After showing signs of wobbling the last few weeks, US markets slumped on 24 July with big tech shares leading the move down. Tesla Inc (TSLA) fell -12.3% after a Q2 earnings miss while Alphabet Inc (GOOGL) dropped -5% despite beating earnings expectations. That was enough to trigger an avalanche and the NASDAQ ended -3.6% lower and the S&P 500 endured its worst day since 15 December 2022, falling -2.2%.
Correction territory
Japanese shares followed the US market down, with the Nikkei 225 index falling -3.3% today as exporters laboured under a strengthening yen. The benchmark index peaked on 11 July at ¥42,426 and has trended downwards since then. It turns out that I wasn’t imagining things when I asked Are we shaking? at the end of June.
Investors will now be wondering if this is simply a healthy correction after a big run-up or the start of a larger move downwards. It is too early to begin talking about a bear market but we are certainly in correction territory. A correction is defined as a fall of -10% from a recent high and the Nikkei closed today down -10.7% from the 11 July peak.
At 3pm today, USD/JPY was trading at ¥152.7. The current rebound in the yen is being driven by expectations that the Bank of Japan will raise rates at its policy meeting next week. In addition, the US Federal Reserve appears to be moving in the direction of rate cuts starting in September. A sustained sell-off in stocks may well need confirmation of rate cuts in order to stabilise.
Semiconductor stocks fall hard, Lawson delisted
Semiconductor-related stocks are bearing the brunt of the current selloff with Disco Corporation (6146) falling for seven straight days. Disco fell a further -4% today to close at ¥46,850, well off its peak of ¥68,850 set on 11 July.
In other news, convenience store operator Lawson Inc. was delisted from the TSE on 24 July following a successful tender offer from KDDI Corp. KDDI will partner with Lawson’s parent company, Mitsubishi Corp to take the company private.
A stock to watch
Crypto followed the trend in traditional markets with Bitcoin falling to around the $64,200 mark. Ethereum is down around -8% despite the successful launch of the Ethereum ETFs in the US on 23 July.
Meanwhile, Japanese Bitcoin proxy Metaplanet Inc. (3350) has been on a wild ride. The stock has risen more than +1,100% since the company announced its Bitcoin treasury strategy in early April. However, the FOMO really kicked in this week with shares accelerating to ¥300 on 24 July. Metaplanet is back trading around ¥220 today but is still a stock to watch as investors try to front-run the potential decisive break of Bitcoin’s all-time high in the coming months.
It seems likely that traders view Metaplanet as a tax-efficient way to gain exposure to Bitcoin price moves. Crypto in Japan is taxed as miscellaneous income, whereas stocks are taxed as capital gains.
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.
The all-time highs keep coming. On Monday 9 July, the Nikkei 225 index made its highest ever close at ¥41,580.17. Semiconductor-related stocks led the way, while other notable movers included Hitachi Ltd (6501) and Fujikura Ltd (5803).
Not to be outdone, the S&P 500 and NASDAQ Composite also closed at record highs on 9 July. Gains were heavily weighted to big tech stocks as the AI narrative continues to drive market sentiment. Fed Chair Jerome Powell stuck to the script during his first day of testimony, reiterating that the Fed’s objective is to cool the economy and progress towards the 2% inflation target without cooling it too much. Market consensus continues to favour a soft landing scenario, with one or two rate cuts expected later this year. CPI data is due on Thursday and if that comes in line with expectations, the positive mood should continue.
Meanwhile, Tesla Inc (TSLA) continued its rebound, closing higher for the 10th consecutive day.
Japan’s real wages fall again, BOJ discussing cuts in bond purchases
Despite the good times in the stock market, much of Japan’s economy still looks relatively weak. Real wages fell by 1.4% in May, marking a record 26th month in decline. Wages are actually rising at the fastest pace in 31 years, but the increases are being offset by inflation, meaning households have less purchasing power.
USD/JPY is trading around ¥161.47 with no end to yen weakness in sight.
This week sees the Bank of Japan meeting with major market players to discuss the tapering of the central bank’s bond purchases. Some market participants are calling on the BOJ to cut bond purchases in half while others favour a more gradual reduction. The final plan is expected to be revealed at the BOJ’s end-of-July meeting.
