Tag Archives: japan

Kyle Bass and Hugh Hendry on shorting Japan

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Two good interviews here with these fund managers.

EDIT: The Bloomberg interview of Kyle Bass is no longer playing, and I can’t find it on youtube, so I’ll just post a couple of other links:
All I could find was this on his new fund:
http://dealbreaker.com/2011/04/want-to-invest-in-japan-kyle-bass-has-a-fund-for-that/
Here he is talking inflation last October:
http://www.youtube.com/watch?v=bCYIBf4_GMw

Hugh Hendry on the rationale for shorting Japanese corporate credit (extremely low yields, overexpansion, China crash & contagion)

FYI, I think talk of inflation is still premature, since there is still too much credit to be liquidated before currency creation overwealms credit destruction. Significant inflation is more likely to appear towards 2020 than 2012, and we could easily see another episode of deflation in the next year or two.

Inflation, deflation & the dollar – where do we stand?

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We have had inflation since late 2009, using my favored definition of inflation as an increase in money supply and credit from Mish. By the way, commodity prices change with the speculative whims of of the financial markets, and are not a good definition of inflation (commodities fell from 1980 to 2000, as we experienced credit & monetary inflation and the price level doubled).

Since 2007, the monetary base has of course soared (see below), but in 2008 and 2009 its increase was overwhelmed by the decrease in private debt (marked-to-market), and the mood of risk-aversion. Since then defaults have eased and new debt issuance has grown, so we have had significant inflation.

Monetary base:

shadowstats.com

Monetary Aggregates:

shadowstats.com

The world is still laden with too much debt to sustain, so we will likely be back into deflation and de-risking before long. The following debtors in particular have yet to have their come-to-Jesus moments:

  • US cities & states (muni-bonds)
  • Canadian and Australian homeowners (record high prices, prices too high relative to incomes and rents, absurd loan-to-value ratios).
  • Several European nations (Portugal, Spain, Italy, much of Eastern Europe). Actually even Greece and Ireland will have to default before long, since their bailouts were just extensions and added to their debt.

The Kondratieff cycle is not perfect, but its main point is that debt cycles are generational, since they have as much to do with attitudes as with numbers. The deflation/de-leveraging phase (winter) can last over a decade, and this one certainly looks like it will.

Previous recent generations were as follows, off the top of my head:

  • Winter: 1929-1940 (decrease in debt, falling assets, low interest rates, falling to stable prices)
  • Spring: 1940-1966 (early debt growth, rising assets, rising interest rates, moderately rising prices)
  • Summer: 1966-1982 (continued debt growth, falling assets, high interest rates, rapidly rising prices)
  • Autumn: 1982-2007 (rapid debt growth, rapidly rising assets, falling interest rates, slowly rising prices)
  • Winter: 2007- (decrease in debt, falling assets, low interest rates, falling to stable prices)

The dates are approximate – some say that winter began in 2000 when we first faced deflation. Also, all nations are not in sync. Japan went into winter in 1990, and is still in it despite massive and repeated central bank printing.  What clears the way for spring is the reduction in debt, and the west is making the same mistake that we criticised the Japanese for making, propping up failed institutions and not allowing the market to clear.

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Bonus chart: US dollar index since 1985 – in classic form, by the time everyone started worrying about a dollar crash (2007), it had already happened.

shadowstats.com


Despite its central bank’s profligate ways, the Japan’s currency has risen dramatically since the 1990s. Don’t count the dollar out just yet. This chart shows yen per dollar (downward slope = rising yen):

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Thoughts on P3 and the secular bear

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Hi guys.

Sorry for being so quiet on the blog lately. I’ve been busy trying to take my mining site out of beta among other things, and not following the day-to-day action much.

In response to comments about Elliott Wave and EWI, I actually don’t read EWI anymore except for Prechter’s monthly essays. I don’t see that the short-term stuff offers much of an edge over just following basic technical and sentiment indicators. Trying to force the market into fitting a specific pattern has just not been a good way to go, but the intermediate-term technical indicators have been doing quite well.

For instance, put:call, vix and weakening RSI have nailed the tops in November, January and March-April. The last was just screaming SELL as loud as the market ever does, and we got the follow through we deserved.

Short-term oversold conditions in late May and July were marked by the VIX and weakening selling as indicated by RSI.  Constantly anticipating a hard 1930-style P3 is just a bad way to play. Of course you don’t want to be caught long without protection at any point in this environment, credit crunch and depression that it is, but there is a tremendous degree of speculative enthusiasm and stubborn optimism among traders that is making this a long slog down.

Of course I think this is a secular bear market that won’t end until there is real value restored in stocks and real estate, which means solid after-tax yields high enough to compensate scared investors for the risk of further capital losses. But there is no reason why we have to get there in 3-4 years — this could go more like ’66-’82 in the US or post-’89 in Japan.

