Author Topic: Why the US stock market will never repeat the Japanese stock market experience.  (Read 4237 times)

bwall

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I posted this in a reply on an earlier thread ('Retiring at the top in 2007') in an attempt to answer a question posed by @ChpBstrd . I thought the topic might be worth it's own thread as ChpBstrd's point is valid; how do we KNOW that the US market won't suffer the same fate as the Japanese market since 1989?

Here was the post:

Allow me to try and give a convincing rationale for why there will be no repeat of the Japanese stock market experience in the USA.

The stock market is a reflection of the economy--everyone (should) know this. But, what exactly does it reflect? In the USA you have new small companies coming onto the stock market all the time. These new companies then grow into larger companies. Most of us could easily name many large cap US stocks (over $100 billion market cap) that did not exist or were very very tiny 20-25 years ago (aapl, goog, amzn, nvda, to name a few.)   The growth of these companies is then reflected in the growth of the stock market index over time. If your country (or stock market) cannot produce these world class companies, then your stock market will not show much growth over time. Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong. 

But, perhaps a biotech CEO could illustrate the point better than I can. It's a bit of a dry talk, but the important part is less than five minutes long, beginning just before the 7 minute mark.  https://www.youtube.com/watch?v=XFK-B1xJzGc
In these five minutes, the CEO of CRSP, a biotech company with technology that will change the world as we know it, explains how the Europeans who discovered this technology moved their headquarters from London to Basel, Switzerland although none of them were Swiss. Airplanes from London can fly in any direction, but they chose Switzerland. Why not Germany? Or Sweden? Or Luxembourg? Or Austria? Or Turkey? Or Greece? Or Russia? Or even simplest of all, stay put in London!

They then discovered that they couldn't access enough talent or capital in Switzerland or all of Europe. So, they opened shop in the USA and listed on the nasdaq. Japan wasn't even on their radar screen, btw. The benefits of the growth of this company will flow to investors in the US stock market. Not the European or Japanese stock market. To hear the speaker in the link say it, an important part of the US market is researchers who will accept stock in a company in exchange for salary. In Europe (and Japan?) the average person is wary of the stock market and not willing to accept stock in exchange for salary. Again, in these five minutes the European born CEO of a cutting edge technology company explains why the USA is the best place in the world to work and invest.

There are dozens of biotech companies in the USA that are working on curing cancer with 'smart drugs' that target only the cancerous cells. They will be able to sell their products worldwide. But, only investors in the US stock market will reap the benefits as that is where they're listed. Not all the companies will succeed, but some of these will grow into behemoths in the next 10-20 years. Even if the USA cannot or does not produce the researchers or the technology these companies still choose to list in the USA with the benefits flowing to those who invest in the US stock index.

Japan has nothing like this. Ditto Europe, for the record.

GuitarStv

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Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong. 

I'm not super familiar with Japanese companies . . . but can't think of any 'world-class' businesses that have only become successful in the past 30 years.  Most of the big Japanese companies that are successful which come to mind (Sony, Honda, Toyota, Mitsubishi) are pretty old.  But then I started thinking . . . how common are companies with extreme and rapid success like google and amazon?  Canada isn't under the same market conditions as Japan at all, but I can't think of any huge successes over the past 30 years for Canadian companies.

Actually, the only other country that immediately springs to mind as having similar very quickly rising world class companies is China (Alibaba/Aliexpress, Baidu, Xaiomi, Huawei).

Buffaloski Boris

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The US stock market is losing companies over time. Fairly dramatic drop over 20 years or so. There  arenít nearly as many up and coming new companies listing as there are companies going private, going bankrupt, or merging. The trend since the 90s has not been our friend.

IMO, the reason behind the current valuations of the stock market have everything to do with a lot of available cash sloshing around. The point where the money spigot is turned off, if it is ever turned off, is when weíll see how things shake out. My personal opinion is thatíll be a ďbug meets windshieldĒ moment.

Also, the issues in Japan 30 years ago are fairly similar to those in the US now. Stock market with very high PE ratios. Check. Rapidly declining birthrates. Check. Increasing social expenditures having the effect of transferring wealth from the young to the old. Check.

We like to think that ďthis time will be different.Ē Maybe it will be. I doubt it.

PDXTabs

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Also, the issues in Japan 30 years ago are fairly similar to those in the US now. Stock market with very high PE ratios. Check. Rapidly declining birthrates. Check. Increasing social expenditures having the effect of transferring wealth from the young to the old. Check.

The largest problems that Japan faces are demographic in nature. An aging population, low birth rates, and a reluctance to let in foreigners. The US, traditionally, has not suffered from these ailments. But recently we have been looking more and more like Japan.

Buffaloski Boris

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The largest problems that Japan faces are demographic in nature. An aging population, low birth rates, and a reluctance to let in foreigners. The US, traditionally, has not suffered from these ailments. But recently we have been looking more and more like Japan.

Indeed. US birthrates have dropped like a rock. We face a similar economic future as Japan, just delayed a few decades. I find it entertaining to see folks explain how an economy continues to expand once itís population is middle aged. Must be that ďgreen economyĒ thatís going to save the day.

Donít forget the unicorns.

 Entrepreneurship and consumption are generally for the young. Well educated kids today will have the world as their oyster. Most of the industrial world is desperate for them.

