The Inflation vs. Deflation Debate

Inflation has been on a lot of investor’s minds recently. Every time the Federal Reserve’s Jay Powell speaks he us under intense pressure to clarify his expectations for inflation, and how the US central bank would react to it. Amidst the ongoing re-opening of America, and indeed much of the world, inflation seems to be the one thing that could derail the stock market. The massive stimulus following the 2008 Global Financial Crisis was just in the process of being tapered when Covid-19 hit, and since then we have seen some $10 trillion in government stimulus globally. That’s already triple the total stimulus for the 2008-2009 recession. When national debts and the supply of money are increased at this rate, there is always going to be an effect on the value of money somewhere down the line.

Inflation can be defined as the rise in the cost of goods and services over time, but a better way to understand it is the decline of purchasing power of a given currency over time. Simply put, the same money buys you less and less.

I came across this site, which is a great tool for understanding inflation. Take a look at the Japan Inflation Calculator and you can clearly see how brutal the effect of inflation has been on purchasing power here. 1 yen today is only worth 19% of a yen 60 years ago. And that is in a county that has been battling deflation for the last 30 years…

Japan’s example is a precursor to the ongoing debate as to whether the current scenario is inflationary or deflationary.

I recommend reading this excellent thread by Raoul Pal. Here’s an excerpt:

“In fact with global debts of all forms between $400 trillion net and $1.2 quadrillion gross – the collateral (assets) can NOT be allowed to fall or the system is wiped out. and so the merry game of systematic bailout MUST continue….”

What Raoul describes here will sound familiar to anyone who has been in Japan for a long time: interest rates held at zero and unable to rise, never-ending stimulus, wages stagnant. Official inflation is somehow measured at zero, but every year your money buys you less. What investors in many parts of Europe are facing is not only the devaluation of the currency, but also negative interest rates. Yes, for amounts over €100,000 depositors are paying up to 0.5% per year to keep their money in the bank. Imagine if that was implemented in Japan!

Raoul’s conclusion is that regardless of whether you sit in the inflation or deflation camp, the result is the same: the value of money is falling.

So where does that leave us? If we are working hard, earning as much as possible and trying to plan for our future, what should we be doing?

First of all, if your money is in cash, you are losing purchasing power year on year. If you want to escape this and maintain the value of your hard-earned money you need to invest. I don’t know any other way around this problem, other than making more money, which is great if you have a way to do so.

Invest wisely. Bonds might be a one year trade but over 5 years you WILL lose. Most equities just allow you to stand still. Tech does better. Crypto much better. Real Estate is a stand still too (except super limited supply). The rarer the asset, the more it rises.

I don’t disagree with Raoul’s quote above, however for a typical investor allocating to just crypto and tech stocks involves taking on way too much risk. Regardless of how each asset will perform over the next 5 years, diversification is the only way to protect yourself, whilst staying invested. I have covered the basics in numerous other posts: understand your risk profile, figure out your base currency, study up on asset allocation (also here), and, most importantly, take action! Sitting in cash is not a safe strategy over the longer term.

(This post on Japan inflation may be useful too)

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.

New NISA – Coming in 2024

I had been wondering for some time if there may be some changes coming for NISA after the current scheduled end date of 2023. The good news is that changes are indeed coming, but it is nothing too severe.

You may remember that NISA is the Japan Individual Savings account, designed to encourage Japanese investors to invest in the stock market. Capital gains and dividends from NISA are exempt from the 20% tax over the investment period. It has actually been pretty successful with around 14 million people using the system across the three account types. (General, Tsumitate and Junior NISA) Of those, approximately 11.75 million people have invested some ¥17.9 trillion into the General NISA system.

So what is going to change? Well the Junior NISA is being discontinued in 2023, and the Tsumitate NISA will be extended as is until 2042, so the main changes come in the General NISA account:

1. General NISA is being extended for 5 years from 2024 to 2028.

2. Contributions will be split into 2 tiers:

The first tier is for up to ¥200,000 per year and this amount must be invested in “Stable Investments” – what is meant by this is collective investments such as funds and ETFs that have been approved by the Financial Services Agency. This is to encourage diversification and sensible investment. There are currently 184 funds and ETFs that have been approved for this.

In Tier 2 you can invest up to ¥1,020,000 per year. There are fewer restrictions on this tier so you can buy funds, ETFs and individual stocks. It looks like there will be some restrictions on highly leveraged funds, but you can pretty much expect to be able to access the same assets as you can now in General NISA.

This means the total investable per year has increased by ¥20,000 to ¥1,220,000 yen. It looks like you have to fill up the Tier 1 ¥200,000 before you can invest in Tier 2 assets.

