03/04/11 Waterford, Ireland – And now, let’s update our Trade of the Decade.
Our “Trade of the Decade” called for selling Japanese bonds and buying Japanese stocks. The bonds go down when the liquor runs out…and then, when Japan can no longer close its budget gaps by borrowing, it will print money. First, the bonds will crash. Then, the stocks will soar.
Has it done well? Not exactly. But the decade has just become. And it looks more promising than ever.
Lord Keynes may not have had the Japanese bond market in mind. But almost an entire generation of JGB investors is living proof that “the market can stay irrational longer than you can stay solvent.” For nearly 20 years, they thought rising supplies of Japanese bonds must lead to falling prices. As the quantity increased the quality had to decline. It was irrational to think anything else. And yet, Mr. Market not only remained irrational, he seemed to enjoy it. He was like a drunk with a half-finished bottle in his hand. Everyone knew he would have to sober up some day. But as long as there was still liquor left, why bother? Japan borrowed more and more…and speculators went broke waiting for bonds to go down.
Here on the back page we yield to no man in our appreciation of the irrational. It is practically boundless, as near as we can tell. Nevertheless, sooner or later the booze runs out.
What makes this interesting to readers everywhere is that Japan is a trendsetter. The Japanese stock market headed down 10 years before the NASDAQ cracked in the US in January of 2000. Japan’s economy was ahead of the pack too; it went into a long correction 17 years before America’s subprime lending crisis. Its central bankers and finance ministers have a long lead too. Every rabbit, currently being pulled out of Ben Bernanke’s hat, was hopping around in Tokyo many years ago.
For example, the Japanese have been “zero bound” for 15 years. In an effort to restart the economy, the Bank of Japan went to ZIRP (a zero interest rate policy) in 1995. They’ve been within 50 basis points of zero ever since. So too did Japan’s huge central government deficits begin a decade ahead of those in the US. But the rope that was thrown out as a lifeline has become a noose. Japan can’t go back to normal policies; it can’t afford it.
Among all the world’s nations none now has more debt per GDP than Japan. For every dollar of output, Japan has $2 of central government debt. The figures are much more striking, and meaningful, when you compare debt to the cash-flow that services it. The central government owes about 1,000 trillion yen. It collects less than 50 trillion in revenues each year. In other words, every dollar of tax receipts must support about $20 in debt. If it had to carry its debt at just 5% interest it would take up 100% of government revenues. And its debt is still increasing; the Bank for International Settlement says it will grow to 3 times GDP over the next 10 years.
Pondering these numbers, JGB speculators must have thought they had found a gold mine. Japanese bonds HAD to go down, they said to themselves. What they discovered was that a government can stay insolvent longer than they could stay rational. And now, practically every financial official, householder and investor on the home island is foaming at the mouth. Having avoided sanity for so long, they think they can do so forever.
The descent into insolvency was directed by the Bank of Japan and enabled by bond buyers themselves. It did not bother them that Japan was the most broke nation in the world. Or that the Japanese were dying out, with negative population growth and more people retiring than entering the workforce. Or that the primary sources of funding for Japanese deficits were drying up. Corporate profits are pinched between the forefinger of a strong yen and the thumb of higher energy prices. The savings rate for people over 60 has fallen to zero. And as a percentage of GDP, national savings, net of both public and private borrowing, has fallen from plus 11% in 1991 to minus 5% today.
Lenders must be as stupid or as mad as borrowers. Even today, they give their money to the government for 10 years, at a yield of only 1.2%. But so far, they have been right. The inflation rate in Japan is negative by about 2%, giving them a real yield of 3.5%. And compared to other investors in Japan, bond-buyers are geniuses. Japanese stocks are down 75% since 1990. Real estate is down about 70%.
He should get out more. Take a trip to Japan. He would see where $1.5 trillion deficits, ZIRP, and QE lead – to more deficits, more ZIRP, and QE squared. He would see the madness in investors’ eyes…and palsied hands of his central banker cronies. They couldn’t stop. Neither can he. Not without higher unemployment and falling prices – the very things he fears more than the fires of Hell. Once an economy drinks deeply, it cannot stop until the bottle is empty.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
How does the retail investor short JGBs?
