February 2025 – Smart Money Asia

Time in the market

With markets looking a little shaky of late, it’s worth remembering the old saying that time in the market beats timing the market. With Warren Buffett once more making news in Japan this week, this post and Bullish Batman’s comment tickled me:

I think readers of this site will have at least a basic understanding of the benefits of compounding on investments. That said, it can take some time to actually experience its power. I have noticed that one of my accounts, which started small and took a while to grow, has picked up momentum in the last 12 months. I haven’t added new money to it for a while but have been diligently reinvesting capital gains and dividends, resulting in a significant acceleration in growth.

Here’s the Investopedia definition of compounding:

I shared a simple example of the Power of Compounding back in 2017.

It’s a great reminder that, although short-term price moves make headlines, we should focus on investing for the long term. Accumulate good assets and hold onto them!

Is Uncle Warren coming back?

Warren Buffett has mastered the art of buying quality stocks and allowing them to compound over the long term. In his recent letter to shareholders, the Berkshire Hathaway CEO commented that he is keen to increase his investment in Japan’s big five trading companies. You may remember that Buffett has been playing a very smart game in Japan, issuing debt at around 1% in yen to buy solid companies that pay around 4% income. Shares in those trading companies surged this week in anticipation that Buffett may be coming back for more.

Despite The Oracle of Omaha’s endorsement, the trading houses still face significant headwinds related to yen movements and Donald Trump’s tariff policies. The US President’s aggressive stance on that issue is unsettling for companies that rely on smooth international trade. It doesn’t seem to worry Buffett too much, though.

Speaking of the yen, on 25 February it hit a four-and-a-half-month high of ¥148 to the dollar. With inflation on the rise, the Bank of Japan will come under pressure to continue to raise rates while the US Federal Reserve has rate cuts on pause for now.

The Corolla index reaches 50%

This is new to me, but this Nikkei Article refers to a Toyota Corolla index. It measures the affordability of a typical mass-produced Japanese car by dividing the price by the average annual income. During the good times, it has been as low as 20% but currently stands at a whopping 50%. For comparison, in the US it is 30%.

This clearly illustrates that, although wages are rising, they are failing to keep pace with inflation in Japan.

Nvidia beats on earnings again

In the US this morning, Nvidia might well have saved markets from severe pain, at least in the short term. The chip powerhouse once more beat analyst’s expectations and issued solid Q1 guidance. The company reported Q4 revenue of $39.3 billion and expects $43 billion plus or minus 2% in Q1. Shares were up +3.7% in anticipation of the report but are down in after-hours trading.

It seems to take a lot to get investors excited these days. Trump is talking about a 25% tariff on chip imports and the AI behemoth is still weathering the DeepSeek storm. You may remember that Nvidia’s previous earnings also beat expectations but the stock fell afterwards.

Is the US economy slowing?

Despite the S&P 500 trading near all-time highs, sentiment in the US is increasingly muted. The downbeat mood is generally attributed to Trump’s tariff talk, however, in this Yahoo Finance article, Neil Dutta argues that it is more likely because the US economy is slowing down. He points to weaker economic data coupled with the Fed’s pause on rate cuts acting as a “passive tightening of monetary policy”.

That argument makes a lot of sense and could also explain why, despite a slew of good news, Bitcoin failed to break back above $100k and has now broken down instead. People who have been ‘waiting for a dip’ are not so keen now they have one. We may have to endure some economic pain to push the Fed to start cutting again before the bull market resumes. (no, I don’t think it’s over)

Also, it’s notable that hedge-fund manager Steve Cohen recently struck a bearish tone for the first time in a few years. You can see a snippet of his interview here. (in case the embedded link below doesn’t work)

Sounds like this is a time to be cautious: cash, bonds, defensive equities with low valuations pic.twitter.com/FCZqCSMvFD
— Michael Fritzell (Asian Century Stocks) (@MikeFritzell) February 24, 2025

Cohen states that he isn’t expecting a disaster, but things could be difficult over the next year or so, and it wouldn’t surprise him to see a significant correction.

All the more reason to keep a long-term view and focus on compounding those assets over time!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Exit liquidity

Welcome to another fun-packed week in crypto. This week, Metaplanet reached ¥6,880 per share and game company Gumi Inc (3903) announced plans to purchase $6.6 million worth of Bitcoin. As I edit this post, I note that GME is considering buying BTC and other crypto.

I am hearing more rumours that Japanese regulators are considering reclassifying crypto as security, paving the way for ETFs and sensible tax treatment. My guess is that it’s likely to take until 2026 but this is a reasonably high probability outcome.

As we approach the sharp end of the Bitcoin bull market, here are a few thoughts and observations:

It’s truly a Bitcoin-driven market

The last 12 months in crypto have clearly been all about Bitcoin. Meme coins had a hot moment in Q1 of 2024 but that market is now saturated and the attention span on new coins is down to a few hours. People are talking about being in “the trenches” when really they are just at the casino.