3. If you started your NISA after 2019, you will be able to rollover the holdings in your General NISA to the New NISA. NISA started before 2019 will not be eligible for rollover.

It also seems that Tier 1 assets from New NISA will be eligible to be rolled over to Tsumitate NISA after the five year investment period. However you will only be able to rollover the book cost, the amount you invested rather than the actual value of these holdings. So if you invest ¥200,000 and it goes up to ¥400,000, you can only roll over ¥200,000 yen.

I have pieced this information together from a couple of different articles, which are in Japanese. I’m pretty confident I have the main facts correct, but there are probably a few minor details that I haven’t fully understood yet. Will update if I think I missed anything. For now, rest assured that NISA will still be available as an investment option to you from 2024 onwards!

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.

Crypto Curious? You Should Be!

Wow what a week it has been in crypto! In case you weren’t paying attention, the guy whose company bought $1.5 billion in Bitcoin just a couple of months ago sent a flurry of tweets and crashed the market by 40%. Yes, Mr. Musk is not the the most popular person in cryptoland right now, and Tesla shareholders are probably not very impressed either. For people who just got into crypto this year, as the bull market picked up steam, it’s literally been a crash course in risk.

Despite this I have spent my free hours this week labouring over this post, the reason being that over the last 12 months or so I have come to the following conclusion:

If you are serious about building wealth and pursuing financial freedom, and you have not done so already, you need to educate yourself on cryptocurrency.

Notice that I’m not advising you to go out and buy XYZ coin today. I’m saying you need to study, understand the shift that is going on in this space, and act accordingly. Otherwise you could miss out on a world of opportunity.

So what do you need to get your head around? Here are a few things:

Adoption

A couple of surveys in the US have just published some interesting results. The first is Gemini’s State of Crypto 2021 report. (you can read a good summary of the report by Zerohedge here.) Then NYDIG carried out a similar survey, reported in Newsweek here. The Gemini survey of US based individual investors shows that 14% of Americans already own crypto. More interesting is that 63% of respondents are “crypto-curious”. This group are interested in learning more about crypto, with 13% considering adding crypto to their portfolios in the next year.

NYDIG estimate that some 46 million Americans own Bitcoin, and they found that many of these people would be happy to store their Bitcoin with their bank if the option was available. (see here) Banks are seeing the outflows to crypto exchanges like Coinbase and are waking up to the opportunity to offer Bitcoin and other crypto directly to customers.

We are also seeing rapid adoption in the developing world, particularly in countries like Venezuela where the economy has been poorly managed, resulting in a severely devalued local currency.

Institutional Adoption

The 2017 bull market was peppered with whispers that “the institutions are coming”. Well in 2021 they are slowly arriving. There are currently 8 filings for a Bitcoin ETF sitting with the SEC in the US, and it looks like it is only a matter of time before the first one is approved. (Canada already approved a BTC ETF) In the meantime, Grayscale’s cryptocurrency-based trusts are nearing $50 billion in assets under management!

Morgan Stanley are launching access to three funds which enable ownership of Bitcoin for their wealthiest clients. Goldman Sachs are preparing to offer clients access to digital assets from this quarter. Insurance companies are starting to invest. Hedge funds and wealthy family offices are involved. Guggenhiem Partners, who manage over $230 billion in assets, have a sizeable position in the Grayscale Bitcoin Trust, as do Ark Funds.

A growing number of publicly traded companies are now allocating part of their cash reserves to Bitcoin, and yes, at least at time of writing, Tesla is still one of them.

Inflation fears

Bitcoin is seriously starting to rival gold as the ultimate hedge against inflation. And following over a decade of money printing and quantitive easing in response to the 2008 Global Financial Crisis, and yet more stimulus to combat the economic damage wreaked by Covid-19, inflation fears have been wobbling markets in the last few weeks. With its hard-coded fixed supply, 4 yearly halving events and digital immutability, Bitcoin is programmed to be deflationary. You simply can’t print more Bitcoin, even if you wanted to.

This is why the likes of Michael Saylor at MicroStrategy are investing part of their company treasury in BTC. Bitcoin is now viewed, by some at least, as a superior store of value, an alternative to the “melting ice cube” that is Fiat currency

DeFi

The word “disruptive” gets thrown around a lot these days as technology challenges the old “traditional” way of doing things. Some may say this is just a natural progression of things, but it perhaps doesn’t feel that way if it is your business that is in the process of being disrupted! DeFi, or Decentralised Finance is threatening to disrupt TradFi, or Traditional Finance. DeFi is one of those terms that can quickly turn off people who only have a passing interest in crypto – it all sounds too complicated. To keep it simple, DeFi is removing the middleman from financial transactions, with the middleman generally being a bank or brokerage.

