I don’t mean to think about the Bank of Japan this much.
As we enter December, US markets continue to push to all-time highs and Wells Fargo just got all bulled up and issued a target of $7,007 for the S&P 500 in 2025. Here in Japan, stocks have hardly been in easy mode but are still up around +17% year-to-date. Yesterday, the Nikkei 225 index jumped +1.91% as hopes rose that Japan will be spared the wrath of the incoming US President’s trade controls. These days people seem to love Japan as a destination for investment as much as they do for tourism.
What could go wrong?
The Bank of Japan meets on 18/19 December. For some reason, these dates are marked on my schedule. It must be some kind of PTSD hangover from the July meeting. Remember when they surprised markets with a hike then? I bet you remember the few days that followed. Is Governor Ueda poised to spoil our Santa rally?
Judging by Ueda-san’s recent comments, he aims to avoid any surprises this time around. Earlier this week, he told the Nikkei that rate hikes are ‘nearing’ as economic trends line up with the central bank’s forecasts. The market is interpreting the comments as a signal of a hike with bond yields rising and the yen strengthening against the dollar. In fact, you could say it would be more of a surprise if the BOJ didn’t raise rates this month.
I’m not saying we will see volatility like early August but, once again, Japan’s mainstream financial media seems remarkably calm about the potential impact on markets. With the US in a rate-cutting cycle, tightening in Japan will drive a stronger yen and could lead to another dramatic carry trade unwind. A stronger yen is also not kind to Japanese stocks.
Keep an eye on the Nikkei news for early leaks of the BOJ decision to soften the impact.
What do I care?
Given how quickly markets recovered from the August plunge, it doesn’t seem like there is much to worry about for long-term holdings. However, I once more find myself sitting on some Japanese stocks that have done rather well. And again, I am tempted to take some profits while the going is good. The benefit here is that I could use this money in January to fund my NISA instead of adding more cash. I’m sure I’m not the only one considering this. Imagine how clever we’ll feel if we sell before the meeting, sidestep the crash and buy it all back cheaper in January. (of course, it is never that easy)
Given the possibility of impending central bank shenanigans, the deadline for profit-taking is looming. I’ll give it a few more days and see.
What else is going on?
In other news, Fast Retailing Co. Ltd (9983) shares got a boost as the clothing giant announced a 12.2% rise in domestic same-store sales for November. People must be stocking up on their heat tech!
Donald Trump seems intent on blocking Nippon Steel Corp’s (5401) takeover of U.S. Steel. U.S. Steel released a statement on Tuesday in support of the acquisition. The company is crying for help but foreign takeovers are not a great fit with Trump’s ‘America First’ agenda.
SBI Holdings Inc. (8473) seems to be the beneficiary of the demise of DMM Bitcoin. DMM is giving up the ghost after losing some ¥48.2 billion worth of crypto in a leak back in May. Customer assets will be transferred to SBI VC Trade Co. by around March next year. SBI shares have seen a nice move as a result. One thing about Japanese crypto exchanges – the customers tend to get their money back these days.
Staying with crypto, I’ve joked before that it’s time to sell when hostesses start trading on their smartphones, so make what you will of this post:
Bull market things…
Finally, Saxo has released its annual Outrageous Predictions list, which is always a fun read. Nvidia surging to double the value of Apple, the end of OPEC and Trump blowing up the dollar feature on this year’s list of unlikely, yet intriguing events.
You never know…
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.
Today, we have a guest post from the team at PlanetDAO. I discovered their Facebook ad last week and was intrigued by their focus on protecting cultural heritage whilst embracing the principles of decentralisation. After exploring their website, I made a modest investment in the Hayama Bamboo Forest House project – not primarily for financial gain, but because I believe in the project and want to be part of it. I’m excited about engaging with the local community and other co-owners.
This is not a paid post, and there are no affiliate links. I’m sharing simply because I admire PlanetDAO’s work and the DAO model.
And now, I will turn it over to PlanetDAO to explain more.
Contributed by the PlanetDAO Team
PlanetDAO was launched to address a growing challenge in Japan: the preservation of cultural and historical properties. As local economies evolve and traditional inheritance patterns shift, many significant buildings risk being lost to time. This innovative model addresses this challenge by connecting global investors with Japanese cultural properties.
The Challenge of Cultural Preservation
Historic properties in Japan, particularly temples and traditional houses called kominka, struggle with maintenance and preservation when local resources can no longer sustain them. PlanetDAO’s mission is to unlock these properties’ potential through the collective participation of a diverse global community.
A Collaborative Model
The model operates in four distinct phases. The process begins with identifying properties and building relationships with local communities during the sourcing phase. In the fundraising phase, opportunities open for interested parties to participate in property ownership. Throughout renovation, the focus shifts to property transformation while maintaining cultural integrity. The operational phase then combines vacation rental management with community engagement.
Participant Engagement
Participants who join the PlanetDAO community become co-owners, part of something larger than traditional property investment. The term “co-owners” rather than “investors” reflects the collaborative nature of these projects. Co-owners participate in voting on key decisions, engage with fellow community members through both digital platforms and in-person events, and play an active role in shaping the future of these cultural properties.
First Success: Ryogonji Temple (PlanetDAO001)
PlanetDAO’s first project, Ryogonji Temple, demonstrates the potential of this innovative approach. Located in the historic Irokawa district, this 170-year-old temple gained recognition as a registered Tangible Cultural Property in 2021. Adding to its historical significance, the stone stairs leading up to the temple have also been recognized as cultural heritage, symbolizing the enduring craftsmanship and cultural richness of the region. Despite its relevance, only four local supporters remained, leaving the temple’s future uncertain.
