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Something to think about
TheRoarOfTheCrowd
Member, Swaye's Wigwam Posts: 1,730 
So lots of people here have been talking about the morality of selling short.. preferring to earn money the "old fashion morally correct way": in a rising environment by simply buying assets at a discount to their forever rising price ~ which of course is a "natural expectation". Or is it? that is the question.
What do you then do when you are in an economy and logistical structure which isn't actually growing? What then?
Toi illustrate that this actually does happen and that this is not just a hypothetical question consider this... here is the Japanese stock market premier index, the NKE Nikkei. Look at the history of the premier companies in Japan ~ many of which were the most admired companies on Earth as we knew it the 1980's.
So what happened to the Japanese economy, banking system and real estate to cause a market that went sideways at a substantial discount off of the market top ever since 1990 ~ that is 32 years my friend, the equivalent of many people's wheelhouse zone of above average productivity ~ the time that they hope to acquire wealth.
So what happened? What was the cause of this kind of "unheard of" malaise?
Here is the back story as I know it. In the spring of 1989 I was on Wall Street working on my chops as stock broker and developing my skills as an analyst of economic and security market trends. At that time, the Nikkei was the hottest index on the planet [it went from 7500 to 35,000 between 1984 and 1989, a five to 6 year period] and 4 of the top 10 banks in the world from an assets on the books standpoint were the Japanese banks. They were ranked like number 1,#4, #7 and #8 at the time. The Japanese economy was booming, the Nikkei had move up Everyone wanted to pattern themselves after the Japanese because their growth rate was astounding. So i did a fair amount of research on the situation and lined myself up to have lunch with one of the largest asset managers on Wall Street that was managing assets in Japan.
The research i had conducted at that time was astounding, and i needed to know if this analyst thought that what I had uncovered was actually true. The statements I had been reading had indicated the following: interest ratess in Japan had gone through the floor as a result of government manipulation and that as a result the average citizen on the streets could actually get a loan at 1% to buy real estate. Not only that, but the baking community had actually liberalized the rules and the bond market supported the resale of the monitized bonds such that the borrower on the street could amortize the loan over as long as a 100 year period. Think of that.
As a result, real estate went through the roof in Japan... I don't know if this is true but at the time i read a report that the appraised value on the books at the time in the Japanese market that the value of the real estate in Tokyo in 1989 along was valued as being worth as much as the Continental United States ~ and that all of Japan was valued for collateral purposes to backstop the Japanese banking system at a value which was greater than all of North America. This blew me away.
Here was the kicker:
At that time, the estimates that I read were that 40% of corporate profitability was due to something they called Shiitsu [not sure of the spelling] ~ that is, that the Major co's on the NKE were actually using free reserves of cash, as well as money that they were aggressively borrowing at less than 1% in the bond market [free money, yay!] to buy each others stock as well as their own stock. They were then logging the exponential gains as operating profit on top of the growth they were actually generating, and the illusion of profound growth in the economy was perfected.
What do you then do when you are in an economy and logistical structure which isn't actually growing? What then?
Toi illustrate that this actually does happen and that this is not just a hypothetical question consider this... here is the Japanese stock market premier index, the NKE Nikkei. Look at the history of the premier companies in Japan ~ many of which were the most admired companies on Earth as we knew it the 1980's.
So what happened to the Japanese economy, banking system and real estate to cause a market that went sideways at a substantial discount off of the market top ever since 1990 ~ that is 32 years my friend, the equivalent of many people's wheelhouse zone of above average productivity ~ the time that they hope to acquire wealth.
So what happened? What was the cause of this kind of "unheard of" malaise?
Here is the back story as I know it. In the spring of 1989 I was on Wall Street working on my chops as stock broker and developing my skills as an analyst of economic and security market trends. At that time, the Nikkei was the hottest index on the planet [it went from 7500 to 35,000 between 1984 and 1989, a five to 6 year period] and 4 of the top 10 banks in the world from an assets on the books standpoint were the Japanese banks. They were ranked like number 1,#4, #7 and #8 at the time. The Japanese economy was booming, the Nikkei had move up Everyone wanted to pattern themselves after the Japanese because their growth rate was astounding. So i did a fair amount of research on the situation and lined myself up to have lunch with one of the largest asset managers on Wall Street that was managing assets in Japan.