Here’s a good definition from Investopedia: DeFi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction.

The potential for DeFi is clearly huge, and it is in the very early stages. Expect plenty of volatility as TradFi is not going to give up easily! It is also going to be tricky to regulate as there is no central body with its HQ in a particular jurisdiction, where it can be bound by that country’s specific rules.

NFTs

Non Fungible Tokens suddenly hit the news this year when a digital collage by the artist Beeple sold for a whopping $69 million! NBA Top Shots offer the chance to own digital highlight plays, with some listed as high as $250,000. A lot of assets are accused of being in a bubble these days but this one is hard to deny. After all, if you want to look at the Beeple collage, it’s right there online to view for free and you can download a JPEG onto your computer. However, don’t write NFTs off so easily. Ownership of something digitally certified as unique can be applied to art, fashion, collectables, licenses and certifications, tickets for entertainment and more. The potential for use in gaming and virtual worlds is huge too.

Ethereum

You may have noticed a dramatic increase in price of the number two cryptocurrency, ETH recently. ETH is programmable money and much of the above DeFi and NFT ecosystems are built on its protocol. ETH is not without competition, but it has first mover advantage in the smart contracts space. There is even talk of the ETH market cap surpassing (flipping) Bitcoin over time.

Cycles and how to invest

What I wish I had better understood during the 2017 bull market in crypto, and the subsequent bear market, is that it wasn’t the first time around the track. In fact, it happened in 2013. And now here we are in the 2021 bull market. Do you see a pattern here? The Bitcoin four yearly halvings generate a clear four year cycle. And as long as BTC leads the market, this cycle applies to other coins as well. The two graphs below compare the current bull market to those of 2013 and 2017.

Source: @raoulgmi
Source: @raoulgmi

I recommend reading this excellent post on the Bitcoin four year cycle. Understanding this is crucial to formulating an investment strategy for the years to come. Despite the current correction, we are now well and truly in Phase 1- the bull market! That’s why Bitcoin is in the news and every Elon Musk tweet moves the market. The Bitcoin bull market does not go straight up, there are usually a number of pullbacks, corrections and mini crashes. Bitcoin being in the news can be both positive and negative: It’s boiling the oceans, China is banning it, India too! Believe it or not, this is the fun part!

If you didn’t accumulate Bitcoin and/or other crypto in the last couple of years, then that’s a shame, but guess what? The next phase is the bear market. During this chilly crypto winter, BTC generally declines around 80% and Altcoins possibly more – and then comes your next chance to accumulate. If there is one thing I would like you to take away from this post it is this: If you learn about crypto in the months to come you are still early. I don’t think that dollar cost averaging and buying on dips (like the one now) this year is a bad idea, but be very careful with your sizing. It is not the time for FOMO (Fear Of Missing Out) and betting the ranch. A little skin in the game will give you motivation to study, but you need to think longer term. Step up the dollar cost averaging during phase 2,3 and 4 and 2025 is your target year for enjoying the good times!

I note that there is talk in some circles of a super-cycle. That is no 80% decline this time and the bull market continues. It sounds wonderful and there would be no complaints from me if it happened, but I am not convinced and am basing my planning on the 4 year cycle. What I could see perhaps happening is ETH and perhaps some of the DeFi coins decoupling from the Bitcoin cycle and going their own way. Only time will tell on that too.

Crypto and Japan

In 2017 Japan appeared to be positioning itself as a global leader in crypto regulation, and there was even one ICO issued by a regulated exchange in Japan. (Quoine, now known as Liquid’s Qash token) However, very little of note has happened since then. Hacks at Coincheck and Zaif probably didn’t help. Only a handful of crypto assets are available on Japan exchanges and there are no stablecoins on offer. If you are looking to invest in Altcoins or DeFi coins you will need an account overseas to do so. (FTX, Kraken etc.)

Moreover, the tax treatment of crypto gains in Japan is less than friendly. Gains should be reported as miscellaneous income and are taxed at your highest marginal rate, with the maximum of 55% often mentioned in reports. I would note here that your marginal rate depends on how much you earned in the previous year and, depending on your income you may pay significantly less than 55%. Here is a useful summary of the Japan tax treatment.