Semiconductor shares remain strong, Hitachi and Fujikura impress
Chip stocks are once more powering ahead with Advantest Corp (6857) and Tokyo Electron Ltd (8035) gaining +4.1% and +3.8% respectively on 9 July. Chip materials maker Resonac Holdings Corp (4004) announced that it will form a consortium with nine other Japanese and US firms to collaborate on the development of semiconductor technologies for generative AI. Resonac shares surged +8.7% on the news.
Hitachi shares jumped +5.2% on reports that the company is increasingly focused on improving shareholder returns. On 2 July, the electronics giant provided an update on the progress of its buyback of up to 21 million shares at a cost of up to ¥200 billion. The company is targeting a total return ratio of around 50%, including dividends and buybacks – that would be on an expected net profit of 600 billion this fiscal year. Hitachi shares are up +89% year-to-date.
Another big mover was Fujikura Ltd, which jumped +11.4% on 9 July. Fujikura is an electrical equipment manufacturer that develops a range of telecommunication system products, including devices for optical fibres. It appears that Fujikura’s surge was spurred by a 12% move by Corning Inc (GLW) on 8 July after the company revised its sales forecast upward. Fujikura gained a little more today and is now up +228% in 2024.
Japanese stocks rose again today with the Nikkei 225 closing at another record high of ¥41,831.99. Financial stocks were up again on hopes that higher interest rates would bring improved profits. Mitsubishi UFJ Financial Group (8306) has gained over +8% in the past month and almost +50% year-to-date.
Bitcoin also bounced back from its current correction somewhat, moving from around $57,000 to $59,000 despite an increase in market supply from Mt Gox and the German government. Bitcoin ETF flows were positive again and traders eagerly await the SEC decision on Ethereum ETFs.
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.
Anyone who has lived in Japan for a while knows the feeling: a faint tremor, something moving in your peripherals, like the train next to yours slowly pulling away and you’re not sure which carriage is moving. You look up at your partner/friend/co-worker…
Are we shaking?
Earthquakes are not always so subtle of course. Sometimes that faint rumble becomes something bigger. And sometimes, it’s just a heavy truck passing by outside.
Did you feel that? Maybe it was just me? Of course, the market is not just one stock but, if you had to pick a name that has driven US markets to new highs this year, it would be Nvidia. Sure, your Apples and your Microsofts have been strong too, but nothing quite like this. And last week we finally saw a hint of weakness. It would hardly be the first dip this year – questions were asked in mid-February and again in mid-April. What we haven’t really seen is a broadening out of the stock rally into other industries. Charlie Bilello points out here that the top 5 holdings in the S&P 500 now make up 27% of the index, the highest concentration since 1980. He also notes here that the index’s P/E ratio moved above 25 last week, the highest level since Q1 2021.
So, the AI hype-driven tech boom (or is it a bubble?) is still the dominant narrative driving the US market. George Soros once said: ‘When I see a bubble forming, I rush to buy, adding fuel to the fire.’ This is precisely what less savvy investors do too. However, they are rarely as clever as Soros when it comes time to take profits and get out.
Pockets of recession
US economic data continues to come in better than expected. Certainly better than small businesses and low-income families are feeling at this point. To wildly misquote one of my favourite writers, William Gibson: ‘Recession is already here – it’s just not evenly distributed.’
This one-hour podcast with James Lavish is worth a listen if you want to get a better understanding of the impending US debt crisis. He talks about how pockets of recession are already forming, they just haven’t spread broadly across the economy yet.
Are Japanese stocks stalling?
Speaking of debt crises, how is Japan doing? USD/JPY is creeping ever closer to the ¥160 level. Rubbing salt into the wound, the US has just put Japan back on the currency manipulator watch list. This could all be solved by the Bank of Japan raising rates in a hurry but it’s the debt that makes that rather difficult. Bad demographics, sky-high debt to GDP and a doomed currency – good thing we choose to live here for the harmony and the mild weather, desho?