The research i had conducted at that time was astounding, and i needed to know if this analyst thought that what I had uncovered was actually true. The statements I had been reading had indicated the following: interest ratess in Japan had gone through the floor as a result of government manipulation and that as a result the average citizen on the streets could actually get a loan at 1% to buy real estate. Not only that, but the baking community had actually liberalized the rules and the bond market supported the resale of the monitized bonds such that the borrower on the street could amortize the loan over as long as a 100 year period. Think of that.
As a result, real estate went through the roof in Japan... I don't know if this is true but at the time i read a report that the appraised value on the books at the time in the Japanese market that the value of the real estate in Tokyo in 1989 along was valued as being worth as much as the Continental United States ~ and that all of Japan was valued for collateral purposes to backstop the Japanese banking system at a value which was greater than all of North America. This blew me away.
Here was the kicker:
At that time, the estimates that I read were that 40% of corporate profitability was due to something they called Shiitsu [not sure of the spelling] ~ that is, that the Major co's on the NKE were actually using free reserves of cash, as well as money that they were aggressively borrowing at less than 1% in the bond market [free money, yay!] to buy each others stock as well as their own stock. They were then logging the exponential gains as operating profit on top of the growth they were actually generating, and the illusion of profound growth in the economy was perfected.
Comments
So regarding the lunch I had with the big time asset manager in Japan [he was managing like 2 billion at the time which was a large number in those days] he said yah, that stuff is true but its nothing to worry about ~ he explained that they had a different accounting system than we do and that everything was fine. Yow. As an econ strong guy I heard that as the explanation equivalent as that the laws of gravity don't apply.
Following the aftermath of the Japanese experiment, I believed that I would never see those kind of wild events again, yet here we are 30 years later with negative interest rates across many places on the globe and all time high free money getting printed by corporations as well as sovereign states.
By the way, this is not a call to arms or even intended as a doom and gloom message ~ it's simply perspective to ask the question ~ are you prepared to figure out how to grow assets and net worth in an environment where stocks and real estate do not automatically grow in value on a secular basis, and where your earned income from employment is not necessarily growing either.
So if I'm reading this correctly, the Japanese were artificially inflating their markets using a ponzi scheme? The same scheme currently implemented in US markets?
Amirite?
I guess the short answer is, no, I'm not. The only other thing I know how to do is work.
The first sentence in your first of two magnificent posts asked a question about our views on the morality of shorting stocks. Are you offering this perspective on where we may be heading to suggest that people get smart about how to make money when assets in general should be expected to drop in value? I guess the problem with that, other than most of us lack the sophistication and experience (and probably time) to engage in that kind of trading, is that if we are looking at Japan-like free-fall, and I see no reason to question your point on that as a strong possibility, then most assets will trend downward, everybody will be making those bets, and only the people who are REALLY good at it will succeed.
In my mind, on the most basic of economic levels, there are four basic ways to obtain value: (1) create it yourself; (2) be early in someone else's value story before the value reveals itself to everyone else, (3) time and (4) dumb luck of being in the right thing at the right time. I guess there's one more: cheating/stealing.
Shorting seems to be heavily weighted to (3). You are making a simple bet about the downward direction of a stock. It's depressing to think that's the primary way to make money if we are headed where many of us agree we might be headed.
Related but different question: what we're talking about is basically a statement that the government wants to cheat the economic cycle and constantly maintain an "up" cycle.
So, that leads to another question with which I've wrestled for some time: Why, in economic terms, does there have to be a down cycle? We know the economy cycles as an empirical matter; but other than the reality that there will be externalities that inevitably lead to down cycles, why must the economy cycle in an of its own forces?
@HoustonHusky however says it with much more technical clarity.
When the call comes in, who benefits? Nobody here...
If the idea seems complex, then simply buy an inverse ETF... they are set up to mimic the index that you choose and will go up in value as the index they track goes down... simple. In that manner, you are buying first and selling later in the usual tradition.