You should also note that there is no offset on losses as there is with stocks. This makes me think that the best strategy in Japan is to accumulate over time and hold for the longer term. (noting that crypto moves fast and long term could mean 3-5 years) Trading aggressively doesn’t really seem worth it, although some may disagree. I would be careful of this one major pitfall: making big gains in one coin, selling and creating a taxable event, and then moving them to another coin to try to make more money but actually making a big loss. You will still be liable for the gains from that first trade, even if you don’t actually have any of the money you made left…

One way around the tax issue is using funds, and ETFs when they are finally available. Grayscale’s trusts are taxed as stock, (so 20% on gains) and I imagine ETFs will be too. (you will need a US Brokerage account though)

So be careful on tax. That said, we are talking about an investment space with massive growth potential. If you accumulate during the bear market and sell during the bull cycle and actually bank the money you probably won’t be too unhappy about paying some tax.

So what should I do again?

Educate yourself. People will tell you to only invest in what you know, but if you aren’t expanding your range of knowledge you will be stuck with a rather narrow range of investments, and you could miss out on great opportunities. Yes, you should buy some and get a little skin in the game. It will encourage you to take notice of what is going on, but take it slowly. You may feel late to crypto, but we are still at the stage where one person’s tweets can move the market by 40%. It’s still early and there is plenty of opportunity. People often ask what percentage of their assets they should have in crypto, but I think you should size your positions according to your level of knowledge and conviction.

The other big part of crypto is learning to take responsibility. Don’t invest half of your life savings because of something you saw on Twitter. (or read on a blog!) Don’t leave your coins sitting on an exchange that could be hacked – learn how to self-custody and use cold storage. People have perhaps gotten too used to handing their money over to a third party and letting them look after it for them. Connect with people who know more than you do and learn from them, but make sure to go down the rabbit hole yourself. And if after that you are not convinced then that’s fine. It’s better to make an informed decision not to get involved than to just assume something is meaningless and miss the opportunity.

Below is a list of resources to get started. I may add to these from time to time.

That’s all I have for now. Best of luck and be curious!

Resources

Podcasts: What Bitcoin Did / The Pomp Podcast

Books: The Bitcoin Standard / The Internet of Money

People to follow: @100trillionusd / @woonomic @PrestonPysh / @raoulGMI / @CryptoHayes / @RussellOkung / @glassnode / @CaitlinLong_ / @zhusu

Detailed Overview of DeFi

NFTs and Their Use Cases

Article On Bitcoin Energy Consumption

Video Interview on Virtual Worlds- Earning Money in the Metaverse

The Crypto Fear and Greed Index – I have found this to be a much better indicator than price. Buy at extreme fear, and sell, or at least be cautious, when it’s at extreme greed!

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.

Investing in Innovation

I hope everyone has had a good start to 2021. That’s one month gone already! I have been thinking about writing a 2021 investment outlook for weeks, but given the start to the year we’ve had it hardly seems worth it. In one short month we have seen the storming of the US Capitol, a new state of emergency declared in Japan, Olympics uncertainty, vaccine uncertainty, a short squeeze on a down and out game retailer, and possibly a new one on silver. Not to mention a surge in the Bitcoin price to $40k followed by a drop back down to $30k, and a pump and dump on the one and only DOGE coin. Who knows what’s in store for February!

Given that last year I wrote an investment outlook less than 2 weeks before the corona virus went from “something happening in China / on a cruise ship” to “global pandemic”, I think I will pass on making short term predictions this year, but I will say this: expect some volatility! Last week saw the largest hedge fund de-grossing since February 2019, so take care out there. (remember what happened in March)

Given all that, I thought it would be much more productive to zoom out and look at some long term themes. Instead of trying to figure out how various asset classes will fare over the next 12 months, let’s consider what is going to be big over the next 10-20 years.

Luckily this doesn’t require weeks of research, because Ark Invest have already done it for us. Click here to access their 2021 Big Ideas report. You need to register your email address in order to view it, but I can promise you it is worth getting a few emails for. At 112 pages it is quite hefty but a quick skim through will give you the idea. Ark have done their homework on companies at the cutting edge of fields such as Deep Learning, Digital Wallets, Automation, Delivery Drones, 3D Printing and Gene Therapy, to name but a few.

Even better, if you think these are areas you should have some exposure to, Ark Invest have a range of ETFs which make it simple to get involved. You can pick and choose the particular field you like, or just get a bit of everything with their Ark Disruptive Innovation ETF. They even have a Space Exploration ETF on the way.

The only tricky thing with Ark is you will need a US / International Brokerage account in order to access their ETFs. But never fear – a search through the US Market ETFs available in my Japan SBI account turned up a number of Global X Innovation ETFs that are available and cover similar themes. They have even released two new tech focussed thematic ETFs in Japan – see the story here, and more at the Global X Japan website.

