The Yen and the Dollar Milkshake Theory

Back in April I wrote about the weakness in the Japanese Yen and how it can affect life and the economy here. Since then, I’ve noticed that in relation to the Pound and the Euro, the yen really hasn’t moved quite so much. In fact, both of those currencies have also dropped significantly against one other currency: the mighty US Dollar.

This reminded me of a term that keeps cropping up in my reading, and led me to take a closer look at the Dollar Milkshake Theory. Developed by Brent Johnson, AKA Santiago Capital, the theory envisages a scenario that appears to be playing out before our very eyes, whereby rapid USD appreciation sucks liquidity into the US and destabilizes world markets

This 6 minute Video provides a brilliantly simple explainer on what the Dollar Milkshake is and how it could play out.

A huge “milkshake” of liquidity has been created by global central banks, who have injected some $20 trillion in various currencies into the global economy since 2008. And everyone needs dollars. Whether it is to trade in commodities, shore up currency reserves, or to pay interest on USD debt: China needs dollars, Europe needs dollars, and Japan needs dollars. Despite significant money printing in America in the last decade there is still a shortage of dollars. Other countries have also been printing their own currencies in similar amounts. The demand for dollars is, quite simply, outstripping the supply.

More important even than the availability of dollars, is the rate of change in the level of the dollar. If that level rises too fast, then problems start popping up all over the world. That’s when countries like Sri Lanka and El Salvador start showing up in the news. When things get bad and the dollar rises rapidly, the rest of the world needs to print more and more of its own currency to convert to dollars to pay for goods and service its dollar debt. This means the dollar keeps on rising, forcing other countries to devalue their own currencies, which in turn makes the dollar rise further. And because in this environment the US looks like a safe haven, capital is sucked into the country which again pushes the dollar higher. Sooner or later we end up with a full on sovereign bond and currency crisis, which is bad news for the whole world, the US included.

Long periods of dollar strength have often ended with major financial dislocations, like the Asian crisis of 1997, so if the dollar continues to rise we could see some extreme volatility in markets.

So what does this mean for the Yen? Well, having just broken through a 40 year support line, things are looking pretty treacherous for JPY. We are probably near a point where, if the yen continues to fall against the dollar, we may see the first Japanese intervention in the currency markets in over a decade. You have to go back even further to find the last time Japan sold USD/JPY in order to support a weak yen, and guess what? It was in 1998 during the Asian Financial Crisis, when the USD/JPY was trading at 145. Note, we’re at 138 today…

As the title suggests, the Dollar Milkshake is just a theory. There is no guarantee that things actually play out this way, but there is a reasonable probability that we will witness what Raoul Pal calls a “dollar wrecking ball” scenario either now, or in the next few years. So how do you invest in an environment like this?

First and foremost, as I stressed in the Weak Yen Dilemma, know your base currency. Being in the wrong currency can sometimes hurt you more than a fall in investment value. On the other hand, if you hold dollars, but you are planning to spend the money in yen, you are looking at a golden opportunity to bring some money into Japan.

Secondly, remain diversified. With inflation still on the rise, this is not a good time to be sitting in cash, but it’s not a time for excessive risk either. If things get crazy that little bit of gold and silver (and maybe even Bitcoin) in your portfolio could come in handy.

If you want to be a little tactical, one area to avoid is emerging market debt. These are the countries that often issue dollar denominated debt, and are going to struggle to meet interest payments in a rising dollar environment. So maybe stay away from emerging market debt ETFs / funds for the time being.

Lastly, I think it’s key to stay patient. Extremes in markets do not last forever and reversion to the mean occurs eventually, milkshake or no milkshake.

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.

Living With the Bear Market

We humans are a complex bunch. I have heard that there are five stages of grief: denial, anger, bargaining, depression and acceptance. With covid, entire countries seem to have gone through their own version of this, which may or may not have included these stages: zero covid, flattening the curve, lockdowns, mass vaccination, and finally living with covid. In the end, it seems, we have to accept and live with whatever pains us.

So are we in a bear market yet? Some would argue not – the S&P 500 is down some 18% from its January peak, and bear markets are defined as falls of 20%. So they are correct, but the NASDAQ has already passed 20%, so it sure does sound a lot like denial, don’t you think? I’m generally an optimist, but I’ve come to appreciate the value of time as I get older, and therefore think we can all save some of this valuable commodity by skipping past anger, bargaining and depression and moving to accept the bear! Grrrr…

Spotted in Marunouchi recently.

