Category: Market news

USD/JPY: ¥160 and beyond!

I came back from the gym this morning and found my wife at her desk.

“Wow, my stocks are up again!”

This is good news.

“But why are they going up so much? News on the economy doesn’t seem so great.”

I begin an explanation of how low interest rates have finally reignited inflation in Japan and fueled a boom in stocks. And despite the recent rate hike by the Bank of Japan, real rates remain negative, which means the price of things, including assets, will continue to rise.

Her eyes quickly glaze over, and she goes back to work. I put some coffee on. Then I begin writing this, in case someone is actually interested!

USD/JPY is at ¥157. GBP/JPY is ¥210!!!

Last week’s BOJ rate hike was viewed mainly as an effort to prop up the currency. But it seems unlikely to halt the slide back to ¥160. Could we go further than that next year?

Here’s a quick reminder about the bind the central bank finds itself in, from my January 2023 post How screwed is the yen?:

The BOJ is caught in a spiral of rising bond yields and a falling yen. And between the bond market and the yen, it can only save one. The programs you would have to enact to save the yen are the exact opposite of the programs you would have to enact to save the bonds. To save the currency, you have to raise rates. To save the bond market, you need to keep rates low.

Last week’s rate hike was a band-aid. Many were hoping for at least a short-term bounce in the yen, but it didn’t come. The BOJ can’t manage an aggressive hiking cycle without destroying the bond market and taking down the banks, pension funds and insurance companies that own the bonds.

Nobody wants to say it, but further devaluation of the yen is the only option. And the new Takaichi administration is implementing policies that will only accelerate the decline. (Japan Diet enacts 18 trillion yen extra budget for PM’s expansionary stimulus)

¥160 and beyond is firmly on the table.

This is all very depressing, I know. However, I imagine many of us will be looking to allocate money to NISA, etc, next year and need to begin thinking what to do with it. I haven’t made any decisions myself yet, but I’m beginning to put together a list of themes that will influence these decisions:

Themes for 2026

  • Japan’s base interest rate is 0.75%, inflation is around 3%, so we have a real rate of negative 2.25%
  • The BOJ can maybe squeeze in one more hike to 1%, so real rates could go to negative 2%
  • This is still very accommodative monetary policy and will support asset prices
  • The weak yen will persist and perhaps go beyond 160
  • Rice isn’t getting any cheaper, and people’s spending power will continue to decline

To be clear, I’m not in the doomer “Japan has reached the end of the road” camp. Japan is the world heavyweight champion of muddling through with extraordinary monetary policy. There’s still a lot of road to kick this can down. However, those who do not own financial assets will struggle. It’s not going to be pretty.

Outside Japan, things could get pretty spicy, too.

Better have a plan to not get knocked out!

A few additional themes:

  • Trump’s new Fed pick will likely force lower rates
  • Trump will want to pump the stock market ahead of the midterms
  • However, the AI trade will continue to come under scrutiny
  • The debasement trade is very much still in play – own hard assets
  • Bitcoin bear market – an opportunity to accumulate

I will think on this some more and come back with a plan for 2026 in the next few weeks. Let’s see if the yen breaches the ¥160 mark before the year’s end.

Thanks for reading. Wishing you all a wonderful Christmas!

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.

Financial repression playbook

One down, one to go. With the FOMC resulting in a dovish cut, we now await the BOJ meeting next week. So, how are things shaping up for the end of the year and 2026?

The Fed delivered the expected 0.25% rate cut. It was accompanied by cautious commentary on next year, without really turning hawkish. Pretty much a goldilocks result for markets. Stocks rallied into the close, while Bitcoin pumped to $94k before quickly retracing. The Fed’s dot plot and 2026 outlook seem wildly irrelevant given where things are going after Powell’s term ends.

Does anybody need that stated more clearly? The next Fed chair will be appointed by Trump and will do his bidding. Their primary function will be to cut interest rates. End of story.

Leaping into the future, it will be fascinating to see if a post-Trump Democrat administration will work to reinstate the Fed’s “independence”. I bet you they won’t…

Anyway, I digress. The US is moving toward financial repression in 2026. Inflation allowed to run hot, and interest rates forced lower = Negative real rates. Negative real rates are a stealth tax on savers. It’s how the government reduces the debt burden.

It’s not good. But it’s what is going to happen.

Americans who own assets will be fine. Those who don’t will struggle.

Lots of liquidity, equities up, hard assets up, and a weaker dollar.

So, Bitcoin to the moon, right?

Hmmm, given what I wrote above, we are looking at the perfect environment for Bitcoin. The macro gurus, who are relatively new to Bitcoin, are declaring the 4-year cycle dead and preparing for new all-time highs in 2026. Except that’s not what usually happens. October marked a picture-perfect 4-year cycle top. It doesn’t get any clearer. The bottom should be around Oct/Nov next year.