As exciting as innovation strategies are, I’m not suggesting you abandon your asset allocation and put everything into them right away. However, they are an excellent place to be averaging in a little money every month and leaving it invested for the long term. Personally I know I don’t have the skill or the time to do the level of research where I can identify the winners of the future at an early stage, so I’m happy to drip money into a broad innovation strategy like Ark’s and let them do the work. And yes, I’m going to buy a bit of the Space Exploration ETF when it’s available, just because it’s cool!

Here’s wishing you all the best for 2021 and beyond!

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.

I don’t have any affiliation with any of the fund managers mentioned in this post.

Bitcoin: It’s About to Get Loud

Well it’s official, three years after the last one, Bitcoin has set an all time high and broken through the massive $20,000 resistance point . As I write now, it’s actually trading at around $21,500. However, somehow it feels different this time around. Something is missing. It’s very, very quiet… Nobody outside the world of finance or crypto itself seems to be paying much attention.

I remember the previous all time high very clearly. Late 2017, having risen from under $1,000 earlier in the year, Bitcoin surged past $10k and just kept on marching. New highs were marked every week. Here in Japan there were crypto exchange ads on TV constantly. (remember Tetsuro Degawa and the ill-fated Coincheck?) Mr. and Mrs. Watanabe were buying feverishly as the FOMO (Fear Of Missing Out) took hold. I remember watching a news report about Kabukicho hostesses trading crypto on their smartphones. The 2017 bull run was driven by individual investors caught up in a get-rich-quick buying frenzy. And when the bubble burst they all got burned…

Fast forward three years and the landscape looks quite different. Since the halving in May 2020, Bitcoin has gradually fought its way through heavy resistance at $10k, $12k, $13k, $14k and now $20k. Mainstream news, dominated by Covid-19, economic stimulus and a soaring stock market, makes little mention of it.

Meanwhile, big things are happening: You can now buy crypto through Paypal. MicroStrategy, a business intelligence software company, has invested $475 million of its cash reserve in Bitcoin and is in the process of issuing $650 million in convertible notes, the proceeds of which will be used to buy more BTC. Square, the payments company run by Twitter’s Jack Dorsey has invested $50 million in Bitcoin. One River Asset Management, a hedge fund specialising in volatility bets, has just emerged as another huge investor in Bitcoin, with some $600 million already allocated. And also this week, MassMutual has become the first insurance company to invest in Bitcoin, dipping its toe in with a $100 million investment.

Are you feeling bullish yet?

Guggenhiem Partners, who manage over $230 billion in assets, started investing in Bitcoin when it was around $10,000. Their CIO, Scott Minerd, just shocked Bloomberg TV hosts by telling them that his firm’s analysis shows it should be worth $400,000. (Video here – tellingly Bloomberg delayed coverage of a Federal Reserve press conference to get this comment!)

Following the massive success of Grayscale Investments, Bitwise have just launched the Bitwise 10 Crypto Index Fund, which invests in the 10 biggest cryptocurrencies. The fund is available to purchase the same way you would purchase a stock or an ETF on US brokerages, and is already seeing huge demand. (not to mention a dizzying jump in price)

What is interesting here is that the reason for this underlying demand from companies and financial institutions is due largely to a change in the perception of Bitcoin, from payment system to store of value.

The original Bitcoin white paper talked of a peer to peer electronic cash system: i.e. a means of exchange, something you would use to buy your coffee, but with no intermediary / bank in the middle of the process. While Bitcoin is certainly capable of such transactions it is still somewhat clunky and there are other cashless payment methods, and even other cryptocurrency solutions, that can get the job done more efficiently.

What the likes of Michael Saylor at MicroStrategy see, is that Bitcoin acts far better as a store of value, an alternative to the “melting ice cube” that is Fiat currency. This is the role that has typically been played by gold for generations. The unprecedented expansion of Central Bank balance sheets, pumped ever higher by Covid-19 stimulus, has institutions eyeing an asset which, despite being easy to transport and store, cannot be manipulated to increase supply. You can’t just print endless Bitcoin. Understanding this shift in reasoning is essential for individual investors wondering why they should care about digital assets. (Saylor has been the guest on a number of podcasts where he talks at length about his reasoning on Bitcoin – here’s one if you are interested in listening)

Institutions and Bitcoin “whales” are certainly trading the BTC price action to some degree, but their main goal is accumulation. And compared to individual investors they have the capacity to accumulate in bulk. When dips in price scare off smaller investors and day traders, these big guys are hoovering up supply and locking it away for the long term. This level of demand combined with Bitcoin’s built in scarcity could lead to some serious price moves in the next 12 months.

