The only reservation I have about doing this trade right now is that the Japanese fiscal year ends on March 31. As we all know, book closings can generate some pretty weird gyrations in the market place as both companies and government window dress in the extreme.
However, once we are in the new fiscal year, I expect the yen to resume its downtrend, and the Nikkei its uptrend.
I think that the action in the foreign currency markets is about to shift from the Euro, which is now oversold in the extreme, to the Japanese yen, which has recently been sleepy.
?Oh, how I despise the yen, let me count the ways.?
I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
1) With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials between countries are the single greatest driver of foreign exchange rates. That means the yen is taking the downtown express.
2) This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. So ?RISK ON? means more yen selling, a lot.
3) Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re just not making enough Japanese any more. Countries that are not minting new consumers in large numbers tend to have poor economies and weak currencies.
4) The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 260% of GDP, or 130% when you net out inter agency crossholdings, Japan is at the top of the list.
5) The Japanese ten-year bond market, with a yield of only 0.33%, is a disaster waiting to happen. It makes US Treasury bonds look generous by comparison at 1.93%. No yield support here whatsoever.
6) You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters and revive the economy.
When the big turn inevitably comes, we?re going to ?125, then ?130, then ?150. That works out to a price of $150 for the (YCS), which last traded at $90.50. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360.
To me the ?120.78 I see on my screen today is unbelievably expensive.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/03/Japanese-Girl-e1414074431163.jpg280400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-03-20 01:03:032015-03-20 01:03:03It?s All Over for the Japanese Yen
I am once again writing this report from a first class sleeping cabin on Amtrak?s California Zephyr. By day, I have two comfortable seats facing each other next to a broad window. At night, they fold into bunk beds, a single and a double. There is a shower, but only Houdini could get in and out of it.
We are now pulling away from Chicago?s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I am headed for Emeryville, California, just across the bay from San Francisco. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure, and to keep me up to date with the onboard gossip. The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Spellchecker can catch most of the mistakes, but not all of them. Thank goodness for small algorithms.
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied searches during stops at major stations along the way to chase down data points.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS. Who knew that 95% of America is off the grid? That explains a lot about our politics today. I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone.
After making the rounds with strategists, portfolio managers, and hedge fund traders, I can confirm that 2014 was one of the toughest to trade for careers lasting 30, 40, or 50 years. Yet again, the stay at home index players have defeated the best and the brightest.
With the Dow gaining a modest 8% in 2014, and S&P 500 up a more virile 14.2%, this was a year of endless frustration. Volatility fell to the floor, staying at a monotonous 12% for seven boring consecutive months. Most hedge funds lagged the index by miles.
My Trade Alert Service, hauled in an astounding 30.3% profit, at the high was up 42.7%, and has become the talk of the hedge fund industry. That was double the S&P 500 index gain.
If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets facing in the coming year:
The Ten Highlights of 2015
1) Stocks will finish 2015 higher, almost certainly more than the previous year, somewhere in the 10-15% range. Cheap energy, ultra low interest rates, and 3-4% GDP growth, will expand multiples. It?s Goldilocks with a turbocharger.
2) Performance this year will be back-end loaded into the fourth quarter, as it was in 2014. The path forward became so clear, that some of 2015?s performance was pulled forward into November, 2014.
3) The Treasury bond market will modestly grind down, anticipating the inevitable rate rise from the Federal Reserve.
4) The yen will lose another 10%-20% against the dollar.
5) The Euro will fall another 10%, doing its best to hit parity with the greenback, with the assistance of beleaguered continental governments.
6) Oil stays in a $50-$80 range, showering the economy with hundreds of billions of dollars worth of de facto tax cuts.
7) Gold finally bottoms at $1,000 after one more final flush, then rallies (My jeweler was right, again).
8) Commodities finally bottom out, thanks to new found strength in the global economy, and begin a modest recovery.
9) Residential real estate has made its big recovery, and will grind up slowly from here.
10) After a tumultuous 2014, international political surprises disappear, the primary instigators of trouble becalmed by collapsed oil revenues.
The Thumbnail Portfolio
Equities - Long. A rising but low volatility year takes the S&P 500 up to 2,350. This year we really will get another 10% correction. Technology, biotech, energy, solar, and financials lead.
Bonds - Short. Down for the entire year with long periods of stagnation.
Foreign Currencies - Short. The US dollar maintains its bull trend, especially against the Yen and the Euro.
Commodities - Long. A China recovery takes them up eventually.
Precious Metals - Stand aside. We get the final capitulation selloff, then a rally.
Agriculture - Long. Up, because we can?t keep getting perfect weather forever.
Real estate - Long. Multifamily up, commercial up, single family homes sideways to up small.
1) The Economy - Fortress America
This year, it?s all about oil, whether it stays low, shoots back up, or falls lower. The global crude market is so big, so diverse, and subject to so many variables, that it is essentially unpredictable.
No one has an edge, not the major producers, consumers, or the myriad middlemen. For proof, look at how the crash hit so many ?experts? out of the blue.
This means that most economic forecasts for the coming year are on the low side, as they tend to be insular and only examine their own back yard, with most predictions still carrying a 2% handle.
I think the US will come in at the 3%-4% range, and the global recovery spawns a cross leveraged, hockey stick effect to the upside. This will be the best performance in a decade. Most company earnings forecasts are low as well.
There is one big positive that we can count on in the New Year. Corporate earnings will probably come in at $130 a share for the S&P 500, a gain of 10% over the previous year. During the last five years, we have seen the most dramatic increase in earnings in history, taking them to all-time highs.