I’m long BTC and happy to be proven wrong, but I think there is pain to come. I think we will see $40-50k, and buying Bitcoin when stocks are pumping will seem like the dumbest thing a person could ever do with their money. Sentiment needs to be broken before we run again.

And yes, I will buy at those levels. Until then, there isn’t much point in thinking too hard about it.

As for stocks…

The midterm general election is in November. Sometimes the most obvious outcome is the correct one.

Is the BOJ going to spoil the party?

The BOJ is signalling a hike. It’s been reported in the Nikkei. It’s pretty much baked in and would be more of a surprise if it didn’t happen. I don’t think it’s going to shock markets. It might strengthen the yen a little, but it probably won’t be earth-shattering. See my post on the Yen Carry Trade from last week.

Japan, of course, is already at negative real rates. That should support the Japan equity bull market. It only sucks if you don’t own stocks…

I have the flu. That’s as much brain power as I have this morning. Time for a lie down.

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 yen carry trade explained

It looks like the Bank of Japan (BOJ) is finally ready to raise rates again this month. So, right on cue, out come the doomers to ring the alarm on how the unwinding of the yen carry trade is going to blow up global financial markets.

Should we be worried? How could a potential unwind of this trade affect investors in Japan?

What is the yen carry trade?

The core idea behind this trade is to borrow money in a low-interest currency (JPY) and invest it in higher-yielding assets elsewhere.

For example, a fund could borrow yen at less than 1% interest, invest in US Treasuries earning 3.5%, and pocket the difference. This works perfectly until exchange rates make a big move. Then things can get interesting.

A conservative estimate puts the size of the carry trade at around $1 trillion, based on Japanese banks’ foreign lending. Some estimates use the notional value of FX swaps and forwards using the yen to reach a figure closer to $14 trillion.

Of course, hedge funds are not necessarily just buying conservative US government bonds on this trade. A mountain of cheap yen is converted to dollars and other currencies and flows into all kinds of assets. A deep dive would likely reveal that a large portion of this trade has gone right into the red-hot Magnificent 7 stocks.

Why Japan?

The carry trade can take place using any currency with a low interest rate. Japan has been the primary go-to market due to its unique characteristics:

  • The lost decades following the bursting of the bubble in the early 90s
  • Deflation and slow growth
  • The BOJ’s long-term low/negative interest rate policy
  • Hence, the yen became the world’s cheapest funding currency

How the carry trade makes (and loses) money

This trade works based on the interest rate differential – the carry. With a stable or weakening yen, it will remain profitable. In this type of environment, it’s hard to miss.

Problems occur if the yen strengthens. If an institution borrowed yen at ¥150 to the dollar but later the yen strengthens to ¥130, it suddenly requires more dollars to repay the same yen loan.

The unwind then happens as follows:

  • Sell the dollar asset (treasuries/stocks, etc.)
  • Convert to yen
  • Repay the yen loan

This unwind puts downward pressure on the asset being sold, which could be US treasuries or global stocks. And the flood of capital back into JPY accelerates the yen’s strengthening. A relatively small move in exchange rates can snowball into something much larger.

Famous unwind events include the 1998 Asian financial crisis and the 2008 global financial crisis. In 2024, we saw a mini unwind as the BOJ shifted policy.

Why does it matter to everyday investors, especially in Japan?

With the US central bank cutting rates and the BOJ looking to raise rates, there is a real possibility that the yen will strengthen in the short term. Most Japan residents will be relieved as foreign goods and overseas trips will become more affordable.

However, the unwind can suck out global liquidity and do some real short-term damage to our investments. Not many risk assets fare well in this kind of event, so be prepared for international stocks, Japanese stocks, high-yield bonds and crypto to take a beating. Japanese exporters, such as Toyota, are particularly sensitive as a stronger yen erodes their overseas profits.

So, are the doomers right this time?

Beware of people claiming that the yen will suddenly surge and stocks will crash overnight. The reality is:

  • Yen carry trade unwinds tend to happen in bursts, and not always in a straight line
  • Central banks will often intervene, verbally or via policy tools.
  • Markets tend to pre-position before the worst moves happen

You can already see this pre-positioning happening. The yen has strengthened over the last few days after the BOJ hinted at action at its next meeting. Note how BOJ governor Ueda is trying to communicate his thoughts in advance and avoid a “shock rate hike” a la August 2024.

People writing epic threads on X tend to overstate the timeline risks. Sharp moves can indeed happen. However, it doesn’t necessarily guarantee an imminent crash.

Should we be worried?

Concern about the carry trade unwind is most rational if you have:

  • Investments heavily exposed to foreign currencies
  • A portfolio dominated by global stocks
  • Income linked to export-driven Japanese companies

There is less to worry about if you have:

  • Mostly yen-denominated assets
  • A long time horizon
  • No plans to move money internationally soon

Concerns about a carry trade unwind are certainly not irrational. However, the real risk lies less in timing the event and more in understanding how currency moves can affect your portfolio and positioning accordingly.