So how should regular investors be adjusting to this new dynamic? If you don’t own any crypto but think you should, how do you get involved without getting burned? What follows is my two cents, for what it’s worth, in a market that changes fast. Please note that I am not a trader and do not use leverage. The purpose here is to share my thoughts on how to accumulate BTC. All the usual disclaimers apply: I don’t know your financial situation or risk profile, this is not investment advice, don’t invest money you can’t afford to lose etc etc:

  • Breaking $20k is a big deal. We could be off to the races, but new resistance levels will form and volatility is the norm in crypto.
  • Expect retraces down into the 17,000s and below, and be ready to buy these dips. It’s going to take courage as every financial news site will be screaming about the “crash” in the Bitcoin price.
  • Any kind of major macro shock, eg. a severe stock market correction, will send BTC tumbling down with it. This will be even scarier as the panic will lead investors to sell every asset they have to raise cash, as they did in March this year. Mainstream news will now be proclaiming a full-blown financial crisis. Bitcoin will be pronounced dead for failing to act as a hedge against other assets. Hold onto your hat and buy as much as you can.
  • Hold, hold, hold.
  • Assuming however, there is no such macro shock. Things are about to get interesting. Just as big dips are possible, so are big moves up.
  • Accumulation is best done little by little over time, and the same goes for selling a rising asset. If the trend is up, don’t fight it. Sell a little at a time unless you are already looking at life-changing values. (when kabukicho hostesses start trading again and Degawa pops up, it’s probably time to think about getting out!)
  • I’m not going to guess how high it’s going to go. If you are looking for price models, charts and research here are some people worth following: @100trillionusd / @woonomic / @PrestonPysh / @raoulGMI
  • When BTC takes off, altcoins generally follow. Personally I would stick to the top 10 in the Bitwise fund. I have no idea where Dogecoin will land in all this!

By the time you read this, prices could already have changed significantly. This is a fast-moving space. Whatever happens, I don’t think it will stay this quiet for much longer. Things are about to get loud!

With that I’ll sign off. Wishing you a safe and enjoyable holiday season and an exciting 2021!

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.

US Brokerage Accounts for Japan Residents

You may have seen my original post on Brokerage Accounts. Today I would like to offer an update.

I was recently doing some research on US brokerage accounts that accept foreign residents and came across StockBrokers.com. This site publishes reviews of online brokers and has a section dedicated to International Trading. If you scroll down the page a little you can enter your country of residence and search for brokers that support your country. If you enter Japan, you get a short but helpful list, complete with reviews of each broker.

Other than Interactive Brokers, I must admit I was a little skeptical about whether it would really be possible to open an account with one of the other three brokers on the list, so I gave it a try. I decided to go with Firstrade. I have to say I was impressed! Not only was I able to open an account, but the whole process was completed online in a couple of days. And no need to mail documents overseas.

Here’s the process:

  1. Click on Open An Account, and then on the next screen click on Open International Account
  2. Complete the phone number verification
  3. From there just follow the directions, input your information, and upload your ID document
  4. After the initial setup I received an email asking me to explain why I live outside my country of citizenship and to upload a proof of address document (having to explain why I live abroad seemed a bit odd, but I guess in the end this is a US account and it’s something that seems to raise a flag)
  5. After that my account was open within two days and all I had to do was fund it. This can be done by wire transfer, or if you have an existing US brokerage account you can transfer that account over. (this takes 3-4 business days)

And there you have it. From google search to shiny new account in less time than it takes to figure out who won the US Presidential Election! If you have had a similar good experience with another overseas broker I would love to hear about it.

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.

Update January 6th 2021: I am now affiliated with Firstrade Securities (I was not when I published this post)

The Japan National Pension – How Much Can You Expect?

I just came across this Bloomberg Article which looks at a survey on the state of the world’s pensions. The Netherlands and Denmark are the only countries to come out of the survey with an A-Grade, and there is some concerning news for people planning to retire in Japan, which came in 32nd and received a D-Grade.

Japan’s replacement rate, which is the percentage of pre-retirement income that retirees can expect to receive, is just 37%. Given Japan’s high life expectancy, this is likely to result in the raising of the state pension age. This means that not only are those nenkin (pension) contributions going to be inadequate by the time you finish working, but you are likely to have to wait longer to get them back.

As a visitor to this blog, you are probably already well aware that the Japan state pension is not something you can rely on to cover retirement income needs, and that you really need to be saving and investing by yourself if you don’t want to be struggling to make ends meet later in life.

