James Gruber at Forbes.com (via Asia Confidential) is out with a controversial piece discussing ways to protect yourself in case the experiment in Japan goes south in a hurry.
I recognize that there are many hotly contested points of view on the subject. So feel free to share yours in the comments section, below.
Here are the first few paragraphs:
I’d hate to say it but this time really is different. Never before has there been coordinated global money printing of the scale of today. Ever. Japan intends to double its money in circulation in just two years. This is incredible stuff. But it only mimics the U.S. Federal Reserve which has tripled the amount of dollars in circulation since 2008.
Most stock brokers and mainstream media will tell you that this money printing is what’s needed to stimulate economies and whether it succeeds or not, the outcome will be relatively benign. Don’t believe them. It’s highly likely that this is not a normal economic cycle and the consequences will be more extreme: success will mean all the printed money filters through to economies resulting in double digit inflation or failure will bring serious deflation. In other words, the most probable outcomes aren’t pretty and you need to prepare your investment portfolios as such. Today I’ll suggest some ways that you might be able to do this.
Sayonara to Japan
First to Japan. You’ve got to love mainstream media, investors and stockbrokers. The Japanese central bank’s plans to end deflation have been widely greeted as having surpassed expectations. They’re described as “bold”, “inventive” and just what Japan needs after sitting on its hands for 20 years. Nowhere have I seen words such as “stupid”, ”insane” or “half-witted”. Because whether Japan’s plans to produce inflation succeed or not, anyone with a brain can tell you that they’ll have terrible consequences.
First, let’s look at what Japan intends to do:
- It will double current stimulus to 7.5 trillion yen (US$81 billion) per month. This means buying the equivalent of 70% of the total long-term government bonds in markets.
- It will buy Japanese government bonds with maturities of up to 40 years, seeking to push the average duration of Bank of Japan (BoJ) bond holdings to seven years, from the current three years.
- It will increase purchases of financial instruments linked to the stock and property markets to lift the prices in those sectors and encourage other investors to buy them. More specifically, the BoJ will increase purchases of exchange traded funds (ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) by 30 billion yen per year.
- The BoJ put a timeline of two years on its prior promise to achieve 2% inflation.
To put this into some context, Japan’s stimulus of US$81 billion a month compares to the U.S.’ own US$85 billion program. But Japan’s economy is much smaller than the U.S.. Adjusted for GDP, Japan’s stimulus will be twice as large as America’s. It makes Bernanke look like a patsy.
CLICK HERE TO READ THE REST
I think that it is a lot of fuss and fears around what is perhaps Japan’s first real attempts at getting out of the deflation trap. Especially since the results so far indicate that the policy makers are achieving what they aim for, i.e. an increase in inflation expectations and no spike in yields.
I suggest reading Paul Krugmans blog for the best analysis of Japan.
The arguments for and against money printing are getting so convoluted that I gave up on following them. I guess, I’ll leave this to history to judge it – although so far the actions of the Fed look to be successful as there isn’t any inflation or serious run on the dollar or the bonds + US looks better than the rest, I a instinctively against it – you can’t create something from nothing. Last time this was done at such a scale – the Germans ended with Hitler on top
Surprising this guys familiarity with in a sub par mutual fund in the latter half of the article given his apparent lack of awareness of risk parity. The line “Bondholders aren’t going to sit there earning less than 0.6% on Japanese government bonds while debt increases and the yen tanks.” is laughable – as if the marginal bond buyer cares about nominal yield. “Been printing less than 2% for 15 years now but don’t you dare take it to 50bps or else I’ll LEAVE I swear!” haha
The marginal bond buyer is going to be comfortable as long as margin levels continue to rise.
Hello,
I am the author of the aforementioned article.
Regarding Geckler’s comments, there are 3 things that are vastly different now in Japan vs at any time over the past 23 years of its downturn:
1. The marginal buyers of Japanese government bonds are foreign investors. Up to now, its been almost solely domestic investors, who now have to fund their retirements and cannot fund government bonds to the same degree anymore. Foreigners won’t accept low yields, with a declining yen and a balance sheet such as the one that Japan has.
2. The yen is depreciating quickly with the government doubling its monetary base over the next 2 years. This kind of determined yen depreciation hasn’t occurred previously. Even domestic investors will start to question domestic investments given this.