So what is it like living with a bear? Well, let’s take a look at some of the qualities of this charming beast: Historically bear markets occur every 3-5 years, and on average they last about a year. The S&P 500 typically falls around 33% during bear markets, although a third of these delightful periods have seen drops of over 40%. Bear markets typically end, and bull markets begin, when investor confidence is at a low point. In terms of character, although they may start with a crash, bear markets tend to be a slow grind down, peppered with the odd burst of optimism. Yes, bear market rallies are very much a thing, usually spurred by some piece of good news. However, the rallies are generally short-lived, and then the grind downwards resumes.

As you have probably already guessed, trading the bear is not as easy as you may think. Sure, we would all like to sell the top and then go to the beach, only to return to buy the beginning of the next bull run, but trying to do that can seriously damage your wealth if the market turns around quicker than expected. This is from a post of mine back in 2017:

In the years 1980 to 2015, the S&P 500 experienced an average intra-year decline of 14.2%. However, the market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time. You cannot afford to be sitting on the sidelines while this is happening. In fact, the opportunity cost of doing nothing will cost you far more than any of the corrections, bear markets, and flash crashes:

“From 1996 through 2015, the S&P 500 returned an average of 8.2% a year. But if you missed out on the top 10 trading days during those 20 years, your returns dwindled to just 4.5% a year. Can you believe it? Your returns would have been cut almost in half just by missing the 10 best trading days in 20 years! It gets worse! If you missed out on the top 20 trading days, your returns dropped from 8.2% a year to a paltry 2.1%. And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!” (from Unshakeable: Your Financial Freedom Playbook by Tony Robbins)

So how do you make the most of the slow grind downwards without trying to be too clever and missing out on the best trading days? First of all you need to stay calm. Bear markets are not the time for panic and dumping investments out of hand. If you are taking the time to read this blog you likely have a long term plan and there’s no need to deviate from that. Know your risk profile, stay diversified, and take this as an opportunity to accumulate assets at lower prices. Dollar cost averaging is your friend in the bear market. Rather than trying to catch the absolute bottom, keep investing little by little at regular intervals and build up your holdings at a nice average cost. Buy quality, buy what you believe in – this is not the time for speculation on penny stocks.

As to how this particular bear will play out, my thoughts, for what they are worth, are as follows:

  • The Ukraine situation is obviously a factor in inflation, but the main driver here is the Federal Reserve and other central banks.
  • Stocks in general, and tech stocks in particular, did well in the low interest rate environment during covid – lots of stimulus!
  • Now inflation is 8.3% and the Fed funds rate is 0.75%, and it’s a similar story elsewhere in developed markets ex-Japan.
  • The Fed has to close that gap – they will keep raising rates until they close it / inflation cools down, or until something breaks…
  • Means pain for stocks while this goes on – we could still go lower and there will be a plenty of volatility. I don’t see capitulation yet.
  • I think it will be later in the second half of the year before things start to look better – there are already signs that inflation is cooling off a little. We either get out of this because inflation eases off, allowing the Fed some breathing space, or something breaks and the Fed starts cutting rates again to head off the crisis.

How about crypto?

Crypto bear markets are a rare beast, in that they are programmed into the code of the leading crypto asset and arrive with the regularity of a Japanese train. If you don’t understand the Bitcoin 4 year halving cycle, you will constantly be bombarded with narratives to explain the pain, from the Mt Gox hack to the Quadriga scandal, to the Luna / UST debacle of late, there will always be a narrative to explain something that is actually pre-programmed. 2014 was a bear market, 2018 was a bear market, and so here we are in 2022. As with stocks, in crypto bear markets you accumulate quality. That means Bitcoin and Ethereum. Keep your hands off those alts unless you are really confident in their long term value proposition. Even then, prepare to be burned as the LUNAtics have been this week. Bad things happen to alts in bear markets… Bitcoin is down some 60% from its high so far this time around. Keep in mind that peak to trough 80% is the norm. BTC fell from $20,00 to around $3,000 in 2018. In the 2021 bull market it reached $69,000. If you have the nerve, now is the time to accumulate, and 2025 is the when the next bull market train comes along. Act accordingly and embrace the bear.

