The Pendulum Shifts

The Dow has about quadrupled in the last eight or nine years. The Nikkei Dow has been cut by almost two-thirds. A dollar in the Dow is now $4. A dollar in the Nikkei is now about 40 cents. There’s been, therefore, about a tenfold shift — U.S. stocks are now about ten times as expensive relative to Japanese stocks as they once were.

Of course, Japanese stocks were wildly — and I mean wildly — overpriced back then, when the Nikkei peaked at 40,000. A lot of the decline was warranted. Indeed, maybe it is still overvalued. But a tenfold relative shift is pretty big. Maybe Japan, which a decade ago appeared poised to rule the global economy, is not entirely done for. (Have you seen that amazing new handheld Sony video camera? The new 1.2-mile suspension bridge they just built that dwarfs by a factor of four our own Brooklyn Bridge?) And maybe the U.S. — which now appears to own the next millennium lock, stock, and barrel — could face competition. (Did you see the report recently on CBS that 80% of our high school kids now readily admit to cheating? Something like that. It was probably overblown, but awfully depressing.)

I had to laugh when, at the height of the Japanese insanity, they began making 100-year mortgage loans. (Truly – they did!) Today I see that here in the U.S., mortgage loans remain limited, so far as I know, to 30 years — but some lenders are advertising loans on up to 150% of the value of your home.

I’m not saying the U.S. stock market, though it sure seems overvalued, is remotely as overvalued as Japan was. (And for all I know, those 150% mortgages are only granted to people with trust funds. I haven’t researched the offers yet.)

Still, a tenfold shift in relative values is enough to get my attention. If 100% of your stock-market money is in U.S. stocks and none in Asia … or if you’re in the stock market on margin (or in the stock market but still have a car loan, say, which amounts to much the same thing) … maybe it’s a good time to reconsider your strategy.