3. Japan’s balance sheet is far worse than even a few years ago. It is now running relatively consistent current account deficits. This hasn’t occurred previously and means Japan needs increasing foreign money to fill the funding gap.
In sum, extrapolating from the past is a dangerous game. Things change, and investors need to change with it.
I think you may have missed my point. The mutual fund you mention mimics a common portfolio management tactic called risk parity popularized years ago by Ray Dalio. So when you say “foreign bond holders” won’t accept low yields what you’re really saying is “investors will not accept high leverage.” The same is true in Germany US Japan and other major DMs where real yields have been negative for years.
Think about the investor profile for a minute who is more likely to invest in bonds for their nominal yield? The very types of people you say now must retire and fund the end of their lives. These folks also live in a country that much of what they consume has depreciated as well. At the same time the only investment they’ve made that has not lost a penny for them has been JGBs.
The new marginal buyer of JGBs is in fact is more likely to pursue the same strategy as the mutual fund you reco – leverage up on JGBs for an equal weighting. If the yield comes down they will be buying MORE JGBs not less. Japan also issues inflation indexed bonds so they will come for those as well like many have for US TIPs. Many of these products have a negative yield already.
The situation you describe of course could happen but investors sweating a low nominal yield won’t have anything to do it with. In fact every day yields go lower by a bp an international investment bank books another 3bps in carry trade profits in New York London and Sydney.
I would take much of what this guys says as fact. I have been talking with him to invest in his ‘fund’ he claims to manage. The guy can’t provide and trade logs or history.
He sent me a log of paper trades using a demo account in TradeStation.
He is a twitter fake. I did some googling for Gordon C Eckler and his twitter and found this.
http://wikileaksgce3.blogspot.com/
and his linkedin
http://www.linkedin.com/in/eckler
He has more fake companies and names than
Gordon C Eckler just regurgitates what he reads on http://www.advisorperspectives.com/
You haven’t been speaking with me. Several entities have exclusives to market our products. Nice try.
Mr. Eckler, do you really thing we wouldn’t do a background check and credit check when you solicited our investment group for funds.
The only history you have is one with delinquent rent, utility, and education loans.
If you had any ‘products’ they would be registered and so would you and one of the many company names you give out.
You were unable to provide dailys, then became angry when we questioned them and asked for statements.
When you can find multiple warnings and history online just by a name search, someone is lying. You don’t even pass the smell test.
Your only real product is the BS you try to feed people.
What is the name of your investment group? I don’t solicit investors so I find it highly unlikely you’ve spoken previously to me or anyone else in our firm.
Your libelous comments are self evident given the fact that most alternatives funding portfolio managers would be aware the products they traffic in are unregistered.
Again – nice try.
Mr. Eckler, the investment group is registered in the Cayman Islands and does business in 20 countries. You know exactly who we are.
Private investment with offshore entities is something we do regularly and we vet each manager/fund before allocating any resources.
You can try to do damage control, the facts remain with regard to your unregistered paper trading and poor financial history.
It is only by happenstance that I saw your comments on this site.
I would advise you to stop holding yourself out to the public and simply do your business, if you actually have one, which after our interactions is highly unlikely.
If you’re registered in the Caymans there’s no issue for you disclose your name here. You’ve never had a conversation with me in your life because of the way our firm’s marketing is conducted.
There’s no need to do damage control when no damage has been done. You proved you’re not who you say you are in first comment you made via your complete lack of knowledge of basic securities laws.
100% percent incorrect on your part, we do NOT hold ourselves out to the public in any fashion, by name or otherwise.
While you on the other hand not only solicit investors for funds but also anyone that allocates funds to various specialized investment categories.
Again, I would advise you to deal with your inappropriate business dealings and transient history in a professional and timely manner.
I would advise you to return to middle school so you’re able to properly structure a sentence.
Indeed Mr. Eckler. Same as when we called you out on audited statements, turning to insults and anger instead of fact. First signs of someone who is a liar and has a questionable history.
Your IP doesn’t lie only you do. Fittingly this other muttley fiction writer is into the second week of Japanese REPARTITION. Opps http://www.flickr.com/photos/geckler/8701425056
REPATRIATION*
Apart from pushing back against the libel posted here, seems at least so far Japanese investors are reacting as I expected:
And of course JGB yields are at the same level to lower depending on when you measure the BoJ announcement – we wouldn’t have it any other way would we’
http://www.bloomberg.com/quote/GJGB10:IND