The Mother Of All Bubbles Is Here

What's up? Grandma's guys here!

So lately, there's been this ominous looking chart. It's beginning to scare a lot of investors, and today we have to talk about it. On the left, we see the Japanese stock market, which peaked in 1992, crashed 80 percent over the following two decades, and still, in present day, is trading lower than its previous high over 30 years ago. On the right, we see the United States Dow Jones index, which appears strikingly similar, suggesting that maybe we could be in store for a disastrous 30-year crash of everything as interest rates increase, demand dries up, and people post on Wall Street bets, waiting for the housing market to collapse.

Okay, but jokes aside! Japan's everything bubble is a very real and very serious event, with several factors that share a very strong resemblance to what we're seeing right now with the U.S. economy that should not be ignored. Not to mention, the more I looked into this, the more I began to realize that there are some ways that you could protect yourself and even make a profit from such a catastrophe that anyone can follow in less than 10 minutes.

So let's talk about whether or not the U.S. stock market is following this same path, whether or not these charts are cause for concern, and then most importantly, how you could use all of this information to make you money. After all, we are a personal finance channel, and it would be nice to make enough money to quit your job at Wendy's.

Although before we start, it's really important to look at this chart here, which shows the portfolio of those who smash the like button for the YouTube algorithm, so thank you guys so much! And also, big thank you to public.com for sponsoring this video, but more on that later.

Alright, so in order to understand why these charts look surprisingly similar and whether or not the United States could face an identical collapse, we need to break down what happened to Japan. Because there are some key connections that everyone should be made aware of in regards to your own portfolio.

For Japan, their economic downfall began in 1986 when the Bank of Japan lowered interest rates and issued stimulus to help overcome a recession. However, that proved to be so effective that real estate and stock prices skyrocketed to higher and higher highs. By 1987, the Bank of Japan signaled that the possibility of beginning to raise interest rates, but they decided to hold off after the economic uncertainty of Black Monday of 1987 in the U.S. In hindsight, this delay proved to be a huge mistake.

When interest rates continued to remain low, stock and real estate values soared to a point that eventually would lead to complete economic disaster. For example, the Nikkei index increased from 10,000 to 40,000 in just four years. Housing prices increased by 167 percent from all the expansion, and assets got so expensive that they had to take abrupt action to raise interest rates to halt prices and slow inflation.

Now, in the very beginning, high interest rates were actually seen as a blessing. It was said that housing was considered to have become too expensive for ordinary citizens, so stopping the housing price from skyrocketing was considered to be a good thing. But within a year, the economy had screeched to a halt, and prices began to fall.

In response to that, investors began to hoard a lot of cash, and with less consumer demand, prices fell even more. That created a vicious cycle where the lower prices dropped, the more investors held cash, and the more investors held cash, the lower prices dropped. The result is a Japanese stock market that is lower today than it was 30 years ago.

The concern is that the United States could see something similar. This also created the term known as the lost decade, where the stock market trades at a lower value 10 years from now than it does today. If you thought that would be impossible here in the U.S., think again! In 1954, the S&P 500 was trading at the same price as it was at the peak in 1929. The stock market was also higher in 1968 than it was in 1978, and if you invested in 1999, it took you over 10 years for prices to reach the same level after the dot-com crash.

So as you can see, a lost decade is certainly not out of the ordinary. It's not like it hasn't happened before in the past, and now some of the biggest investors are warning that it could soon happen again in the future.

To look into this further, we have to understand what's happening now. First, just like Japan, we did see record low interest rates and stimulus throughout the last two years, which resulted in record high inflation and an abrupt reaction from the Federal Reserve to slow down demand.

Second, that rampant speculation caused asset prices to increase at some of the highest paces ever. For example, the two largest price increases of the S&P 500 both occurred in 2020. The NASDAQ nearly tripled in price within 18 months from its March 2020 low, and home affordability was the worst it's ever been.

Third, with affordability declining, the Federal Reserve has launched its quantitative tightening, where interest rates will increase throughout the rest of the year, at the same time that their balance sheet is being reduced. Leading to, of course, fourth, falling prices.

In the last few months, the S&P 500 has fallen almost 20 percent to a bear market. The NASDAQ is more than 30 percent lower than its all-time high, and many companies are trading substantially below their value prior to the pandemic. Home prices are also beginning to soften as sellers start to drop their asking prices, worsening the concerns that oh snap, we might end up like Japan.

So to figure that out, here's what we could look out for. Hopefully, this should give us some guidance in terms of what we could expect in the future.

Although before we go into that, even though we are entering a time of uncertainty, studies have shown that the most successful investors continue to buy into the market, regardless of where it's trading. One of the best ways to do that is with a versatile brokerage like our sponsor public.com, and they never sell your trades to market makers. So your orders are routed directly to the exchanges for the best possible price.

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And now with that said, let's get back to the video.

Alright, so in terms of the magnitude of the Japanese stock market bubble and how that compares to the U.S., I highly recommend you take a seat because here's where things get real.

Like I mentioned, from 1990 to 2003, the Japanese market fell 80 percent as the entire economy was completely turned upside down. But one thing that most people don't mention is just how big that bubble was before it popped. For example, it was reported that from 1956 to 1986, land prices increased five thousand percent, even though consumer prices only doubled in that time. Share prices also increased three times faster than corporate profits.

By 1990, the total Japanese property market was valued at over 2,000 trillion yen, which was roughly four times the real estate value of the entire United States. And the most shocking from all of this: in 1989, the PE ratio in the Nikkei was 60 times trailing 12 months earnings.

Just for comparison, the P/E ratio of the S&P 500 is currently around 20, which is higher than its average of 16 but not unreasonably high when compared throughout history. Just to put that into perspective, when you view that in comparison to the 2001 dot-com bubble, Japan traded at a value that was nearly three times higher, where a ten thousand dollar investment in Japanese large-cap stocks in 1970 would have turned into 5.7 million by 1989.