So it really comes down to portfolio structure. Trying to predict macro events is insanely hard…

Ok, then how do I hedge against this?

Of course, some assets will benefit from a carry trade unwind:

  • The yen, of course, is the obvious winner – that trip abroad could get a lot cheaper next year!
  • Gold is historically a beneficiary of unwinds as investors deleverage and seek out safe havens. If the yen is rising, the dollar is usually falling, which is generally good for gold.
  • Long-duration government bonds generally do well as the world goes risk-off and money flows into the safest assets. Bond prices go up as yields go down.

In conclusion, don’t let the doomers scare you out of long-term investments, but be prepared for some volatility. Keep an eye on central bank rate decisions, the corresponding US-Japan interest rate gap, USD/JPY exchange rate and global risk sentiment.

Personally, I am long-term bearish on the yen, but in the short term, anything can happen.

It’s always good to keep some dry powder to pick up risk assets while investors run scared.

And make sure your passport is still valid for that overseas trip you’ve been planning!

Top image from Freepik

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.

Bear with me

Markets are not looking so hot right now. I really hate to be bearish, but it’s becoming unavoidable.

Last week, Bitcoin made its first daily close below $100,000 in 188 days. Then yesterday it closed below the 50-day moving average on the weekly chart. This is always bad news for bulls. Some of the people who were telling us the 4-year cycle is over are still holding out for a reversal, but they are probably grasping at straws.

We are so done. Thank you for playing.

I know it’s unlike me to be so negative, but when a situation changes, it’s important to confront reality quickly. Crypto is heading into a bear market, and it’s right on schedule.

Initially, Bitcoin is acting as the pressure release valve as investors lose faith in an overheated risk environment. You will note how, over the last week or so, Bitcoin is lower when you wake up. Asia propped up the price in the daytime, and then America sold hard while we slept. Now Asia is selling, too.

Worse still, BTC tends to lead equities, and in my humble opinion, BTC is heading lower.

Stocks are already wobbling. In particular, the AI trade is coming under increased scrutiny. Nvidia earnings are due on Wednesday. I don’t think there are numbers big enough to satisfy the masses this time, although the numbers will likely be impressive regardless.

I talked about Michael Burry in my last post: In this economy?

Burry put on his Nvidia/Palantir short and then closed his fund. Now he doesn’t have to worry about investors trying to pull their money when the market moves against him. People are debating whether he is actually any good at calling this stuff, which is a valid question. It’s such an obvious trade that you wonder if it can really be that simple, especially with Trump there to pump the markets every time they stumble.

But it doesn’t look great to me. In the short term, at least, I’m siding with the bears.

Time preference is key

It’s ok to be bearish, but the big question is: over what timeframe?

BTC is a good starting point for this discussion, as it is highly sensitive to both global liquidity and overall risk sentiment.

When Bitcoin topped in November 2021, it was just as the Federal Reserve pivoted to begin a brutal tightening regime. Interestingly enough, in November 2025, the Fed is going in the opposite direction. In fact, the market was pricing in a further rate cut in December until the US government shutdown delayed the data and muddied the waters. Uncertainty around rates is a huge factor in sparking the sudden loss of appetite for risk.

The liquidity picture for 2026 actually looks pretty rosy. Trump is effectively going to gain control over the Fed, and he has the midterm elections to pump the market for. On the flip side of that lies a slowing US economy.

Bitcoin’s level of institutional adoption was meagre in 2021/2022. In fact, it turned out the industry was on the brink of collapse. And collapse it did: Terra/Luna, Celsius, Blockfi, 3AC, and, of course, FTX all fell during the bear market.

The picture is very different now. US Bitcoin ETFs have almost $120 billion in assets under management. $72 billion of that is in BlackRock’s IBIT alone. What’s more, the Trump administration is pro-crypto. This is not an industry on the brink of collapse any more. It’s just going to need to take a breather for a while.

Plan for the worst

The typical bear market drawdown from the peak for Bitcoin is 80%. So, worst case, we are going back to $25,000. Ouch! Not pleasant at all, but I would not bet against this outcome.

If ETFs and institutional adoption, plus a favourable liquidity cycle count for anything, which I think they do, we may not go that low. Personally, I’m not really interested in bidding $90k. I’ll get interested at lower levels. $50k seems a bit more like it. (this is my finger in the air, best guess if you are wondering how I got this number)

Here’s a little perspective:

What about stocks?

Nvidia’s P/E ratio is around 53. Investors are willing to pay that amount for each dollar of the company’s earnings. I probably don’t need to tell you that future earnings expectations are a little on the high side. The Magnificent 7’s average P/E ratio is around 28 to 35. Those expectations may well be due for a sharp adjustment.

The other 493 stocks in the S&P 500 are not looking so bad, although they could get dragged down somewhat in a Mag 7 correction.

Global stocks, Japan included, are unlikely to emerge unscathed, but we could well be looking at an interesting buying opportunity.