Davnasty

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Also, the issues in Japan 30 years ago are fairly similar to those in the US now. Stock market with very high PE ratios. Check. Rapidly declining birthrates. Check. Increasing social expenditures having the effect of transferring wealth from the young to the old. Check.

We like to think that ďthis time will be different.Ē Maybe it will be. I doubt it.

The mean trailing 12 month P/E ratio of the S&P 500 is currently 15.76. P/E ratios in Japan were consistently above 50 for years before the crash. Uncheck. How many people were immigrating to Japan around 1990? Rate of population growth in the US was 0.7% in 2017. Population growth rate of Japan in 1990 was 0.3% and in 2017 it was -0.2%. Uncheck.

I'm not refuting your conclusion but these are not good data to support it.
« Last Edit: October 11, 2019, 10:26:20 AM by Dabnasty »


bwall

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Since Japan's stock market crashed in 1989 and hasn't risen again, I can comfortably surmise that Japan has produced no world class companies in the past 30 years. Please prove me wrong. 

I'm not super familiar with Japanese companies . . . but can't think of any 'world-class' businesses that have only become successful in the past 30 years.  Most of the big Japanese companies that are successful which come to mind (Sony, Honda, Toyota, Mitsubishi) are pretty old.  But then I started thinking . . . how common are companies with extreme and rapid success like google and amazon?  Canada isn't under the same market conditions as Japan at all, but I can't think of any huge successes over the past 30 years for Canadian companies.

Actually, the only other country that immediately springs to mind as having similar very quickly rising world class companies is China (Alibaba/Aliexpress, Baidu, Xaiomi, Huawei).

Exactly.

Google and Amazon aren't the norm. Nor is Netflix or Apple post-2002 or Microsoft post 2011 or Facebook or Nvidia (or Tesla, Qualcomm, or Iliumina). The last time the EU started a company that has more than $100b market cap it was 1972 (SAP, in Germany, for those keeping score).
Canada did have one world class company: RIMM (Blackberry) until Apple ate it's lunch. Before that they had Nortel, until the went bankrupt. Dunno what happened there.

China presents an interesting conundrum; Alibaba and Baidu both went public in the USA, not mainland China. Which means that the company's profits flow to those who are invested in the US stock indices, not China's. And then there's Tencent; it sold an early 49% percent stake to South African-listed Naspers for $32 million USD. Today that same stake has grown in value to over $130 billion (not million) on the Hong Kong exchange (not mainland China). So $130 billion in value has flown to investors in the South African (!) stock market, not the mainland Chinese stock market. The greatest irony of all is that the most valuable Chinese companies aren't listed in mainland China, which means that the average Chinese citizen is locked out of a means to participating in their rise to riches. Unlike US index investors who can reap the benefits of investing in Chinese companies and other companies across the world who chose to list here.


ChpBstrd

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Didnít notice the new thread until I had already posted the following on the old one. So at the risk of being a tedious overposter Iíll paste it here :)
óóóóó

I donít believe the explanation that the US is the only or best place to find talented or skilled workers. The US ranks 27th in the world in terms of educational quality. FWIW other disadvantages of setting up shop in the US include some of the highest crime in the developed world, some of the highest wage expenses, and a healthcare system that is largely employer funded at a cost 3x that of other developed countries plus administrative costs to deal with the bizarre tangle of laws around healthcare.

The explanation that workers in other countries wonít accept stock options as compensation is an assumption that deserves to be proven. If it cannot be proven, this reminds me of the 1980ís anxieties about how the Japanese might, due to their culture, have a superior work ethic and cooperative tendency that allow them to run better factories and dominate the auto and electronics industries. That narrative was disposed of and forgotten after the market crash, and no lessons were learned about the dangers of using cultural stereotypes as economic predictions. Now, with the US economy riding high, we tell a narrative about ourselves to explain and justify our success.

Why hasnít Japan produced as many worldwide brands as they once did? Competition from corporate zombies is part of the answer, but I think demographic graying is the other.

https://www.businessinsider.com/us-ranks-27th-for-healthcare-and-education-2018-9

MaaS

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Didnít notice the new thread until I had already posted the following on the old one. So at the risk of being a tedious overposter Iíll paste it here :)
óóóóó

I donít believe the explanation that the US is the only or best place to find talented or skilled workers. The US ranks 27th in the world in terms of educational quality. FWIW other disadvantages of setting up shop in the US include some of the highest crime in the developed world, some of the highest wage expenses, and a healthcare system that is largely employer funded at a cost 3x that of other developed countries plus administrative costs to deal with the bizarre tangle of laws around healthcare.

The explanation that workers in other countries wonít accept stock options as compensation is an assumption that deserves to be proven. If it cannot be proven, this reminds me of the 1980ís anxieties about how the Japanese might, due to their culture, have a superior work ethic and cooperative tendency that allow them to run better factories and dominate the auto and electronics industries. That narrative was disposed of and forgotten after the market crash, and no lessons were learned about the dangers of using cultural stereotypes as economic predictions. Now, with the US economy riding high, we tell a narrative about ourselves to explain and justify our success.