After a fantastic run, there are signs that Japanese stocks are stalling too. (are we shaking?) Foreign investors, who played a significant role in driving the market to post-bubble highs, have largely been unloading in the last couple of weeks in the face of lacklustre economic data and persistent yen weakness. The Bank of Japan can no longer be relied on to buy ETFs on down days either. Stocks take the stairs up but they’re known to take the elevator back down…
Meanwhile, the Norinchukin Bank has gotten itself into quite a pickle. The fishers, farmers and foresters cooperative was long US treasuries and, trying to be sensible, it was currency hedged. That meant it endured the two-year rout in US bonds without any of the benefit of the strong dollar when converting holdings back into yen. As a result, it is having to fire sale around $60 billion of its $310 billion in foreign assets and eat the loss. I have preached for some time that currency is the biggest risk most investors don’t know they are taking, but I never considered getting burned like this by being currency hedged – ouch!!!
To sell or not to sell?
This is beginning to sound like a terribly negative post, but it’s really just a reflection of my thoughts about taking some profit and de-risking for a while. Just to be clear here, I am talking about adjusting tactical or satellite holdings. I don’t see any reason to make any changes to my long-term core investments. I own US tech stocks and a range of Japanese stocks in my core portfolio and am happy to keep them. However, I also own some of these same assets tactically – that’s to say I bought them at an opportune time with a shorter time frame in mind. Those are the ones I am getting tempted to sell.
Everyone is a genius in a bull market. You will notice though, that no one wants to tell you when to sell. Except maybe the macro doomers, but they’ve been telling you to sell the whole time markets have been rising, so let’s leave them out of this. For sure, it is smart not to fight the trend, and in US tech and Japanese equities, the trend has been unmistakably upward. There is also the fear of leaving money on the table and looking silly if markets pump after what turned out to be a minor correction.
However, we are talking tactical and that means buy low, sell high. If you are yen base currency and you bought US tech stocks a couple of years ago, not only have you made nice gains in the stocks, but the weak yen has boosted your profits significantly. You could be forgiven for cashing out back to yen and taking the win. The same can be said if you got trapped in yen and instead bought Japanese stocks to counter inflation and the market then went off to the races. That’s a nice win too, but you have to sell before you take the victory lap.
The big question is, supposing you sell, what do you do with the money next? If you are going to spend it on a sports car or a nice holiday, good for you! But if you still have to worry about keeping pace with inflation and currency debasement, you are going to have to find a suitable home for it. Sitting in cash for a few months and then catching a big drop in markets would be ideal, but we are not playing on easy mode here.
These are the thoughts I have on a Monday afternoon with the Nikkei up +0.5% to ¥38,804 and US stock futures looking steady. Perhaps I’ll just sit on this one for a while. Doing nothing is frequently the smartest play, but did you feel that? Maybe we are shaking?
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 spent the last year and a half writing financial content for a broker. I enjoyed the experience immensely and learned a lot in the process. Unfortunately, the contract ended, but I now have 10-12 hours a week that have been returned to me. So, readers of this blog may notice some extra market commentary/analysis being posted here. I hope it is useful.
It’s central bank week, with both the Federal Reserve (Fed) and the Bank of Japan (BOJ) conducting their policy meetings. As expected, the Fed held rates steady at 5.25-5.5% while CPI came in marginally cooler than expected. The Fed was surprisingly hawkish, forecasting just one rate cut in 2024.
Some think the BOJ may actually tighten at their meeting. If they do, it will likely be a minor adjustment. There will certainly be discussion about reducing the purchase of government bonds.
USD/JPY is currently trading close to the ¥157 level. With no major change in the US/Japan interest rate differential, we can expect the yen to remain weak for some time.
US markets hit all-time highs
In the US, the S&P 500 and the NASDAQ hit fresh all-time highs overnight. Apple Inc (AAPL) rose again after jumping +7.3% on 11 June when it unveiled a range of AI-enabled features and software for its devices. Apple overtook Microsoft Corporation (MSFT) to once more become the world’s most valuable company. Apple’s market cap now stands at a staggering $3.27 trillion.