Personally, I kind of like the idea of reducing US exposure (particularly Mag 7) and increasing Japan. The only problem is then you get trapped in yen. Finance Minister Katayama is making the usual concerned noises about exchange rates, while taking absolutely no action to counter the yen’s decline. Real interest rates in Japan remain negative, and as long as they persist, the currency will continue to struggle.

Negative real rates are a boon for stocks, though. If rates somehow ever turn positive, it’s time to rethink.

All in all, it comes down to where you are in the financial planning process. I covered this in the Burry post, but here it is again in simpler form.

I see three key stages in the personal finance journey:

  1. Accumulation – spend less than you earn and invest the difference into stocks and other high-growth assets. If asset prices decline, don’t panic and keep buying. In fact, buy more if you can.
  2. Diversification – a mix of protecting capital, whilst continuing to accumulate. The key to knowing when to diversify comes down to three factors:

a) The data tells you – you hit your number and simply don’t need as much risk any more

b) You become conscious of the amount of money you have at risk and start thinking about what to do

c) Asset prices are considerably higher than the average price you paid when accumulating. Despite the wobbles, we are still in this zone for anyone who has been accumulating for a while. It may not last much longer, however…

3. Distribution – you begin living off the income generated from your accumulated assets, or simply spending the money

If you are in stage 1 or 3 and are properly allocated, a stock market correction should not bother you too much. If you are at stage 2 but have not diversified yet, the current window of opportunity may be about to close for a while. Don’t panic, but perhaps give it some thought.

Personally, I have been selling stocks that have done well over the short term, particularly tech/semi/AI-related stuff. A few Japanese tech stocks I owned got a big boost when PM Takaichi was elected and are probably due for a reality check.

In other business

My next casual meetup, billed as the Nikkei ¥50,000 party, is on 26 November from 7pm at Hobgoblin Roppongi. Everyone is welcome. You don’t have to talk about investing, and you don’t have to drink unless you want to. Some of us may need to!

Before you ask, yes, the event will go ahead even if the Nikkei is below ¥50,000. That is an achievement unlocked, and I’m sure we’ll be back above that level in due course.

Don’t get too bearish!

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.

In this economy?

It’s been another interesting week. ‘Big Short’ legend Michael Burry returned to X to call out the AI bubble, posting charts that question whether the ongoing mega AI capex boom really matches demand. Burry pops up every now and then to predict disaster, and his hit rate post-2008 is not all that spectacular. However, he followed up by filing his investment firm’s 13F 11 days early, showing that he is short 1 million Nvidia shares and 5 million Palantir shares.

Money where his mouth is.

The market took notice and US tech stocks tumbled on 4 November. Japanese stocks followed suit, with Softbank Group dumping almost -17% over 2 days. This comes at a time when the US government shutdown is blocking the liquidity faucet and tightening things up considerably.

Crypto didn’t like it either, but hey…

Predictably, President Trump issued some positive comments about stocks and Bitcoin overnight, and the situation calmed down. Every time I think this market is ready to begin its descent into hell, I’m reminded that the guy in charge of America has a vested interest in keeping it above ground…

Clearly, Burry is hitting a nerve with AI bubble enjoyers. Here’s a great thread from Marko Bjegovic covering why he is probably correct.

The ‘K-shaped’ economy

You are probably hearing this term lately. The K-shape represents the latest expression of wealth inequality. Essentially, high earners and large corporations are getting richer as asset prices rise, while low-income households and small businesses, the lower leg of the K, are struggling to get by.

High-end products are selling, while companies like Chipotle are finding their customers poorer and less inclined to visit.

Here’s another way of looking at the K-shape, from a different Marko:

Speaking of liquidity and the AI bubble, Ray Dalio just posted about how the Fed is stimulating at an odd time. I’m not sure the Fed is really beginning QE, as he says, but it is certainly ending QT, cutting rates and taking an expansionary stance. This is something it would generally do when the economy is in trouble. Instead, the backdrop for the Fed’s easing is high asset valuations, a relatively strong economy, inflation above target and abundant credit. Not to mention a bubble in AI-related stocks – the elephant in the room, so to speak.

The Trump administration is taking a bold and probably reckless bet on growth, and particularly AI growth. What could go wrong???

Time to take profit?

We’ve been talking about a melt-up before a melt-down, but that’s by no means guaranteed, and we’ve already melted up a lot.

Stock investors, belonging to the top leg of the K, have done very well, but are now faced with a choice: remain invested and ride through the bubble or protect capital. As Michael Burry experienced in 2008, bubbles can keep inflating and punishing shorts for a long time before they finally pop. Younger investors can probably handle the drawdown, provided they are disciplined enough not to sell the bust. We all know the drill when panic hits: as the last desperate few capitulate, central banks will cut rates, stimulate, and markets will surge back over the next 12-18 months.

People who are getting closer to spending their investment money should probably think more carefully. There may not be a better opportunity to take risk off the table and diversify for some time. Nobody ever went broke taking profit, especially around all-time highs.