Why hasnít Japan produced as many worldwide brands as they once did? Competition from corporate zombies is part of the answer, but I think demographic graying is the other.

https://www.businessinsider.com/us-ranks-27th-for-healthcare-and-education-2018-9

I like the thoughtful take, although this argument only holds water if you propose a country that's a better place to rapidly scale a business. Utopia isn't an option for entrepreneurs. They must make a choice from today's options. IMO, the U.S. is "the cleanest dirty shirt" and it really isn't even close.

China has the potential but would require a complete 180 by the government. A foreign entrepreneur cannot move there, start a company, and compete on a level playing field.

The U.S. has:

  • Access to a ridiculous amount of capital, and more importantly, investors willing to take big risks on early-stage, private companies.
  • Strong property and IP rights (this is so critical)
  • A system that heavily incentives selling equity. The government takes less of the value created by your idea.*
  • Cheap, stable energy due to fracking.* Most developed markets have massive, near-term energy-related risks.
  • A good (not saying "best") workforce that's willing to relocate for a career.
  • An immigrant-friendly environment. Relative to most of the world, this is still true.

I have no idea if the U.S. stock market will continue to outperform in the decades to come - but I am sure that the U.S. is the best place to turn an idea into a business.

*No political responses, please. Let's focus on what is instead of what we feel should be.
« Last Edit: October 12, 2019, 08:00:07 AM by MaaS »

flipboard

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The U.S. has:

  • An immigrant-friendly environment. Relative to most of the world, this is still true.
Oh hell no. Geting highly skilled professionals into the country is extremely difficult, and one of the major reasons why US companies are expanding presences in other countries. Just to illustrate, its much easier to bring in a highly skilled engineer/technician/scientist in any of Canada/Ireland/Germany/Nordics/Australia, even for China highly skilled Visas aren't difficult to get, at least in Academia. The US yearly lottery is a joke. Especially if you want to hire someone from India or China (and you get a lot of highly skilled engineers/scientists from those countries), I know many who considered the US but rejected it as soon as they discovered the green-card discrimination they'd be subjected to.

The fact that many Chinese engineers and scientists are now returning to China from the US alone is enough to illustrate just where things might be going.

MaaS

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The U.S. has:

  • An immigrant-friendly environment. Relative to most of the world, this is still true.
Oh hell no. Geting highly skilled professionals into the country is extremely difficult, and one of the major reasons why US companies are expanding presences in other countries. Just to illustrate, its much easier to bring in a highly skilled engineer/technician/scientist in any of Canada/Ireland/Germany/Nordics/Australia, even for China highly skilled Visas aren't difficult to get, at least in Academia. The US yearly lottery is a joke. Especially if you want to hire someone from India or China (and you get a lot of highly skilled engineers/scientists from those countries), I know many who considered the US but rejected it as soon as they discovered the green-card discrimination they'd be subjected to.

The fact that many Chinese engineers and scientists are now returning to China from the US alone is enough to illustrate just where things might be going.


1) There is more to being immigrant-friendly than the number of visas. If you think China is a more pro-immigration environment than the U.S., I don't even know where to start.

2) I never said the U.S. is the best in this area. You can attack any one of the bullets I listed with a reasonable argument, but it's not really relevant. What makes the U.S. an attractive place to start a business is the combination of those factors (among others).

3) I forgot to add home market scale. The truth is that even in digital businesses, having a big domestic market is a huge advantage. The countries listed (outside of Germany and China) aren't in the same universe as the U.S. in that regard. 

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1) There is more to being immigrant-friendly than the number of visas. If you think China is a more pro-immigration environment than the U.S., I don't even know where to start.
Gross misrepresentation of my words. But given just how horrible the US system is to anyone in it, probably not far off the truth. (Have you been through either system yourself?) The US is simply immigrant hostile, full stop. There aren't many countries where you legally have to leave the same day that your employer fires you, there aren't many countries where you'll be treated with that much suspicion when crossing the border, other countries don't put you in a 40 year waiting list to get permanent residnece with an uncomfortable limbo situation until that is granted, etc. etc.

Quote
2) I never said the U.S. is the best in this area. You can attack any one of the bullets I listed with a reasonable argument, but it's not really relevant. What makes the U.S. an attractive place to start a business is the combination of those factors (among others).
Sure, but immigration is not a factor that should be in that list.

Quote
3) I forgot to add home market scale. The truth is that even in digital businesses, having a big domestic market is a huge advantage. The countries listed (outside of Germany and China) aren't in the same universe as the U.S. in that regard.
No disagreement, but not relevant for the immigration topic.

MaaS

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Quote
3) I forgot to add home market scale. The truth is that even in digital businesses, having a big domestic market is a huge advantage. The countries listed (outside of Germany and China) aren't in the same universe as the U.S. in that regard.
Quote
No disagreement, but not relevant for the immigration topic.

It is relevant because this isn't a thread about immigration. It's about where the next generation of great companies is likely to come from.

I completely agree the U.S. should improve its immigration system. It would make us even more competitive. Yet, the numbers continue to show that (relative to many of the other feasible options), people want to, and are able to, move to America in large numbers. It's an area for improvement but still a strength.

PDXTabs

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Oh hell no. Geting highly skilled professionals into the country is extremely difficult, and one of the major reasons why US companies are expanding presences in other countries. Just to illustrate, its much easier to bring in a highly skilled engineer/technician/scientist in any of Canada/Ireland/Germany/Nordics/Australia, even for China highly skilled Visas aren't difficult to get, at least in Academia.