Through community investment, the project raised ¥34,540,000 for preservation and development. Today, the project has 134 co-owners from 15 countries actively participating in its development. Co-owners engage through regular online meetings and voting, and several have already visited the property in person, demonstrating the genuine community involvement that the model fosters.
The project is now entering an exciting phase, with architects submitting proposals for the renovation. Co-owners will be involved in key decisions throughout this process, maintaining their active role in the property’s evolution. The property is scheduled to open for bookings in early spring 2026.
Current Project: Bamboo Forest House (PlanetDAO002)
The second project focuses on an 80-year-old residence in Hayama’s Kamiyamaguchi district, recognized as one of Japan’s top 100 Satoyama landscapes. The Bamboo Forest House holds historical significance as a former farmer’s residence and a cherished gathering place for local artisans.
The property features an impressive 7,199 square meters of bamboo forest, offering a tranquil retreat from urban life. The surrounding bamboo grove, carefully maintained for decades by the local community, creates a natural sanctuary that embodies traditional Japanese landscape aesthetics.
The project is currently open for investment, with detailed information about participation opportunities available on the PlanetDAO website.
Building Trust in a New Model
While the first project demonstrated the potential of this innovative approach, each new project brings its own challenges. The global nature of the DAO model, which invites participation from people worldwide who share a commitment to cultural preservation, requires building trust across borders and cultures.
Connecting with potential participants who may be unfamiliar with this investment approach takes time and patience. While in-person conversations often help address initial skepticism, establishing credibility in the digital age remains an ongoing journey. This challenge reinforces the importance of transparency and community building in PlanetDAO’s commitment to cultural property preservation.
Looking Forward
PlanetDAO continues to evolve its approach to cultural preservation. The team is exploring opportunities to expand to additional properties across Japan while developing new ways to engage global participants in local cultural preservation.
Those interested in joining this community of cultural preservation enthusiasts, or learning more about current and future projects, can visit the PlanetDAO website. The team welcomes scheduling online calls to share more about their vision and answer any questions.
Disclaimer: This post is for information only. It should not be considered personal financial advice and does not constitute an offer or solicitation to invest in any of PlanetDAO’s projects. Investments like these carry specific risks and readers should conduct their own research before proceeding.
The American people have spoken, and it’s about goddamn time! We may argue about politics but I think there’s one thing we can all agree on: there is no need for a presidential election campaign to take all year. Can’t you just get it over with in a month or so?
You have likely already had your fill of election hot takes, so I will spare you mine. I will, however, use this post to explore what the result could mean for our investments over the weeks and months to come.
Risk on, for now at least…
The initial market reaction to Trump’s win was well-expected. Stocks pumped, and Bitcoin surged to a record high. Add to that above-trend GDP growth and gold around all-time highs and you have an intriguing risk cocktail in the mix.
And then, last night, Jerome Powell delivered another rate cut. The Santa rally is well and truly in play.
Financial conditions in the US are easing considerably with a strong economy and inflation not fully defeated. What could go wrong? Many, myself included, think that the Fed is cutting too soon.
It’s one thing to disagree with the man’s strategy. However, don’t go asking him any stupid questions!
I’ll take that as a ‘no’.
On the subject of inflation, Powell also wasn’t afraid to say the quiet part out loud:
For those who think pre-pandemic price level is coming back Fed’s Powell notes “the price level doesn’t come back down…It takes some years of real wage gains for people to feel better.” Underscores disconnect from how public experiences inflation vs. economists view.
Take a moment on that one. Prices don’t come back down. Wages have to catch up. If you live and work in Japan, how are those wage hikes coming along? Data released on 7 November showed that Japan’s inflation-adjusted wages fell for the second month running in September. (you may remember that before that they fell every month for more than two years)
In case you missed it, I covered the four must-own assets for inflationary times in my previous post. All roads lead to inflation. Plan accordingly.
Stocks look likely to remain strong into year-end. If you are wondering what can go wrong after that, the bond market is the place to look. America just came out of the longest period of yield curve inversion in history. (short-term interest rates being higher than long-term rates) Without getting too deep into the weeds here, an inverted yield curve frequently precedes a recession. The consensus, however, seems to be that this time it’s different and the US economy is heading for a soft landing. Time will tell.
If you want to challenge yourself to understand the relationship between bond yields and the Fed, have a crack at this X thread. I’ve read it twice now and I think I still need another go…
How high is Bitcoin going?
Forgive me, I know I have been banging on about Bitcoin for a long time, even longer than the US election! My take is that the 4-year halving cycle is the best predictor of price movement – until it’s not. If that cycle breaks, I will change my view but as of now, it is playing out exactly as expected.
However, the Republican election sweep just added rocket fuel to the fire. In no particular order, here is the crypto bull case for the next 10-12 months and beyond:
The Democrats’ war on crypto is over
SEC head Gensler is on the way out – see ya buddy!
A significant number of incoming senators are pro-crypto/crypto-curious
Senator Cynthia Lummis has submitted a bill proposing a strategic bitcoin reserve. The proposal is for the US to buy 1 million BTC over the next 5 years. That’s 548 BTC a day. Currently, only 450 are mined every day.
Detroit, Michigan just became the largest American city to accept crypto as payment for taxes
Global easing cycle underway
Retail didn’t even get interested yet
Solana ETF possibly in the works
The parabolic phase of the bull cycle is upon us. I am not making any predictions as to how high it will go. Nobody knows. But the higher it goes, the harder it will fall at the end. That’s how the 4-year cycle runs. Here’s Mark Yusko with his take:
📺 The Bitcoin Bull Run Cycle Explained by Mark Yusko! 👀
Mark Yusko of Morgan Creek Capital Management breaks down what will happen next for Bitcoin as the bull market cycle continues into 2025.