That said, we have not had full-on recognition of the extent of the economic problems within the financial community, with most analysts and economists clinging to the hope of Keynesianism. Trading horizons are so short-term among the big players that these considerations hardly matter. The technicals are all that drive the machines and guys like Paul Jones, Cohen, etc.

This is a deflation though, no doubt at all. Credit is contracting hard, and prices of everything not directly traded as futures or set by the government are falling. This includes private sector wages, groceries, capital goods, etc. In this environment we do not have the same set-up as for the rolling sideways market of ’66-’82 (only in nominal terms was that a sideways market – in real terms it was a 75% loss). The ’30s and Japan are still the corollaries to watch.

Also remember that the public sector has gotten itself into huge trouble, which is just starting to take effect with austerity measures in Europe and pending bankruptcies in US municipalities. US states are also broke and will have to finally deal with their union problems. Shrinking government worker salaries, if not payrolls, will put further pressure on demand for goods and leave banks with more bad loans. None of this is inflationary. Remember, in the ’70s private debt was low and growing, and companies were increasing their revenues and profits so that by ’82 Dow 1000 was a bargain. Now we’re in a generational de-leveraging, frugality-restoring mode, Kondratieff winter for lack of a better term.

The last couple of years should give deflationists confidence that we’re able to correctly assess the situation. Where is that dollar crash? What about $200 oil? What, in 2010 China still owns trillions in treasuries? Bernanke has tripled the US base money supply but a dozen eggs is still $1.50 and the long bond yields 4%? Obama spent how much, and unemployment is 17% ?

We make it way too hard on ourselves trying to get every squiggle right. Stocks and real estate are expensive and cash is still the way to go. Gold is still increasing in purchasing power. This is not bizarro world, it’s so far just a very big dead cat bounce after a 60% crash. US stocks are about where they were 12 months ago, and other markets are much lower, so clearly momentum is broken and bears should be confident so long as they’re not over-levered.

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PS- In response to Roger, upon first glance VXX looks like a fine vehicle for trading volatility. It seems to have tracked the VIX without much error since launch. Of course VIX futures and long-term OTM puts are also fine for going long vol.

Getting close: Japan may have just made a bottom.

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The Nikkei sold off 9.38% last night, closing at 9,203. Coming after a long and steady decline (from 18,250 in June ’07), such a dramatic move to deeply oversold conditions reflects capitulation — the market just throws in the towel. Afterward, who is left to convert to a bear? Bullish sentiment readings in Tokyo must have dipped well into the single digits.

5-day view here:

Source: Yahoo! Finance. Click image for larger view.

Now, I am not calling a final bottom in Japan, since yields are still low and this global depression has a lot further to run, but this may be a major stage bottom. Rallies from such intermediate lows can be extremely powerful, as the fear of losses subsides and gives way to the fear of missing out on gains.

The world markets have been moving together through this bear market, so a capitulation in one major index suggests that relief may be near for the rest, although they may have to make their own dramatic plunges first. Here is a 2-year view of the Nikkei (blue), Europe (VEURX, green) and the S&P 500 (red). Note that the chart does not reflect last night’s dive in the Nikkei.

Source: Yahoo! Finance. Click image for larger view.

Now, once this bottom is in, the rally should only be of interest to traders, not long-term investors, because once it peters out we are going plunge all over again. Anyone who needs these funds for retirement or their kids’ tuition or who is not a proven trader should get out and stay out. Don’t even look at the market news for the next two years, because you will be tempted to jump back in at just the wrong time.

Can’t make your retirement plans work without 8% compounded returns? Well, better scale down on those plans and increase your savings, because this bear is here to stay. The whole concept of putting the bulk of your life savings in the stock market is one of the biggest scams of all. Stocks are a horrible way to save. They are good for investing when they are cheap, and good for speculating if you are a pro, but as a savings instrument they are terrible. What kind of a savings instrument routinely loses 50-90% of its value?

The pervasiveness of the belief that one should save in stocks is a product of a bull market. People had different opinions in the ’30s, ’40s and ’70s. Before long, newspaper columnists will again promote Treasury bonds for saving, and at that point you might want to look the other way and consider that stocks could be cheap.

I would like to be a stock bull again — it is more fun. But I am going to wait until things are really cheap and paying nice dividends. Even after 30% and 50% plunges, respectively, US and Japanese stocks are still only yielding about 2%. Furthermore, dividends are being slashed left and right, so the expected yield is even lower. I want to see at least 8% yields before I buy stocks and put them away.

In 1932, the yield on the Dow briefly hit 15%. That speaks as much to the strength of American industry at the time as it does to the depth of the crash. I would be surprised if US companies hold up as well this time.