You missed Singapore, New Zealand, and basically all of Europe. Which is to say that the vast majority of Europe is on the Blue Card system which is head and shoulders above our H1B system for the employees and AFAICT also the employers.

bwall

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Didnít notice the new thread until I had already posted the following on the old one. So at the risk of being a tedious overposter Iíll paste it here :)
óóóóó

I donít believe the explanation that the US is the only or best place to find talented or skilled workers. The US ranks 27th in the world in terms of educational quality. FWIW other disadvantages of setting up shop in the US include some of the highest crime in the developed world, some of the highest wage expenses, and a healthcare system that is largely employer funded at a cost 3x that of other developed countries plus administrative costs to deal with the bizarre tangle of laws around healthcare.

The explanation that workers in other countries wonít accept stock options as compensation is an assumption that deserves to be proven.

Bold mine.

No doubt that the USA is not perfect. As @MaaS said, it's the 'cleanest dirty shirt'. I've brought over skilled workers for my small company and it was a PITA, but not impossible or ridiculously expensive. Just typical bureaucracy.

I'm not insightful enough to know that workers in other countries wouldn't accept stock options as compensation. But, I did see a video of a CEO saying that exact thing and found it interesting. That's why put it in the original post. Here's the youtube video of him describing what it was like looking for talent in the USA vs Europe: https://www.youtube.com/watch?v=XFK-B1xJzGc. The relevant comment starts at about the 7 minute mark and he's done in less than five minutes.

MustacheAndaHalf

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Google and Amazon aren't the norm. Nor is Netflix or Apple post-2002 or Microsoft post 2011 or Facebook or Nvidia (or Tesla, Qualcomm, or Iliumina)
Microsoft + Apple + Amazon + Google + Facebook make up 13% of the U.S. stock market (source: VTI monthly holdings).

Was Ford the norm when cars were mass produced?  What about G.E. owning electricity?  All of it.  And then you have AT&T growing rapidly with the rise of the land line phone.  Excluding the latest technology ignores the past companies that have been in the same situation.  It assumes it hasn't happened before, and won't happen again.

Indexer

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I don't see any conditions right now that would lead the US market to have a Japanese experience.

We don't have 50+ PE ratios, demographics are still okay, immigrants want to come here(how hard it is to legally do so is another topic), and we have a ton of land, wealth, and natural resources.


However, I wouldn't say the US market would never have a Japanese market experience. Giving ourselves a long enough time frame it will certainly happen... eventually. Let's just hope it's not during the period any of us are looking to FIRE, and if it is, that we are properly diversified across asset classes.

Alchemisst

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IMO the reason doesn't matter, there's always a reason for a crash in hindsight and they're not always the same, Japan is easy in hindsight, GFC was easy in hindsight and the next crash will be easy in hindsight, just because the conditions aren't the same as the last crash or the same as Japan doesn't mean there won't be another reason that will lead to a crash..

ChpBstrd

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IMO the reason doesn't matter, there's always a reason for a crash in hindsight and they're not always the same, Japan is easy in hindsight, GFC was easy in hindsight and the next crash will be easy in hindsight, just because the conditions aren't the same as the last crash or the same as Japan doesn't mean there won't be another reason that will lead to a crash..

True, thereís always some threat on the horizon and only some are ever actualized. In Japanís case, consumer spending has consistently failed to keep up with production, as the aging population hoarded yen. Their national average savings rate hit 42% in 1992 and averages in the 20s. This in a country with a well-functioning medical payments model, pensions, etc. So blame Mustachianism for killing the Japanese economy! JK

Makes one wonder what might cause a consumer clampdown in the US? An aging population for one (the US just hit the point where Japan was in 1990 in terms of the % of population over 65). We have also inflated housing costs in most of the country, meaning millennials and generation Z are unable to buy and furnish big houses like their parents did. Given that trading housing is something like a zero sum game, money spent on house notes is not spent on other goods and services. In the US, consumer spending has somewhat followed the stock market, so as in 2008 another big correction would lead to a decade of an aging population cutting spending. Out of control medical inflation continues to claim a larger and larger percentage of paychecks, leaving less available for discretionary items.

https://www.ceicdata.com/en/indicator/japan/gross-savings-rate/amp



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Japan had a massive stock market and real estate bubble at the same time, combined with a Great Recession-style banking crisis.  Then there was a lack of political will to implement reforms/policies needed to get out of the crisis, and so GDP growth was barely positive for two decades. 

So, I don't think the US stock market will repeat the Japanese stock market experience, but there are other things that can go wrong, and we probably don't know about them.

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IMO the reason doesn't matter, there's always a reason for a crash in hindsight and they're not always the same, Japan is easy in hindsight, GFC was easy in hindsight and the next crash will be easy in hindsight, just because the conditions aren't the same as the last crash or the same as Japan doesn't mean there won't be another reason that will lead to a crash..