Oracle Corporation (ORCL) surged +13.3% after the cloud technology company announced two new partnerships with OpenAI and Google Cloud while also forecasting strong revenue growth in fiscal 2025. Broadcom Inc (AVGO) jumped +14.6% after hours on strong earnings and a big stock split.
TDK and Hitachi set new highs since listing
Japanese stocks are largely in wait-and-see mode as the BOJ meeting kicks off today. TDK Corp (6762) has set another new high since listing as electronic parts stocks related to Apple are bought up. TDK announced in December that it will manufacture lithium-ion battery cells for iPhones in India.
Hitachi Ltd (6501) also hit a new high since listing of ¥17,340 on 11 June. On 7 June, its subsidiary, Hitachi Energy announced that it will invest $4.5 billion to increase production of power transmission and distribution equipment by 2027. Hitachi shares have cooled a little in the last couple of days, despite the announcement of plans to invest ¥300 billion in generative AI in fiscal 2025.
At lunchtime on 13 June the Nikkei 225 index is up slightly to ¥38,831.
Crypto stocks rise
Bitcoin, being the quickest asset to react to economic data and central bank policy, fell the day before the CPI data release and immediately bounced when the numbers came in soft. At the time of writing BTC is trading at around the $68,000 mark. Crypto stocks fared well with both Microstrategy Inc (MSTR) and Marathon Digital Holdings Inc (MARA) up overnight. Meanwhile, in Japan, Metaplanet Inc (3350) announced the purchase of an additional 23.35 Bitcoin on 11 June. The company now holds 141.07 Bitcoins, acquired at an average price of ¥10,278,391 per coin. Shares are up +494% since Metaplanet announced the adoption of Bitcoin as its core treasury asset on 8 April.
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.
Once more, I find myself short of time to post here. However, it is not due to a lack of things going on in markets these days. So, here I am on a Friday afternoon with a little time to spare to share some observations. Let’s do it quick and dirty!
Macro
We seem to be at the mercy of central banks these days. The number of Fed watchers and Fed experts is growing exponentially, especially among those with high exposure to risk assets who are gasping for a rate cut! Inflation is coming down, but not as fast as Mr. Powell would like. (remember falling inflation still means prices are going up, just not as quickly as they were) You may notice how the US stock market pumps whenever Fed officials say anything vaguely dovish. It also jumps on any weak economic data. Bad news is good news – ie. if the economy is slowing, the Fed is more likely to cut rates and pump our stocks. Weak jobs report = market up. GDP lower than expected = market up. Whatever you think of the Fed’s performance, they have been abundantly clear that they are data dependent. If inflation comes down and/or the economy weakens significantly, cuts are more likely. My guess is not until late this year, maybe next year.
Despite all this, the US market is near all-time highs. Stocks sure do like to climb a wall of worry!
Of course, there is an election coming. Biden has rather brashly said on camera that he thinks rates will come down. Yes, the Fed is independent and not susceptible to political pressure, right? The last time Trump won, the market went up. And you can bet the orange one will be applying heavy pressure for rate cuts if he wins again.
Of course, worsening economic data puts recession firmly on the table. Stocks do not like the R-word. However, recession also means rate cuts and the mere whiff of them may be enough to reignite irrational exuberance across risk assets. It’s going to be interesting…
Japan
The Nikkei is trading over ¥38,000 with bond yields pushing 1% and the yen at ¥157 to the dollar. If you had predicted this a few years ago, nobody would have believed you! I keep seeing articles about ‘the sun rising on a new Japanese bull market’. I don’t know where these writers have been for the last 2 years… I keep getting tempted to take some profits but doing nothing has worked nicely so far. Still, you might want to make sure your seatbelt is securely fastened. Turbulence is no fun, as we learned in recent news about a UK to Singapore flight.
In theory, rate cuts in the US will reduce the interest rate differential between the US/Japan and the yen should strengthen. Again, I don’t think it will be until later this year at the earliest, and maybe well into next year, but there may be some relief for the yen in the near term. Long term looks dark though, ladies and gents. If you got stuck in yen but it’s not your base currency, I would take any chance you get to reverse that. The market doesn’t owe you anything.
Time to get long on electricity generators?