— Tony Edward (Thinking Crypto Podcast) (@ThinkingCrypto1) November 6, 2024
If you own Bitcoin, you need to decide if your strategy is to hodl for the long term or sell during the bull run so you can increase your holdings in the inevitable bear market that follows. Option two sounds great, but it’s harder than you think. Expect more on that in a later post. In my humble opinion, any other flavour of crypto needs to be sold in the bull market. Those Metaplanet shares too. It will all get crushed when the music stops. But for now, enjoy the ride!
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.
Happy Friday! I thought I would provide a quick round-up of what is going on in markets. In case you missed it, here’s the most important five minutes of financial commentary I saw this week:
If you don’t know who PTJ is, here is his Wikipedia page. The Tldr is legendary trader and billionaire hedge fund manager.
The message here couldn’t be clearer: ‘All roads lead to inflation.’ Note the mention of Japan around the 4-minute mark. The playbook for how nations get themselves out of debt trouble is to inflate their way out. This is happening. Think what that means for your spending power. Think what it means for the yen…
So what assets does a guy like this own to face down the inflation threat? Bitcoin, gold, commodities and tech stocks. Hard assets and tech stocks. Simple.
I have had numerous conversations this past few weeks along the lines of ‘I want to own gold, but I feel like I’m too late.’ Yes, this is why I preach having the core of your assets in a diversified portfolio instead of just lumping it all into a global stock ETF. If you owned a diversified portfolio, you would have 3-5% in gold, and that part of your portfolio would be up +30% this year already. You wouldn’t have to scramble to buy some now.
This is an excerpt from a post I wrote in March 2023:
‘But global stocks have outperformed a diversified allocation over the last 12 months.’ – yes, there will be times when they will do that and there will be times when they won’t…
Here’s the simplest way I can put it: if you are young and in the process of accumulating wealth, then maybe a 100% stock allocation is ok. If you have already built up a nice nest egg, you need to think seriously about how to keep it. Spread the risk and sleep well at night.
When it comes to the satellite holdings, it’s pretty clear what needs to be beefed up right now: bitcoin, gold, commodities and tech stocks. You might already have commodities in your diversified portfolio, but with inflation looming, it’s time to get some more. Note that PTJ mentions how commodities are still under-owned.
Bitcoin is coiled
The Bitcoin four-year cycle is playing out exactly as expected and we are about to enter the fun phase.
If you are waiting around for a Japan Bitcoin ETF, I wouldn’t hold your breath – see this Financial Times article.
Meanwhile, Microsoft placed an ‘assessment on investing in Bitcoin’ on the voting ballot for its 10 December annual shareholder meeting. The Microsoft board recommends voting against the proposal, deeming it ‘unnecessary’ as the firm’s management ‘already carefully considers this topic’. This is a conversation that will take place in boardrooms of more and more major companies. Note here that Tesla still owns 9,720 BTC.
Gold breakout is happening now – are you really late?
Chart of the Week – Gold
Gold is starting to come on the radar for more and more people (after rallying some 60% off the October 2022 low), with financial pundits, hedge fund billionaires, and even mainstream media starting to talk louder about the shiny metal.
Tesla was the first Magnificent 7 company to report earnings this season and it got things off to a good start. The EV manufacturer’s stock just had its best day in the market in over a decade after reporting better-than-expected results. I understand why some people don’t like the CEO, but betting against his companies is a risky business. A +22% gain in a day is going to hurt some short sellers. More on upcoming Mag 7 earnings here.
That’s all I have for today. Wishing everyone a great weekend!
In summary, all roads lead to inflation. A core diversified portfolio and satellite holdings in bitcoin, gold, commodities and tech stocks is the best way to face down the threat to your purchasing power.
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.
So, here we are. Overnight, the Federal Reserve announced a rate cut of 50bps, the first cut in four years. Projections imply a further 50bps later this year and another 100 bps in 2025. Welcome to the rate cut cycle.
US markets reacted cautiously, with stocks rising ahead of the announcement only to give back those gains and close down slightly. 50bps is considered a big initial cut, so it will be interesting to see how markets behave over the next few days as they digest the news.
Surprisingly, the yen fell against the dollar to the upper ¥143 range and Japanese stocks were up strongly this morning. Again, time will tell if the initial reaction is the correct one.
The macro gurus will no doubt be fighting it out as to whether the US economy is coming in for the much-vaunted soft landing or heading for recession. Jerome Powell sounded upbeat on America’s economic prospects and made clear that he views the larger cut as a move to prevent the Fed from falling behind.
We will find out in due course.
Sometimes the most obvious take is the correct one: rate cuts are generally bullish for risk assets over time, although we may need to ride out some volatility in the short term. The doomers will keep dooming but optimists make more money in the long run:
“Bulls make more than bears, so if anything being an optimist about life and about things in general is a great attribute as an investor. You just can’t be starry-eyed and naive.” — Stanley Druckenmiller
Deja vu
Three assets that are a hot topic in this new environment are gold, silver and bitcoin. It’s funny because I remember these three getting a lot of attention four years ago. Granted, the post-Covid crash environment in 2020 was very different from today – for a start, the Fed funds rate was already at zero in September 2020. However, it’s interesting how things move in cycles. Gold is around all-time highs now and silver enthusiasts are clamouring for a breakout. It has a strong 2020 feel to me, so I thought I would take a look back and see what happened four years ago.
