so that if it does I'll be okay".

If a person bought at today's levels and the cape dropped to 16.71 and stayed there, they'd still get a 8.7% return? That surprises me. (I don't follow your math because, er, I'm not so bright, I guess.)
We are in a permanent and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

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Re: Will the US become like Japan?

Post by willthrill81 » Mon May 25, 2020 9:28 am

Robot Monster wrote:
Mon May 25, 2020 9:22 am
If a person bought at today's levels and the cape dropped to 16.71 and stayed there, they'd still get a 8.7% return? That surprises me. (I don't follow your math because, er, I'm not so bright, I guess.)
If stocks would return 10% if CAPE remained the same, then the impact of CAPE slowly dropping to 16.7 over 40 years would represent a 1.3% headwind, reducing returns to 8.7%. These are nominal returns, however, not inflation-adjusted (i.e. real).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Will the US become like Japan?

Post by SimpleGift » Mon May 25, 2020 9:28 am

The relative success of the U.S. stock market should not lead folks to believe that the U.S. economy is somehow exceptional or immune from the global demographic and secular forces impacting the rest of the world. In fact, U.S. economic growth has been decelerating for six decades, right along with the other developed economies (charts below).
  • Image
    Data source: World Bank, showing real GDP growth rates in constant 2010 U.S. dollars.
The U.S. bond market today is already acknowledging a low growth future, with low inflation and interest rates forecast for the decades ahead. Not to say that the U.S. is in exactly the same boat as Japan or Europe, but it does make one pause and wonder how long the U.S. stock market can continue to defy economic gravity.

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Re: Will the US become like Japan?

Post by Anon9001 » Mon May 25, 2020 9:33 am

SimpleGift wrote:
Mon May 25, 2020 9:28 am
The relative success of the U.S. stock market should not lead folks to believe that the U.S. economy is somehow exceptional or immune to the global demographic and secular forces impacting the rest of the world. In fact, U.S. economic growth has been decelerating for six decades, right along with the other developed economies (charts below).
  • Image
    Data source: World Bank, showing real GDP growth rates in constant 2010 U.S. dollars.
The U.S. bond market today is already acknowledging a low growth future, with low inflation and interest rates forecast for the decades ahead. Not to say that the U.S. is in exactly the same boat as Japan or Europe, but it does make one pause and wonder how long the U.S. stock market can continue to defy economic gravity.
Right the thing is that the US stock market is misleading. These companies US Giant Caps ie S&P 500 or even Total Market that many people invest in have 40% revenues outside USA. If you look at the mid and small caps they should mirror the local economic situation more closely. The diminishing size premium might be due to this poor economic growth in USA.

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Re: Will the US become like Japan?

Post by JoMoney » Mon May 25, 2020 9:33 am

Robot Monster wrote:
Mon May 25, 2020 9:22 am
JoMoney wrote:
Mon May 25, 2020 9:06 am
Robot Monster wrote:
Mon May 25, 2020 8:52 am
...
When you think about a reasonable worst case scenario for the U.S., what is it? How about this scenario: The U.S. cape ratio, which is currently 27.78, reverts back to its historical mean of 16.71, and stays there for 40 years. Does this go too far? Not far enough? (I'm asking about a reasonable tail risk, not the zombie apocalypse.)
"A reasonable worst case scenario" :D That's funny.
Do you want something that's "worst case", or "reasonable" ? And reasonable based on what? The great thing about being reasonable is you can find or make a reason for whatever you want.
If you used a historical 10% annualized return for stocks, and if the only factor that changed was a price multiple going from 27.78 to 16.71, that implies a change of -1.3% annualized across a 40 year period. So it might take the return to 8.7%
... but keep in mind people buying at the lower multiple would have higher expected returns, and the 'duration' like effect from reinvesting dividends and new investments would average it higher...
I used the word reasonable so people wouldn't start talking about extreme events like nuclear catastrophe. I guess I'm asking about the worst case scenario a person should consider when investing, that's all. The person might say to himself, "I don't expect such-and-such to happen, but I'm going to arrange my portfolio so that if it does I'll be okay".