Remember when Bitcoin was boiling the oceans and drinking swimming pools full of water like tequila shots? Crypto is forgiven. There’s a new bad guy in town and ChatGPT is hungry for electricity and in dire need of a drink! I’m pressed for time so you can google yourself, but data centres for AI are consuming mucho power and they get hot while they do it – I literally saw an article this morning about some crazy number of swimming pools needed to cool everything down. If you think demand for power is going anywhere but up, I don’t know what to say to you.
While on the topic of AI, chip giant Nvidia nailed earnings yet again. And raised their guidance to suggest more next quarter. Absolute monster company. Semiconductors, AI, data centres: all going bonkers.
The stock is up +594% over the last 3 years. Expect volatility, sure, but it’s not slowing down yet…
Crypto bull market progress
The Bitcoin halving is behind us. We got a pretty good pullback to $56k from $70k and now we are back at $67k. We didn’t even get to the good part yet. I still think people are underestimating how crazy this cycle will get. Another thing to strap in for!
The Biden admin, spearheaded by Senator Karen (sorry, Warren) has been openly hostile towards the industry ever since Sam Bankman-Fried torched them. These guys could rival the EU in crushing innovation. But then a funny thing happened: Trump came out and said ‘If you like crypto, you better vote for me’. Then he started accepting donations in crypto. Suddenly the crypto vote is leaning heavily towards orange man. And what do you know? We got an Ethereum ETF. Believe me when I say, there was ZERO chance of an ETH ETF getting approved a few weeks ago.
ETH has underperformed this whole cycle. And judging by today’s weak ETF reaction, the PTSD is real. The Bitcoin ETFs blew away expectations in terms of inflows. Watch for ETH doing the same.
There are many ways to play the crypto bull. Metaplanet Inc, a Japanese company no one had ever heard of, (they do hotel development and some web3 stuff) announced on 8 April that they were adopting Bitcoin as their core treasury asset, a la Microstrategy. The stock went from ¥19 to ¥36 on the news. Now it’s at ¥57, having touched ¥120 on 23 May. They’ve got Mark Yusko on the board and Dylan LeClair as Director of Bitcoin strategy.
I’m not saying you should buy this stock. (Disclaimer below!) I’m saying you should put it on your watchlist and forget about it until Bitcoin breaks out past the previous cycle all-time high, goes parabolic and then you can kick yourself for not owning such an obvious play on the bull market. (insert wink emoji here)
Supply and demand
Being dumb but with a high appetite for risk if you can explain something to me in simple terms, I own a copper ETF. (1693) I was hearing for some time that the demand for copper is going to far outstrip supply, so I got some exposure. So far, so good. A lot of clever people are saying the move is overdone and we are going lower, but these are low-time frame traders and from what I can tell, the long-term supply/demand dynamics are unchanged. But what do I know? Regardless, we’re gonna need some popcorn over here, please.
A note here: we are talking about satellite holdings and my long term diversified portfolio is completely unchanged, moisturised, happy in its lane etc etc.
I’m out of time here but lastly, somebody helpfully reminded me that Ben at Retire Japan is offering a 50% discount if you pre-order his 2024 Guide to NISA. I don’t see how you can afford to miss that. Click here!
Until next 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.
With the weather warming up, I’m starting to get the itch to get back out on the golf course. I know people who don’t play the game struggle to see what is so interesting about golf, but I can tell you there is a lot more to it than just chasing a little white ball around the countryside. Golf may be a competitive sport professionally, and many amateurs like to put a bit of money on the line against their mates. However, anyone who has played the game knows that it’s never you against the other player. It’s all about the battle between you and the golf course. Or, more accurately, the battle between you and that space between your ears. If you focus on what the other guy is doing, you are always going to lose. Knowing who the real opponent is is the key to improvement.
The same can be said for investing. If you’re a trader, you are playing a zero-sum game. Every time you win, someone on the other side of the trade loses. However, it’s not like this for investors. It’s not a competition between you and other people. What everyone else is doing is irrelevant. You need to master yourself, and more importantly, you have to know what it is you are competing against.
