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Just In Case...
Sat Feb 10, 2018 1:37pm

...any of you losers has any money in the stock market or any related investments that have outcomes that are dependent on stock market activity, here's what we think, we thinking a professional group of investors with over a combined fifty years of very profitable investing and who have survived and succeeded through each of the various market crashes since 1987 :

We see this present situation as eerily reminiscent of Japan at the end of 1989. The Japanese stock market Nikkei 225 Index - their "Dow Jones Industrial Average" - touched 39,000 at the end of that year, an all-time high that was the result of very low artificial interest rates for the financial sector that had been manufactured by the Central Bank of Japan throughout the 1980s so as to give the Japanese companies the cheap credit they needed to expand throughout the world.

By the end of the 1980s, the amount of money printed by that Central Bank had the effect of being invested in stocks. This happened because companies had done as much expansion as there was demand to justify, and no longer needed any further credit. But since the cheap money still was being offered and since their stock market seemed to only know how to go up, companies expanded their business into stock investment. At the same time, individuals did the same thing, since home equity and consumer loans were very inexpensive and since the Japanese of that time had very high amounts of savings and were receiving hardly any interest from their bank deposits.

In 1989, the era of easy money in Japan caused prices inside the country to start rising at a rate that had not been seen there since the end of the second world war. All of that newly-printed money finally had devalued the buying power of each unit of currency. A new Central Bank President took the reins at the end of 1989 and vowed to stop the rise in inflation.

That's all the stock market had to hear, because even the elevator operators knew that if interest rates started to rise inside Japan, the flow of funds into stocks would reduce the amount of new money coming into the market to drive prices higher. Additionally, as the cost of borrowing rose, the amount of profit that could be made from any stock market appreciation would slow. Higher interest rates would increase input costs for Japanese companies, which would reduce their profits. That was very worrisome, since prices of stocks there already were so high that an investor was paying for 30 years of future earnings per share with every share that the investor bought.

Bottom line is that when interest rates rose, the element of risk appeared in the Japanese stock market, so that no one could have the same confidence that stock prices would continue their historic ascent to record high levels.

So in January 1990, companies started liquidating stock holdings, and by the end of the month the selling spread to almost every sector of buyer in that market. During the next few months, the selling accelerated and became even more widespread. The Central Bank continued raising interest rates to wring inflation out of the economy, which gave investors no hope at all that the stock decline would end anytime soon.

By the end of 1990, the Nikkei 225 had dropped from that record high above 39,000 to below 20,000, a fall of 50% or more. By the time the selling had finished in the years to follow, the market fell below 10,000, a 75% decline which is characteristic of the great stock market crashes of all-time. Since then the Nikkei has never returned to its old highs, actually never came close. The country has been mired in an ongoing recession and at times Depression ever since, caused by losing its export economy to the Chinese but fueled in part to the destruction of capital that occurred in the 1990s which paralyzed the ability of the Japanese economy to re-invent itself.

We believe that there are so many similarities to what has occurred in the US economy since the financial crisis in 2008 through the end of 2017 that it is inevitable for the US stock market to experience an almost identical fate as what befell the Japanese in 1990 and beyond. Both economies were stimulated by the desire of their Central Banks to improve economic conditions in a major way, which caused interest rates to remain artificially low for so long as to cause significant economic imbalances that manifested in a grossly overvalued stock market. Once the stimulus faded and the punch bowl was removed from the party, the mood soured and people went home. Stocks plunged in classic form, and created a negative feedback loop that is commonly known as a negative wealth effect. That negative sentiment caused the the economy to slow which reinforced the prevailing notion that stock prices were too high even as they fell by harrowing percentages.

The victors in these kinds of meltdowns have been precious metals and debt securities. The losers have been the stocks of the country experiencing the downturn, its currency, and commodity prices as demand of consumers shrinks when they feel negative about economic conditions going forward.

This time in America, the problem will be especially dangerous as many new complex investment products that are highly leveraged will decline in value to a much higher degree than the overall stock market. This will lead to forced liquidation of underlying stock holdings that will fuel the downturn, making the negative price movement greater than it would have been had these products never been approved for investment. Already in the last two weeks, a type of investment that reacted to changes in volatility - and had been very popular for the last five years because of the dearth of market volatility - collapsed and lost something like 90% of its value, even though the overall stock market was down less than 10% during the same time. Leverage is a really nasty double-edged sword.

So regardless of what the cheerleaders for the stock broker companies may be chanting on CNBC, we believe that this calamity is far from over. Its what is known as a paradigm shift, where all of the factors influencing stock prices make an about turn and cause the market to change direction.

I am not allowed nor do I care to give any of you advice. My message is one of warning. This situation could get very bad in a hurry. Owners of stocks or anything having to do with stocks could get hurt very badly from what we believe is about to happen. There will be a path of destitution and bankruptcy of a generation if the warning signs flashing now come to fruition. I think if you pay heed to the prospective direction of asset classes as I described above in the way you manage your investments and savings, you will be safe and actually will do quite well. This includes the way you have any retirement funds structured. If you have a 401k that has investments in stocks, maybe now would be a good time to shift those stock holdings into bonds and precious metals. Do not think that because money is in a retirement account that it is immune from the performance of the stock market unless there is an explicit guarantee in the prospectus or offering memorandum that says so without condition.

The excesses of what has occurred during the last nine years, excesses that were originally fashioned to save an economy in great suffering after the financial crisis, now are being wrung out of the financial system as they transitioned from being beneficial to harmful. The financial organism is trying to save itself by taking severe counter-measures to the agents that have caused great malady. We believe that this is going to be the big one that the more erudite and reasoned of financial gurus have been talking about for quite some time.

The patient had a severe heart attack in 2008, and was put on some heavy medicines to help nurse him back to health. Unfortunately the doctor left the patient on the medicines too long and they began to do harm. Making matters worse, the patient started to return to his old bad habits as he felt better, and now became heavier, smoked more, and had higher amounts of bad cholesterol in his blood than when he had the last heart attack. Its only a matter of time before this kind of patient encounters his well-deserved demise. We think that time has come.

There are many culprits to blame for what is about to occur, but the main one is the Federal Reserve of the United States, and namely Janet Yellen, who was their Chairwoman for the last four years and had been on the Federal Reserve Board of Governors for quite a long time before, starting when she became the President of the San Francisco Federal Reserve Bank. She has been the leading advocate for keeping free money provision the central operating tenet of the Federal Reserve for far longer than was required or wise to do so. She failed to admit that the policies implemented by the Board t=over whom she presided were causing a huge stock market bubble to form, and she refused to admit what every economist trained in the last sixty years was taught : that these policies would eventually ignite an inflation that would poke a dangerous hole in the bubble that Fed policies were creating.

The new Chair of the Fed is no better, in that he sat on the Board and concurred with the policies that Yellen supported since May of 2012. Its not surprising that the change of trend in the stock market started just about the time when Powell took the reins from Yellen. It was like the market sent them a huge sign of displeasure.

Its a good time to be cautious, remembering that return of capital is more important than return on capital.

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