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.

2022 Q1 Roundup

It’s been almost two months since my last post. Apologies for the silence but we have been busy at home with a new baby girl, born in early February! I must say that, despite the massive disruption caused by covid, working mostly at home has been a blessing this last couple of months. Some things really do only happen once or twice in a lifetime and it’s important to be present for them.

So I thought I would do a general roundup on things I have been thinking about during working hours, and how I am investing in this somewhat turbulent environment.

In my 2020 Investment Outlook post in December I wrote about having a view that guides your investment plan, and being prepared to change it if necessary. My focus for the year was on inflation and how Central Bank’s efforts to fight it would affect the investment environment. This, of course, has been somewhat overshadowed by the tragic events unfolding in Ukraine. I have no experience in international conflict, so little of value to add in terms of how things may play out there, but obviously we all hope that peace is restored as soon as possible.

The war has, of course, had a huge impact on the inflation narrative, as anyone who has visited a gas station recently will know. I actually accumulated a satellite holding in energy stocks during 2021 based on 2022 being a year of re-opening / reflation, with business getting back to normal, more travel, and therefore higher consumption of energy. It actually looks like energy prices could have some way to go, but I am out of those positions now and have rotated into tech stocks, which took a pretty good hit this quarter, and Japanese dividend stocks – largely inspired by @CacheThatCheque, who I interviewed in December. (that post is here)

My core holdings are unchanged, as they only require rebalancing once a year.

So what can we expect for the rest of the year? Well, the Federal Reserve went ahead and ended bond purchases on schedule, and then proceeded with a clearly telegraphed rate hike of .25% this month, and the market has reacted surprisingly favourably. It is said that stocks climb a wall or worry, and that’s exactly what they are doing at the moment. With more rate hikes to come I still expect plenty of volatility, but I don’t see any reason for big changes in allocation. Another dip in Q2 and a strong second half of the year is my working hypothesis.

Inflation means sitting in cash is a losing trade. Your spending power is being eroded day by day. And if you hold JPY cash, but are planning on spending the money in the US, for example, you are losing almost 8% per year and taking currency risk. However, investing overseas has been somewhat complicated by exactly that risk, as we have seen a sharp weakening of the yen – the Bank of Japan is by no means ready to taper and just announced they would purchase an unlimited amount of 10 year government bonds at 0.25%. If Japan is your home for the long term, I would estimate the real inflation rate, taking into account recent energy prices, at around 2% per year. This is why I think Japan dividend stocks are interesting as there are plenty of opportunities to earn more than 2% if you are willing to take a little risk. If you don’t have the time to research individual stocks, take a look at something like this Japan high dividend ETF:

As readers know, I also invest in crypto, and things have gotten interesting there again recently. A few weeks ago, Terra founder Do Kwon announced that they would be buying some $10 billion worth of Bitcoin to back their UST stablecoin over the coming weeks. And true to his word, Terra set about buying some $125,000,000 in BTC per day last week. If you are wondering if $125 mill per day is a lot, it is. And if you are wondering how you go about buying this much BTC, the answer is TWAP, or Time-Weighted Average Price strategy.

All this twapping appears to have been the catalyst for a rally in BTC to around $47,000, which is close to the year open price. L1 alts have also picked up significantly as a result.

One thing I am watching with interest is the Grayscale Bitcoin Trust (GBTC). The trust, which simply buys and holds BTC with a 2% p.a. custody fee is still trading at almost a 28% discount to the value of the assets it holds. At $30.8 bill in assets under management it is major contender for conversion to an ETF, if it receives approval from the US Securities and Exchange Commission. So GBTC, which can be bought through US brokerage accounts and retirement plans, offers the opportunity to invest in BTC at a 28% discount to current price, with a strong possibility that it will be converted to an ETF, whereby that discount will disappear. If you believe in BTC long term, it actually looks like a better buy than the asset itself. Obviously investing in crypto is high risk, but food for thought…

Best wishes to everyone. I hope you are enjoying the warmer weather and the cherry blossom!

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.

