The Nikkei Bubble from 1983-Present

Japan was going to dominate the world. From 1983 until its peak in 1989, the Nikkei rose from 7,500 to 38,900 - a 500% increase in 7 years.

Following World War II, Japan implemented tariffs that protected their industries from overseas competition. This resulted in large trade surpluses and an appreciating yen. With artificial protections, Japanese companies made mal-investments. Easy money and false confidence led to a frenzy in the stock and real-estate markets. Japanese banks had financed this speculative bubble with high-risk loans. The PE ratio of the Nikkei reached 78 in 1989.

Today, 20 years after this peak, the Nikkei hit a low of 7,500 - the same level it started at in 1983. This has occurred despite spending billions on make-work stimulus programs, reducing interest rates to zero, and artificially reducing the value of the yen. The ultimate outcome has been a national debt that's 150% of GDP with a rapidly aging population and no way out.

See any similarities?

The NASDAQ Bubble from 1999-2003

To prove that Japan didn’t have a monopoly on foolishness and speculative frenzy, the US had their own bubble in 1999 and 2000. The NASDAQ market rose from 1,000 in 1996 to 5,132 in 2000. The introduction of the internet convinced millions we had entered a new era. Wall Street did what it does best, hyping the can’t-miss riches to be gained from investing in any company that added a dot-com to their names.

When Time Warner (TWX) acquired AOL in January 2000, the top was marked. The over-hyped fear of the Y2K “disaster” resulted in a huge surge in computer purchases. Alan Greenspan did what he did best and flooded the system with liquidity. These all combined to produce a blow-off top in March 2000. The PE ratio of the NASDAQ reached 264, as most of the hyped dot-com stocks had no earnings. Nine years later, the NASDAQ stands at 1,457 - 72% below its peak at 1998 levels. The bubble burst completely.

Toil & Trouble

Now, there are 3 bubbles deflating simultaneously: Housing, consumer spending and US total debt. And they can't be re-inflated.

The following chart from Gary Shilling’s newsletter clearly shows that home prices went into a classic bubble inflation after Alan Greenspan reduced interest rates to 1% and urged Americans to take out adjustable-rate mortgages. Americans believed the hype from the National Association of Realtors and Wall Street: Home prices were sure to go up forever. Home prices will need to fall another 21% to reach pre-bubble levels.

Jim “I haven’t gotten one right yet” Cramer is calling for a June 2009 bottom in housing. It looks like he won’t break his streak of faultless predictions - as I’m sure Jon Stewart will remind him.