This is set to continue. Furthermore, this growth will be front end loaded into Q1. The ?tell? was the blistering 5% growth rate we saw in Q3, 2014.
Cost cutting through layoffs is reaching an end, as there is no one left to fire. That leaves hyper accelerating technology and dramatically lower energy costs the remaining sources of margin increases, which will continue their inexorable improvements. Think of more machines and software replacing people.
You know all of those hundreds of billions raised from technology IPO?s in 2014. Most of that is getting plowed right back into new start ups, accelerating the rate of technology improvements even further, and the productivity gains that come with it.
You can count on demographics to be a major drag on this economy for the rest of the decade. Big spenders, those in the 46-50 age group, don?t return in large numbers until 2022.
But this negative will be offset by a plethora of positives, like technology, global expansion, and the lingering effects of Ben Bernanke?s massive five year quantitative easing. A time to pay the piper for all of this largess will come. But it could be a decade off.
I believe that the US has entered a period of long-term structural unemployment similar to what Germany saw in the 1990?s. Yes, we may grind down to 5%, but no lower than that. Keep close tabs on the weekly jobless claims that come out at 8:30 AM Eastern every Thursday for a good read as to whether the financial markets will head in a ?RISK ON? or ?RISK OFF? direction.
Most of the disaster scenarios predicted for the economy this year were based on the one off black swans that never amounted to anything, like the Ebola virus, ISIS, and the Ukraine.
With the economy going gangbusters, and corporate earnings reaching $130 a share, those with a traditional ?buy and hold? approach to the stock market will do alright, provided they are willing to sleep through some gut churning volatility. A Costco sized bottle of Jack Daniels and some tranquillizers might help too.
Earnings multiples will increase as well, as much as 10%, from the current 17X to 18.5X, thanks to a prolonged zero interest rate regime from the Fed, a massive tax cut in the form of cheap oil, unemployment at a ten year low, and a paucity of attractive alternative investments.
This is not an outrageous expectation, given the 10-22 earnings multiple range that we have enjoyed during the last 30 years. If anything, it is amazing how low multiples are, given the strong tailwinds the economy is enjoying.
The market currently trades around fair value, and no market in history ever peaked out here. An overshoot to the upside, often a big one, is mandatory. After all, my friend, Janet Yellen, is paying you to buy stock with cheap money, so why not?
This is how the S&P 500 will claw its way up to 2,350 by yearend, a gain of about 12.2% from here. Throw in dividends, and you should pick up 14.2% on your stock investments in 2015.
This does not represent a new view for me. It is simply a continuation of the strategy I outlined again in October, 2014 (click here for ?Why US Stocks Are Dirt Cheap?).
Technology will be the top-performing sector once again this year. They will be joined by consumer cyclicals (XLV), industrials (XLI), and financials (XLF).
The new members in the ?Stocks of the Month Club? will come from newly discounted and now high yielding stocks in the energy sector (XLE).
There is also a rare opportunity to buy solar stocks on the cheap after they have been unfairly dragged down by cheap oil like Solar City (SCTY) and the solar basket ETF (TAN). Revenues are rocketing and costs are falling.
After spending a year in the penalty box, look for small cap stocks to outperform. These are the biggest beneficiaries of cheap energy and low interest rates, and also have minimal exposure to the weak European and Asian markets.
Share prices will deliver anything but a straight-line move. We finally got our 10% correction in 2014, after a three-year hiatus. Expect a couple more in 2015. The higher prices rise, the more common these will become.
We will start with a grinding, protesting rally that takes us up to new highs, as the market climbs the proverbial wall of worry. Then we will suffer a heart stopping summer selloff, followed by another aggressive yearend rally.
Cheap money creates a huge incentive for companies to buy back their own stock. They divert money from their $3 trillion cash hoard, which earns nothing, retire shares paying dividends of 3% or more, and boost earnings per share without creating any new business. Call it financial engineering, but the market loves it.
Companies are also retiring stock through takeovers, some $2 trillion worth last year. Expect more of this to continue in the New Year, with a major focus on energy. Certainly, every hedge fund and activist investor out there is undergoing a crash course on oil fundamentals. After a 13-year bull market in energy, the industry is ripe for a cleanout.
This is happening in the face of both an individual and institutional base that is woefully underweight equities.
The net net of all of this is to create a systemic shortage of US equities. That makes possible simultaneous rising prices and earnings multiples that have taken us to investor heaven.
Amtrak needs to fill every seat in the dining car, so you never know who you will get paired with.
There was the Vietnam vet Phantom jet pilot who now refused to fly because he was treated so badly at airports. A young couple desperate to get out of Omaha could only afford seats as far as Salt Lake City, sitting up all night. I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a ?See America Pass.? Mennonites returning home by train because their religion forbade airplanes.
If you told me that US GDP growth was 5%, unemployment was at a ten year low at 5.8%, and energy prices had just halved, I would have pegged the ten-year Treasury bond yield at 6.0%. Yet here we are at 2.10%.
Virtually every hedge fund manager and institutional investor got bonds wrong last year, expecting rates to rise. I was among them, but that is no excuse. At least I have good company.
You might as well take your traditional economic books and throw them in the trash. Apologies to John Maynard Keynes, John Kenneth Galbraith, and Paul Samuelson.
The reasons for the debacle are myriad, but global deflation is the big one. With ten year German bunds yielding a paltry 50 basis points, and Japanese bonds paying a paltry 30 basis points, US Treasuries are looking like a bargain.
To this, you can add the greater institutional bond holding requirements of Dodd-Frank, a balancing US budget deficit, a virile US dollar, the commodity price collapse, and an enormous embedded preference for investors to keep buying whatever worked yesterday.