People tend to think they are trying to beat the market but that is really not the case. The market just is. It doesn’t even know you exist. It’s the sum of all the information available driven by the impulse of human emotion. You cannot conquer this beast. The market just tells you the price of things, no matter how crazy it may seem.
Know your enemy
If you are going to be successful at investing, you better know what you are up against. What exactly is it you are trying to beat? Think about that for a minute. Why is it that you have to expend all this time and energy trying to run your own personal hedge fund? Why do you have to pay some ‘expert’ to guide you through this lifelong struggle? Why can’t you just put your money in the bank and get on with more important things?
The standard answer to these questions can be summed up in one word: inflation. But what does that mean? Well, here’s the definition: inflation is the rise in the cost of goods and services over time. It sounds almost innocent, doesn’t it? The price of things just goes up a little over time, so you should invest to keep pace with it. No big deal right? Any half-decent financial planner can help you put a plan in place to handle that.
The truth is a little more sinister. That 2-3% inflation number that governments and central banks report to you every month is heavily manipulated to begin with. But it doesn’t even come close to measuring the size of the monster that is actually eating up your spending power. The final boss, the thing you are really playing against is much more significant than a natural rise in the price of stuff over time.
What the hell is that you ask? Well, in the old days, when coins were made out of gold and silver, debasement was the act of mixing base metals with the precious metals, therefore reducing the amount of the ‘good stuff’ in money. By using less gold and silver in the coins, the issuer lowered the value of the currency.
These days, debasement takes place when a government prints money, increasing the money supply without a corresponding increase in output. Debasement gifts more money to governments for spending and bailing out their banker friends, and the result for citizens is inflation.
Can you think of a country where that may be happening?
Gold was long considered money, and still is by many people. A good way to judge if your currency is being debased is to take a look at how it is performing against gold.
Gold vs JPY
Hmmmm, maybe printing all that money in order to escape deflation has more than achieved the expected result…
And before we rag too hard on the Bank of Japan, here’s the US dollar. And yes, the chart goes back to 1832 – can you spot where the currency came off the gold standard?
Gold vs USD
If that doesn’t make you mad, I don’t know what will. It certainly answers the question of why we have to spend so much time learning to invest.
You are probably understanding that investing is not a choice here. If you don’t learn how to do it, your spending power is toast. Do you think these governments are going to stop?
If anything, debasement is picking up the pace. The world’s economies took on too much debt and are not producing nearly enough to pay it back. The only way out of this hole is to inflate the currency which means that you and me get screwed.
Oh, and if you want to see what monetary debasement looks like when combined with climate change, take a look at cocoa these days:
Cocoa vs USD
Better stock up on Easter eggs folks!
Yes, all Fiat currency
I know I said let’s not rag on Japan, but let’s rag on Japan, shall we? Finance Minister Suzuki has been out every day this week expressing his ‘concern’ over ‘excessive’ moves in the currency. After printing to infinity, he even had the nerve to blame the weakness in the yen on, wait for it, ‘speculators’!
It’s straight-up gaslighting and I’m ‘speculating’ that with debt to GDP at 263%, they are going to continue to incinerate the yen. Don’t get me wrong, this isn’t Turkey – the liras of this world are on their death bed and there isn’t long left to say your goodbyes. Japan has a highly developed and productive economy so the currency isn’t going to implode tomorrow, but have no doubt, it is going to die a slow and painful death and that pain will be felt by you if you don’t protect yourself.
The US dollar is the global reserve currency. This doesn’t free the US from the endgame of its own excessive money printing. It just means it will be the last man standing. All currencies will go down against the dollar. The dollar will go down after the demise of everything else.
No double bogeys!
Back to the golf analogy – I don’t know who said it but there’s a quote that goes something like: ‘A bogey is one bad shot. A double bogey is one bad shot followed by a stupid shot.’
If getting yourself into a position where you have money in yen that you one day want to spend in another currency was your mistake, it’s time to make sure your next shot isn’t a stupid one.