For people in between, US treasuries are holding up as a safe haven as well as anything else at this time. Spreading some of the risk also serves an often overlooked purpose: offering the opportunity to rebalance and buy the bottom in stocks if we do suffer a crash. I stand by my belief that anyone with a meaningful amount of money should be well diversified at a time like this.

The stock market is not the economy

Here in Japan, we are enjoying the Nikkei holding above the ¥50,000 mark. That doesn’t mean we escaped the K-shaped economy. In a rare quiet moment the other evening, I was thinking about Japan’s economy and why interest rates don’t seem to go up much. Aside from the rich asset holders, many people are struggling. Wages still lag inflation. 5kg of rice is almost ¥5,000. The lower/middle classes do not have a lot of money to spend.

Fewer people spending money is bad for the economy. The general expectation seems to be that interest rates will rise gradually. They certainly won’t rise quickly. Higher rates would mean higher interest payments on government debt. PM Takaichi is focused on growth, not inflation.

Should we really expect a meaningful rise in interest rates? I simply can’t see it.

If rates can’t rise, then the yen remains weak, prices increase, stocks and Tokyo property appreciate, and low-income families continue to struggle.

If all this is true, then what’s the trade?

Own dollars, own financial assets, own hard assets, and be kind…

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.

Retail therapy

Our family just came back from a weekend break, which was my treat in celebration of our stellar investment returns. Note: don’t tell your significant other how well your portfolio is doing unless you are prepared to spread some of the winning around! We had barely been back home for 5 minutes when the doorbell rang and a new pair of boots was delivered. She bought those herself, so no complaints from me, but you can see how this goes.

Even the stock market is enjoying a little retail therapy.

In case you’re not familiar with the term, retail in this case means individual investors: regular people, you and me. One theory is that covid is behind this surge in retail-driven performance. Stuck at home with their stimmy checks, regular investors learned to buy the dip, and it’s been working for them ever since. Stocks, crypto, gold – whatever retail jumps on goes up. Institutional investors look on in bewilderment, stuck with their risk models flashing warnings as the market leaves them in the dust.

It may not be healthy, but these are the cards we’ve been dealt. And with the Fed expected to cut a couple more times this year while simultaneously ending its balance sheet runoff, it’s hard to find a compelling reason to ease off the gas. Trump has even been talking about handing out money from tariff proceeds to the public. Can you imagine?

An interesting tidbit:

Maybe retail is buying washing machines, too!

Nikkei ¥50,000 party!

It would be rude not to do this! I’m looking at late November, maybe 26th, 27th or 28th. I’m open to suggestions on the venue, but my basic rule is that it must be a cash bar, so we don’t have to worry about whether everyone turns up to cover costs or fiddle around sorting out the bill. What do you say? If you don’t live in Tokyo and have been thinking of taking a trip, well…

Send me a message, email, DM or whatever if you want to come along. Will mostly plan this on X, so keep an eye on this thread.

We’ve been talking about an end-of-year melt-up for a few weeks now. So far, so good. I noticed the Nikkei Asia already started talking down the likelihood of a BOJ rate hike later this week. You can pretty much take that to the bank, right?

Is the Bitcoin 4-year cycle over?

After the most vicious deleveraging event ever just a couple of weeks ago, the crypto market has recovered. Yes, retail bought the dip once more!

There has been a wave of speculation over whether the 4-year cycle is still intact. It’s fascinating, actually, as crypto-natives have been hyper-trained on this narrative. It’s probably the reason Bitcoin is not significantly higher right now. Long-term holders have been unloading, while retail ETF buyers continue to accumulate. Many of the new investors have no idea what the 4-year cycle is and just have a monthly allocation set up for their account.

Price agnostic.

Felix Jauvin makes a pretty good case for the end of the 4-year cycle in this thread.

Felix is awesome, and I love his Forward Guidance Podcast, but time will tell. 2013, 2017 and 2021 were all followed by a nasty bear market. Yes, Bitcoin wasn’t a macro asset like it is now. Yes, you can make a great case that liquidity is rising, and the boomer ETF buyers will keep buying. I really want to believe, you know! But let’s just say I’m ready for anything. Warren Buffett hates crypto, but his quote about finding out who’s been swimming naked when the tide goes out could have been written for the industry. All we need is one good leverage flush to start the dominoes falling, and we all get a chance to buy at $50k again. Don’t think it can’t happen.

At least it will give these guys something to chirp about.

These guys are great! They’ve done zero work, but they will gladly tell you how Bitcoin is too volatile to be investable.

Well, BTC has closed above $100,000 for 172 consecutive days now. If you wanted to sell, you have had plenty of time to do so. If 2026 is a bear market, make sure you ignore these nitwits on their victory lap and back up the truck.

Melt-up before the melt-down, though, right? I’m yet to see real euphoria in crypto this year. Remember the images of people lined up on the street to buy gold a week or so ago? That’s what we’re looking for. We’re not there yet.