Observe the five-year charts:
As you can see, both gold and silver reacted quickly to the stimulus injection that followed the March 2020 Covid shock. Liquidity is generally good for hard assets. Bitcoin took longer to catch alight but when it did, the fireworks were spectacular as it took out the previous all-time high of $20k and then marched right on to $60k and then $69k in 2021. That move started at $6k at the end of March 2020 and BTC was still only $11k on 19 September 2020.
I like all three of these assets in the current environment, but I like one much more than the others.
Game time soon, anon.
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 hope you are enjoying Obon and the summer holiday. After a market crash and a Nankai Trough earthquake warning, things feel a little calmer this week. Hopefully, there won’t be any more ‘big events’ in August other than the local matsuri.
However, September is approaching and it feels like that will be the time to get locked in and focused. So here are a few thoughts as we speed into the last four months of the year!
US markets
There is a slew of economic data coming out of America this week, with the Producer Price Index (PPI) coming in a little softer than expected last night. CPI is tonight and another soft print will heighten expectations of a Fed rate cut in September. Toys will be thrown if Chair Powell does not deliver, but I’m also becoming a little more cautious about the outlook for stocks if he does go ahead and cut. History favours a recession scenario at the end of a hiking cycle. A lot of effort has gone into the soft landing narrative, so we should be on our guard. No reason to make adjustments to long-term investments but things rarely go as smoothly as the crowd expects.
That said, the completion of the US election will remove a lot of uncertainty, regardless of who wins.
Yen / Japan stocks
After starting August with a bang, the Bank of Japan has swiftly backed down from any plan to raise rates again this year. They got as far as 0.25% and the stock market melted down. They didn’t even get to the bond market jitters part of the project. I would love to hear from anyone who can explain how the BOJ will go about a meaningful tightening from here. Imagine what rates at 0.5% would look like. How about 1%?
I just saw a Bloomberg headline that said that PM Kishida is stepping down in favour of a leader who is supportive of the central bank’s efforts to normalise policy. Best of luck to whoever picks up that poison chalice!
Let’s just call BS, shall we? You can’t normalise a ponzi.
Nonetheless, if the Fed does begin to cut, the yen should strengthen. I don’t know how far it will get. 130? 120? 100? It doesn’t matter, because once that cycle is over it is only going the other way. You can save the bond market or the currency and no one is sacrificing the bond market.
I have said it before but I’m nothing if not a broken record: if you are going to spend your future money outside of Japan, you should forget about those alluringly cheap Japanese value stocks and get your money out of yen and into your base currency while you have the opportunity.
If you are here for the long haul, by all means, have at it. In the shorter term, Japanese stocks should do ok and I would even be tempted to look for names that will benefit from a stronger yen. Exporters that did well under the weak yen don’t seem such a great idea going forward.
Getting hard
With the US election looming, the cynical among us would be watching out for a liquidity boost to pump up the US stock market. Rather than the Fed, we should probably be looking at the treasury to provide the liquid refreshment. This ‘Bad Gurl Yellen’ piece by Arthur Hayes goes deep into the fountain of liquidity that is about to spring forth. In short, the treasury needs to lower the debt-to-GDP ratio, and it will do so by issuing yet more debt.
The Congressional Budget Office projects that interest payments on America’s debt will total $892 billion in fiscal 2024 and rise significantly in the next decade.
If you are wondering what that looks like, get a load of this chart:
Tell me you’re gonna print more money without saying you’re gonna print more money…
I wrote about currency debasement and and how to protect yourself in Harden up your assets! If you are looking at stocks to plough your hard-earned money into right now, that’s one way to do it but maybe there is a better option.
As you can see, some technical traders are getting excited about gold. JP Morgan agrees, arguing that the structural bull market remains intact and forecasting an average price of $2,500 in Q4 and $2,600 in 2025. Geopolitical tensions, rate cut expectations, central bank buying and ETF flows all point to elevated gold prices – report here.
Of course, those are short-term targets and the real point of owning gold is to protect against currency debasement over time. Remember, this is what you’re up against:
Digital gold
Ever the broken record, allow me to point out once more that the boring phase of the Bitcoin bull market is drawing to a close. We probably bounce around for a few more weeks, maybe even a couple of months. The timing is difficult to predict but I expect significantly higher prices by the end of the year. And more to come in 2025. If you are thinking of getting on the train, you don’t have long left…
Despite a reshuffle of the Democratic nominee, pretty much everything I wrote in the Bitcoin bull market update still stands. All aboard!
If you are still trying to get your head around the hardest asset on the planet, the presentations from Michael Saylor’s keynotes are a great resource.
Don’t say I didn’t warn you!
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.
It’s the 1st of August. The two big central bank decisions are behind us and summer is in full swing. So what comes next? Where will markets be at the end of this year? Nobody knows the answer to that question but I can almost guarantee you one thing: there is turbulence ahead.
Just like Japanese summer, the volatility already got started in July. However, we seem to have entered a new phase and central banks are the main drivers of the momentum shift.
Having hiked rates to levels unseen in 15 years, there is little doubt that the BOJ has entered a tightening cycle. Governor Ueda did not rule out another hike this year and the yen responded quickly to his comments, rising to 150 against the dollar. Today it is trading at around 149. Weston Nakamura sees 152 as the most important price level in global macro right now and we are already well beyond it.
Japanese stocks reacted positively to yesterday’s decision, pumping across the board. However, the Nikkei 225 index slumped -2.5% today as exporters felt the pinch of a stronger yen.