For more depth on the perennial strength of bonds, please click here for ?Ten Reasons Why I?m Wrong on Bonds?.
Bond investors today get an unbelievable bad deal. If they hang on to the longer maturities, they will get back only 80 cents worth of purchasing power at maturity for every dollar they invest.
But institutions and individuals will grudgingly lock in these appalling returns because they believe that the potential losses in any other asset class will be worse. The problem is that driving eighty miles per hour while only looking in the rear view mirror can be hazardous to your financial health.
While much of the current political debate centers around excessive government borrowing, the markets are telling us the exact opposite. A 2%, ten-year yield is proof to me that there is a Treasury bond shortage, and that the government is not borrowing too much money, but not enough.
There is another factor supporting bonds that no one is looking at. The concentration of wealth with the 1% has a side effect of pouring money into bonds and keeping it there. Their goal is asset protection and nothing else.
These people never sell for tax reasons, so the money stays there for generations. It is not recycled into the rest of the economy, as conservative economists insist. As this class controls the bulk of investable assets, this forestalls any real bond market crash, possibly for decades.
So what will 2015 bring us? I think that the erroneous forecast of higher yields I made last year will finally occur this year, and we will start to chip away at the bond market bubble?s granite edifice. I am not looking for a free fall in price and a spike up in rates, just a move to a new higher trading range.
The high and low for ten year paper for the past nine months has been 1.86% to 3.05%. We could ratchet back up to the top end of that range, but not much higher than that. This would enable the inverse Treasury bond bear ETF (TBT) to reverse its dismal 2014 performance, taking it from $46 back up to $76.
You might have to wait for your grandchildren to start trading before we see a return of 12% Treasuries, last seen in the early eighties. I probably won?t live that long.
Reaching for yield will continue to be a popular strategy among many investors, which is typical at market tops. That focuses buying on junk bonds (JNK) and (HYG), REITS (HCP), and master limited partnerships (KMP), (LINE).
There is also emerging market sovereign debt to consider (PCY). At least there, you have the tailwinds of long term strong economies, little outstanding debt, appreciating currencies, and higher interest rates than those found at home. This asset class was hammered last year, so we are now facing a rare entry point. However, keep in mind, that if you reach too far, your fingers get chopped off.
There is a good case for sticking with munis. No matter what anyone says, taxes are going up, and when they do, this will increase tax free muni values. So if you hate paying taxes, go ahead and buy this exempt paper, but only with the expectation of holding it to maturity. Liquidity could get pretty thin along the way, and mark to markets could be shocking. Be sure to consult with a local financial advisor to max out the state, county, and city tax benefits.
There are only three things you need to know about trading foreign currencies in 2015: the dollar, the dollar, and the dollar. The decade long bull market in the greenback continues.
The chip shot here is still to play the Japanese yen from the short side. Japan?s Ministry of Finance is now, far and away, the most ambitious central bank hell bent on crushing the yen to rescue its dying economy.
The problems in the Land of the Rising Sun are almost too numerous to count: the world?s highest debt to GDP ratio, a horrific demographic problem, flagging export competitiveness against neighboring China and South Korea, and the world?s lowest developed country economic growth rate.
The dramatic sell off we saw in the Japanese currency since December, 2012 is the beginning of what I believe will be a multi decade, move down. Look for ?125 to the dollar sometime in 2015, and ?150 further down the road. I have many friends in Japan looking for and overshoot to ?200. Take every 3% pullback in the greenback as a gift to sell again.
With the US having the world?s strongest major economy, its central bank is, therefore, most likely to raise interest rates first. That translates into a strong dollar, as interest rate differentials are far and away the biggest decider of the direction in currencies. So the dollar will remain strong against the Australian and Canadian dollars as well.
The Euro looks almost as bad. While European Central Bank president, Mario Draghi, has talked a lot about monetary easing, he now appears on the verge of taking decisive action.
Recurring financial crisis on the continent is forcing him into a massive round of Fed style quantitative easing through the buying of bonds issued by countless European entities. The eventual goal is to push the Euro down to parity with the buck and beyond.
For a sleeper, use the next plunge in emerging markets to buy the Chinese Yuan ETF (CYB) for your back book, but don?t expect more than single digit returns. The Middle Kingdom will move heaven and earth in order to keep its appreciation modest to maintain their crucial export competitiveness.
There isn?t a strategist out there not giving thanks for not loading up on commodities in 2014, the preeminent investment disaster of 2015. Those who did are now looking for jobs on Craig?s List.
2014 was the year that overwhelming supply met flagging demand, both in Europe and Asia. Blame China, the big swing factor in the global commodity.
The Middle Kingdom is currently changing drivers of its economy, from foreign exports to domestic consumption. This will be a multi decade process, and they have $4 trillion in reserves to finance it.
It will still demand prodigious amounts of imported commodities, especially, oil, copper, iron ore, and coal, all of which we sell. But not as much as in the past. The derivative equity plays here, Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE), have all taken an absolute pasting.
The food commodities were certainly the asset class to forget about in 2014, as perfect weather conditions and over planting produced record crops for the second year in a row, demolishing prices. The associated equity plays took the swan dive with them.
However, the ags are still a tremendous long term Malthusian play. The harsh reality here is that the world is making people faster than the food to feed them, the global population jumping from 7 billion to 9 billion by 2050.
Half of that increase comes in countries unable to feed themselves today, largely in the Middle East. The idea here is to use any substantial weakness, as we are seeing now, to build long positions that will double again if global warming returns in the summer, or if the Chinese get hungry.
The easy entry points here are with the corn (CORN), wheat (WEAT), and soybeans (SOYB) ETF?s. You can also play through (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU).
