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Tuesday, March 24, 2015

THE DOW JONES 30 VERSUS THE NIKKEI 225


Why is the Dow Jones Industrial Average regularly now breaking all-time records, while the Nikkei 225 is only at half of what it was in 1989?  For one, Japan, no matter what Prime Minister Shinzo Abe says, is in despair:
  • The Great Tohoku Earthquake and Tsunami, compounded by the tragedy of the Fukushima nuclear disaster, will bleed the Japanese economy for the next few decades.  Clean-up could take from $1 trillion to $10 trillion, just for Fukushima.  The annual Japanese government budget is $2 trillion, for everything.  Almost trivial by comparison, but a sum of $6.8 billion is being spent just to build 41 foot high barriers to protect certain areas from future tsunamis.  It seems a lot more sensible to re-build only in safe terrains.  A country should learn from horrible experiences.
  • For the first time since records were collected in 1955, the population of Japan is drawing down its savings.  People are not saving much anymore.  In 1975, 23% of workers' income was saved.  While Japan has historically been about the worst in national debt as percentage of GDP (240% last year, while that of the USA is closer to 70%), 70% of this loan came from domestic sources.   Japan soon won't be able to borrow from its populace at ridiculously low rates.  Further, average earnings last year dropped 4.3%.  Household income has now dipped for eight straight years. 
  • Japan this year approved its largest ever defense budget, the third straight year of increases.  Part of their economic miracle recovery after World War II had to do with minimal military expenditures.  There is now a macho administration provoked by Chinese posturing determined to misuse money on war goods.
Well, anyway, the Nikkei has recently risen above 19,000, but was at a historic high of 38,957 in 1989.  Worse, the inflated value of 38,957 is $74,5000 today, so the 19,713 is only 26% of the max.


However, an argument can be made that the Nikkei uses 225 blue chip companies, while the Dow Jones only selectively picks 30 companies with rising futures.  When a stock gets stale, it is replaced. Just last week Apple kicked out ATT.  Two years ago, Nike, Visa and Goldman Sachs took the place of Alcoa, Hewlett-Packard and Bank of America.  Interestingly enough, NONE of the original DJ stocks on the list in 1896 exists today.  In any case, it seems unfair to compare the DJ with the Nikkei.

However, there is the Standard and Poor's 500, with more than twice the stocks of the Nikkei:


This better representation of the New York Stock Exchange also has recently hit all time highs.  So the only conclusion you can come to is that the Japanese economy is metastably rising, but continues to suck, while America's economy is at an all-time high and continues to strengthen.

Incidentally, there is something called an exchange-traded fund (ETF).  In 1998 the SPDR Dow Jones Industrial Average, more commonly called DIAMONDS (has to do with trust funds), was created, where the value tracks the Dow Jones.  I bought SPDR (which is also known as spider) in 2009 when the market dropped below 7,000, and doubled my investment when I sold all my stocks a year ago, awaiting a crash.  Well, the market has increased by another third since I abandoned it.  So much for my skills in the stock market.

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