True, thereís always some threat on the horizon and only some are ever actualized. In Japanís case, consumer spending has consistently failed to keep up with production, as the aging population hoarded yen. Their national average savings rate hit 42% in 1992 and averages in the 20s. This in a country with a well-functioning medical payments model, pensions, etc. So blame Mustachianism for killing the Japanese economy! JK

Makes one wonder what might cause a consumer clampdown in the US? An aging population for one (the US just hit the point where Japan was in 1990 in terms of the % of population over 65). We have also inflated housing costs in most of the country, meaning millennials and generation Z are unable to buy and furnish big houses like their parents did. Given that trading housing is something like a zero sum game, money spent on house notes is not spent on other goods and services. In the US, consumer spending has somewhat followed the stock market, so as in 2008 another big correction would lead to a decade of an aging population cutting spending. Out of control medical inflation continues to claim a larger and larger percentage of paychecks, leaving less available for discretionary items.

https://www.ceicdata.com/en/indicator/japan/gross-savings-rate/amp

Interesting perspective. Personally, I think a Japan-like malaise is in the realm of possibility but not likelihood. I think muddling along like we are with high stock and housing values but not seeing a dramatic change is probably more likely. Everyone waiting for the other shoe to drop.  Another scenario is stagflation 1970s style. Thatíd be fun. Maybe we could hand out Whip Inflation Now! buttons again.

ChpBstrd

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The trend is for interest rates and inflation to be higher in nations with younger populations. Europe is also in the grasp of a disinflationary cycle (and has been for a while; austerity was a big mistake), and look at their demographics.

Median ages:

Japan 46.7
Germany 45.9
Italy 45.4
Greece 43.4
France 41.2
US 38.1
Australia 37
China 37
Brazil 32
Mexico 27.7
South Africa 27.1
India 26.8

Also note the inverse spread in interest rates across these countries. At the bottom of the list, Indians and South Africans have 6-7% interest rates (and similar inflation). At the top of the list, the Europeans have negative interest rates and minimal inflation. The US is not quite as old, but rapidly graying and we canít get inflation over our 2% goal even with near-ZIRP. Negative rates are being considered as in Europe and Japan. Everyone used to assume ZIRP was an anomaly unique to Japan.

My theory is the Phillips Curve is sensitive to the age of a population. Beyond a certain age, low interest rates do not seem to stimulate as much demand.

What is a typical 65 or 70-year-old going to do with a loan? Start a business? Buy a new car? The answer is they donít take out the loan in the first place, no matter how cheap it is. They are focused on financial survival after having lost the ability to earn income and this situation is the same for elderly populations everywhere. Itís also a well known fact that income and spending peak in middle age. A graying population means falling aggregate demand.

Japanís median age in 1990, when they first entered their disinflationary trap, was 37.3. Let that sink in a moment. The US is already beyond their tipping point. Yet our policy makers are just as confused about the flattening of the Phillips Curve as the Japanese were in 1990.

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The U.S. has:

  • Access to a ridiculous amount of capital, and more importantly, investors willing to take big risks on early-stage, private companies.
  • Cheap, stable energy due to fracking.* Most developed markets have massive, near-term energy-related risks.
So I just wanted to talk about these two, but first, a philosophical interlude: the thing about your list, is that all of the elements on the list combine to form a tipping point. Two or three or four of them may diminish with no effect. Then one more variable drops one more percent and some other country "suddenly" becomes just marginally better. At that point, you would see the beginning of a divestment from the us. Immigration and Domestic market are interlinked, but they aren't my personal bugbears.
So first the capital thing: the wash of capital were seeing right now is pretty directly the result of fed policy. Loans have a negative real rate, QE is happening again, and the government is basically giving away money. This pillar is rickety. Its sensitive to political influence like only immigration matches. Depending on your monetary theory, its also probably doing a bunch of structural damage to everything but that's a Shaharezad.
Two is actually pretty related. Art Bergman (sic?) Is my top of the head source here, but basically Fracking has a card up its sleeve. The federal government has engaged in regulation changes, monetary policy, and in some cases subsidy to allow oil to be reclassified as discovered or proven that would not be so under a pre-2000 regulatory environment. The "246 billion barrels" of American oil is probably closer on the free market to 64 billion. That's still a healthy number, buy its no world champion.

Buffaloski Boris

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The U.S. has:

  • Access to a ridiculous amount of capital, and more importantly, investors willing to take big risks on early-stage, private companies.
  • Cheap, stable energy due to fracking.* Most developed markets have massive, near-term energy-related risks.
So I just wanted to talk about these two, but first, a philosophical interlude: the thing about your list, is that all of the elements on the list combine to form a tipping point. Two or three or four of them may diminish with no effect. Then one more variable drops one more percent and some other country "suddenly" becomes just marginally better. At that point, you would see the beginning of a divestment from the us. Immigration and Domestic market are interlinked, but they aren't my personal bugbears.
So first the capital thing: the wash of capital were seeing right now is pretty directly the result of fed policy. Loans have a negative real rate, QE is happening again, and the government is basically giving away money. This pillar is rickety. Its sensitive to political influence like only immigration matches. Depending on your monetary theory, its also probably doing a bunch of structural damage to everything but that's a Shaharezad.
Two is actually pretty related. Art Bergman (sic?) Is my top of the head source here, but basically Fracking has a card up its sleeve. The federal government has engaged is n regulation changes, monetary policy, and in some cases subsidy to allow oil to be reclassified as discovered or proven that would not be so under a pre-2000 regulatory environment. The "246 billion barrels" of American oil is probably closer on the free market to 64 billion. That's still a healthy number, buy its no world champion.