Embracing Volatility – How to Buy Low and Sell High

It was not even a month ago that I wrote a 2022 Investment Outlook predicting there was some volatility coming our way, and following the US Federal Reserve’s commitment to tackle inflation, the markets did not disappoint. The S&P 500 is down some 10% from its peak, the NASDAQ 15%, and Bitcoin, being Bitcoin, dumped over 50% in a matter of weeks. Welcome to 2022!

The last time I heard the term “indiscriminate selling” was March 2020, as stock markets were actually being closed early for falling to their limits for several days running. Risk happened fast as investors dumped everything: stocks, bonds, gold, crypto, you name it. Everything went to cash. There wasn’t a lot of thinking going on, just a mad rush for the exits.

We haven’t reached that level of panic so far this year, but in the US the steady pulse of easy monetary policy is fading, and as I write this the Nikkei 225 index is down over 3% on the day. There is clearly more volatility to come. So how do you invest in this environment? Selling indiscriminately along with the herd is clearly not the smart way.

As usual the strategy needs to be broken down into core and satellite. The core being the 70-80% of your portfolio that is broadly diversified, and satellite being the 20-30% you may have in something a little more sexy.

Core holdings – I have already written about how to buy low and sell high in your core allocation here. In short, you establish a strategic asset allocation that meets your risk profile and then rebalance it once per year. The rebalance in effect sells part of holdings that have gone up in value and reallocates them to the holdings that have gone down. That’s it, no further action required!

Satellite Holdings – Now for the fun part. Satellite holdings are generally invested in assets that add a little more spice to your overall portfolio. They usually have a higher risk / return profile and may change over time depending on market conditions and what is hot. So they could include an allocation to smaller companies, emerging markets, emerging technology, commodities, private equity, and of course crypto. I would note here that for someone who is retired, satellite holdings may actually be lower risk, alternative income-focussed assets, but for today we are talking about the racy stuff!

Higher risk plays tend to exhibit bigger swings, and are therefore more tempting to try and time the entry / exit. So, the first thing you need to do is make an honest assessment of your temperament and ability to manage more risk. I’m no trader and I know it, but I do have the stomach for volatility for part of my portfolio.

Scale in / Scale out: The simplest way to buy something volatile is a little at a time. Dollar cost averaging is probably the most effective way to do this. Buy a little every week, every month, or every quarter until you build your position into the size you want. As you get better at this you will learn to add a little more in months when the asset is cheap, and a little less when it is more expensive. Looking back at the chart above, it’s clear that the panic of March 2020 was a golden opportunity to acquire risk assets, but it takes some guts to be buying when everyone else is selling. That said, buying the asset is generally easier than selling it, and you don’t make money until you sell! Waiting for that perfect top is a recipe for disaster for all but the best market-timers. You need to set yourself a target price, and be prepared to adjust it if conditions change. Once you reach your target, sell half. If you think it might have more to run, don’t get too carried away. Average back out of the asset little by little, the same way you got in. You may end up feeling like you left some money on the table, but that money doesn’t exist if you go over the precipice and tumble down the other side.

If the asset is traded on an open market, learn how to set a stop loss. If it’s trading above your target price and you have already sold half, you can set the stop loss at your target price to make sure you get out if the market takes a turn.

All of this sounds great in practice, but I have personally screwed up trying to time markets more often than I have got it right. This is why position size is important. If you are in something volatile like bitcoin, which frequently dumps 50% just when you think it’s going to the moon, you are going to get it wrong sometimes. You shouldn’t have half your net worth in there! I would also say that you should be invested in assets that, although they may be hot at the moment, you don’t mind holding for the next 10 years. It takes a lot of pressure off if you get stuck in something you understand and believe in during a bear market.

Cutting your losers quickly is good advice, but many people struggle with it as they get attached to the trade and don’t want to lose money. If it’s an asset you believe has great long term prospects, then you can ride out a few bumps in the road, but if the fundamentals change and you realise you were wrong, it’s time to take the hit. Psychologically, people are conditioned to try to be right all the time, but it simply isn’t possible in investing. Accept that you will be wrong sometimes and move on.

Experience is, of course, the best teacher. Keep your positions small enough that you can learn from your mistakes without blowing up your balance sheet. Keep an eye on what smart people are doing, but make your own assessment before entering something risky. One thing you can be sure of: taking a little risk helps you to get to know yourself better!

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.

