Our trade of the decade

How’s our ‘trade of the decade‘ doing?

Great! It outperformed almost everything in 2013. Only bitcoin did better.

To refresh your memory, the trade of the decade is based on a few simple ideas:

First, that you don’t make money by trading in and out. You do it by taking a good position and sitting tight.

Second, that one trade every ten years should be enough to capture most major market moves.

Third, that we can never tell what direction events will take, but over time, things that are expensive have a way of becoming cheap and things that are cheap have a way of becoming expensive.

The first time we announced a trade of the decade was in the year 2000. Stocks were expensive. Gold was cheap. “Buy gold… sell ttocks” was our advice.

That worked out well. No major asset class beat gold. Stocks, meanwhile, went up, down, and up again, ending the decade about where they started it (less losses to inflation).

Then, in 2010, we looked around. Nothing was very cheap. But Japanese stocks had been going down for 20 years. What were the odds that they would recover sometime in the next decade? We didn’t know. But compared to other bets, Japanese stocks looked good.
We went long Japanese stocks.

But what to put on the other side? What had been going up all the while Japanese stocks were going down? Japanese bonds! Easy peasy. We went short yen bonds. “Buy Japanese stocks… sell Japanese bonds.”

That looked like a bum trade for the first couple of years. But in 2013 it was, well, golden. Japanese stocks rose more than 50%. Meanwhile, Shinzo Abe goosed the inflation rate up to 1%. This had the effect of sending the yen down 15% against the dollar. Great for Japan’s exporters, terrible for Japan’s fixed income securities.

So, we made good money on both sides of the trade last year. By our rough, back of the envelope ciphering, our trade of the decade is up about 50% so far, with seven more years to run.

What will happen in those next six years? Oh, dear reader, you’re asking a lot for a free service. But we’ll take a crack at an answer anyway. What the heck. It’s still near the first of the year. A good time to look ahead and try to see what’s coming our way.

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Last year, as we turned off the lights and closed the doors, heading off for the holidays, Ben Bernanke was saying goodbye to the Fed. He did not apologise for having missed the biggest financial train wreck in 60 years.

He did not say he was sorry for sending America’s central bank on a fool’s errand, trying to save every fool banker and speculator in the country. He did not issue a mea culpa for enabling the economy’s addiction to cheap credit either.

That last point deserves elaboration. Mr Bernanke announced on 18 December that the long-awaited ‘tapering off’ had begun. The end of the world did not come. Neither stocks nor bonds seemed got the shakes or the chills.

Commentators and Wall Street shills – who see silver linings without clouds – told us that this proved what every investor already felt in his heart: that this boom is for real.

But what it really showed was that this taper was not for real. Shrewd investors figured it out. Having got the economy addicted to cheap credit, there is now no graceful way out. The ‘tapering’ announcement was like cutting the ribbon on a new methadone treatment centre; nobody expects to go cold turkey.

There is no way the current stock-market boom (with its collateral ‘wealth effects’), nor the incipient ‘recovery’ (if there is one), nor the bond market (home of the serious money), nor the federal budget (with more debt than anyone), nor household budgets can survive significantly higher interest rates.

Thanks to Mr Bernanke’s maladroit and naive policy moves, the whole shebang now needs artificially low rates just to stay more or less in the same place.

A real recovery typically brings higher rates as borrowers compete for limited savings. But this time, no major economy can stand the upswing of the credit cycle.

So, the fix is in. Central banks have spread out the clean needles. What else can they do? They’re trapped by their own policies, and speculators know it.

China stimulates its economy to produce more. America stimulates its economy to consume more. With even more debt than the US, Japan is caught in the middle. It cannot stand the deflation that comes with low-cost Chinese imports. And it can’t afford to lose its US customers.

Shinzo Abe has become the biggest pusher on the planet, stimulating the Japanese economy to produce and consume, with a lower yen and a higher inflation rate.

Coincidentally, he also knows that Japan’s debt cannot be paid off; it will have to be inflated away.

He may not succeed. But in the meantime, he’s locked in to a programme of aggressive stimulus.

And our trade of the decade still looks good.

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  • steveH

    The link at the top goes to a different version of the trade of the “decade” which sells US treasuries.
    How would one go about selling Japanese tresuries anyway?

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