If a person bought at today's levels and the cape dropped to 16.71 and stayed there, they'd still get a 8.7% return? That surprises me. (I don't follow your math because, er, I'm not so bright, I guess.)
It was a very quick back-of-the-envelop calculation based on:
Long-term (since 1925 to present) an investment in U.S. equities would have grown 10% annualized

A price multiple changing from 27.8 to 16.71 is a -39.9% change, but annualized across a 40 year period amounts to -1.3% annualized
I just subtracted the price multiple change projected into the future 40 years you suggested from the historical growth projected 40 years into the future.

If you invested $10,000 today and it grew at a 10% annualized rate for 40 years, you'd have about $450,000 at the end
If at that point the $450,000 lost 40% of it's value ($180,000), you'd have $270,000 , which represents a 8.6% CAGR

If you invested $10,000 today and it immediately lost 40% of it's value ($4,000), and your remaining $6,000 grew 10% for 40 years, you'd have $270,000 at the end.
Last edited by JoMoney on Mon May 25, 2020 9:40 am, edited 2 times in total.
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Re: Will the US become like Japan?

Post by Stef » Mon May 25, 2020 9:35 am

SimpleGift wrote:
Mon May 25, 2020 9:28 am
The relative success of the U.S. stock market should not lead folks to believe that the U.S. economy is somehow exceptional or immune from the global demographic and secular forces impacting the rest of the world. In fact, U.S. economic growth has been decelerating for six decades, right along with the other developed economies (charts below).
  • Image
    Data source: World Bank, showing real GDP growth rates in constant 2010 U.S. dollars.
The U.S. bond market today is already acknowledging a low growth future, with low inflation and interest rates forecast for the decades ahead. Not to say that the U.S. is in exactly the same boat as Japan or Europe, but it does make one pause and wonder how long the U.S. stock market can continue to defy economic gravity.
Luckily we live in a highly globalized world. You don't need domestic GDP growth for great stock market returns. The correlation between GDP growth rate and stock market returns seems to be even negative.

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Re: Will the US become like Japan?

Post by Robot Monster » Mon May 25, 2020 9:37 am

willthrill81 wrote:
Mon May 25, 2020 9:10 am
If a global financial crisis of that magnitude wasn't enough to cause CAPE to revert to its historic mean, I don't really know what would, short of an existential threat to the whole system. So yes, I'd say that goes too far.
What about, to the surprise of many, inflation kicks in and we enter a prolonged period of stagflation that makes the Fed have to change gears and hike interest rates? Is this a tail risk you'd not even consider?
We are in a permanent and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

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Re: Will the US become like Japan?

Post by willthrill81 » Mon May 25, 2020 9:46 am

Robot Monster wrote:
Mon May 25, 2020 9:37 am
willthrill81 wrote:
Mon May 25, 2020 9:10 am
If a global financial crisis of that magnitude wasn't enough to cause CAPE to revert to its historic mean, I don't really know what would, short of an existential threat to the whole system. So yes, I'd say that goes too far.
What about, to the surprise of many, inflation kicks in and we enter a prolonged period of stagflation that makes the Fed have to change gears and hike interest rates? Is this a tail risk you'd not even consider?
You can play 'what if' scenarios all day long, but I fail to see how that leads to much that is actionable.

At least partly in order to address some of the tail risks faced by stocks, I have chosen to be a trend follower. The details of my strategy are here, though I no longer discuss my strategy on the forum.
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Re: Will the US become like Japan?

Post by Slick8503 » Mon May 25, 2020 9:46 am

willthrill81 wrote:
Mon May 25, 2020 9:28 am
Robot Monster wrote:
Mon May 25, 2020 9:22 am
If a person bought at today's levels and the cape dropped to 16.71 and stayed there, they'd still get a 8.7% return? That surprises me. (I don't follow your math because, er, I'm not so bright, I guess.)
If stocks would return 10% if CAPE remained the same, then the impact of CAPE slowly dropping to 16.7 over 40 years would represent a 1.3% headwind, reducing returns to 8.7%. These are nominal returns, however, not inflation-adjusted (i.e. real).
Where would the 10% return come from without significant multiple expansion? Or what Bogle called “speculative return”.

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Re: Will the US become like Japan?

