Thread by @fallacyalarm

1/X Baburu Keiki - Is this the Nikkei 1990 moment for the S&P?🧵

On Dec 29, '89, the #Nikkei hit an ATH of 38,957. It was the peak of the biggest boom Japan had ever seen. Sony, Toyota & co took over the 🌎

Or so it seemed. That ATH was never seen again to this day, 33y later.

2/X By mid '92 it was down 50%. And in fall '12, on the eve of the start of Abenomics it was down 77% from its ATH. After 23y had passed.

Whenever there is a correction in the S&P, I think about Japan and what lessons it can teach us. Come join me for a trip far east.

3/X I tend to compare money supply growth with index appreciation to learn about the overall ambitiousness in the valuation.

While the S&P tends to follow USD money supply in lockstep, the Nikkei has disconnected completely from Yen supply after 1989.

fallacyalarm.substack.com/p/a-measuring-…

4/X If the Nikkei had grown with domestic money supply like the S&P does, it would be >100k today. Instead it's below 27k.

Why is that?

Has to do with foreign trade & demographics dynamics.

JPY appreciated big time. Yen demand due to exports. Up 3x vs. USD since '71 (2% pa).

5/X While it may have been beneficial for a domestic Japanese investor to then hold Yen instead of investing it in domestic stocks, we cannot make the same argument for a global investor assessing the S&P.

IMO a fairer comparison is having both Nikkei and S&P in USD:

6/X Looks much more like having upward drift and even outperforms S&P at times. But this massive bump in the 80s taking decades to deflate! Looks very similar to the S&P post 1929. What the heck were Japanese investors thinking when they bought the top?

Demographics explain it!

7/X Remember my HA-HW metric? Delta between the cohort saving/investing most and the one selling most.

Boy, does this explain the boom & bust well! I should have branded this metric better. Look at the incredible chart below, like a shadow of the Nikkei.

https://twitter.com/fallacyalarm/status/1541142314508111872?s=20&t=XixsImtx-yW5sgTxV9_pdw

8/X The Western Boomers caused dotcom. But 🇯🇵 Boomers were 10y ahead of the game. Same goes for the Millennials. 10y early in 🇯🇵 providing a nice demographic tailwind for the coming 5y. After 2025, I would definitely place my bets on 🇺🇸 though.

https://twitter.com/fallacyalarm/status/1541142325987971073?s=20&t=Z1llNgL_VlHX1JzrEfKSNQ

9/X What about Europe btw since we're already at it? Don't touch it with a 10ft pole. 💀

10/X Bottom Line: Abysmal performance of Nikkei is driven by foreign trade & demographics dynamics both of which do not pertain to the S&P as of today in a comparable manner.

Okay, some excesses in '21, but nothing comparable to the '80s in Japan requiring decades to unwind.

11/X Instead, a favorable demographic set-up. USD won't appreciate in uncontrolled fashion bc 🇺🇸 is not a net exporter of goods & services. Some appreciation risk from tightening. But likely self-solving as it carries the seeds of disinflation and monetary easing once again.

12/12 This 🧵is a summary of the article linked below in which I go into significantly more detail. Please check it out and consider retweeting or subscribing if you like it. Really helps building reach.
fallacyalarm.substack.com/p/baburu-keiki…