A hundred thousand dollar investment in small caps would have grown to 18.3 million dollars. If we applied the same metrics today with the U.S. economy, the S&P 500 would be trading around 9,000.

So that should give you a pretty good understanding of just how big that bubble was and why it's no surprise that it still hasn't recovered 30 years later.

On top of that, Japan's economy is fundamentally different from the United States in several ways. First, population growth throughout the last several decades: their GDP has been declining mainly because of an aging workforce where fewer people are having children. That combined with a limited inflow of foreign workers has led to an economy that has remained fairly stagnant.

Second, limited immigration. That's a tongue twister; try saying that: limited immigration, limited immigration, limited... well, maybe not. Up until recently, Japan was extremely strict on their immigration policies while limiting the number of foreign workers that could contribute to the economy. But when you consider that the United States has a 17.4 percent foreign workforce compared to Japan's one and a half percent, you'll begin to realize that the two are completely different.

Third, imports and exports. It is said that Japan is the fourth largest export economy in the world, but they're highly reliant on oil imports from other countries to supply their energy, leaving them in a precarious position should something happen outside of their control.

Fourth, we got zombies! And no, not those zombies. And no, not those zombies either. These zombies, like the company, the Japan Times recently outlined the prevalence of zombie companies throughout the country that only exist from ongoing financial support.

Now, in all fairness, they do admit that this is a global problem and that an estimated 25 percent of all European companies with more than 20 employees will run out of money by the end of the year. But in Japan, it's estimated that one in five small and medium-sized companies are zombies, kept alive for the sole purpose of allowing people to continue to work. This, in turn, stifles innovation and long-term. There is less of a need to improve.

And lastly, fifth, Japan holds a lot of cash across the board. Fifty-two percent of the average household's assets are held in cash, along with very little debt compared to the United States' 14 percent cash rate. Of course, when you consider that the country has experienced decades of negative inflation, then cash looks like a pretty good asset to hold on to. But that leads to an economy that grows at a much slower pace than the rest of the world.

For those reasons, the Japanese economy is substantially different than what we're seeing right now in the United States. But that doesn't mean we won't see another lost decade in the stock market, as warned by some of the brightest investors in the industry.

First, the billionaire Ray Dalio. He was one of the first to warn about a lost decade in the stock market, and his reasoning is fairly simple to understand. He says the consumer demand will begin to slow, corporate profits will decline, and some companies won't be able to survive. That, of course, will cause less growth, and over the next decade, the stock market could remain fairly flat.

Second, we have Blackstone Capital Management. The vice chairman said that stocks were overvalued, and it could take us a decade to catch up to where stocks were previously trading at. He also said the current valuations were only supported by low interest rates. But as rates begin to go up, that increases the cost of debt, which eats away at profits and lowers prices.

Third, we have one of the investors that I respect the most, the chairman of Berkshire Hathaway, Charlie Munger. He says that stocks and bonds are currently in a bubble due to the Federal Reserve artificially keeping interest rates extremely low, combined with an excessive amount of new money and the rational enthusiasm towards investing, which has led to a perfect storm of driving up prices way higher than they should be. He says that nobody's gotten by with the kind of money printing now for a very extended period of time without some kind of trouble. His warning is that the stock market may see lower than average returns over the next decade only because it's already risen so much so fast, and that's something to be prepared for.

As for my own thoughts on this, here's the thing. Most likely, if the stock market does have a lost decade where prices trade at the same price 10 years from now as they are today, realistically, it's not going to be trading at the same price the entire time. For example, it's not like the S&P 500 is going to be trading between 3,900 and 4,200 straight for the entire time. That's never happened, and most likely, we're going to see a lot of ups and downs the entire way.

Sure, I'll admit, if you just made one investment at the very peak of the market and you're done, then yeah, you might lose money. But again, chances are investing is going to be something that you do consistently every single year, and that is your way to make a profit. For instance, if you want a practical example of a lost decade, look no further than the years 2000 through 2012.

Even though you only would have made 4.6 percent total over 12 years, if you include dividends, your return skyrockets to 32. However, if you consistently bought in month after month, regardless of where the lost decade was trading at, your cumulative return jumps to 24, and with dividends reinvested, your return is as high as 42 percent.

Now, sure, averaging at a 3.5 percent return every year isn't exactly amazing, but during a lost decade, it's not exactly bad either. That's why even if we do see a lost decade, it's only lost for the people who only invest once and then never again. For anyone who continually buys in during the highs and lows, you'll have an opportunity to substantially increase your returns just by staying the course.

In terms of my own thoughts, though, I tend to agree with Charlie Munger that as investors, we shouldn't get accustomed to the types of returns that we've previously seen. My strategy is to prepare for lower than average returns over these next 10 years, and if it doesn't happen, then I'm pleasantly surprised. If it does, then it's exactly what I expected.

A lost decade is certainly not something to be worried about. Most likely, we're going to see one to three of them in our lifetime. But every other lost decade eventually recovered; prices went up, and things carried on as usual.

Now, as far as Japan, even though the charts are eerily similar, our economies are fundamentally different in so many ways that the chance of that event happening here is extremely unlikely. Although, I will say this is certainly not financial advice.

What do I know? I'm just a guy making YouTube videos in his half-converted garage. You probably shouldn't listen to me at all, but you should subscribe and hit the like button for the YouTube algorithm. And I also got a weekly newsletter down below in the description as well to compile all the research that I do for these videos, plus a lot more that I just don't include here because it's too nuanced.

So if you want to be a part of it, the link is down below. Thank you so much for watching, and until next time!