The grain ETF (JJG) is another handy fund. Though an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cakewalk. You can participate in this most liquid of assets with the ETF?s (PHO) and (FIW).
Yikes! What a disaster! Energy in 2014 suffered price drops of biblical proportions. Oil lost the $30 risk premium it has enjoyed for the last ten years. Natural gas got hammered. Coal disappeared down a black hole.
Energy prices did this in the face of an American economy that is absolutely rampaging, its largest consumer. Our train has moved over to a siding to permit a freight train to pass, as it has priority on the Amtrak system. Three Burlington Northern engines are heaving to pull over 100 black, brand new tank cars, each carrying 30,000 gallons of oil from the fracking fields in North Dakota.
There is another tank car train right behind it. No wonder Warren Buffett tap dances to work every day, as he owns the road. US Steel (X) also does the two-step, since they provide immense amounts of steel to build these massive cars.
The US energy boom sparked by fracking will be the biggest factor altering the American economic landscape for the next two decades. It will flip us from a net energy importer to an exporter within two years, allowing a faster than expected reduction in military spending in the Middle East.
Cheaper energy will bestow new found competitiveness on US companies that will enable them to claw back millions of jobs from China in dozens of industries. This will end our structural unemployment faster than demographic realities would otherwise permit.
We have a major new factor this year in considering the price of energy. Peace in the Middle East, especially with Iran, always threatened to chop $30 off the price of Texas tea. But it was a pie-in-the-sky hope. Now there are active negotiations underway in Geneva for Iran to curtail or end its nuclear program. This could be one of the black swans of 2015, and would be hugely positive for risk assets everywhere.
Enjoy cheap oil while it lasts because it won?t last forever. American rig counts are already falling off a cliff and will eventually engineer a price recovery.
Add the energies of oil (DIG), Cheniere Energy (LNG), the energy sector ETF (XLE), Conoco Phillips (COP), and Occidental Petroleum (OXY). Skip natural gas (UNG) price plays and only go after volume plays, because the discovery of a new 100-year supply from ?fracking? and horizontal drilling in shale formations is going to overhang this subsector for a very long time.
It is a basic law of economics that cheaper prices bring greater demand and growing volumes, which have to be transported. However, major reforms are required in Washington before use of this molecule goes mainstream.
These could be your big trades of 2015, but expect to endure some pain first.
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders. The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a train over on to its side.
In the snow filled canyons we sight a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It?s a good omen for the coming year. We also see countless abandoned gold mines and the broken down wooden trestles leading to them, so it is timely here to speak about precious metals.
As long as the world is clamoring for paper assets like stocks and bonds, gold is just another shiny rock. After all, who needs an insurance policy if you are going to live forever?
We have already broken $1,200 once, and a test of $1,000 seems in the cards before a turnaround ensues. There are more hedge fund redemptions and stop losses to go. The bear case has the barbarous relic plunging all the way down to $700.
But the long-term bull case is still there. Someday, we are going to have to pay the piper for the $4.5 trillion expansion in the Fed?s balance sheet over the past five years, and inflation will return. Gold is not dead; it is just resting. I believe that the monetary expansion arguments to buy gold prompted by massive quantitative easing are still valid.
If you forgot to buy gold at $35, $300, or $800, another entry point is setting up for those who, so far, have missed the gravy train. The precious metals have to work off a severely, decade old overbought condition before we make substantial new highs. Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window.
If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation adjusted all-time high, or more.
This is why emerging market central banks step in as large buyers every time we probe lower prices. For me, that pegs the range for 2015 at $1,000-$1,400. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP).
I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal, silver (SLV), which I think could hit $50 once more, and eventually $100.
What will be the metals to own in 2015? Palladium (PALL) and platinum (PPLT), which have their own auto related long term fundamentals working on their behalf, would be something to consider on a dip. With US auto production at 17 million units a year and climbing, up from a 9 million low in 2009, any inventory problems will easily get sorted out.
Would You Believe This is a Blue State?
8) Real Estate (ITB)
The majestic snow covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write. My apologies to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.
It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.
There is no doubt that there is a long-term recovery in real estate underway. We are probably 8 years into an 18-year run at the next peak in 2024.
But the big money has been made here over the past two years, with some red hot markets, like San Francisco, soaring. If you live within commuting distance of Apple (AAPL), Google (GOOG), or Facebook (FB) headquarters in California, you are looking at multiple offers, bidding wars, and prices at all time highs.
From here on, I expect a slow grind up well into the 2020?s. If you live in the rest of the country, we are talking about small, single digit gains. The consequence of pernicious deflation is that home prices appreciate at a glacial pace. At least, it has stopped going down, which has been great news for the financial industry.
There are only three numbers you need to know in the housing market: there are 80 million baby boomers, 65 million Generation Xer?s who follow them, and 85 million in the generation after that, the Millennials.
The boomers have been unloading dwellings to the Gen Xer?s since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made.
If they have prospered, banks won?t lend to them. Brokers used to say that their market was all about ?location, location, location?. Now it is ?financing, financing, financing?. Banks have gone back to the old standard of only lending money to people who don?t need it.
Consider the coming changes that will affect this market. The home mortgage deduction is unlikely to survive any real attempt to balance the budget. And why should renters be subsidizing homeowners anyway? Nor is the government likely to spend billions keeping Fannie Mae and Freddie Mac alive, which now account for 95% of home mortgages.
That means the home loan market will be privatized, leading to mortgage rates higher than today. It is already bereft of government subsidies, so loans of this size are priced at premiums. This also means that the fixed rate 30-year loan will go the way of the dodo, as banks seek to offload duration risk to consumers. This happened long ago in the rest of the developed world.