Good article except for the comment that the Japanese “Corporate profits are pinched between the forefinger of a strong yen and the thumb of higher energy prices”
Actually a strong yen lets them pay fewer yen for energy so the two offset. Remember that the Japanese economy (and Japanese exports) went from virtually zero after WW2 to the wonder of the world while the yen strengthened from 300 to the dollar to less than 100 to the dollar.
During that same period we paid less than $0.20 per gallon for gasoline here in the US to $3.00 plus. So the Japanese economy became the wonder of the world while the yen more than tripled in strength and the price of fuel increased 15 fold.
Bill revises history a bit here…
Actually his trade of the decade started out as Sell U.S. government bonds not japanese. But he did say buy japanese bonds, that part not revised.
In fairness he did change his trade of the decade a while back but originally it was definitley sell U.S. bonds.
And its a good trade.
I have some EWJ which is an ETF that holds Japanese stocks. It has risen in price nicely the last month or so.
I could not find any ETF though to short the JGB the Japanese Government Bond.
Anyone know how an investor can realisticly short the Japanese government bond?
TIF,
“… But he did say buy japanese bonds …”
stocks that is, smallcap Japanese …
it was changed from “sell US gov bonds” to “sell Japanese gov bonds” very soon thereafter … maybe a week, maybe 2 weeks, but if you say a month, I will look it up …
anyway, in a Trade of the Decade, those few days make no difference …
(and the change from US to Japan probably neither …)
“What they discovered was that a government can stay insolvent longer than they could stay rational”
priceless ! …
I don’t know. I didn’t buy into our own sucker’s rally when Uncle Ben started printing, and I don’t think I’ll buy into this one either. The Yen is not the world’s reserve currency, and the average Japanese can withstand a heckuva lot more austerity than a Wisconsin schoolteacher.
ducdorleans, you are right, I too recall the trade of the decade was (originally) buy small cap Japanese stocks and sell U.S. treasuries. (But I could not find the original trade announcement)
It’s not there in the Bill Booner Archives, but I think maybe another place on the dailyreckoning site.
And right Bill soon changed to Sell Japanese treasuries – that was (coincidently?) after I posted that suggestion in a comment to the original trade of the decade.
Wiggens said in May it was sell U.S. treasuries. Check the link to the May 13 rticle just above these comments.
These guys should stick to one consistent trade.
And do tell us how to sell short the Japanese bonds, where is the ETF for that?
Here’s Bill Bonner on January 19, 2010
Since we announced our new ‘Trade of the Decade’ – sell US Treasury bonds/buy Japanese stocks
The trade of the decade was first announced Monday Januar4 , 2010. My comment suggesting the change to short Japanese Treasuries is there.
http://dailyreckoning.com/our-new-trade-of-the-decade/#hl-trade%20of%20the%20decade
Read it and weep. Where is my royalty cheque Bill? Or at least acknowl;edgement of my idea. Seems to me I earn my keep on this blog. (Yeah I get a bit of traffic from it but I “pay” for that with good comments.)
SHAWN, I HEREBY ACKNOWLEDGE YOUR IDEA. I’m also putting your name in for next year’s Nobel.
We all get what we pay for, eh?
P.S. You don’t need to post more than one comment for each of my essays. It’s rude.
B
Bill B Bonner (the impersonator of Bill that is).
Stop trolling this site full time. While your attentions to me are flattering, they do creep me out. Do I need to get a restraining order?
We all know the real Bill never comments in these posts.
I imagine though he will acknowledge me soon in one of his daily reckonings.
Wow.
Imported food price is higher could be attributed to the depreciation of the USD. But if measure it in another currency you could have different results. China’s inflation problem is the opposite of the US, where a currency that is kept artificially weak is driving higher food prices.
Similarly it is interesting to note that if you measure the oil price in another currency, it has not risen as much. For example the Oil price in Yen is still cost at equivalent to $65 per barrel.
Intrinsic Value: Current Oil Price Adjusted for Exchange Rates
alas, the bottle may well seem near empty, but i think i see another 20 trainloads of cases. she’ll be comin’ round the mountain, soon enuf…
check this out: http://www.sltrib.com/sltrib/home/51364301-76/silver-gold-legal-tender.html.csp (via goldSeek)
Looking forward to your next Trade of the Decade update, post earthquake and tsunami. Might be a long time before Japan’s economy can heat up again enough to bounce back from this. Where to go from here?