Similarly, altcoins have mostly struggled to live up to expectations. There are simply too many coins and not enough money to make them all go up at once. AI coins never really had any tech and utility coins never really did much.

Ethereum continues to disappoint. Among the other L1s, Solana has had its moments, mostly driven by the memecoin casino. Hyperliquid and SUI have also shown periods of strength. Binance seems to be toying with launching memes on BNB, which has driven up the price in the last week or so.

If you don’t follow crypto Twitter, I can tell you the mood has been downright depressed for weeks. Many of these people have been hyping the bull market for the last two years and don’t even own any Bitcoin. They are knee-deep in trash and crying for alt season or central bank quantitative easing. (QE)

Meanwhile, Bitcoin is at $96k. It’s up almost 350% from the same time two years ago.

Are you not entertained?

The debate about Bitcoin’s institutional appeal is over

It has been fun frontrunning mainstream adoption but now the suits are here. Blackrock is here, tradfi is here. The US has a crypto-friendly administration that is just picking up steam. 16 US states are debating creating strategic Bitcoin reserves and a federal SBR is under consideration.

Read that last part again.

Institutional money is pumping into Bitcoin. It is not flowing down into other crypto assets like in previous bull markets. It goes into the spot ETFs and stays there.

Serious money is not coming to buy your altcoin bags.

I sound like one of those sanctimonious Bitcoin maxis, don’t I? But identifying what is actually happening is the key, not being right about this coin or that coin.

The harsh truth

Most people looked at this chart for the last 10 years and failed to act because they couldn’t figure out what the use case was, or it just seemed silly to them. “If Bitcoin is money, why can’t I buy my coffee at Starbucks with it?” It must have taken an incredible amount of overthinking not to buy the asset going up and to the right faster than anything else, but people managed it somehow.

Bitcoin began as a solution looking for a problem. Much mental gymnastics have been performed in defining what it is actually useful for, but years of ZIRP (Zero Interest Rate Policy) and QE (Quantitive Easing) eventually provided the answer: Like gold, Bitcoin is the countertrade to the wanton destruction of Fiat currency by governments and central banks.

It’s the hardest of the hard assets. And now the big boys are buying it.

You may think the crypto people were either lucky or very clever, but the reality is so much funnier:

It’s only a 10x to $1 million per Bitcoin. Do you know how many times this thing has 10x’d? If I sound like the left-curve guy here, it’s because I am.

The volatility will continue to fall and Bitcoin will become another boring tradfi asset, albeit one you can’t afford not to own. Expect diminishing returns from here on.

It’s still going to a million, though. That outcome is right there if you can discipline yourself to accumulate and then sit on your hands for 5-10 years. How much do you need to own to change your financial life?

Study up on the state of global liquidity. This Raoul Pal interview with @crossbordercap is worth a watch. (particularly 27:22 Japan’s Role in US-China Financial Tensions)

FOMO

“Am I too late to on crypto?”

“What do you think about Metaplanet?”

I’ve been getting more of these messages recently. People who couldn’t bring themselves to buy before are now scared they are going to miss out. It’s the signal that we are down to the last couple of innings of this bull market.

Hell, we may already have topped, but I doubt it. For those looking to take profit, the next leg up will offer an opportunity to start moving towards the exit. And there’s only one door, remember.

Beware of unit bias. The big mistake that people make at this stage is deciding that Bitcoin is too expensive at $96k so they need to buy something cheaper to catch up.

The people who own those “cheap alts” have a name for you guys: Exit liquidity

It’s their last chance to offload their bags to a newbie with FOMO.

Be smart.

It’s not too late

This post is meant as a warning but here’s some encouragement:

There will still be opportunities to get on the train. When the dust settles, sometime in 2026, Bitcoin will once again lurk in the buy zone. Below $80k is cheap. Below $50k is deep value.

That’s the chance to get on the train. While it is stationary. Getting on now is like trying to jump on a moving Shinkansen. Just understand that next year everyone else will be getting off and puking on the platform as you try to board…

If you really want to get started now, it’s ok, but go slow. Average in and prepare for the next bear market to really deploy capital.

And stick to Bitcoin. Don’t become some gambler’s exit liquidity.

Top image by Kev from Pixabay

What’s your Japan plan?

I started this site in 2017 and ran out of things to say about the basics of financial planning some time ago. If you are just getting started, I put together a thread of simple financial planning tips from my early posts, which you can view on X here.

The basics don’t change, but the environment can change drastically. If you plan to live in Japan for the long term, you are probably now figuring out how to adjust from living in a country where deflation was the norm to one where prices are rising. Looking into the future, one of the big questions is whether this inflationary environment will stick, or will Japan be back at zero interest rates and falling prices in a few years? How can we plan when we don’t know the variables we will likely deal with?