There is a happy ending to this story. By 2022 the Millennials will start to kick in as the dominant buyers in the market. Some 85 million Millennials will be chasing the homes of only 65 Gen Xer?s, causing housing shortages and rising prices.
This will happen in the context of a labor shortfall and rising standards of living. Remember too, that by then, the US will not have built any new houses in large numbers in 15 years.
The best-case scenario for residential real estate is that it gradually moves up for another decade, unless you live in Cupertino or Mountain View. We won?t see sustainable double-digit gains in home prices until America returns to the Golden Age in the 2020?s, when it goes hyperbolic.
But expect to put up your first-born child as collateral, and bring your entire extended family in as cosigners if you want to get a bank loan.
That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with. This is especially true if you lock up today?s giveaway interest rates with a 30 year fixed rate loan. At 3.3% this is less than the long-term inflation rate.
You will boast about it to your grandchildren, as my grandparents once did to me.
Crossing the Bridge to Home Sweet Home
9) Postscript
We have pulled into the station at Truckee in the midst of a howling blizzard.
My loyal staff have made the 20 mile trek from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
Well, that?s all for now. We?ve just passed the Pacific mothball fleet moored in the Sacramento River Delta and we?re crossing the Benicia Bridge. The pressure increase caused by an 8,200 foot descent from Donner Pass has crushed my water bottle. The Golden Gate Bridge and the soaring spire of the Transamerica Building are just around the next bend across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my Macbook Pro and iPhone 6, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten mile night hike up Grizzly Peak and still get home in time to watch the season opener for Downton Abbey season five. I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I?ll shoot you a Trade Alert whenever I see a window open on any of the trades above.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/Zephyr.jpg342451Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-01-06 01:02:142015-01-06 01:02:142015 Annual Asset Class Review
Traders in Japan suffered a rude awakening yesterday morning when the Ministry of International Trade and Industry announced that the troubled country?s GDP shrunk by -1.6% during the third quarter. Analysts had been expecting a gain of 2.2%.
What?s worse, this is the second consecutive quarter of negative GDP, meaning that the Land of the Rising Sun is now solidly in recession, the fourth since 2008, and the umpteenth since the country fell off a demographic cliff 25 years ago.
The Nikkei Average took it on the kisser, plunging some 3% from its high for the year. The Wisdom Tree Japan Hedged Equity ETF (DXJ) declined by half as much.
Half of the gain since the Bank of Japan?s ?shock and awe? monetization measures on October 15 went up in smoke. Now we know why the central bank had been so aggressive and preemptive.
There are immediate implications from the dismal numbers. Prime Minister Shinzo Abe is almost certain to delay a hike in Japan?s VAT sales tax from 8% to 10% scheduled for the new fiscal year starting April 1.
This year?s rise, from 5% to 8%, is viewed as the chief culprit responsible for the shocking slowdown.
It turns out that clever consumers rushed to beat the tax, pulled their spending forward, creating an artificial boost to economic growth in the first quarter. This lulled the government and Japanese retailers, into thinking their recovery strategy was working.
After the tax increase took effect, the spending boom ground to a complete halt, and the economy came to a juddering stop. The end result was a huge inventory build that was the most destructive aspect of the terrible GDP numbers, as higher prices caused consumers to stay away from the stores in droves.
The conservative Abe was behind the government?s grab for more revenues to head off the country?s runaway budget deficit, which is now seen by many economists as reaching catastrophic proportions, some 160% of total GDP.
The problem is that governments should balance budgets when they can, not when they want to. I have lost count of how many Japanese recoveries have been smothered in the cradle by premature tax increases over the last two decades.
Thank goodness the US government had the sense not to try that here, or we?d all be standing in breadlines by now.
The global implications of a new Japanese recession are, fortunately, not as dire. It?s not like many analysts had built in a Japanese economic miracle into their long-term growth forecasts. Japan only accounts for 7% of world GDP these days, and losing a couple percent of that annualized doesn?t move the needle much.
The fall of the Japanese yen this year has been so rapid and dramatic that there hasn?t nearly been enough time for it to have a positive impact on the economy. It will going forward. That alone should pull the country back out of recession in the current quarter.
Remember too that since Japan is far more dependent than America on imported energy, it will benefit greater from the ongoing collapse in the price of oil.
The disastrous GDP numbers should also encourage the BOJ to become even more aggressive in its own reflationary efforts. Think more growth of the money supply, more quantitative easing, and faster. Buy Japanese printing press stocks!
Fortunately, all of these global, multi market cross currents distill down into a single trade for you and I: sell more yen.
A substantially weaker Japanese currency seems to be the one stop solution for all of Japan?s many intractable problems.
You already saw this in action in the foreign currency markets on Monday after the GDP numbers came out. Normally, a downside surprise of this magnitude on the economic data front generates a big ?flight to safety? move across all asset classes. That would have caused the Japanese yen to rise sharply against the buck.
Not this time. In fact, it barely moved. Japan and yen bears weren?t waiting a nanosecond to sell short more of the beleaguered currency, offsetting whatever profit taking there was from pre existing shorts the GDP figures might have incited.
So the set up here is to sell short the Currency Shares Japanese Yen Trust ETF (FXE), or to buy the 2X ProShares Ultra Short Yen ETF (YCS), two positions I have been recommending non stop for the past three years.
It looks like we have only just gotten started with out big down move in the yen.
Foreign exchange traders are an odd lot. They tend to maintain a laser like focus on specific numbers that are utterly meaningless to us mere mortals, but which have momentous importance to themselves.