Here are a few things you can do to supplement your retirement savings:

  1. Consider contributing to iDeCo. iDeco is a tax-advantaged private pension you can use to boost your retirement savings. (eligibility is covered in the link above but generally it is open to anyone who pays into the Japan National Pension Scheme)
  2. Start a NISA. NISA is also a tax-advantaged savings account which is open to all residents of Japan over the age of 20.
  3. Open a brokerage account and start investing in stocks / ETFs. (update coming soon on available accounts)
  4. Start an offshore regular savings plan or overseas platform account.

As always the key thing is to develop a plan. Think about the income you want to have in retirement and work backwards to figure out how much you need to be saving and investing now in order to get there.

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.

Why is Bitcoin Valuable?

BTC Scarcity

I’m writing this today with Bitcoin having once more passed the $10,000 mark. It’s quite remarkable to think that a digital asset that didn’t even exist until 2009 can be valued at such a level. Is it pure speculation? Or is there something particular about BTC that makes it valuable?

One person who has an answer for that question is known as PlanB, an anonymous Dutch institutional investor who created the Bitcoin Stock to Flow (S2F) model. According to his website, the name PlanB refers to “an alternative plan to quantitative easing (printing money by central banks), negative interest rates, and currency debasement in general.” His online handle, @100trillionusd, “is a reference to the Zimbabwe 100 trillion dollar note during the 2008 hyperinflation.”

If you really want to understand what the S2F model is, you should go straight to the following two articles from March 2019 and April 2020 respectively:

Modeling Bitcoin Value with Scarcity

Bitcoin Stock-to-flow Cross Asset Model

If this is a bit too much heavy reading I will attempt to summarise briefly:

The bottom line here is scarcity, Bitcoin is scarce in the same way that silver and gold are scarce, but it can be transmitted over the internet. The S2F model aims to put a value on this scarcity.

Stock refers to the existing stockpile or reserves of something. Flow is the annual production. Gold has a high Stock to Flow ratio – it would take 62 years of gold production to get the current gold stock. Around the year 2022 Bitcoin’s stock to flow ratio will overtake that of gold.

It is high stock to flow that makes something monetary goods. Low stock to flow goods can easily be over-produced, thereby crashing the price.

Supply of Bitcoin is fixed. As new Bitcoins are mined, the miner that found the block is rewarded. Over time those rewards are cut in half at regular intervals, know as halvings. The halvings and the fixed supply are the reason that Bitcoin’s stock to flow increases over time.

Working on the hypothesis that scarcity (SF) drives value, PlanB created a statistical model. What he found is that there is a statistically significant relationship between stock-to-flow and value. (the price of Bitcoin) Interestingly he also found that gold and silver are in line with the Bitcoin model values for SF. Of course other factors also affect price, but he found scarcity to be the dominant driving factor.

So what could it mean for the future price of Bitcoin? The initial modeling predicted a $1trillion valuation sometime after the May 2020 halving. This would mean a price of $55,000 per Bitcoin in the next year or two.

“People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs.” (Modeling Bitcoin Value With Scarcity)

The Bitcoin stock-to-flow cross asset model in the second article then revised this to a market value of $5.5trillion in 2020 – 2024. Which translates as $288,000 per Bitcoin. Yes, that’s the kind of number that can get your attention! Whether it turns out to be accurate or not will be something that’s very interesting to watch over the next few years. (particularly if you have some skin in the game)

Clearly my explanation above has been highly simplified. If you find this interesting and / or need a lot more persuading, please do read the two articles posted above and follow PlanB for more: @100trillionUSD

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.

 

Where to invest ¥100,000 today

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It’s been a while! I hope everyone is doing ok in these difficult times. The state of emergency in Japan has been lifted and people are cautiously getting back to something like normal life. Looking at news from around the world it seems we are lucky to be living in a country that has weathered the Covid-19 storm so well, and I’m certainly looking forward to getting out and about a bit more in the coming weeks.

I note that Japan residents are starting to receive the paperwork  for the ¥100,000 government cash assistance scheme. If you are not sure how to make your claim, here is a useful thread telling you how to complete the paperwork.

For some people, this money is clearly needed to replace income lost during the corona virus crisis and ensuing state of emergency shutdown.

However, if you are lucky enough not to need this money to cover expenses, and are thinking of putting it to work, below are a few ideas as to how you could invest it today. Please note I am trying to make these interesting “satellite” type ideas. It is of course perfectly acceptable to simply add this money to your core asset allocation – it’s just not as fun!

Cash is king – ok I know I said “invest”, but now is not such of a bad time to be holding cash. After a steep drop in March, stock markets have rebounded remarkably well, but this does not disguise the fact that the economic damage from Covid-19 is significant. The US unemployment numbers really don’t fit with where the S&P 500 is right now, and with America and Europe trying to reopen even before they have got through the first wave, there’s a chance of further extended lockdowns and more market panic to come. Keeping cash for now and investing when fear takes over is not a bad strategy.

