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History Doesn’t Always Repeat Itself

Fear mongering is as rampant on Wall Street as it is in politics, Cramer said Friday. So to clear the air a bit, he debunked two of the biggest myths that might be keeping investors out of this market.

Bears, or traders looking to make money on stock declines, often use “hysterical historical analogies,” Cramer said, to scare the investing public. Two of the most common are likening the US to either Japan and its “lost decade” or the inflation that crippled Germany’s Weimar Republic. These comparisons may look compelling, but they fall apart under closer scrutiny.

Ever since the financial crisis struck the US in 2007, a number of pundits have claimed that we were repeating Japan’s lost decade, or the stock market crash and flat-line economic growth that plagued the country during the 1990s. But while there are some similarities here – a real-estate collapse, a financial crisis and government-supported banks – there are also some glaring differences as well.

The US made tough decisions during its recent crash, such as when American businesses cut their inventories to compensate for the slowdown, but Japan did not. Also, consumer spending rebounded here much sooner than in Japan. And instead of letting some banks fail and then selling off their assets to stronger competitors, Japan propped up even its worst institutions.

And this says nothing of the other key fundamental differences between the two countries. Japan’s population is stagnant, growing just 9% between 1980 and 2008, while the US population grew 34% in that time. Both a lower birth rate and a strict immigration policy in Japan kept that number low, and they are the reason the country’s economy could deliver zero to no growth at any given time.

Also, the average American is much younger than the average Japanese person, with the former being 36.7 years versus the latter’s 44.2 years. This means Japan has lots of retirees who don’t contribute to the economy and are reluctant to spend money. Then there’s the fact that Japan is far more dependent on exports than the US. In the end, the two countries couldn’t be any more different, so the lost-decade analogy doesn’t work.

As for the Weimar Republic, some pundits have predicted that hyperinflation will destroy the value of equities and ruin our purchasing power because the US government has been borrowing and printing so much money. But you don’t go from rising commodity prices, which are largely the result of speculating hedge funds and not real demand, and a barely noticeable blip in Treasury yields on the 10-year chart to hyperinflation, Cramer said.

Maybe even more important, though, is that the US can’t go from the severe deflation we experienced during this past recession to hyperinflation without some growth in between. But apparently that doesn’t stop the fear-mongering bears from using this analogy to stir up panic.

The rule going forward then is to “sell when our fundamentals are faltering,” Cramer said, “not when the bears are trying to freak you out.”

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