US tech investors rotate into small caps
In the US, Fed chair Powell left rates unchanged while hinting that he is getting closer to a cut. The market fully expects this to happen in September and there will be visible disappointment in people’s brokerage accounts if it doesn’t. Volatility is already rearing its head. Tech stocks have sold off over the past month amid fears that the AI bubble might be bursting. Nvidia has been trending down from its 6 June high of $140.76 and a -7% dump on 29 July seemed ominous, but last night it pumped +12.7% after AMD’s better-than-expected earnings release. Go figure…
Hats off to strategist Tom Lee for calling the rotation into small caps. IWM has been the main beneficiary of the tech selloff.
The crypto coaster rolls on
Not to be outdone by chipmakers, crypto remains unpredictable over short time frames. At the Bitcoin conference in Nashville last week, none other than Donald Trump showed up to play to the crowd. His list of “promises” included: keeping the Bitcoin the US government has seized as a strategic reserve, (yes, wow!) firing Gary Gensler on day 1, ending the democrat’s war on crypto and making the US a leader in mining.
The air quotes around “promises” don’t need much explanation. Trump has zero interest in crypto and is plainly exploiting the dem’s antagonistic stance toward the industry for votes. But don’t let that distract you from the bigger picture: governments are examining Bitcoin as a strategic hedge against their own money-printing excess. The fact that this conversation is even happening is remarkable. Bitcoin game theory is going to get very interesting in the months and years ahead.
Trump to the Bitcoin Bros: “Have a good time with your Bitcoin and your Crypto and everything else you’re playing with.”pic.twitter.com/9Mf1zr1mGX
Bitcoin is back in the $64,000 range today, as it appears that the Biden/Harris camp may be selling off the reserve that Trump promised to keep. It’s never boring. See my Bitcoin bull market update for more.
Meanwhile, investors in Japan received a lesson in FOMO from Bitcoin proxy Metaplanet Inc. this week. Shares went on a tear after the company announced its Bitcoin treasury strategy in April and many people piled in late. Now the stock is coming back down to earth with a bang as the excitement wears off. Shares are down over -70% from their 24 July high and the move down doesn’t look done yet. Of course, every man and his dog wanted the stock when it was skyrocketing and nobody is interested now. There’s a clear lesson there. That said, I wouldn’t be surprised if Metaplanet makes another run if/when Bitcoin makes a decisive break above its previous all-time high and enters the parabolic phase of the cycle. Timing is everything in narrative-driven trades.
So, what to do?
I have noticed an uptick in clients trying to position and trade some of these macro moves, particularly the USD/JPY angle. The problem with access to unlimited information, content and opinion is the urge to react to it and do something. So here’s my two cents:
The summer, and perhaps the rest of the year, will see some turbulence. Volatility goes both up and down. Overall, the backdrop keeps me optimistic. Rate cuts in the US are coming – it’s just a question of when. As things currently stand, it would not be a panic cut, which is constructive for risk assets. US stocks, gold and crypto should react accordingly. Regardless of who wins, the US election will remove a lot of uncertainty. If you are broadly diversified, you could do a lot worse than fastening your seatbelt and taking a nap for a while.
If the BOJ is tightening and the Fed is loosening, the yen should continue to strengthen. This is going to put some strain on export-related Japanese stocks and the market as a whole looks more unpredictable than the US. Governor Ueda said he doesn’t think the rate hike will damage the Japanese economy. He’s probably right for now, but let’s see what kind of toll a series of hikes will take. The last time the BOJ tried to hike was 2007/2008 and that move was reversed in a hurry…
If you have been waiting for your chance to escape JPY and get into your base currency, that window is opening. Don’t miss it – long term it does not look good for the yen.
Stay hydrated folks!
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.
It’s pretty incredible that the US Federal Reserve has gone through a 27-month hiking cycle and US stock markets are at all-time highs. Unless you’ve been living under a rock during this time, you are probably aware that the main growth driver has been the intense hype surrounding artificial intelligence (AI) and more specifically, generative AI.
What is AI?
The Encyclopedia Britannica defines AI as ‘the ability of a digital computer or a computer-controlled robot to perform tasks commonly associated with intelligent beings’. The US company Nvidia says AI is ‘the capability of a computer program or a machine to think and learn and take actions without being explicitly encoded with commands’.
In March 2023, Bill Gates published a blog post titled ‘The Age of AI has begun’. In it, he says: ‘The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.
Technological revolution or a waste of resources?
I read a couple of interesting threads about AI last week. The first one by David Mattin considers the recent UK election as the last ‘pre-AI’ election we will hold. He sees a world entering a period of deep economic transformation that will change how we live and work and accelerate the process of scientific discovery. Rather depressingly, he expects this transformation to split society into two camps: enthusiasts/accelerationists, who want to lean into this new technology and sceptics/decelerationists, who want to resist the incursion of technology into daily life. This split is not hard to imagine when you look at how divided the Western world has been on almost every issue of late.
The second thread, by Ed Zitron, summarises a recent Goldman Sachs report on generative AI, which brutally dismisses Chat-GPT and its ilk as unreliable and power-hungry. The report concludes that generative AI is unprofitable, unsustainable and fundamentally limited. Moreover, the huge surge in AI-related stocks is a bubble that will soon burst. Original report here.
I don’t think my opinion on the first part is worth much, but I am not really interested in taking sides. There are clearly opportunities for massive positive change and there are also equally glaring risks. In a perfect world, these would be balanced sensibly but that world doesn’t exist. Things are about to get interesting…
As far as generative AI goes, time will tell. I think the most common complaint people have is that they don’t want gen-AI to write stories, produce art and know everything. They want it to do all the boring jobs that we humans don’t want to do and free us up to be more creative.