Diversification the Ray Dalio Way

I recently listened to this excellent podcast with investor Ray Dalio and it once again struck me how, out of all the “investment gurus”, Dalio really preaches simple, actionable investing that us regular people can easily understand and implement.

Dalio has just published a new book, which I haven’t read yet, but contains some eye-opening assessments of the decline of the United States, (30% probability of civil war in the next 10 years) and the rise of China. However, it’s the part covering how to invest in this turbulent environment that really caught my attention. Dalio sees the world economy approaching the end of a major cycle that could have dramatic repercussions for risk assets.

Here are some of the key points from the interview:

  • Don’t judge your wealth in nominal terms – i.e. how many dollars or yen you have. Judge it in terms of buying power. The ballooning of central bank debt has pumped up risk assets so people are feeling rich at the moment. However in real terms, inflation is eating away at your wealth.
  • Cash and bonds are a terrible investment in this inflationary environment. Both have negative real returns now, when measured against inflation.
  • Diversification is key. A diversified portfolio of assets should include inflation indexed bonds, stocks, and gold. Take a look at Dalio’s All Weather allocation to understand what a diversified portfolio should look like in an inflationary environment.
  • Don’t try to time the market yourself – that’s an extremely competitive game that even the pros struggle with.
  • Look for balance in your portfolio and make sure that once a year you rebalance back to your original weighting, effectively selling a portion of the assets that went up and investing them into the parts that went down.
  • Dalio is neither a raging bull or bear on Bitcoin and digital assets. He is impressed that Bitcoin has stayed around this long and been adopted so widely, and that means that some of the initial risks of hacking or replacement by a better asset have diminished. However there are risks that money in Bitcoin could flow to something else, and of course regulatory issues as the threat of a better (non-inflationary) currency is a perceived as a risk by governments who have outlawed gold and silver in the past. In all he says an allocation of 1-2% of your total portfolio to Bitcoin is about right.
  • Dalio also makes a great observation on the value of stock indexes, whereby all companies die at some point, but the index is refreshed as the old companies exit and new ones come in, so you don’t have to have your finger on the pulse continually. Simply buy the index and relax.

Just picking up on an important point here: Dalio talks about the negative returns on traditional government bonds, and suggests investing in inflation indexed bonds instead. These are often referred to as TIPS (Treasury Inflation Protected Securities) and seeing as some people may not know what they are here is the Investopedia definition. You are going to struggle to find these in a Japan-based account, but if you have a US account then the TIP ETF is a great way to get exposure. ITPS works for European accounts.

From my experience, I find that people who organise their own investments are often under-diversified. When you boil it down they are largely invested in global / US stock ETFs which all have a high concentration in the same major companies (mostly big tech). In the good times this allocation will perform perfectly well, but there is little protection there when markets take a turn for the worse. So if you are conducting your annual portfolio review as 2022 gets going, it would be a good time to consider if you are really properly diversified.

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.

2022 Investment Outlook

Wow, year two of the great covid saga is almost over! It may not feel like it, but from an investment perspective, we are coming to the end of one of the easiest years in recent history. How is your portfolio doing? The odds are it’s looking pretty good so far. This has been the kind of market where we all look like pros.

So can we expect more of the same in 2022? You are probably already getting the feeling that it’s not going to be that simple, and that has a lot to do with Mr. Powell, pictured above. There are a lot of tough jobs in this world, but trying to fight inflation during a pandemic, without crashing a stock market that you inflated, certainly has the difficulty level set to Precarious. Volatility is coming back and you better have a plan to deal with it.

Stocks: So how well have stocks actually done? Well if you look at the indices, everything looks fine: The S&P 500 is up some 26% year to date, with the NASDAQ up 17%. Bull market! The picture gets somewhat muddled though when you realise that 45% of the components of the S&P 500 are below their 50 day moving average, and 65% of NASDAQ components are below their 200 day moving average. What does that mean? Well a big chunk of the US stock market is actually in bear market territory. What’s holding up the average is the massive outperformance of big tech: Apple, Alphabet (Google) Amazon, Meta (Facebook), Microsoft, and Netflix literally are the bull market!

All this has happened in an environment nourished by the steady drip of liquidity in the form of zero interest rates and quantitative easing from Jerome Powell’s Federal Reserve.

This from a recent Zerohedge post: “So I submit the notion of a raging bull market is a myth. Indices propelled to constant new highs by still flowing central bank liquidity increasingly held together by a few stocks.”