I want to address the second one as well: the cheap, reliable energy shibboleth. That cheap energy only exists so long as there are people willing to risk money to extract oil and gas and to bankroll alt energy projects. Keep in mind that the producer tax credits for wind and solar expire this year. Prices, especially for natural gas, are extremely low, but that wonít necessarily continue. Ironically I think that those extremely low prices contain the seed of higher prices in the future as producers get shaken out of the industry in the short term. Fewer producers will be going into an environment of stable To increased domestic demand and increased export demand in the next several years.

Toothpick

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The U.S. has:

  • Access to a ridiculous amount of capital, and more importantly, investors willing to take big risks on early-stage, private companies.
  • Cheap, stable energy due to fracking.* Most developed markets have massive, near-term energy-related risks.
So I just wanted to talk about these two, but first, a philosophical interlude: the thing about your list, is that all of the elements on the list combine to form a tipping point. Two or three or four of them may diminish with no effect. Then one more variable drops one more percent and some other country "suddenly" becomes just marginally better. At that point, you would see the beginning of a divestment from the us. Immigration and Domestic market are interlinked, but they aren't my personal bugbears.
So first the capital thing: the wash of capital were seeing right now is pretty directly the result of fed policy. Loans have a negative real rate, QE is happening again, and the government is basically giving away money. This pillar is rickety. Its sensitive to political influence like only immigration matches. Depending on your monetary theory, its also probably doing a bunch of structural damage to everything but that's a Shaharezad.
Two is actually pretty related. Art Bergman (sic?) Is my top of the head source here, but basically Fracking has a card up its sleeve. The federal government has engaged is n regulation changes, monetary policy, and in some cases subsidy to allow oil to be reclassified as discovered or proven that would not be so under a pre-2000 regulatory environment. The "246 billion barrels" of American oil is probably closer on the free market to 64 billion. That's still a healthy number, buy its no world champion.

I want to address the second one as well: the cheap, reliable energy shibboleth. That cheap energy only exists so long as there are people willing to risk money to extract oil and gas and to bankroll alt energy projects. Keep in mind that the producer tax credits for wind and solar expire this year. Prices, especially for natural gas, are extremely low, but that wonít necessarily continue. Ironically I think that those extremely low prices contain the seed of higher prices in the future as producers get shaken out of the industry in the short term. Fewer producers will be going into an environment of stable To increased domestic demand and increased export demand in the next several years.

Yep, that's usually how it works.  Very few sectors have turned in as horrid performance as natural gas companies.  Just when you think it can't get any worse, it does.  Many companies down to 10-15 year lows.  Eventually capital will dry up to stop the oversupply, and the cycle begins again. 

MaaS

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The U.S. has:

  • Access to a ridiculous amount of capital, and more importantly, investors willing to take big risks on early-stage, private companies.
  • Cheap, stable energy due to fracking.* Most developed markets have massive, near-term energy-related risks.
So I just wanted to talk about these two, but first, a philosophical interlude: the thing about your list, is that all of the elements on the list combine to form a tipping point. Two or three or four of them may diminish with no effect. Then one more variable drops one more percent and some other country "suddenly" becomes just marginally better. At that point, you would see the beginning of a divestment from the us. Immigration and Domestic market are interlinked, but they aren't my personal bugbears.
So first the capital thing: the wash of capital were seeing right now is pretty directly the result of fed policy. Loans have a negative real rate, QE is happening again, and the government is basically giving away money. This pillar is rickety. Its sensitive to political influence like only immigration matches. Depending on your monetary theory, its also probably doing a bunch of structural damage to everything but that's a Shaharezad.
Two is actually pretty related. Art Bergman (sic?) Is my top of the head source here, but basically Fracking has a card up its sleeve. The federal government has engaged is n regulation changes, monetary policy, and in some cases subsidy to allow oil to be reclassified as discovered or proven that would not be so under a pre-2000 regulatory environment. The "246 billion barrels" of American oil is probably closer on the free market to 64 billion. That's still a healthy number, buy its no world champion.

I want to address the second one as well: the cheap, reliable energy shibboleth. That cheap energy only exists so long as there are people willing to risk money to extract oil and gas and to bankroll alt energy projects. Keep in mind that the producer tax credits for wind and solar expire this year. Prices, especially for natural gas, are extremely low, but that wonít necessarily continue. Ironically I think that those extremely low prices contain the seed of higher prices in the future as producers get shaken out of the industry in the short term. Fewer producers will be going into an environment of stable To increased domestic demand and increased export demand in the next several years.


Prices may rise - but we have to consider this relative to the context of the question. The U.S. unquestionably has the energy the economy needs domestically, between current production and reserves. It's not the only country that does, but very few of them are places you'd really want to start a business. Norway, perhaps.

vand

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Japan is fairly unique in just how expensive equities became (CAPE 85!).

As they say the bigger the bubble, the deeper the crash and subsequent recovery.

No extreme should be considered impossible when considering the behaviour and belief of crowds, so never say it can't or won't happen.

That said, the US does have a fairly unique and enviable culture of entrepreneurship, which has been the driving force behind unrivalled economic growth for a long time. Most other countries are far more Statist and as pointed out do not have anywhere near the constant supply of new world-class companies powering them.

The US and other developed economies do have their own headwinds, but they also have the culture and wherewithall to make continual progress despite them. Japan's culture of humility and job-safety and endless heirarchy has all contributed to its own stagnation.