Investing in AI
From an investment standpoint, I don’t think AI can be ignored. It seems imprudent to dismiss the whole field as a bubble. However, if some parts of the industry are in a bubble, the key question is how long can the bubble continue inflating? As George Soros has pointed out, there is a lot of money to be made by rushing into a bubble. The tricky part is getting out before it bursts.
There are relatively few pure-play AI stocks to invest in. However, many great companies are using AI technology and making investments in AI. I have picked up a few below that I think are worth watching. This is neither an exhaustive list nor a recommendation to invest. Just some ideas to get you started so you can do your own research. (performance is quoted up to 15 July 2024)
Nvidia Corp (NVDA) and Super Micro Computer Inc (SMCI)
If I asked you what the best-performing AI-related stock is over the past 12 months, you could be forgiven for answering Nvidia. However, Nvidia has actually been beaten by a company it is partnered with – Super Micro.
The Motley Fool did a nice write-up on these two companies here: Essentially, they aren’t really competitors, they complement each other. NVDA designs graphics processing units (GPUs) which, among other things, are used for AI model training. SMCI designs servers and it takes Nvidia’s GPUs and other components to make them and sell them to its clients. These are what some people refer to as ‘pick and shovel’ investments in AI.
Of all the big-name tech companies, Microsoft is perhaps the most bullish on AI. The company is accelerating its own AI commitments and has invested some $13 billion in OpenAI in a partnership that dates back to 2019. Microsoft has integrated all of its generative AI assistants into a single AI product named Microsoft Copilot. Copilot offers both free and paid versions and is integrated into a wide range of Microsoft applications providing access to Chat GPT-4 and DALL-E 3.
Investors can keep up with Microsoft’s AI developments here.
Shares are up +21.2% in 2024 so far.
Arm Holdings ADR (ARM)and Softbank Group Corp (9984)
Majority owned by Softbank Group, Arm Holdings was listed on the NASDAQ in September 2023 and has quickly established itself as a major force in AI. The company architects, develops and licenses central processing unit (CPU) products and related technology which semiconductor companies and original equipment manufacturers (OEMs) rely on to develop their products. 99% of smartphones run on Arm-based processors and Arm has shipped 287 billion chips to date.
In Q4 of fiscal 2024, Arm reported its highest-ever revenue of $928 million, up 47% year-on-year. Shares are up +216.5% since listing and +136.3% year-to-date.
Softbank Group has had its ups and downs but is recovering in 2024. Led by the charismatic and controversial Masayoshi Son, Softbank Group has aggressively invested in a broad range of fields including robotics, AI, real estate, e-commerce, telecoms and more. It would be fair to say that the company has backed more than its fair share of losers, but Arm is proving to be one of its better bets.
AI stands at the forefront of Softbank Group’s vision and strategy so investors should expect the heavy investment in AI-related companies to continue. CEO Masayoshi Son says: ‘We are heading for an AI revolution, and we will be the investment company for the AI revolution’.
Softbank Group shares are up +81.1 % so far in 2024.
These are just a few ideas to get you started. There are many more companies involved in AI that are worth considering. Both Amazon and Meta are making huge investments in AI. Arista Networks (ANET) AI networking has driven impressive returns over the past five years. In Japan, NEC Corp is developing a range of AI technologies under the banner of ‘NEC the Wise’. And, of course, the huge boom in semiconductors has largely been driven by demand from AI.
The majority of investors will already have a larger allocation to AI-related stocks than they probably realise. Any S&P 500 or NASDAQ tracker will have significant exposure, so it isn’t always necessary to make an effort to dig out the next big name.
As for timing, returns over the last 3 years have been extraordinary. It remains to be seen if this is a bubble that is soon to burst, but sudden deep corrections can occur at any time. If you are a long-term believer in the AI narrative, there is no rush to pile money into the space in one go. Dollar-cost averaging is a solid strategy, and so is adding on significant dips.
Whether you are allocating passively or building a portfolio of AI satellite holdings, things are going to get interesting and maybe just a little weird.
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.
Of the six main asset classes, the one that stands out as perhaps the least understood is bonds. Although most people have a general idea of what bonds are and how they fit in an investment portfolio, they are incredibly complex financial instruments and misconceptions abound. I frequently hear people wonder if there is even any need to own them. So, let’s take a look and see if we can get a clearer picture of how bonds work and why they are useful.
Why do bonds exist?
Bonds are used by governments and corporations to raise capital. If a government issues a bond, it is borrowing money from the public to finance itself. Companies issue bonds so that they can expand operations or fund new business ventures. So if you buy a bond, you are loaning a government or a corporation money.
The key components of bonds
Issuer: bonds can be issued by governments or corporations. Each issuer carries a different level of credit risk, with bonds issued by developed world governments considered the safest. Bonds from issuers with a lower credit rating carry more risk of default and pay a higher yield to compensate for that risk.
Coupon rate: this is the annual interest rate paid to bondholders, expressed as a percentage of the bond’s face value. (often referred to as par value) So a bond with a $1,000 face value and a 5% coupon rate pays $50 a year in interest.
Maturity date: bonds have a specified maturity date when the issuer repays the bond’s face value to the bondholder. Maturities can range from a few months to several decades, influencing the bond’s risk and potential return. A 30-year bond is regarded as more risky than a 5-year bond as more factors can affect the issuer’s ability to repay the debt over longer periods.