Post by SimpleGift » Mon May 25, 2020 9:48 am

Stef wrote:
Mon May 25, 2020 9:35 am
Luckily we live in a highly globalized world. You don't need domestic GDP growth for great stock market returns. The correlation between GDP growth rate and stock market returns seems to be even negative.
While the correlation between GDP growth and stock returns has been low or negative for individual countries, it has been strongly positive for the world as a whole. See this Forum discussion:

Global GDP Growth --> World Stock Returns, 1970-2017

As the planet has become more interconnected, the correlation between world GDP growth and global stock returns has increased in recent decades. The more companies' earnings are global, the more they are impacted by global growth.
Last edited by SimpleGift on Mon May 25, 2020 9:52 am, edited 1 time in total.

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Re: Will the US become like Japan?

Post by JoMoney » Mon May 25, 2020 9:52 am

Slick8503 wrote:
Mon May 25, 2020 9:46 am
willthrill81 wrote:
Mon May 25, 2020 9:28 am
Robot Monster wrote:
Mon May 25, 2020 9:22 am
If a person bought at today's levels and the cape dropped to 16.71 and stayed there, they'd still get a 8.7% return? That surprises me. (I don't follow your math because, er, I'm not so bright, I guess.)
If stocks would return 10% if CAPE remained the same, then the impact of CAPE slowly dropping to 16.7 over 40 years would represent a 1.3% headwind, reducing returns to 8.7%. These are nominal returns, however, not inflation-adjusted (i.e. real).
Where would the 10% return come from without significant multiple expansion? Or what Bogle called “speculative return”.
The same place it's always come from, intrinsic growth of the business.
The long-term return on stocks has been 10% even where Bogle shows the "speculative return" was 0% across time.
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Re: Will the US become like Japan?

Post by bigskyguy » Mon May 25, 2020 10:01 am

SimpleGift wrote:
Mon May 25, 2020 9:28 am
The relative success of the U.S. stock market should not lead folks to believe that the U.S. economy is somehow exceptional or immune from the global demographic and secular forces impacting the rest of the world. In fact, U.S. economic growth has been decelerating for six decades, right along with the other developed economies (charts below).
  • Image
    Data source: World Bank, showing real GDP growth rates in constant 2010 U.S. dollars.
The U.S. bond market today is already acknowledging a low growth future, with low inflation and interest rates forecast for the decades ahead. Not to say that the U.S. is in exactly the same boat as Japan or Europe, but it does make one pause and wonder how long the U.S. stock market can continue to defy economic gravity.
Thank you for the very informative graphs. Trends across the developed world are consistent, with aging populations, increasing costs of both equities and fixed income instruments. Yes there are significant fluctuations around the trend lines, but the trend lines are consistent and likely predictive of the future, absent radical events. US median age in 1970 was 28, today 38. Birth rate us 1960 was 3.7/woman, now 1.8/woman. Similar statistics for the rest of the developed world. The major demographic difference between the US and Japan/Europe until recently was our immigration policy which was a significant counterbalance to the demographic trends towards slower growth. Our history of being a nation of immigrants was and remains integral to sustained economic growth and expansion. Absent robust immigration for the majority of the 20th century, I suspect we would already be Japan.

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Re: Will the US become like Japan?

Post by SimpleGift » Mon May 25, 2020 10:08 am

bigskyguy wrote:
Mon May 25, 2020 10:01 am
Our history of being a nation of immigrants was and remains integral to sustained economic growth and expansion. Absent robust immigration for the majority of the 20th century, I suspect we would already be Japan.
This has certainly been a big factor. And it's a realization that both Japan and Europe are coming to, now that their population growth rates are stagnating or declining.

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Re: Will the US become like Japan?

Post by bobcat2 » Mon May 25, 2020 10:30 am

Economically the US already looks a lot like Japan. US annual real GDP growth for the first 20.25 years of the 21st century (4th quarter 1999 thru 1st quarter 2020) is only 1.9%. US population grew at an annual rate of 0.8% from 1999 thru 2019. So that per capita US GDP growth has only been 1.1% since 1999.

Real GDP growth will be negative for 2020. The only question is how negative? The Congressional Budget Office estimates that GDP in 2020 will fall 5.6%. That would bring the GDP annual growth rate for the last 21 years (4th quarter 1999 thru 4th quarter 2020) down to 1.6% and per capita growth down to 0.8%.