It’s a busy week with the Fed meeting, BOJ and Trump on the loose in Asia. I don’t know when the next dip will come, but you can bet that retail will be ready to buy it!

Top image from Pixabay

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.

Hyperliquidation

Well, that was fun…

I woke up last Saturday morning and, as is my habit, checked on the overnight market movements. I did a double-take and wondered what the hell had happened. Bitcoin, perhaps the nimblest indicator of global risk appetite, had dumped heavily. Several possible scenarios ran through my mind, but I knew it could only mean one thing…

Donald Trump has posted something!

Bingo! After market hours on a Friday, America’s fearless leader had somehow mangled a Chinese announcement on rare earth exports and sent out a post threatening further 100% tariffs on China. After all the TACO earlier this year, I had forgotten about the trade war!

Had stock markets been open, they would not have liked it at all. As they were closed, crypto bore the brunt, and anyone unfortunate enough to be awake got to witness the biggest liquidation cascade of all time. Bitcoin fell to around $104,000 initially before bouncing. Alts were nuked without mercy, with $ATOM token getting as close to zero as you can really get without going negative.

Something in the range of $18.7 billion in positions got liquidated in a matter of minutes, and around $560 billion was wiped from the total crypto market cap. Fun times!

I won’t get into the whole conspiracy theory of what happened. Suffice to say, a very large and very suspicious short position appeared in the market shortly before the fun began. This seems to be the only person who made money that day. It could be a coincidence, of course. I guess we will never know…

Japan is moving to ban insider trading in crypto, by the way. Seems like a good call.

Bitcoin hodlers would be a little concerned to see the price fall so quickly, but most take it in their stride. Leveraged traders, however, some of whom don’t even own Bitcoin, did not make out so well. Many got a lesson in risk management they will never forget.

Of course, by the US open on Monday morning, Trump had already straightened things out, and stocks acted like nothing had ever happened.

It’s always the leverage

Most people should stay away from leverage. Hell, even skilled traders should handle it with care. And yet, Volatility Shares just filed for a total of 27 leveraged 3x and 5x single asset ETFs. If approved, every Robinhooder will be able to go 5x long Nvidia, Palantir, XRP and more. What could possibly go wrong?

Wall of worry

We’re so back! Add to this the growing concern over the AI-driven boom and whether it is, in fact, a bubble, and you have to wonder if the Q4 melt-up might be cancelled.

The AI bubble talk is understandable. OpenAI has around $1.5 trillion in AI build-out plans. This for an unprofitable company with only $13 billion in annual revenue. Both smart money and dumb money alike are positioned for a bullish Q4. Tech stocks sure have a long way to fall if investors lose their nerve.

A week or two ago, the CEO of Goldman Sachs warned that a stock market correction could occur in the next 12-24 months. Thanks for the deep insight, bro! Jamie Dimon is talking about gold possibly going to $5,000 or even $10,000.

Throw in the US government’s shutdown, and you may wonder how stocks can possibly rise further. Surely the Bitcoin bull run is over, too?

While Trump was busy TACOing, Jerome Powell came out on Tuesday and said that “the downside risks to employment appear to have risen.” That appears to imply a further rate cut at the Fed’s end-of-month meeting. More importantly, JPow signalled the end of the Fed’s balance sheet runoff. If quantitative tightening is really over and liquidity flows, the wall of worry could melt rapidly.

I don’t know what’s going to happen, and you certainly shouldn’t be making investment decisions based on my offhand opinions, but if we get a strong earnings season, I still see a bullish Q4 and then trouble on the horizon in 2026. It’s never dull, is it?

Yes, Prime Minister

Organising a Prime Minister seems to be a tough gig these days. France had a guy quit and then get reappointed in the same week! Here in Japan, Sanae Takaichi went from being a done deal to less than Liz Truss in a couple of days. Now the LDP is courting the opposition, and it’s looking like they might find the votes to anoint the country’s first female Prime Minister after all. Who knows?

The market has already tipped its hand if the deal gets done. JP stocks up and yen down. I will unapologetically cheer for our iron lady just because I want my Nikkei ¥50,000 party. The yen is cooked anyway.

A diversified portfolio matched to your base currency and risk profile with satellite holdings in debasement assets.

I sound like a broken record, don’t I? By the way, I found a Japan Physical Palladium ETF (1543). It’s amazing what is available these days. Don’t do anything I wouldn’t do!

Thank you for your attention to this matter.

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.

Nikkei ¥50,000 party!

You can’t time the market. Except those times when you can. Last week, I wrote a post called Melt Up? Maybe I got lucky, but the meltup began right after and is now in full swing. Gold, Bitcoin and of course, Japanese stocks.

Not that I’m claiming clairvoyance here. I had no idea how the market would react to the LDP leadership vote. Generally, I discount politics as it has far less effect on asset prices than people think. At first, I thought the market reaction was relief that the younger, less experienced guy didn’t get in, but clearly it’s not that. It’s all about the new leader.