Market price: the price of a bond in the secondary market can fluctuate based on changes in interest rates, credit quality and market demand. If the bond’s market value is higher than its face value, it is trading at a premium. If it is lower than face value, it is trading at a discount.
Understanding bond prices
Bonds can be bought and sold on the secondary market after they are issued. A bond’s value in this market is determined by its price and yield. The key thing to understand is that a bond’s price moves inversely to its yield. A bond’s price reflects the value of the income it can provide. So, if interest rates are falling, the value of older bonds that were sold in a higher interest rate environment increases and their price goes up. In a rising interest rate environment, older bonds become less valuable as investors would rather buy newer bonds paying higher yields.
You can see this clearly in the performance of the above iShares TLT long-term treasury ETF. After the 2008 financial crisis, interest rates were kept low to stimulate economic recovery. Just as rates began to drift upwards, Covid happened and rates were slashed again. Bond prices increased significantly in this low interest rate environment and so the price of the ETF rose. When the Federal Reserve began raising interest rates in late 2021, bond prices fell heavily and continued to fall throughout the Fed’s tightening cycle, which is now nearing its end.
You could make a pretty strong argument that now is a good time to be buying a long-term treasury ETF like TLT. When the Fed begins cutting rates, bond prices will recover and investors will be able to capture capital gains along with income.
Conversely, having held interest rates low for longer than most other developed countries, Japan is now in a rising interest rate environment as the Bank of Japan attempts to slow down inflation. This means the price of Japanese Government Bonds is likely to fall.
Why own bonds?
Investors may choose to own bonds for a range of reasons. Those reasons include:
Steady income – particularly applicable to retirees and investors who require income for other reasons
Capital preservation – if held to maturity, bonds issued by institutions with strong credit ratings come with a low risk of loss of capital
Portfolio diversification – bonds offer a good counterbalance to equity market volatility
Capital appreciation – as above, bond prices can appreciate when central banks are cutting interest rates
A hedge against economic downturn – in the US and Europe, inflation is cooling and economies are slowing. This means the income from bonds will be able to buy more goods and services, making bonds more attractive
How to buy bonds
For a typical retail investor, there is no need to buy individual bonds. Just like equities, investors can choose from a range of active or passive strategies offered by bond funds or bond ETFs. Generally, a passive ETF provides perfectly adequate exposure to bonds without any stress or hassle. For example, Blackrock’s iShares ETF series offers 135 different bond ETFs – more than enough to build a diversified bond allocation. The fixed income part of a well-diversified portfolio will generally contain a blend of shorter/medium/longer-term government bonds along with an allocation to more risky corporate and emerging market bonds.
Be sure to pay attention to your base currency when you build such a portfolio. If you are planning to spend the money in the UK eventually, you should be looking at UK Gilts as the core of your bond holdings rather than US treasuries. Don’t be afraid to engage professional help if you are not comfortable organising this yourself.
As to whether owning bonds is really necessary or not, that’s obviously an individual call to make. I would comment that if you are young and just getting started with investing a little money every month, averaging 100% into equity ETFs is a perfectly acceptable strategy for the first few years.
However, after you have been investing for some time and have built up a larger pool of capital, it is probably time to start thinking about diversifying into other asset classes to protect against sharp drawdowns in equity markets. Bonds become a useful tool as you shift from an aggressive capital accumulation strategy to a more balanced portfolio that offers growth and income with a degree of capital preservation.
Hopefully, this post goes some way to explaining what bonds are, how they work and the benefits of investing in them. Feel free to comment or send questions any time!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Happy New Year everybody! I hope you all enjoyed a peaceful winter holiday and are back, raring to go and make big things happen.
For some reason, I had a feeling that this was going to be a challenging year and it didn’t really get off to the best start in Japan. For those interested, I was googling around yesterday trying to figure out the best way to donate to disaster relief on the Noto Peninsula. I found this page run by Ishikawa Prefecture. You can download a form here to request a receipt for your donation for tax purposes. Donations qualify for the donation deduction and there is a useful FAQ on the tax treatment of donations here.
So yeah, earthquakes, runway collisions, fires and we’re only a third of the way through January!
From a personal finance and investing perspective, there is some exciting stuff going on though. The New NISA has launched. I logged into my SBI account and it was pretty simple to get started. I have already set up the ‘tsumitate’ allocation and started buying some stocks for the ‘growth’ allocation. Clearly, everyone else is doing the same thing as the Nikkei is pumping so far this year!
I posted a couple of interesting takes on Japan on ‘X’ yesterday: an optimistic look at the year ahead from Jesper Koll and a much darker look at the demographic issues facing Japan from author Nire Shūhei. It always pays to look at both sides.
So how to invest in the year ahead? If you have been reading this blog over time, you will know that I divide investments up into core and satellite allocations. The core is a diversified portfolio weighted heavily to your base currency that just gets rebalanced once a year. This would typically account for around 70-80% of your investments and the idea is to keep adding to it as much as you can. If it’s a bit dull and boring, you are probably doing it right!
The other 20-30% can be allocated to satellite holdings, which may be a little more racy and exhibit a higher risk-return profile. If this part isn’t fun, then you are probably doing it wrong!
Satellite holdings will change over time depending on the economic environment we are in. So how are things looking?