For comparison –
Population growth in Japan has been slightly negative since 1999, but essentially zero (population loss of about 100,000 from 1999 to 2018). Japanese annual real GDP growth for the first 20.25 years of the 21st century (4th quarter 1999 thru 1st quarter 2020) is only 0.8%. But that makes Japanese per capita GDP growth also 0.8%, which is only a little lower than the US per capita growth rate of 1.1% over the same 20.25 years.



Comparison of US GDP growth rates since 1959

Code: Select all

US real GDP annual growth rates by decade since 1960 thru 1999
1960s       4.4%
1970s       3.3%
1980s       3.1%
1990s       3.0% 

1960-99     3.5%     per capita 2.4%
2000-20     1.6%     per capita 0.8%             (including CBO estimate for final 3 quarters of 2020)
Data sources are FRED, US Census Bureau, and CBO.

BobK

Edited to include US per capita real GDP growth rate from 1960-99
Last edited by bobcat2 on Mon May 25, 2020 10:56 am, edited 1 time in total.
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Re: Will the US become like Japan?

Post by bigskyguy » Mon May 25, 2020 10:31 am

As I look at the graphs, they are somewhat misleading, in that the y-axes are different. US real GDP growth rates over 60 years has dropped by 50% (4% to 2%), for Europe they have dropped by 80% (5% to 1%), and for Japan from 8% to negative. Clearly the US has a longer way to go to see the extent of decline that has occurred in Japan and Europe. There is a degree of magnitude difference between the US and Japan as to the extent of the decline.

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Re: Will the US become like Japan?

Post by geerhardusvos » Mon May 25, 2020 10:55 am

flyninjasquirrel wrote:
Sun May 24, 2020 9:51 pm
With interest rates set to stay near zero for the foreseeable future, the Fed instituting massive monetary easing for Treasuries and mortgage backed securities, entire industries being bailed out with government cash (i.e. airlines), and consumer confidence likely not to rebound any time soon due to high unemployment - are we destined for a Lost Decade (or more)?

Sorry if this has already been discussed - didn't find a thread in search.
No, the USA isn’t going anywhere soon.

We will likely have lost decades in the future.

But we will also likely have decades similar to 2009 to 2019 of 2x-5x growth in the future as well.

(With japan example in mind) We need to:
-Keep making lots of babies
-Keep educating those babies
-Provide an environment where those babies can grow up and create innovative ideas and companies that disrupt the market

We’ve been doing less of this these days. But will take ~50 years at the earliest for USA to not be the global economic super player anymore, but that may never happen in even our grandkids lifetimes. I think global diversification is helpful here, but I have 20% non us which gets me enough of that for my liking.
Last edited by geerhardusvos on Mon May 25, 2020 12:02 pm, edited 2 times in total.
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Re: Will the US become like Japan?

Post by whereskyle » Mon May 25, 2020 11:38 am

Regarding the higher than average CAPE in the US, I think we can infer that the CAPE is high because investors feel that it is safe to invest in the US, so more people (and more dollars) are doing it, and the prices are therefore higher. I think it is reasonable to assume that the CAPE will remain higher than it was before the end of the Cold War, so long as the US remains a safe place to invest. In 2008-2009, uncertainty reigned, and the CAPE dropped. But we have to remember that even with an elevated CAPE due to a historically unique relative lack of risk, the current US ratio is not much higher than Japan's current ratio. The US's CAPE ratio even during the recent great bull run equaled only one quarter of Japan's CAPE before its crash. When the CAPE is above 60, then we could start to draw some comparisons. Right now, the CAPE tells me that investors feel safe, so prices are high. It does not tell me that prices are so astronomically high that the US is headed for a 30-year bear market.
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Re: Will the US become like Japan?

Post by Anon9001 » Mon May 25, 2020 12:14 pm

If there is a US premium we should MSCI ACWI Ex USA Growth to trade at a discount to MSCI USA. It does not:

MSCI USA

MSCI ACWI Ex USA Growth

The MSCI USA trades at premium to the MSCI ACWI Ex USA index due to the much higher Financials weightage in the later. The investors do not seem to be bidding up USA stocks because they are "safe" whatever that means but rather the sectors the USA index has high weightage in tends to be Growth oriented sectors compared to MSCI ACWI Ex USA. When the Value premium returns we should expect USA stocks to under-perform.