Prediction is very difficult, especially if it’s about the future. – Niels Bohr

I have a client who was an economist at a financial institution for many years. He told me he always felt it was his job to have a view. For some reason that has stuck with me and I think it is important in my job too. It’s also important not to be wrong, though! I wish I could tell you I have always held the correct view and never been wrong, but I doubt you would believe me. I have, however, gained some experience over the years, which has helped me develop some skills in dealing with the uncertain future we face.

Strong views, loosely held.

Having a view is helpful but you don’t have to marry it. If something changes or evidence comes to light that proves you wrong, you can simply change your view. Don’t get caught up in the social media battle to be right about everything. In just the last few years, people have pivoted from being epidemiologists to vaccine experts to geopolitical analysts to macroeconomists to AI gurus and now, tariff experts.

It’s exhausting.

So, I thought today I would take a look at some basic data about the Japanese economy and share my view on what a person living here should focus on in terms of financial planning and investment.

Debt is a problem

Japan still has a strong, productive economy but it is not expected to grow fast. The predicted real GDP change for 2025 is 1.1%. (IMF) Government debt to GDP is currently 255%. (Trading Economics)

December 2024 CPI (inflation) was 3.6% and, in response, the Bank of Japan recently increased the overnight interest rate to 0.5%. The 10-year yield on government bonds currently stands at around 1.2%.

Japan is clearly not going to grow out of its debt problem. Demographics do not support the level of growth required to meaningfully reduce the size of the mountain. When governments can’t outgrow their debt, they usually end up inflating their way out. I struggle to see how the BOJ leadership can raise rates high enough to head off this outcome but they will of course delay it as long as possible.

It doesn’t look good for the yen

In January 2023, I wrote a post charmingly titled How screwed is the yen? It actually holds up pretty well for a two-year-old post. The problems facing the currency have not changed very much and we are still hanging around at 155 yen to the dollar.

I have re-read this excellent post by Richard Katz several times: The BOJ, the Fed and The Future Of The Yen. He notes that although the gap between US and Japan overnight rates may close, the gap between the two countries’ long-term yields is unlikely to follow suit, meaning the yen probably won’t recover as strongly as some think it will. Here’s an excerpt from that piece:

Some of the issues people in Japan are facing when planning for their financial future are as follows:

Continuing yen weakness
Concern that the pension system will not meet their retirement needs
Rising interest rates, but not rising too far
Negative real rates (interest rates lower than the rate of inflation)
Rising wages but negative real wages relative to inflation

People are already feeling the pinch. If you bought rice recently, you know what I mean. Furthermore, prices of 1,656 food items are set to rise this month according to this Japan Times article.

So, what can we do?

If you are a regular reader, I am probably repeating myself, but here are some action items to consider:

Check your base currency – are you really going to spend all of your future money in Japan? Are there big expenses overseas that you are likely to be on the hook for in future? If so, you need to save and invest some or all of your money in that currency. More on that here: What is your base currency?

JPY cash is trash – even if your base currency is yen, you are going to lose against inflation over time if you keep all of your money in the bank. Sure, you need to keep a liquid emergency cash reserve, but everything else needs to go somewhere more productive. CPI was 3.6% in December. The BOJ’s target inflation rate is 2%. How much is your bank paying you in interest?

Fill up tax-free vehicles first – another no-brainer. If you are eligible for NISA and/or iDeCo, they are the first stop for investment money. NISA especially is an incredible deal as you can access the money freely if you really have to. Bad luck if you are a US citizen – you should explore options for investing back home. And remember, if your spouse is eligible, they should be maxing out tax-advantaged options, too.

Yen-cost average – if you are young, regular investment in a global stock index fund/ETF is a perfectly good strategy. You can worry about diversification later.

Learn to diversify – lump sum investments require more care. And the closer you get to spending your capital, the more you need to protect it. Diversification across asset classes (not geographical areas) is how you do this. Own some bonds, stocks (growth, value, dividend), property (physical or REIT), commodities and alternatives. Use a core/satellite allocation to dial up/down risk.

Explore dividend stocks – Japanese dividend stocks offer a great way to keep pace with inflation in yen terms. More here: How to beat inflation with Japanese dividend stocks

Lever up – if you are here for the long run, owning property is still better than renting. Even if you are risk averse, I am still seeing 35-year fixed-rate mortgages at under 2%. Floating rates are still well below 1% and, in some cases lower than 0.5%. It is still very cheap to borrow money for a home in Japan.

Stack gold and bitcoin – the two kings of hard assets and possibly the only satellite holdings you need. Average in over time and hold. More here: Facing inflation – the four assets you should own

A fistful of dollars – if you are the entrepreneurial type, I recommend brainstorming ways to earn money in USD. As the global reserve currency, it will be the last one standing in the Fiat race to the bottom. Read up on the dollar milkshake theory. If you can get paid in bitcoin, even better!

To summarise: have a view, make a plan and adjust it as you go. If you need help, don’t be shy about getting some. You will get better at this with practice.

Top image by tawatchai07 on Freepik