Lessons from Japan
Wednesday, March 11, 2009 | Teeka TiwariRating:
What a difference a day makes. All of a sudden, stocks are a buy again.
This is the nature of bear markets: Protracted down movements punctuated with very sharp up movements. During a bull market we see pretty similar action, but in reverse.
I don’t know that anything all that dramatic has changed in the world over the last 24 hours, but given Tuesday's 5.8% leap in the DOW, it sure looks like the long-awaited bear market rally is upon us.
If you are still short, you may want to at least hedge some of your exposure if you don’t have the stomach to sit through what could be a fair sized rally.
The talk now is of re-instituting the uptick rule. Talk about closing the barn door after the horse has already bolted!
With the advent of ETFs (ETFs have never required an uptick to short them), I don’t know how much of a net benefit we will see from bringing it back. Some stocks will certainly benefit because it will slow down the rate of destruction that we’ve seen take place in certain stocks that have just been “bear raided” into oblivion.
We’re hearing isolated rumblings about doing away or suspending mark to market rules, and I’ve got to say that’s just a bad, bad idea. Mark to market rules compel companies to value their assets based upon what they can sell them for, rather than what they paid for them. It’s a rule that is intended to keep everybody honest. Much of a firm’s liquidity and credit rating is geared off the ratio between the value of their assets and their liabilities.
Crashing asset values are wreaking havoc with financial institutions' liquidity ratios. Doing away with mark to market rules is the equivalent of playing pretend; kind of cool when you’re an eight year kid, but bloody scary when witnessed in full grown adults.
Parts of Japan’s 20 year malaise has had to do with their refusal to fully embrace mark to market rules.
Their banks were rife with real estate holdings that were being held on the books at ridiculously high values.
If you are wondering just how beat up asset values can get, let me put this in perspective for you ...
In 1989, commercial real estate in the ritzy Ginza area of Japan was going for $93,000 per square foot! By 2004, prices had declined to less than 1% of that number. In the same period, Tokyo residential homes dropped 90% in value. Much of this massive appreciation was caused by too large a money supply matched with lax lending standards ... sound familiar?
Attempting to expand lending right now just doesn’t make sense. What you end up doing is creating half dead businesses. Just about any business can stay alive if it can have access to cheap enough capital.
Creative destruction is part of capitalism; you can’t be capitalists on the way up and socialists on the way down. That’s the path Japan took with its more than 100 billion yen of fiscal stimulus packages. Japan tried 10 stimulus packages, in fact, and none of them worked.
According to yesterday's Journal, the Dems are floating the idea of another stimulus package.
More stimulus packages can only lead to higher taxes, and nothing forces money out of an economy faster than accelerating taxes into a declining economic environment.
(Please let us know what you think about Teeka Tiwari's article.)
Rate his article here »
Rate his article here »
Teeka Tiwari
Chief Investment Officer
ETF Master Trader