Right now, one is hearing the battle cry over the 120/120 targets. Specifically, traders want to take the yen down to Y120 to the US dollar, and the Euro down to $1.20 by the last trading day of 2014.
They may well get their wishes.
Powering the moves is the biggest policy divergence between central banks in a decade. The US Federal is threatening to take interest rates up every other day.
In the meantime, lower interest rates beckon in Europe and Japan as their economies lurch from one disaster to the next, dragging their own currencies down.
Accelerating the move is the gasoline that has been thrown on the economic fires caused by? You guessed it, plunging gasoline prices in the US, which is quickly turning into a massive stimulus program.
Wonder why Wal-Mart (WMT) has suddenly taken off to the races? It?s because their impoverished, gap toothed customers have suddenly received big cash bonuses, thanks to the war for market share among the members of OPEC.
Even a penny drop in the price of petrol adds $1 billion a year in consumer spending. Gas is so cheap that we might even break the $3 level here in high tax California.
Higher interest rates are great for the greenback because they prompt foreign investors to send more money here faster to chase higher returns than available at home.
The sharpest bond market move in history, taking ten year Treasury yields from 1.86% all the way up to 2.38% in four weeks, makes this view even more convincing.
Followers of this letter already know that the currencies have been in deep doo doo all year. That?s why I have been aggressively pushing out Trade Alerts to buy the dollar (UUP) and sell short the Euro (FXE), (EUO) and the Japanese yen (FXY), (YCS) for the past six months.
Readers have been laughing all the way to the bank.
The really thrilling part here is that this is only the beginning of a decade long move. My final target for the yen is Y150 and $1.00 for the Euro. This could be the trade that keeps on giving.
There are also important spillover implications for the stock market. It means more money for stocks at higher prices. The S&P 500 at 2,100 by yearend now looks like a chip shot, and we may probe even higher.
So why am I currently lacking any current positions in the currencies in my model trading portfolio? We are now at the end of extreme moves in all asset classes over the past month.
So, while everything looks hunky dory (a street in Yokohama where the cheap geishas used to hang out) in the markets, risk is, in fact, rising.
I have to admit that, being up 42.5% year to date, I have gotten spoiled. I am holding back for the low risk, high return type of entry points for new trades that my readers have become addicted to.
When I see one, you?ll be the first to know. Watch this space.
?Be Fearful When Others Are Greedy, and Greedy When Others Are Fearful.?
That is one of my favorite quotes from Oracle of Omaha, Warren Buffet, and it was never more true than during the past 30 trading days.
It turns out that the lowest risk day to buy stocks in 2014 was October 15, when we saw a giant, capitulation, spike low in the S&P 500 (SPY) down to $182.
That was the most fearful day I can recall over the last three years. You wouldn?t believe how many people I begged not to sell out entire portfolios that day!
So where are we now with the markets? Go back to the beginning of that legendary quote, and the word ?fearful? really stands out.
That means traders are stuck right back in the uncomfortable position in which they have spent most of this year.
Do I try to play catch up here and chase the market for a few extra basis points of performance, even at the risk of enduring another calamitous selloff? Or do I sit here in cash and earn precisely zero and get fired at the end of the year?
It is a choice that would truly vex Salomon. But as a king, at least he had job security.
We are now entering the tag ends of 2014, with only 36 trading days left, including three half days. I think it is safe to say that the trends that have predominated since January 1 will continue. Expect markets to continue to over reward risk takers and over punish risk avoiders.
That means there are only three trades in the world to execute:
1) Buy the US Dollar
A yield advantage for the greenback is sucking in capital from all over the world. Concerns about principal risk is a further driver, creating a ?flight to safety? of prodigious proportions. Thanks to the collapse in energy prices and a ramp up in US domestic production, dollar outflows from America are at decade lows.
This can only mean that we are at the beginning of a multi year bull market in the buck. Sell short the Japanese yen (FXY) and the Euro (FXE), and buy the 2X short yen ETF (YCS), and the 2X short Euro ETF (EUO).
2) Buy US Stocks
The majority of US portfolio managers are still underweight stocks and are desperately trying to get in. Now that the 10% correction is finally behind us, they can afford the luxury of being more aggressive loading up on the dips.
The midterm elections, which saw the Republicans take control of the Senate with a seven seat gain, is a new turbocharger for equities. Congress is now seen as pro business. Since the stock market tripled and corporate profits rocketed with an anti business elected body, imagine how well they will do with a friendly one!
I was hoping for the Senate results to get tied up in runoffs and the courts for a couple of months, triggering a 5% market correction and an opportunity to load the boat once more. It was not to be. What is left for us now is to see the (SPX) grind up to close the year at a 2100 all time high.
Who will be the sector leaders? The usual suspects who have led the charge all year, technology, health care, and financials.
3) Sell Short All Commodities
It is truly impressive to see the entire commodity space collapse all at the same time. This includes oil, natural gas, gold, silver, copper, corn, wheat, soybeans, and the commodity producing currencies of the Australian and Canadian dollars.
They have all been hard hit with a perfect storm; overwhelming supply of product, a strong dollar, and weak demand caused by a slowing global economy. The story is the same everywhere.
Commodity collapses always last longer and deeper than you imagine possible because you cannot turn off production by simply flipping a switch, as you can with the paper assets of stocks and bonds. Cutting off supplies means freezing capital spending worth hundreds of billions of dollars spread over decades, no easy task.
So, before you purchase a hard asset of any kind, lie down and take a long nap first. And please stop emailing me asking if this is the bottom for all of the above. It isn?t.
