end of the year thoughts (i)

where are the big-picture stories?


Japan, 1980s

The economic and stock market miracle of the 1980s was Japan, a country whose population is something like 20 years older than that of the US. It had been the poster child for cheap-currency, export-oriented growth as it struggles to recover from the devastation of WWII. Early in the decade, however, the US and Europe forced Japan to revalue its currency sharply upward, making local industry much more competitive vs. Japanese exports. This had the desired effect. Revaluation, however, had an immensely positive effect on national wealth, triggering an economic boom and explosive gains for half a decade in industries like banking and property, The Tokyo stock market became by far the largest in the world.

Since then, Japan has experienced three decades, and counting, of economic stagnation. How so? …a hidebound social structure that’s anti-women and anti-immigration, respects age more than competence, and places a very high value on protecting the interests of samurai-founded trading companies in basic manufacturing. The aging workforce peaked in size and began to decline. Without innovation, productivity gains waned as well.

Europe, 1990s

The stock market story of the 1990s was Europe, whose overall population is perhaps 10 years older than in the US. The European Union intended to be a cohesive economic force big enough to compete head-to-head with the US. The main attractions turned out to be: the opening of the entire EU as a market for European companies; cost savings from the elimination of internal barriers to the flow of products and materials between countries; mergers and acquisitions that built pan-European firms large enough to go head-to-head with American rivals; the EU world lead in the burgeoning cellphone industry; and the reintegration of eastern European countries of the Warsaw Pact that had been controlled by the USSR until 1989.

Again, an aging local population, resistance to women workers and to immigration, as well as the ability of countries like Italy or France to craft local anti-growth economic policies–and, later on, Brexit–have considerably reduced the region’s growth potential, and investor interest along with it.

the US and China, 1999 onward

Yes, the 21st century has given us the internet collapse of 2000, the banks’ self immolation in 2007-08 and the covid pandemic of 2020-21. Despite this, the two enduring positives have been explosive growth in the mainland Chinese economy and the dominance of the US in tech industries.

However, the rise of Xi Jinping has slowed Chinese expansion to a crawl. In the US, in many ways the story is a reprise of Japan and the EU–an aging working population, fierce resistance to increasing the workforce through immigration, powerful political lobbying by industries of the past that neuter government support for industrial development. Add to that, organized opposition to the kind of education that prepares students for scientific or other socially useful achievement as adults.

my take on all this

As investors, we’ve been through a long period where high-level concepts, like picking the right geographical area or calling the right currency or the next shortage commodity has been enough to produce reasonable stock market returns. But as they’ve aged, the most advanced economies have, one by one, turned sclerotic–focused on preserving wealth already achieved rather than on growth.

There is still dynamic growth in the world, I think. But it’s now in frontier countries like India or Vietnam or Latin America or Africa, where either regimes are unstable or stock markets are idiosyncratic (translation: rigged by locals), maybe not representative of growth areas and hostile toward foreigners. So the risk of following a top-down economic strategy in markets like these, while depending on AI to sort through the welter of company announcements for good/bad, is likely to be expensive and–my guess–not to work very well. There’s also the issue of whether foreigners are allowed to own stocks.

As for me, I think the best route to success is to find a small number of US-based companies with strong growth prospects and watch them closely.

More tomorrow.

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