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Re: Will the US become like Japan?

Post by Rosencrantz1 » Mon May 25, 2020 12:24 pm

bigskyguy wrote:
Mon May 25, 2020 10:31 am
As I look at the graphs, they are somewhat misleading, in that the y-axes are different. US real GDP growth rates over 60 years has dropped by 50% (4% to 2%), for Europe they have dropped by 80% (5% to 1%), and for Japan from 8% to negative. Clearly the US has a longer way to go to see the extent of decline that has occurred in Japan and Europe. There is a degree of magnitude difference between the US and Japan as to the extent of the decline.
I noticed this as well - in my case, by looking at the fitted line slope and seeing the differences in y-scale. It'd be interesting to see this data on a single graph with fixed x and y scales.

This is not to suggest US GDP growth isn't declining. Just not nearly as quickly as a casual glance at the graphs would imply.

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Re: Will the US become like Japan?

Post by bigskyguy » Mon May 25, 2020 1:20 pm

whereskyle wrote:
Mon May 25, 2020 11:38 am
Regarding the higher than average CAPE in the US, I think we can infer that the CAPE is high because investors feel that it is safe to invest in the US, so more people (and more dollars) are doing it, and the prices are therefore higher. I think it is reasonable to assume that the CAPE will remain higher than it was before the end of the Cold War, so long as the US remains a safe place to invest. In 2008-2009, uncertainty reigned, and the CAPE dropped. But we have to remember that even with an elevated CAPE due to a historically unique relative lack of risk, the current US ratio is not much higher than Japan's current ratio. The US's CAPE ratio even during the recent great bull run equaled only one quarter of Japan's CAPE before its crash. When the CAPE is above 60, then we could start to draw some comparisons. Right now, the CAPE tells me that investors feel safe, so prices are high. It does not tell me that prices are so astronomically high that the US is headed for a 30-year bear market.
That is certainly one inference, that risk is less, so return should be less (lower risk/lower return/stable earnings).
An alternative inference is that due to excessive debt, worsening demographics, etc, that future economic growth will be depressed, so future returns will be repressed (lower earnings/lower returns/stable risk).
A third inference could be that risk is enhanced due to the environment (unstable economics, unfavorable demographics, unfavorable geopolitics), leading to lower earnings, unstable environment, but no good alternative investment vehicles.
What I am driving at is that simply equating a high CAPE to a safer investment environment, while one explanation, is not necessarily the only explanation. And there are less favorable explanations that must be considered.

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Re: Will the US become like Japan?

Post by garlandwhizzer » Mon May 25, 2020 1:45 pm

theorist wrote:

Here are some projections from experts about equity returns in the coming years, made soon after the recent crash. Even with equities cheaper than they were in February, you see that GMO, Morningstar, and Research Affiliates are hardly bullish on US equity returns going forward a few years. Will they be right? Who knows.

https://www.morningstar.com/articles/97 ... is-edition
I read the Morningstar article and found it interesting. It's hazardous trying to predict the future and many predictions turn out in retrospect to be humorous rather than insightful. Humility is the appropriate attitude in predicting the future. Having said that, all for of the firms predictions, the 3 listed above plus Vanguard, have some things in common.

First, bonds, especially Treasuries which have done so well for the last 40 years, are going to produce laughably low returns over the next decade, possibly negative in real terms. Long Term Treasuries which many have touted due to their great performance in the COVID-19 recession may be most vulnerable going forward. Second, INTL and especially EM equity are expected to significantly outperform US equity over the next decade. This is the same refrain we've been hearing from experts and analysts for more than a decade and, thus far, they have been dead wrong. They are keeping the faith however and, as with bonds, they are expecting a rather vigorous reversal relative to what has occurred over the past decade. Third, they expect all returns to be much lower than historical averages for both equity and bonds going forward.

They all seem to agree that reversion to the mean is going to occur, past losers turning into future winners, and past winners turning into future losers. They also agree that 60/40 portfolios are not likely to perform going forward anywhere near as well as historical averages. Time will tell whether they're right or once again their expectations miss the mark of reality. Personally, I continue to hold long suffering INTL and even overweighting EM, hoping for my reward for tolerating signifiant and persistent underperformance. At this point however my faith in that outcome is getting pretty thin.

Garland Whizzer

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