I won’t delve into political analysis. I don’t have any edge here. Takaichi’s economic stance is perceived as expansionary, and there seems to be an expectation that she will go full Abenomics on us. That remains to be seen, but here are a few observations:

  • Taro Aso was clearly instrumental in getting Takaichi elected and will be a key figure in the administration. He opposes ‘modern monetary theory’ and argues for fiscal discipline. Watch the yen over the coming months to find out who is really in charge.
  • When Abenomics was implemented, USD/JPY was at 80 and inflation was negative. Now we have the dollar at 152 and 3% inflation. It’s a very different world. You can’t just cut rates to zero and reimplement QE without inflation blazing out of control.
  • The BOJ may not be entirely free from political interference, but it will make its own decisions. It may or may not hike at the next meeting, but it’s not going to go the other way any time soon. No doubt, Chairman Ueda’s job just got a little more complicated, though.

I’ll stop there. Prime Ministers don’t seem to last very long these days, so we should probably give it 6 months or so before expecting a clear indication of where this will land. For now, you can probably give up on any hopes of a stronger yen. And you’d better own stocks and hard assets.

The meltup continues. I joked about having a Nikkei ¥50,000 party on X, but I think we should do it. It may be soon, so get ready!

Running it hot

If you are seeing posts and mentions about the ‘debasement trade’, it’s no wonder.

I’ve been harping on about monetary debasement for some time. People seem to be getting the idea. I’m seeing more and more people who don’t own gold capitulating and buying it at all-time highs. They should have owned it earlier, but that doesn’t make them wrong for getting some now.

Reminder: if you run a diversified portfolio, you will already have a 5-10% allocation to gold. You don’t have to play catch-up. People who only own stocks are learning this now.

Take a look at this silver chart from Kevin Gordon’s post:

And Helen Meisler posted this palladium chart in response:

Is that going where I think it’s going?

Here’s Paul Tudor Jones again:

Blanket recommendations are generally not a good idea, but if I had to put my current investment thesis in a nutshell, it’s this:

A diversified portfolio matched to your base currency and risk profile with satellite holdings in debasement assets.

Top signals?

A few weeks back, I wrote a post on spending money well. Just this morning, I found a great post from Ben at Retire Japan on the subject in my inbox.

It’s clearly a sign that people’s portfolios are at all-time highs. We should probably be a little careful about getting too greedy, but it’s a wonderful time to consider how to get joy out of the money we have worked for and taken risk to grow.

I ordered the orange iPhone. It’s due to be delivered in early November. I wasn’t planning on becoming a walking top signal, but maybe I’m about to…

See you at the Nikkei ¥50,000 party!

Top image by Mate Holdosi from Pixabay

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.

Dumb money

I am reading “When Genius Failed: The Rise and Fall of Long-Term Capital Management”. It’s the remarkable story of a ’90s hedge fund comprising a group of big-brained academics, including Nobel Prize winners, who were so convinced that their models were infallible that they built a gigantic book of highly leveraged derivative trades. Even if you’re not familiar with the story, you can imagine how that ended.

The smart money doesn’t always win.

One of my favourite books is Jon Krakauer’s “Into Thin Air”. LTCM is like the hedge fund version of that cautionary tale. Hubris and leverage are a dangerous combination. The academics somehow convinced themselves that they had modelled out every outcome, and even if things went bad, there would always be enough liquidity to get out of their positions. Of course, ‘one in a million’ events happen more frequently than we expect, and when they do, nobody is around to buy what you desparately need to sell.

At least we learn our lessons, right? Well, LTCM blew up in 1998, and it was only 10 years later that Bear Stearns, which was closely linked to the fund, faced its own meltdown.

There’s a lot to be said for keeping things simple. Viva le dumb money!

Wait, isn’t this site supposed to be SMART Money Asia?

This is easily the greatest meme ever created. It applies to so many areas of life, and none more than investing. The LTCM guys were just too far out on the right of the curve that they no longer lived in reality.

Generally, the smart money and the dumb money follow the same strategy. They buy risk assets and sit on them. In my previous post, Liquid Refreshment, I covered how tech stocks and Bitcoin are the two things that outperform currency debasement. And what do the Robinhood degenerate gamblers do? They buy Mag 7 and IBIT and print money. When these assets dip, they buy more! What are the older, wiser retirement accounts buying? NASDAQ and IBIT, by the looks of it!

Wait, is the diversified portfolio guy telling us to just buy tech stocks and Bitcoin?

I have always said, if it’s a meaningful amount of money, you should have a core diversified portfolio weighted toward your base currency for about 80% of your wealth. You can allocate 20% or so to satellite holdings to take advantage of opportunities for higher returns. This is where you can go hard on tech stocks, gold, commodities and Bitcoin/crypto as you wish.

Overthinking and mid-curving are the killers. See my post, It’s going up forever, Laura, on why dumb money wins in the end.