4) Sell All Bonds
There is a fourth secular trend that began exactly on October 15, right after the market opening. The ten year Treasury bond (TLT) hit a yield of 1.86%. This is a secondary low in yields, high in prices, after the 1.39% yield we saw in 2012. This means we are now two years into a 30-year bear market for all fixed income securities.
However, don?t expect a crash like we saw during the 1970?s, when yields soared up to 13%. Expect a slow grind up in interest rates, often spending 3-6 months in tedious, narrow, sleep inducing ranges.
This makes your entry points on the short side important. Only buy the short Treasury bond ETF (TBT) on substantial dips, lest hair starts growing on the position.
There is one other alternative if you have been following the Trade Alerts of the Mad Hedge Fund Trader all year.
Quit trading and take the rest of the year off. Start your Christmas shopping early. Contribute to retail sales and the national GDP. You earned it. The 42% profit you have earned so far is of heroic proportions.
https://www.madhedgefundtrader.com/wp-content/uploads/2011/10/johnthomas00.png378251Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-11-07 01:04:292014-11-07 01:04:29How to Trade the Rest of 2014
Those who woke up early Friday morning may be forgiven for blinking at their screens quite a few times.
The Japanese yen (FXY), (YCS) was down by an incredible 3%, the Dow Average futures were trading at an all time high of $17,400, and the S&P 500 was just short of a new peak at $202.
The Japanese stock market blasted 5% to the upside, taking the Wisdom Tree Japan Hedged Equity ETF (DXJ) up a staggering 8%.
Was this a trick or treat?
It only took a few seconds for me to learn that this was all in reaction to bold moves announced by the Bank of Japan overnight. In one fell swoop, they boosted their target for monetary expansion this fiscal year from Y60 trillion to Y80 trillion, an instant gain of 33%, or $200 billion.
Prorate this number for the difference in out two nations? GDP?s, and that is like the Federal Reserve announcing a new $700 billion monetary stimulus program out of the blue. Quantitative easing is not dead. The baton has merely been passed from the US to Europe and Japan.
The bottom line for us? Asset prices everywhere go higher.
Of course, readers of the Mad Hedge Fund Trader knew all this was coming.
While taking profits yesterday on my Japan yen put spread, I cautioned holders of the ProShares Ultra Short Yen ETF (YCS) to hang on because the beleaguered Japanese currency was headed much lower.
Those who did so were richly rewarded with a one-day pop of $4.50 overnight to $79.50, an all time high.
Parsing through the BOJ statement, it?s clear that these spectacular, once a decade moves were justified.
When the Japanese government implemented a poorly conceived tax increase in April, the BOJ sat on its hands.
After sleeping through most of the year, the hand of Japanese central bank was finally forced by simultaneous weakness in Europe. It is now implementing the Fed QE policy lock, stock, and barrel, given the proven excellent results here in the US. They are only five years late!
An even bigger blockbuster was another announcement made by Japan?s government controlled Pension Investment Corp. that it was totally reshuffling its massive $1.2 trillion investment portfolio.
It is doubling its allocation to international equities from $150 billion to $300 billion. Given the dire conditions in Europe, you can count on most of that money going into the US stocks. That explains our gap up in the (SPX) this morning, and a similar move down in bonds (TLT), (TBT).
Here is their new Model Portfolio:
Domestic Bonds 35% Domestic Stocks 25% International Stocks 25% International Bonds 15%
Total 100%
The net effect of all of this is to effect an epochal move out of bonds and into stocks, and also to increase international investments at the expense of domestic ones.
I believe this is the beginning of a prolonged world-wide investment trend.
The bottom line for us traders here is that the Japanese action opens up the possibility of an entire ?RISK ON? leg upward. This is occurring on top of one of the sharpest legs up in market history.
All of a sudden, my yearend target of $2,100 for the S&P 500 is firmly back on the table. If you have any outstanding short positions on your books, it is better to cover them at the earliest opportunity.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/10/Risk-e1414788138459.jpg201400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-11-03 01:06:022014-11-03 01:06:02Japanese Yen Melts Down to 12-Year Low!
Like a deer frozen in a car?s onrushing headlights, markets have been comatose awaiting Federal Reserve governor Janet Yellen?s decision on monetary policy and interest rates.
Interest rates are unchanged. Quantitative easing gets cut by $15 billion next month, and then goes to zero. Most importantly the key ?considerable period? language stayed in the FOMC statements, meaning that interest rates are staying lower for longer.
Personally, I don?t think she?s raising interest rates until 2016. The number of dissenters increased from one to two, but then both of them (Fisher and Plosser) are lame ducks. And, oh yes, the composition of the 2015 Fed will be the most dovish in history.
The latest data points made this a no brainer, what with the August nonfarm payroll coming in at a weak 142,000, and this morning?s CPI plunging to a deflationary -0.20% for the first time since the crash.
Of course, you already knew all of this if you have been reading the Mad Hedge Fund Trader. You knew it three months ago, six months ago, and even a year ago, before Janet Yellen was appointed as America?s chief central banker. Such is the benefit of lunching with her for five years while she was president of the San Francisco Fed.
The markets reacted predictably, with the Euro (FXE), (EUO), and the yen (FXY), (YCS) hitting new multiyear lows, Treasury bonds (TLT), (TBT) breaking down, and precious metals (GLD), (SLV) taking it on the kisser.
What Janet did not do was give us an entry point for an equity Trade Alert (SPY), with the indexes close to unchanged on the day. The high frequency trader?s front ran the entire move yesterday.
Virtually all asset classes are now sitting at the end of extreme moves, up for the dollar (UUP) and stocks, and down for the euro, yen, gold, silver, the ags, bonds and oil. It?s not a good place to dabble.
