Honest Abe’s yen trade

Not much action in the stock market. Not much action in any markets.

So, let’s turn to look at how our ‘Trade of the Decade’ is doing. In a word: terrible.

You probably don’t remember. But at the beginning of 2000 we announced our first ‘Trade of the Decade’.

“Sell stocks, buy gold”, we said.

That trade worked out so well we can scarcely believe we recommended it. Stocks had their worst decade since the 1930s. Gold had it second best, rising from around $300 to over $1,200 (from memory).

Pretty darned good, if we say so ourselves.

So, at the beginning of 2010, we took another wild guess. “Sell Japanese bonds; buy Japanese stocks.”

This trade involved no special insight about what is going on in Japan. As to that we hadn’t a clue. We don’t speak a word of Japanese, other than ‘sayonara’…

Our trade was based not on a hard look into the future, but a quick look at the past. Japanese government bonds had been going up for 20 years… while the Japanese feds issued a slew of them. A whole generation of investors had said sayonara to their money after betting against them.

Meanwhile, Japanese stocks had disappointed investors for two decades. After the crash of 1990, they lost 75% to 80% of their value. Each time they appeared to be going back up… they soon fell again.

So, we figured that the trend of the past 20 years would probably not last another ten years. Specifically, we thought it was unlikely that the Japanese could run up their debt beyond 200% of GDP – far beyond the point of no return – without causing a sell-off in bond prices. Then, the money currently flowing into bonds would need a new home. Where else but stocks?

So far, this hasn’t happened. The trade has gone against us… or at least not in our favour.

But we have the Japanese feds on our side. They are vigorously trying to destroy the yen. Bloomberg:

Japan to Buy European Debt With Currency Reserves to Weaken Yen

Japan plans to use its foreign- exchange reserves to buy bonds issued by the European Stability Mechanism and euro-area sovereigns, as the nation seeks to weaken its currency, Finance Minister Taro Aso said.

“The financial stability of Europe will help the stability of foreign-exchange rates, including the yen,” Aso told reporters today at a briefing in Tokyo.

“From this perspective, Japan plans to buy ESM bonds,” he said. The purchase amount is undecided, Aso said.

Yes, dear reader, the Japanese are now joining the Europeans, the Americans, and the Chinese in the most foolhardy adventure in monetary history. Despite government debt more than two times the size of the economy, the new government of Shinzo Abe is committed to borrowing more money.

And it is looking to the Bank of Japan to support its reckless borrowing, just as the ECB supports Europe and the Fed supports the Obama administration. That is, it wants the central bank to print more money. How much?

“As much as it takes” is the new slogan. That’s what Mario Draghi promised Europe – “whatever it takes.” And it’s what Ben Bernanke offers America, too. He’ll keep the printing presses going “as long as necessary” to bring unemployment down to 6.5%.

Whew! That’s all we can say.

“As much as you need” is not a phrase generally associated with prudent bankers. So, either times have changed in some fundamental way… or these bankers aren’t very prudent.

So which is it? A – a ‘new era’? Or B – reckless central bankers?

We’ll go with B. And we’ll bet that our ‘Trade of the Decade’ will come right before we break out the Dom Perignon on 31 December 2019.

Honest Abe’s government may not completely kill the yen in the next seven years, but they’ll almost certainly do it some damage.

We notice, too, that some serious analysts are coming around to our point of view. While this is usually a negative development, in this case our position is so far out-of-the-money that it’s lonely.

Felix Zulauf:

Japan’s economy is not doing well and still suffers from deflation. The pronounced deterioration of Japan’s current account and the disappearing ability to finance her own large budget deficits are forcing some important changes. The new government in Japan, led by the LDP and prime Minster Abe has a 2/3 majority in parliament and can push through their own will without any problem. Abe wants some increased deficit spending, on top of a budget deficit that is already near 10% of GDP. He wants the Bank of Japan to finance a big part of it by printing new money and thereby weakening the yen and targeting 2% inflation.

… if the currency continues to decline against all the others, there will be tremendous lift to Japanese equities…

So, hold onto your ‘Trade of the Decad’e positions. Sell Japanese bonds. Buy Japanese stocks. Check back with us in seven years to see how it turned out.


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  • Noel Falconer MEcon

    ‘Honest Abe’ usually refers not to Japanese PM Shinzo Abe but to the 16th US President, Lincoln, who was so known in his lifetime because he WASN’T; the myth that surrounds his memory owes much more to his assassination than to historical truth.

  • Kevin Murray

    Any advice on how to short Japanese bonds (Bill advises selling them but how many of us MW readers actually own any?). All I can see are some ETN, traded on NY exchange, JGBS (Inverse of JGB) and JGBD (3x Inverse of JGB), both expensive and awkward for Brits to buy. Or short big holders of JGB like Japanese banks and pension funds, but I dont know how to do this.
    Some detailed advice for retail investors appreciated.

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