I see that USD/JPY is back at ¥150. Let’s do the meme:

Simple!

Of course, mid-curve guy is right. Short-term, barring any crazy events (which happen a lot!), the yen should strengthen against the dollar. However, if you are doing long-term planning and trying to figure out how currency could affect you, it’s pretty clear that the country with the worst debt/demographics profile is going to lose against the country with the global reserve currency.

Plan accordingly.

Trump wants rates lower, and Powell won’t play ball. So, Trump and Bessent will find ways to work around Powell and add liquidity regardless. This is bullish for stocks. If there is some kind of panic and a dip in stocks in the meantime, they will turn on the fire hose. Back up the truck and buy the dip!

The TSE apply pressure to listed companies to improve their governanace and return capital to shareholders – it’s a great time to own Japanese stocks if you have a JPY base currency need! (not so great if you don’t, see above)

Every four years, Bitcoin goes down around 80%. Then it spends about a year floundering around and recovering slightly, and the next two years in a powerful bull market. If it goes down 80% next year, you swing like Happy Gilmore!

See how it works? Dumb money stays winning!

Have a great weekend.

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.

Inflection point

You might have noticed an uptick in articles covering bonds recently. In particular, bond yields and bond auctions. Bonds are confusing, and it’s often easier to just go and read something else, but you might be getting the sense that something is happening in the bond market. Like it’s trying to tell us something.

If you need a refresher on bonds, feel free to read my post, Bond investing – a simple guide.

The market always finds something to worry about, and usually, those worries are temporary. This year alone, we’ve had inflation, stagflation, recession, tariffs, and trade wars, and the sky hasn’t fallen yet. But now the market is worried about bonds. And it’s not just worried about US treasuries. The same concerns surround UK gilts, Euro bonds, and Japanese government bonds.

Here’s a Reuters article about record yields on Japanese long-dated bonds.

This week, the US 30-year treasury yield has been flirting with the closely watched 5% level. Last Friday’s Moody’s US credit downgrade got things rolling. Then, on 21 May, there was a weak treasury auction, and the 30-year closed at 5.09%.

As yields move inversely to price, rising yields indicate that investors are selling bonds. The weak treasury auction, like recent weak gilt and JGB auctions, illustrates a lack of appetite for new bonds. So why are people so worried about bonds these days?

It’s the debt, stupid

At 237%, Japan is the heavyweight champion in debt-to-GDP. The UK is at 96% and the US is at 124%. None of these figures is encouraging. Japan is clearly not paying that back. The UK economy is in disarray, and you may remember Liz Truss almost blowing up the bond market in September 2022.

Trump talks a lot of smack, but his big beautiful tax bill is only going to inflate the problem over time. Anyone who believes he is going to cut deficit spending lives in MAGA fantasyland.

The bond market clearly doesn’t like it.

Is it happening?

The macro-heads I read are all fixated on yields, deficit spending and the massive risk flashing in the bond market. But is something really going to break, or is this just another worry that will soon make way for the next thing?

I’m not going to macro larp here, and I dislike doomers, so here’s a solid thread from Capital Flows on why we could be at an inflection point. It’s recommended reading for anyone trying to get their head around the current situation.

The tldr: Central banks are behind the curve – surprise! Meanwhile, banks are issuing debt like there’s no tomorrow. These big credit deals are feeding money into the economy and preventing a slowdown in growth. When central banks fall behind in a credit cycle like this, bond markets can crash because growth and inflation rise while everyone expects a recession.

Does this mean I should not own bonds?

This is an important question. For traders, the trade is definitely sell long-term bonds. (TLT)

For investors with a diversified portfolio, should they be dumping their bonds and buying gold, copper, bitcoin, etc? I don’t think so. This is short-term tactical thinking and only for people who know what they are doing. By nature, a strategically diversified portfolio is always going to contain some assets that aren’t doing so well. Right now, it’s just the turn of bonds. Unless your time frame has changed dramatically, you can just sit tight.

Big developed economies losing control of yields is a scary proposition, and they are likely to do whatever they can to kick the can down the road and avoid the pain. Just last month, a surge in treasury yields caused Trump to back down on tariffs, remember?

Is this why Bitcoin is ripping?

It’s one of the reasons, yes. BTC is fundamentally a release valve for macro liquidity (I was dying to say that, but I got it from Capital Flows too!) What it means is, the more liquidity that gets pumped into the system, the higher the BTC price goes.

Here’s the Capital Flows report to read if you want to geek out on that one: Bitcoin Strategy – The Macro Liquidity Release Valve

BTC is also going up because it’s at that stage of its own 4-year cycle. But it’s funny how that seems to align so well with global liquidity cycles. There’s probably a bit of mileage left in this bull market yet!

Right now, let’s enjoy the all-time highs. It takes me back to this post from February 2023: Do you want to be right, or do you want to make money?

Sometimes you get to have both.

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.