ChpBstrd

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Japan is fairly unique in just how expensive equities became (CAPE 85!).

As they say the bigger the bubble, the deeper the crash and subsequent recovery.

No extreme should be considered impossible when considering the behaviour and belief of crowds, so never say it can't or won't happen.

That said, the US does have a fairly unique and enviable culture of entrepreneurship, which has been the driving force behind unrivalled economic growth for a long time. Most other countries are far more Statist and as pointed out do not have anywhere near the constant supply of new world-class companies powering them.

The US and other developed economies do have their own headwinds, but they also have the culture and wherewithall to make continual progress despite them. Japan's culture of humility and job-safety and endless heirarchy has all contributed to its own stagnation.

Millennials with student loan debt and McJobs have begun to view their world as a oligarchy (AKA Statist society) where unless one starts a tech unicorn one will labor for life under the hierarchy of the baby boomers and generation X. They also experienced the humbling of the great financial crisis in their formative years, and many are very interested in job safety. The Japanese tap was once flowing with startup companies, until a generational shift occurred and a single market crash ended it all. Even American entrepreneurs will have a hard time competing with zombie companies, supported by never ending low interest rates, subsidies, and too-big-to-let-fail political status. To rely on the USís history of successful innovation is like having the same discussion about Japan in 1995, when Iím sure it seemed true that the next Toyota, Hitachi, Mitsubishi, or Sony was right around the corner. Sometimes itís not.

ctuser1

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Millennials with student loan debt and McJobs have begun to view their world as a oligarchy (AKA Statist society) where unless one starts a tech unicorn one will labor for life under the hierarchy of the baby boomers and generation X. They also experienced the humbling of the great financial crisis in their formative years, and many are very interested in job safety. The Japanese tap was once flowing with startup companies, until a generational shift occurred and a single market crash ended it all. Even American entrepreneurs will have a hard time competing with zombie companies, supported by never ending low interest rates, subsidies, and too-big-to-let-fail political status. To rely on the USís history of successful innovation is like having the same discussion about Japan in 1995, when Iím sure it seemed true that the next Toyota, Hitachi, Mitsubishi, or Sony was right around the corner. Sometimes itís not.

Bringing innovation to market requires an immense amount of personal risk.

To me, the key piece stifling innovation seems to be Healthcare.
It's still not impossible to work really hard and graduate without a whole lot of debt. It's hard, but not impossible. It's even possible to make sure you can do Lean-FI with a few years of toil, and make sure you can put food on the table for yourself and your family.

It's not possible, however, to guarantee that your kids will get healthcare if you take risks and fail!! Obamacare improved things, but what happens when/if the SCOTUS (with one third of it's members, all right-wing, elected by presidents without the popular vote) scraps that?

I know I have not dared to quit my cushy job and join a startup due to that consideration. I know several others who haven't either.

ChpBstrd

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Millennials with student loan debt and McJobs have begun to view their world as a oligarchy (AKA Statist society) where unless one starts a tech unicorn one will labor for life under the hierarchy of the baby boomers and generation X. They also experienced the humbling of the great financial crisis in their formative years, and many are very interested in job safety. The Japanese tap was once flowing with startup companies, until a generational shift occurred and a single market crash ended it all. Even American entrepreneurs will have a hard time competing with zombie companies, supported by never ending low interest rates, subsidies, and too-big-to-let-fail political status. To rely on the USís history of successful innovation is like having the same discussion about Japan in 1995, when Iím sure it seemed true that the next Toyota, Hitachi, Mitsubishi, or Sony was right around the corner. Sometimes itís not.

Bringing innovation to market requires an immense amount of personal risk.

To me, the key piece stifling innovation seems to be Healthcare.
It's still not impossible to work really hard and graduate without a whole lot of debt. It's hard, but not impossible. It's even possible to make sure you can do Lean-FI with a few years of toil, and make sure you can put food on the table for yourself and your family.

It's not possible, however, to guarantee that your kids will get healthcare if you take risks and fail!! Obamacare improved things, but what happens when/if the SCOTUS (with one third of it's members, all right-wing, elected by presidents without the popular vote) scraps that?

I know I have not dared to quit my cushy job and join a startup due to that consideration. I know several others who haven't either.

Yep. Thanks for bringing up what might be the biggest innovation killer in the US. How did I leave that out? We hear it all the time on this particular forum.

I think any prediction of innovation or productivity growth in the US needs to openly state why healthcare inflation will stop increasing at a rate far faster than CPI ex-healthcare. The annual CPI for health insurance hit 10.7% as of last April (but at least the government ended the individual mandate, right? Yay. /sarcasm).

Of course, fixing healthcare would necessarily involve diluting a health insurance industry with $29B in 2018 profits, and a pharma industry that also has billions in profits to defend. So my baseline case is not going to happen, and healthcare cartel profits become a bigger and bigger piece of household budgets.

ctuser1

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Of course, fixing healthcare would necessarily involve diluting a health insurance industry with $29B in 2018 profits...

<completely off topic to this thread>
I don't see that as a given!!
Health insurance plays really nice in all sorts of places with single payer.

Pharma industry has a bad habit of spending a lot of money on ads, and the tiny amounts they do spend on research is driven by near-term profit potential. That will need to change.

