How’s our “Trade of the Decade” doing?

Great! It outperformed almost everything in 2013.

To refresh your memory…

Our Trade of the Decade is based on a few simple ideas.

1. You don’t make money by trading in and out of assets. You do better by taking a good position, at the right price, and sitting tight.

 

2. One trade every 10 years should be enough to capture most major market moves.

 

3. We can never tell what direction events will take over the short term. But over time, assets that are expensive have a way of becoming cheap… and assets that are cheap have a way of becoming expensive.

The first time we announced a “Trade of the Decade” was in 2000. US stocks were expensive. Gold was cheap. “Buy gold. Sell US stocks,” was our advice. That worked out well. No major asset class beat gold. US stocks, meanwhile, went up, down and up again… ending the decade about where they started it (not taking into account losses due to inflation).

In 2010, we looked around again for another trade. Nothing was particularly cheap. But Japanese stocks had been going down for 20 years. What were the odds that they would recover sometime in the next decade? We didn’t know. But compared to other investments, Japanese stocks looked good.

So, we advised our dear readers to go long on Japanese stocks.

But what to put on the short side? What had been going up as Japanese stocks were going down? Japanese government bonds! Easy peasy: We also advised readers to go short on JGB’s.

“Buy Japanese stocks. Sell JGBs,” we advised.

A 50% Gain So Far…

That looked like a bum trade for the first few years of the new decade. But in 2013, it was… well… golden. The Nikkei 225 rose 57% for the year – the best year for the index since 1972.

Meanwhile, Japanese prime minister, Shinzo Abe… aided and abetted by new Bank of Japan governor Haruhiko Kuroda… goosed the annual inflation rate up to 1%. This had the effect of sending the yen down 15% against the dollar. Great for Japan’s exporters. Terrible for Japan’s fixed-income securities.

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

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

Last year, as we turned off the lights and closed the doors, heading off for the holidays, Ben Bernanke was saying goodbye to the Fed. He did not apologize for having missed the biggest financial train wreck in 60 years. He did not say he was sorry for sending America’s central bank on a fool’s errand… trying to save every fool banker and speculator in the country. He did not issue a mea culpa for enabling the economy’s addiction to cheap credit either.

No Way Out

That last point deserves elaboration. Bernanke announced on Dec. 18 that the long-awaited “tapering” of QE had begun. The end of the world did not come. Neither stocks nor bonds got the shakes or the chills. Commentators and Wall Street shills – who see silver linings without clouds – told us that this proved what every investor already felt in his heart: that this boom is for real.

But what it really showed was that this taper was not for real. Shrewd investors figured it out. Having gotten the economy addicted to cheap credit, there is now no graceful way out. The “tapering” announcement was like cutting the ribbon on a new methadone treatment center: Nobody expects to go cold turkey.

There is no way the current stock market boom (with its supposed “wealth effect”)… nor the incipient “recovery” (if there is one)… nor the bond market (home of the serious money)… nor the federal government (with more debt than anyone on the planet)… nor household budgets (still heavily indebted) can survive significantly higher interest rates.

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

The Fix Is In

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

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

China stimulates its economy to produce more. The US stimulates its economy to consume more. With a higher debt-to-GDP ratio than the US, Japan is caught in the middle. It cannot stand the deflation that comes with low-cost Chinese imports. And it can’t afford to lose its US customers. Shinzo Abe has become the biggest pusher on the planet – stimulating the export-driven Japanese economy with a lower yen… and higher inflation. Coincidentally, he also knows that Japan’s debt cannot be paid off; it will have to be inflated away.

Abe may not succeed. But in the meantime, he’s locked into a program of aggressive stimulus.

And our “Trade of the Decade” still looks good.

Regards,

Bill

Market Insight:

Where the Yen Goes… So Goes the Nikkei
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

In 2013, one thing was clear: Bad news for the Japanese yen was good news for the Nikkei Average (a price-weighted index of 225 Japanese stocks that’s similar to the Dow Jones Industrial Average in the US).

As you can see, the Nikkei (red line on the chart) and the Guggenheim CurrencyShares Japanese Yen Trust, which tracks the price of the yen (blue line on the chart), formed near-perfect mirror images of each other in 2013.

I see two risks to Bill’s Trade of the Decade in 2014…

The first is further signs of weakness in emerging Asia… particularly China. Trade between Japan and China has almost tripled since 2000, to about $250 billion. A real slowdown in China will hurt Japanese exporters.

The second is renewed strength in the yen. A stronger yen typically hurts Japanese stocks, because it makes Japanese exports less competitive.

Japan has no control of the first risk factor…. and only limited control over the second. Currency debasement, after all, is a relative game.

One competitor that is particularly upset at Japanese currency debasement is Korea. The Korean won has risen 17% rise against the yen since June.

How long the Koreans will tolerate Shinzo Abe’s yen-debasement policy is anyone’s guess. But Japan doesn’t have a monopoly over the printing press.

Want to know where Japanese shares are going in 2014? Watch emerging Asia growth. And watch the yen. These two factors will largely determine where Japanese shares go over the next 12 months.