No wonder things got choppy around the time of the FOMC meeting this week…

Bonds: The problem here is, of course, the emergence of inflation, which the Fed originally tried to write off as “transitory”, but have now decided they need to act on. That means no more drip drip, and interest rates must rise. Inflation is not good news for bonds, as it eats away at the purchasing power of the bond’s future cash flows. Why buy today’s issue when tomorrow’s will come with a higher yield? Bond yields go up = bond prices go down.

Commodities: Assuming inflation is here to stay for a while, what should go up is the price of “stuff”. There’s a reason for that 5% of your portfolio that’s been sitting in gold doing not very much all year. Just be aware that if there’s a panic à la March 2020, everything gets sold off initially, including the shiny metals. Oil is going to continue to be interesting next year if the scourge of Omicron doesn’t crush the reopening trade…

Crypto: It’s been one year since my Bitcoin: It’s About to get Loud post. Yes, I am now patting myself on the back for calling the most obvious bull market of all – the one that comes every four years! Crypto is never easy though, especially for newcomers. We have seen (I think) seven or maybe eight pullbacks of over 30% this year alone. We have been to an all time high of $69k and are now back at $46k with the fear and greed index indicating extreme fear. Meanwhile on Layer 1, Ethereum has outperformed Bitcoin and Avalanche and Solana have done crazy multiples. (ETH up about 420%, AVAX up 3,000%, SOL up 11,000%!) Have we seen the top of the mountain and we are already on the way down the other side, or is there one final push to the summit to come?

Dude, you mentioned having a plan?

A client of mine, who is a former economist once said to me: “Right or wrong, I always saw it as my job to have an opinion.” That comment has stuck with me, as I think it applies to all investors. You can’t always be right, but you should have a view, test it rigorously, and be prepared to change it if you find evidence you are wrong. So for what it’s worth, here’s my view for 2022:

The Fed, and other Central Banks are being forced to deal with inflation, but they have openly admitted that they are equally, if not more concerned, with not crashing the stock market. The words “rock” and “hard place” spring immediately to mind. So they taper now and plan to stop bond purchases by March. The market does not like this and corrects strongly, which basically means that those big tech stocks sell off dramatically. Then, central banks have to backtrack and slow or end the taper, and maybe rethink those rate hikes planned for later in the year. When the drip is turned back on, the market bounces back.

You get the idea.

How you plan for this depends on your investing style:

If you have a diversified asset allocation and your plan is to do nothing at all and ride it out, maybe continue dollar cost averaging every month: Congratulations! You are dismissed from class and free to go and play!

If you are not one of these people then please take note – staying sane is actually an option here. However, if you insist on trying to trade this, it is probably past time to start getting a little more defensive and raise some cash to deploy when things get rough. I would, however, be tempted to entertain the possibility that Omicron is also a little roller coaster like by nature, and the initial whoosh into the sky will return to earth equally quickly. This could precede the discovery in late Q1 that inflation actually was somewhat transitory, and caused mainly by supply chain disruption, and therefore the need to deal with it falls away. So be cautious, but it’s perhaps not time to lock yourself in the bunker.

Is the crypto bull market over? Crypto is more correlated to stocks than many crypto people like to think, so if anything is going to slay the bull it could be a dramatic stock market correction. That said, the level of adoption, or network effect, has increased significantly this year, and includes a good deal of institutional money. If your plan, like mine, was to sell the cycle top at $100k+ and then buy back in the bear market, it may be time for re-evaluation. I’m slowly becoming more open to the idea that the four year cycle could be smoothing out and, despite frequent mini crashes, we may not see a 2017 style blow off top followed by a grinding two year bear market. Don’t hold me to that, but a simple way to play it is to have a cold storage allocation that you hold longer term, and a tradable allocation that you look to sell at Extreme Greed and buy back at Extreme Fear, rinse and repeat.

However things play out, it is unlikely to be smooth sailing. So I wish you a peaceful holiday season. Here’s hoping Japan does a better job of holding off Omicron than my home country is doing so far…

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.

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.

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.

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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.

 

Online Coaching – Perfect Timing

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I hope everyone is safe and well in these difficult times. One thing you are probably doing is spending a lot more time at home. And with that comes a lot more time online, particularly using internet communication tools like Skype and Zoom.