Putting on a trade here is a coin toss. And when you?re up 30.36% on the year, you don?t do coin tosses. At this time of the year, protecting gains is more important than chasing marginal gains, which people probably won?t believe anyway.
If you want to understand my uncharacteristic cautiousness, take a look at the chart below sent by a hedge fund buddy of mine. It shows that investor credit at all time highs are pushing to nosebleed altitudes. Not good, not good. Oops! Did somebody just say ?Flash Crash??
This is not to say that I?m bearish, I?m just looking for a better entry point, especially as the Q????????? 3 quarter end looms. I?ve gotten spoiled this year. Maybe the Scottish election results, the Alibaba IPO, or the midterm congressional elections will give us one. Buying here at a new all time high doesn?t qualify.
It?s time to maintain your discipline.
Sorry, no more pearls of wisdom today. I?ve come down with the flu.
Apparently, this year?s flu shot doesn?t cover the virulent Portland, Oregon variety. Was it the designer coffee that did it, the vintage clothes, or those giant doughnuts dripping with sugar?
Back to the aspirin, the antibiotics, the vitamin ?C?, and a chant taught to me by a Cherokee medicine man.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/John-Thomas5-e1410989501597.jpg400266Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-18 01:04:402014-09-18 01:04:40She Speaks!
?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates. * This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. * Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more. * The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 240% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list. * The Japanese long bond market, with a yield of only 1%, is a disaster waiting to happen. * You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $62. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/Japanese-Lady-Sad.jpg254250Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-08-27 01:03:422014-08-27 01:03:42The Party is Just Getting Started With the Japanese Yen
War threatens in the Ukraine. Iraq is blowing up. Rebels are turning our own, highly advanced weapons against us. Israel invades Gaza. Ebola virus has hit the US. Oh, and two hurricanes are hitting Hawaii for the first time in 22 years.
Should I panic and sell everything I own? Is it time to stockpile canned food, water and ammo? Is the world about to end?
I think not.
In fact the opposite is coming true. The best entry point for risk assets in a year is setting up. If you missed 2014 so far, here is a chance to do it all over again.
It is an old trading nostrum that you should buy when there is blood in the streets. I had a friend who reliably bought every coup d? etat in Thailand during the seventies and eighties, and he made a fortune, retiring to one of the country?s idyllic islands off the coast of Phuket. In fact, I think he bought the whole island.
Now we have blood in multiple streets in multiple places, thankfully, this time, it is not ours.
I had Mad Day Trader, Jim Parker, do some technical work for me. He tracked the S&P 500/30 year Treasury spread for the past 30 years and produced the charts below. This is an indicator of overboughtness of one market compared to another that reliably peaks every decade.
And guess what? It is peaking. This tells you that any mean reversion is about to unleash an onslaught of bond selling and stock buying.
There is a whole raft of other positive things going on. Several good stocks have double bottomed off of ?stupid cheap? levels, like IBM (IBM), Ebay (EBAY), General Motors (GM), Tupperware (TUP), and Yum Brands (YUM). Both the Russian ruble and stock market are bouncing hard today.
There is another fascinating thing happening in the oil markets. This is the first time in history where a new Middle Eastern war caused oil price to collapse instead of skyrocket. This is all a testament to the new American independence in energy.
Hint: this is great news for US stocks.
If you asked me a month ago what would be my dream scenario for the rest of the year, I would have said an 8% correction in August to load the boat for a big yearend rally. Heavens to Betsy and wholly moley, but that appears to be what we are getting.
It puts followers of my Trade Alert service in a particularly strong position. As of today, they are up 24% during 2014 in a market that is down -0.3%. Replay the year again, and that gets followers up 50% or more by the end of December.
Here is my own shopping list of what to buy when we hit the final bottom, which is probably only a few percent away:
Longs
JP Morgan (JPM) Apple (AAPL) Google (GOOG) General Motors (GM) Freeport McMoRan (FCX) Corn (CORN) Russell 2000 (IWM) S&P 500 (SPY)
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Gun-Ammunition-War-Room.jpg280438Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-08-11 01:05:382014-08-11 01:05:38Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?
It was little after midnight west coast time when the Bank of Japan dropped its bombshell. It said it would refrain from stimulating the economy further to offset the deflationary effects of the VAT tax increase from 5% to 8%, which took effect on April 1.
Within seconds, the Japanese yen rocketed and never looked back. The Nikkei stock average crashed. Traders were stunned by the BOJ?s ill-timed move, as many GDP forecasts for the current quarter hover around the negative -1% level.
I held back on covering my yen short, waiting for a pullback. It was not to be, and I had to stop out with a small loss. Given the heightened level of anxiety in the markets since last week, I don?t have to be told twice to unload a ?RISK ON? position.
I am in the fortunate position in that I can offset this loss with the major gains I made on my short S&P 500 (SPY) and Russell 2000 (IWM) positions. This is why the word ?Hedge? is in the name ?Mad Hedge Fund Trader.?
However, the central bank said it would stick with its current plan to increase the money supply by 60-70 trillion yen per year for the next two years. One of Japan?s confidence indicators fell to the lowest level since 2011. The government is said to be mulling over a further VAT tax hike to 10%. So don?t count on the central bank to stick to the hard line for very long.
Many think that this is just a speed bump on Japan?s road to economic recovery, and that more stimulus is on its way in July, once the magnitude of the current slowdown is indisputable. This could just be another case of central banks slow to adapt to reality, as they are often wont to do.
?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 240% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 0.61%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $65. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/04/Japanese-Lady-Sad-e1400531413320.jpg324319Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-04-09 01:04:092014-04-09 01:04:09BOJ Bombshell Hits Yen Sellers in the Shorts
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