Even if you are planning to stay in Japan and spend your yen here, sitting in cash will devour your spending power. So how do you fight currency debasement? You have to own assets. Assets, like food and other goods, are ‘stuff’. A currency that is being debased goes down against stuff. The Nikkei 225 is not at ¥40,000 by accident. The denominator is going down against shares in companies. Japan’s average land prices rose by 2.3% last year. The denominator is going down against land. I look at my stocks app and a Japanese gold ETF is up over 3% today. It seems like people are getting the message. (great thread about that from Weston Nakamura here)
Harden up your assets
If you’ve been reading my blog for a while, you will be familiar with how I like to structure investments: a ‘core’ diversified portfolio that holds a broad range of assets combined with ‘satellite’ holdings of tactical assets that fit current market conditions. The satellite holdings you want to beef up in order to stave off currency debasement are ‘hard assets’. By this, we mean tangible assets or assets that have a fundamental value. Real estate is a good example. Commodities, especially gold, are another.
You don’t have to buy houses, office buildings and bars of gold to achieve this. You can own Real Estate Investment Trusts (REITs) for a small amount of money. You can own a gold ETF. Is the real thing better? Sure, but we don’t have to be purists about it. The currency is going down against gold ETFs – problem solved.
You’re going to talk about Bitcoin again, aren’t you?
Nah, I’ll just post a chart.
Rock hard supply-capped digital asset vs currency debasement
Happy Easter everyone!
Put this blog post in a tweet
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.
How’s everybody doing? This is a follow-up to my Nikkei ¥40,000? Thinking outside the box piece, which I just happened to post exactly 2 months ago. It’s interesting to see how things have developed since then and then look forward to the last quarter of the year. Yes, I know, it’s almost October. Where did those nine months go???
Remember Monex guy? Two months ago he said the Nikkei 225 was likely to trade in a range of ¥31,000 to ¥33,000 for a while. Gotta give my man credit there, it’s done exactly that. His expectation was that if we can break above that range, we’re heading for ¥40,000. What do you think about that?
If there’s one thing I’ve noticed recently, there’s been a subtle narrative change around the Japan stock market rally. In the first half of the year, it was exactly that – Japanese stocks were broadly rising and outperforming most other developed markets. What has changed, is that the narrative in the news now is more focussed on a Japanese value/dividend stock rally.
So what happened? Well, first, the Bank of Japan has allowed long-term yields to rise up to 0.70% and beyond and then, on 9 September, BOJ Governor Kazuo Ueda said that the lifting of the central bank’s negative interest rate policy will become an option if wages and prices rise. He even said they might have enough data to make a call on that by the end of the year. Despite the talk of interest rates rising, with inflation at over 3%, Japanese investors are realising that sitting in cash is a losing trade. With bonds still offering negative real rates, the money has been pouring into dividend-generating stocks. There’s also a possibility that the revamping of NISA for 2024 has got investors more excited about getting involved in the stock market.
I know it lacks class to say I told you so, but sometimes you need to toot your own horn. This is stuff I figured out some time ago. On 14 September, Nikkei News Plus 9 did a feature on the Nikkei 225 High Dividend Yield Stock 50 Index. There is an ETF that tracks this index and I have owned it since spring 2022 and I covered it in posts in March and October. Here’s what it looks like year to date:
Not bad at all. Ok, enough self-congratulation, there is still a lot to think about here. The big question is, how is this going to play out over the remainder of the year? The fact that financial news programs are starting to fixate on the value/dividend stock narrative is good news if you hold these stocks. Just since the feature on the Nikkei program last week there has been a notable bump in the dividend ETF along with bank stocks, shipping companies, trading companies and steelmakers, which News Plus 9 showcased as examples. So this is now a hot trade which could run for a while, particularly as the talk of exiting negative interest rates heats up. Pick a banking stock and take a look at its performance year-to-date and particularly over the last few weeks!
When a sector gets hot and retail crowds in, it’s often a sign that we are nearing a top. The mania phase can last longer than you expect, but it can also blow off in a hurry. If I didn’t own these stocks already, I don’t think I would be jumping in now. As I mentioned in the July post, these are tactical positions for me, so I am keen to lock in some profit, while also remaining invested to catch any further upside. I have sold incrementally over the past 2 months and reduced my holdings by about 30%. Of course, with hindsight, I feel pretty silly selling anything. I could have just waited and sold higher. But that’s the way it goes – you have to make decisions based on the information you have in real time. So I took some profit, but left two thirds still invested. So far, so good.