Precious metals – Gold is well known as a safe haven in times of market turmoil, but there is a growing buzz about the gold to silver ratio, which suggests that silver is a compelling buy at the moment. In short, the amount of silver it takes to buy an ounce of gold is near an all-time high, which suggests it should revert to the mean over time. This article does a good job of explaining why silver could make a good investment right now. As for how to buy it, if you are not looking to take delivery of the physical metal you can simply buy a silver ETF via your brokerage account. iShares SLV is perhaps the best known silver ETF.

gold-to-silver-ratio-2020-05-28-macrotrends
Source: https://www.macrotrends.net/1441/gold-to-silver-ratio

Cryptocurrency – Following the halving on May 11th BTC has traded between $8,500 and $10,000, despite a negative Goldman Sachs client briefing on the digital currency. The Grayscale Bitcoin Trust is said to have purchased a third of all newly mined Bitcoin in the last 3 months at a total of $29.9 million, and this retail investor demand is combined with heavyweight trader Paul Tudor Jones declaring himself a holder of BTC. This would be a high risk place to put your ¥100,000, but you are at least guaranteed an exciting ride.

Biotech – I mentioned this in a recent post on satellite holdings. With the race for a Covid-19 vaccine hotting up, Biotech / Pharma / Healthcare are obvious areas of interest. Also with more and more countries heading toward the Japan aging population model, it makes a lot of sense as a long term buy and hold. Picking winners is not easy in this space so it’s probably best to look at ETFs.

I hope these ideas help. I would love to hear if you are investing your stimulus money elsewhere. Of course this money is being given out to stimulate the economy, so you are doing a good thing if you simply go out and spend it in your local community. Covid-19 is likely far from over so please stay safe as you get back to work!

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.

 

Insurance: Is It Worth It?

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I first heard this story when a friend of mine posted about it the other day: The All England Lawn Tennis Association, which organises the Wimbledon tennis tournament, has been paying pandemic insurance for the past 17 years at a cost of around £2 million per year. That’s a pretty hefty premium for what people are calling a “black swan event”. My friend wondered if there was a person in their annual budget meeting who had to fight to get that paid every year.

Many people face a similar dilemma. Paying for insurance every year to cover an unlikely event can seem like a waste of money. The Japanese even have a term for someone who buys more insurance than they need and ends up poor for it: 保険貧乏 (hoken binbou)

Of course there are some risks that really do need to be considered. You are not even allowed to drive your car without proper insurance. The types of insurance that are important from a financial planning perspective are:

  • Health insurance
  • Income protection insurance
  • Critical illness insurance
  • Life insurance

Health insurance – if you pay into the Japanese national health insurance system, you are covered for 70% of the cost of medical treatment in Japan. That’s enough for visits to the clinic for a sniffle, but may leave you with a larger bill if you are hospitalised for a long period. Private health insurance is a good way to cover the other 30%. It can also be useful when you travel overseas, and could even end up covering totally unforeseen treatment later in life – see here.

Income protection insurance – what if you were sick or injured and unable to work for a long period? Your company may look after you for a while, but after that you are on your own. With income protection, you can cover up to 75% of your current income up to age 65 if you are unable to work. This is especially valuable when you think that the loss of your income would also prevent you from saving and investing for your future, making life even tougher after retirement age.

Critical Illness Insurance – unlike income protection, which pays a regular income, CII pays out a lump sum on diagnosis of a critical illness (cancer, heart attack, stroke etc). This money allows you to take time off, get treatment and get well again. We are lucky to live in an age where we are likely to make a full recovery from a serious illness and be able to go back to work, but it’s important not to go broke in the process.

Life Insurance – do you have any loans / liabilities? Life insurance makes sure you don’t leave those behind for your family if something happens to you. It also means you can continue to provide income to your family after you are gone. Health and income protection come first, but once you have a family and a mortgage, life insurance becomes an important part of your protection strategy.

If you are a short-term expat, it’s best to look for insurance with companies in your home country, or via an offshore provider. If you are long term, it would make sense to get something local. My experience with insurance in Japan is that the products are all very similar, so finding a salesperson who you get along with who isn’t pushing you to buy cover you don’t need is the most important thing.

If you think you might be missing some important coverage, it may be time for a protection review.  You never know when something unexpected might happen.

And by the way, when they cancelled Wimbledon this year, the payout to the Lawn Tennis Association for £34 million in pandemic insurance premiums over 17 years?

£141 million!!! 

If you insure yourself smartly, it’s worth the money.