But leave all that aside. US is a leader in allowing private players play within a regulated framework. A prime example is the "utilities" marker, specifically how Electricity ISO's and the participant's in those ISO's operate.

Over the next decade or so, the right-wing extremists will die out in large numbers and their ranks will thin. If/once that does happen, I am quite hopeful US will be able to come up with a healthcare delivery system that is much more efficient than all other Single Payers in the world. It certainly has the scale to do it.


ChpBstrd

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Ideas today are less tied to generations or self-interest as they are to which side can spend the most money on media and social media operations. People generally believe ideas they see repeated often enough (the propaganda effect). This is why the middle class has been voting against its own self-interest for decades, and why in these supposedly polarized times voter turnout is so low. So who will spend the most money to drive or prevent healthcare reform?

Surveys have been showing older people as being more right-wing for decades. Yet they never seem to die out.

Back to the topic of Japanification, the rise of too-big-to-fail corporate zombies with monopoly/duopoly  pricing power and government-enforced moats is a key warning sign. Thatís the US healthcare industry in a nutshell.

MaaS

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Japan is fairly unique in just how expensive equities became (CAPE 85!).

As they say the bigger the bubble, the deeper the crash and subsequent recovery.

No extreme should be considered impossible when considering the behaviour and belief of crowds, so never say it can't or won't happen.

That said, the US does have a fairly unique and enviable culture of entrepreneurship, which has been the driving force behind unrivalled economic growth for a long time. Most other countries are far more Statist and as pointed out do not have anywhere near the constant supply of new world-class companies powering them.

The US and other developed economies do have their own headwinds, but they also have the culture and wherewithall to make continual progress despite them. Japan's culture of humility and job-safety and endless heirarchy has all contributed to its own stagnation.

Millennials with student loan debt and McJobs have begun to view their world as a oligarchy (AKA Statist society) where unless one starts a tech unicorn one will labor for life under the hierarchy of the baby boomers and generation X. They also experienced the humbling of the great financial crisis in their formative years, and many are very interested in job safety. The Japanese tap was once flowing with startup companies, until a generational shift occurred and a single market crash ended it all. Even American entrepreneurs will have a hard time competing with zombie companies, supported by never ending low interest rates, subsidies, and too-big-to-let-fail political status. To rely on the USís history of successful innovation is like having the same discussion about Japan in 1995, when Iím sure it seemed true that the next Toyota, Hitachi, Mitsubishi, or Sony was right around the corner. Sometimes itís not.

I completely agree on the dangers presented by "zombie companies" but it's a global problem, not a U.S. centric problem. Pretty much every major economy has similar and in many cases worse conditions in this area. Look at the impact of China's SOE's on private startups getting capital for example.

It's a real shame. A business dying and being replaced by a better company is progress.

TomTX

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I want to address the second one as well: the cheap, reliable energy shibboleth. That cheap energy only exists so long as there are people willing to risk money to extract oil and gas and to bankroll alt energy projects. Keep in mind that the producer tax credits for wind and solar expire this year.

The wind and solar development pipeline in Texas (ERCOT) is absolutely massive and covers very roughly the next 5 years.  Solar installs are set to accelerate, not slow down. In the past year, projects in the pipeline doubled in GW.

35GW of additional wind (presume >40% capacity factor)
+
64GW of additional solar (presume >25% capacity factor)

...for a grid that hasn't ever hit 80GW peak demand.

Maybe half of those will actually get built. 9GW of solar and 13GW of wind are far enough along to have a signed interconnection agreement, which means they will mostly come online over the next 1-2 years.

raincoast

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The U.S. has:

  • Access to a ridiculous amount of capital, and more importantly, investors willing to take big risks on early-stage, private companies.
  • Strong property and IP rights (this is so critical)
  • A system that heavily incentives selling equity. The government takes less of the value created by your idea.*
  • Cheap, stable energy due to fracking.* Most developed markets have massive, near-term energy-related risks.
  • A good (not saying "best") workforce that's willing to relocate for a career.
  • An immigrant-friendly environment. Relative to most of the world, this is still true.


Canada is as good or better than the USA on all of these, except for access to capital. We have cheap, stable hydro electricity. We have low capital gains taxes. We have a highly educated workforce and are attractive to immigrants. Our legal system is similar to the American system. We also have healthcare.

However, like Chinese companies, many successful Canadian companies list solely on the US exchanges, or list on both. Why? Access to capital.

I live in Vancouver, where there are loads of new-ish, small- to medium-sized Canadian companies, as well as outposts of US tech companies. This suggests a decent entrepreneurial environment. But Canada hasn't produced many huge new companies. The Toronto Stock Exchange is dominated by resource companies and financials. Shopify is the one big "new economy" stock. RIM has struggled in recent years.

Obviously there are a lot of factors here - a smaller population means a smaller market, and a lower likelihood of producing a "great idea". But I think access to capital is still a huge reason to start a company in the USA, especially one that's aiming to get big fast.

Scortius

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Federal subsidies for renewable energy don't expire, rather they slightly decrease. The federal credit will reduce from 30% to 26% in 2020. With the rate of efficiency improvement seen in solar panels, you might even be better off waiting a year or two as prices per kWh may decrease faster than the subsidy.

https://news.energysage.com/congress-extends-the-solar-tax-credit/