Posts Tagged ‘Japan’

There are a lot of Americans who are invested in the stock market one way or another.  Many have 401k retirement plans.  Many have 529 college fund plans.  Some have IRAs and others simply buy stocks or bonds directly through a broker.  One way or another, I would guess that perhaps half or more of the adult population has investments in the stock market.  Let’s say that is about 100 million people, give or take.

Today, the Dow Jones fell precipitously from the opening bell.  It fell very quickly and stayed low the entire day without a lot of up and down motion after its initial drop.  By the time the market had closed the Dow had dropped 2%.  There are a few curious things about this.  First, the Chinese market had fallen 5.8% earlier.  Interestingly, the Japanese market had also fallen.  The Nikkei fell by 3.1 %, despite the report that Japan had just exited from recession and was now in an economic recovery. So one has to wonder a bit.  Did those 100 million or so American investors suddenly wake up in their sleep, perhaps due to a bad dream about the stock market, and sometime in the wee hours of the morning place a massive amount of sell orders before the U.S. market opened?

And if they did, why did they also bail on the Japanese economy?  Japan is now the third major country, after Germany and France, to announce that they have recovered from the recent economic meltdown.  Wouldn’t you have thought those sleepy Americans would have held onto their Japanese stocks? Or was it maybe the Japanese citizens themselves who panicked when they heard the dire news that they had recovered from the recession? And what got into all those people who had invested in Chinese stocks? China has the largest stimulus package in this corner of the universe and they also own several tons of U.S. treasury bills.  Did the investors suddenly forget that?  Why would all these little investors suddenly wake up in the middle of the night and scream, “Sell all my Chinese stocks!”

Why indeed.  Unless there is more to this instantaneous worldwide sell off than meets the eye.  I wonder.  Could it be that this massive, worldwide purge of investments wasn’t the result of millions or billions of investors all making the same “sell” decision at the same instant?  Could it be that perhaps something else was going on?  Could it be that maybe this was an orchestrated sell off instigated by a relatively small group of traders?  And if so why?  Why would any group of traders that control maybe 5 0r 10% of the entire world’s stock markets suddenly sell everything?  What could they gain – except to maybe trigger a massive number of stop losses.

And even if they did.  What good would that do for them?  What would they do then?  What would you do?  Perhaps we’ll see tomorrow.

Of course, I could be wrong.  Maybe everybody did just run to the same side of the boat at the same time.  It could happen…. Right???  Couldn’t it?

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The news today about America’s automobile industry is grim.  Today, General Motors stock is down over 14% and Ford Motor Company stock is down over 7%.  Their investors have decided: you might as well stick a fork in these companies – they’re done.  Chrysler is not even in the news today. They are the weakest of the big three and it’s a forgone conclusion that they are dying too. What happened? How can the American automobile industry be the victim of the irrational exuberance in the housing market? The answer is simple – they’re not.

The American automobile sealed their fate long ago, back in the 1960s, but like a staggering prize fighter, they have no idea what hit them. Like the idiotic managers of our financial industry, the managers of our automobile industry believed their own ads and willingly drank the company’s Kool-Aid.

I recently made a couple of long road trips in the U.S. and, just for fun, I decided to count the cars that passed me by to see how many of them were US brands and how many were foreign brands.  Each time I did this I took a sample of about 100 cars. The results were pretty much the same in both cases. 80% of the cars that passed me were foreign brands and 20% were American.  I estimate that of the American cars only about half were newer models.  By far the most popular brands were Japanese, with Toyota the most popular of those.  This didn’t surprise me a bit since I was driving a Toyota myself.

So how is it that the American automobile industry has self-destructed, and it doesn’t even know why?  It’s because they were too smart for their own good.  Way back in the 1960’s a relatively new concept in manufacturing was becoming popular. It was called “planned obsolescence”. At the time the primary market for American cars was the USA and the manufacturers, being good at math, figured that given the size of the American population they had a limited size market and therefore there was a limit to their growth. Unless, of course, they could figure out a way to make people buy cars more often, like every five years. The answer to the problem was to build cars that would last only about five years or 100,000 miles.  If  they could get everyone to buy a new car every five years they could make a lot of money forever.  The thing is that it isn’t that hard to make a car that will last ten years or 200,000 miles, or even 300,000 miles.

I still recall an American made car I bought in 1973. It was a really nice car. I had to replace the water pump after 60,000 miles because an internal component had been made of plastic and it had worn out.  The part probably cost about five cents and it certainly could have been made of steel or aluminum, but it wasn’t.  It cost a lot of money to replace the water pump because of all the labor involved. It wasn’t long before other parts began to fail on my car, but I stuck with it and finally made it to just over 100,000 miles before I had to sell the car.  Detroit’s engineering had worked perfectly.

While Detroit was following the strategy of planned obsolescence Japan was trying to overcome a reputation for building absolute junk. Back in the sixties, if anything had a tag on it saying “Made in Japan” you knew it would fall apart before you brought it home. So Japan started building quality merchandise to overcome this awful reputation.  They also took a different view of the automobile market. For them, their market was not Japan – it was the world. With a world population at that time of well over two billion people, the Japanese car makers knew that they didn’t have to get repeat customers, they just needed to sell just one of their cars to everyone; and the way to do that was to build cars that were inexpensive and high quality, i.e. cars that would last.  Toyota and Honda are triumphs of Japanese engineering, but Detroit could have done it too if they wanted to.  Ask any Toyota or Honda owner and they’ll tell you they fully expect their cars to last at least 200,000 miles. With Japanese cars earning a reputation for quality and longevity and American cars earning a reputation for costly repairs and a short life, the tide turned long ago. Then Japanese car manufacturers even began getting a lot of repeat customers and that was the beginning of the end.

Detroit mistakenly thought they could counter the Japanese products with style and they continued to emphasize fenders and bumpers while the core of their cars was still engineered to rot away after 100,000 miles.  Like the dinosaurs of the past, the Detroit automakers never understood what happened. Now, as they fall on their knees, about to vanish forever, they are blaming the difficult credit market and the real estate meltdown for their demise. I guess Darwin was right after all.

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