Some thoughts
On the one hand, things look pretty much like they did for most of last year. The Fed funds rate is 5.5%. People who are obviously long risk assets have been trumpeting the start of rate cuts as early as March, but Mr Powell doesn’t look like he’s in much of a hurry to me. Although the Bank of Japan has adjusted its yield curve control policy and allowed long-term interest rates to rise a little, it is still continuing with its negative interest rate policy. There has been a significant amount of speculation, from both within and outside Japan, about when the BOJ will ‘normalise’ rates – I do love this term, like there is a way to return to normal with government debt to GDP at 264%! Gulp…
Despite noises being made about an exit from negative rate policy, it’s notable how quickly these ideas get put on the shelf. Comments I have heard recently include: ‘The earthquake will make it harder to normalise rates’. Probably true, but any excuse to avoid the inevitable. The Labour Ministry’s November report showed that real wages have declined for the past 20 months in a row, so there’s no sign of the mystical ‘virtuous cycle’ of wages outpacing price rises that would signal a move from the central bank.
It’s not going to happen, is it?
So if you’re waiting for the yen to get back to something sensible against the US dollar, good luck! Markets can remain irrational longer than you can remain solvent enough to go on a nice holiday abroad…
Japanese stocks, for the most part, are loving the weak yen. Any company with significant exports and profits abroad will see those profits magnified when converted back to yen. If you’re wondering why your Toyota shares are doing so well, there you are.
What kind of market is this?
Some time ago, I read the book Reminisces of a Stock Operator by Edwin Lefèvre. It’s considered somewhat of a bible by many investors. While there are some interesting tales of hi-jinks and high leverage, there was only really one key thing I got out of the book, but that one thing has stuck with me: Traders and investors should always know if we are in a bull market or a bear market.
It’s always the simple things that have the most impact, right? The protagonist in the book is a stock trader and his big-picture strategy is very simple: If he is in a bull market, he trades with a long bias. If he is in a bear market, he trades with a short bias. If you don’t know what kind of market you are in, you have no business trading, he says. The author coined the phrase ‘bulls and bears make money; pigs get slaughtered’.
Now, if you are a long-term investor, you don’t have to be concerned with trying to short-sell. You are more than likely to get into trouble. Simply replace the terms ‘long’ and ‘short’ with ‘risk-on’ and ‘risk-off’. Again, I am talking about satellite holdings here. You don’t have to overthink the core part of your portfolio.
Bull or bear?
The Nikkei 225 index gained around 28% last year. After such a positive start to the year, it is widely expected to keep on trucking. It’s pretty clear we are currently in a bull market. If you live in Japan and have a need for JPY base currency, then Japanese stocks are a good place to be.
The only question is what could go wrong? What could bring an end to the bull market?
I think the main short-term danger is a recession in the US. Although the financial press continues to focus on the ‘soft landing’ narrative, history tells us that rate-tightening cycles rarely have a happy ending. Depending on the depth of the recession, US stocks could fall anywhere between 20-50%. I don’t see how Japan just keeps sailing on if that happens, no matter how much better value stocks here may be. If you have already loaded up your investments for the year, I don’t think that’s a bad thing but be prepared to navigate some choppy seas. So it may not be a reason to go risk-off, but be prepared for some volatility.
The BOJ is another matter. If they actually did try to raise rates we would probably experience more than a minor squall. My expectation is they daren’t even try but let’s keep an eye on them. At year-end, I was watching a news feature where they interviewed Japanese business leaders and asked them their views on the stock market for 2024. When asked what they thought was the biggest danger to the Nikkei bull market, the majority of them said ‘the election of Donald Trump’. Interesting…my feeling is these guys need to look a little closer to home.
I’m not even going to get into geopolitics. Lots of risk there, but what are you gonna do?
Outside of Japan, US markets are making all-time highs. However, when you look under the hood, the good cheer is really driven by one group of stocks, known as the Magnificent Seven. If this is a new term to you, the stocks are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. The size of this group is truly staggering – last time I looked, the combined market cap was around $11.7 trillion. That’s about equivalent to the entire stock markets of Japan, the UK and Canada combined! This group returned around 107% in 2023.
So this bull market is clearly a Magnificent Seven bull market, and the narrative driving it is AI. If you own any kind of global stock fund, go and check their top ten holdings. I’ll bet you that these seven stocks feature prominently.
This group of stocks are a must-own. If you feel you don’t own enough of them, a US recession and corresponding sell-off in the stock market could present a nice opportunity.
Emerging markets could be worth a whole new post, but here’s the tldr: everyone is buying India, not China.
US government bonds got clobbered through this rate hike cycle. If you bought them after the clobbering, you will probably do well as rates eventually subside.
I’m from the UK, so I usually keep an eye on the market over there, but wow, that does not look to me like a place I would want to allocate capital unless I was actually moving back there. Everything about it screams bear…
The biggest bull of all
Of course, the heavyweight champion of satellite holdings is my personal favourite. Yes, the Bitcoin-led crypto bull market is upon us. I already wrote the post on that, it’s right here. You know what to do.
Or do you? I saw a great tweet by Tuur Demeester earlier, in which he said that many people will adopt crypto reluctantly. ‘Hate buying’ he calls it. He also points out how the SEC just ‘hate approved’ the spot Bitcoin ETFs. So why are people going to buy something they hate in the end?
The answer, perhaps, lies in the ongoing debasement of Fiat money, which has accelerated considerably since the 2008 financial crisis. Raoul Pal talks about this a lot and has some great charts. You think your stocks are going up, but really it’s just the purchasing power of your money going down, and you are barely breaking even. People are gradually waking up to this. And there are not many assets that are likely to outperform this money debasement over time. Gold is not getting there. Tech stocks will probably do it, and crypto will likely do it too. Maybe you’re not ready yet, but one day you will be, and you might hate it, but you will probably buy it in the end. Better to rip off the band-aid now perhaps?
On that note, I wish you a happy and prosperous 2024!
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.
Smart Money Asia 