You may have noticed that I offer personal finance coaching. This also includes online coaching, which was initially meant for people living outside the Kanto area, but is fast becoming the norm in these times of social distancing.

Now would be a great time to get your finances in order and take advantage of one of the best opportunities to invest you will see in years. Below is the 25 year chart of the S&P 500. You can see quite clearly the benefit of investing during severe market downturns in 2000 and 2008. Why not make use of the extra bandwidth you have and put some money to work for you?

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Source: https://tradingeconomics.com/

Among other things, I can help you figure out:

  • How much you have available to invest and how much you should be keeping in cash for emergencies.
  • What currency is best for you.
  • What kind of account would be right for you.
  • How to allocate when you get the account.
  • How to maintain your investments over the long run.

More information, including rates, is available here. If you would like to book a coaching session, or you have some questions before getting started, please get in touch with me via the Contact Form.

Spice up your Investments with Satellites

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Is the Covid-19 market plunge getting you down? Tired of being told not to panic and stay diversified? (by people like me!) Are you thirsting for something interesting and exciting to invest in rather than the usual steady and boring stuff?

Then this post is for you! Let’s look at something fun! However, before we jump in, please read here to make sure you understand what I mean by Core / Satellite holdings. In short, core is the sensible diversified allocation linked to your base currency and risk profile that you put 80-90% of your money in. Satellite is the other 10-20% where you swing for the fences!

Some areas that are typically classed as satellite holdings would be: hedge funds, direct stock picking, commodities, structured notes, private equity, biotech, property and cryptocurrency. This is by no means a definitive list and there are many other investments that would be considered non-core, depending on your risk profile.

Here are a few unique satellite holdings that I have come across recently:

ARKK – Ark Innovation ETF: Run by Cathie Wood, the Best Investor You’ve Never Heard of, Ark is a stock picking fund, focussed on innovation in DNA Technologies, Energy, Automation, Manufacturing, Next Generation Internet and Fintech. Ark are currently looking rather smart for their heavy backing of Tesla. Their holdings contain a heady mix of 3D Printing, Gene Therapy, Biotech and Blockchain Technology. This level of active management in highly specialised areas would usually come with a hedge fund 2 and 20 price tag, but the expense ratio is just 0.75%. ARKK is listed on the NYSE so you will need a brokerage account that can access that exchange to access. More here.

GBTC – Grayscale Bitcoin Trust: According to this article, a recent study by brokerage giant Charles Schwab showed that GBTC is in the top 5 holdings for Millennial investors, (currently aged between 25 and 39) ahead of Netflix and Walt Disney. GBTC offers investors access to Bitcoin returns via their brokerage account. The Trust trades like a stock or ETF and, for a 2% annual fee, it takes care of the issue of custody of crypto, so you don’t have to worry about losing your private keys. Bitcoin purists would probably rather hold the real thing, but GBTC is proving popular as an alternative way to get exposure to Bitcoin returns. This could be interesting with the upcoming Bitcoin Halving on the horizon. I would note that not all brokerages allow trading in GBTC. From what I can tell it is available in the US on Schwab, Etrade, TD Ameritrade and Interactive Brokers. More here.

CHNA / CNCR – Loncar China Biopharma ETF / Loncar Cancer Immunotherapy ETF: Given the origin of the novel corona virus Covid-19, China Biopharma is kind of a hot topic right now. Despite the current panic, this article argues that now could be a good time to buy. Companies in the Cancer Immunotherapy space are harnessing the power of the body’s own immune system to offer an innovative alternative to current treatments, which makes for an exciting and potentially rewarding investment opportunity. Loncar’s ETFs are NASDAQ listed. More here.

If you are living in Japan or elsewhere in Asia and looking for a US brokerage account then your best bet for getting an account open is probably Interactive Brokers. See this post for more details on brokerage accounts.

Hopefully that’s helped take your mind off the doom and gloom. Please note that these are not recommendations, and all of the investments mentioned should be considered as belonging in the High Risk category. That’s why they are satellite holdings. We are talking about around 5% of your total investments in any one of these strategies. Please feel free to share any interesting satellite holdings you like. I would love to hear from you.

Note: I have no affiliation with any of the investment companies mentioned above.

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.

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