So is the Nikkei going to ¥40,000 this cycle? I would be happy to be wrong on this one, but my bet is no. Higher rates, or at least the talk of higher rates, are bad for growth stocks but can be good for value as we are seeing. You would need both to be going up to hit the ¥40,000 mark.
I am still of the view that any attempt at normalising rates in Japan will lead to chaos and a hasty reversal. However, as we are seeing now, even talk of an increase is enough to change market dynamics. And if last night’s Nikkei News Plus 9 program is anything to go by, there is a lot of talk going on! They were feverishly covering how some net banks are raising their rates for fixed deposits to a hefty 0.70%!
From the BOJ’s perspective, a lot of this talk on rates is just that. There’s even a term for central bankers talking up a strategy in order to get the reaction they want from markets – jawboning. It doesn’t change the corner they have painted themselves into. It’s not looking good for the yen folks…
Of course, a lot also depends on the US. Last night’s Fed decision to leave rates unchanged and the plan to hike once more this year was as expected. As they always do in this situation, the Fed is talking up a soft landing. History is not on their side on that one. As the effects of this hiking cycle gradually feed through to the underlying economy, the smart money is still betting on recession. Markets are too interconnected for Japan to keep sailing on if that’s where we are headed.
So no ¥40,000 in the near future, but there could be some more upside for value/dividend stocks. Early next year may get interesting if the BOJ tries to translate some of this talk into action. I plan to have a ready supply of dry powder to allocate if we do take a dive. That’s my view, which I will look extremely foolish for putting in writing if we see ¥40k by Christmas! But if you’re going to invest tactically, you’ve got to have an opinion. Perhaps I should buy a Monex hat to eat if I am wrong…
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 have been meaning to write this update for a while. In particular, because people keep finding an article I wrote about the ‘New NISA – Coming in 2024’ and telling me it is out of date, which it most certainly is! You see, that was the old new NISA plan and since then there is a new new NISA plan, which is even bigger and better. Clear? Apologies for the confusion and for my tardiness in updating – the old article will be consigned to the fires of internet hell just as soon as I get this one written and posted.
If you’ve read this blog before, you may be aware that I care very little about product. By that I mean, if you are buying a box to hold things, I don’t care if you get the blue box, the pink box or the rainbow box. It’s just a box, after all! There are a number of NISA products out there offered by online brokerages and banks. I hear even the Japan Post Bank is getting in on the act. My preference would be for the online brokerage accounts, but that’s mainly because I am terminally online and want to minimise time spent ever talking to staff at the bank! If the post office works for you, have at it!
What does get me excited is what you put in the box. That’s where things get interesting. I already wrote a post on How to choose investments for your NISA, so please check that out as a compliment to this post.
So, down to the nitty-gritty. How does the new NISA work? My NISA is with SBI, and they wrote a little guide with some ‘helpful’ graphics – see here. Google translate works ok on the main body of text but the graphics remain in Japanese. I’m really linking to this so you don’t rely entirely on this post to remain correct. Keep an eye on official sources in case something changes before launch.
In short:
You can invest up to ¥3.6 million per year – ¥1.2 million has to be invested in mutual funds, and the remaining ¥2.4 million can be invested freely. That means ETFs and direct stocks are on the menu.
The investment term is unlimited – so ¥3.6 million a year for 5 years = ¥18 million. This is the fastest you can fill it up, but you can actually take as long as you want to reach the ¥18 million limit.
The holding term is forever – there is no limit on how long you can hold the assets in the NISA. As long as you don’t sell, dividends will be paid tax-free and there will be no capital gains tax when you do eventually sell.
All in all, it’s a pretty good deal! I plan to be maxing out my allocation for each of the five years before making any investments into taxable accounts.
If you have an existing NISA, you will not be able to make any new contributions to it after the end of 2023, but you can choose to keep the money invested until the end of the term. For example, if you started a regular NISA this year and invested ¥1.2 million, you can leave that money invested, tax-free, for another four years. Any new contributions will go into the new NISA. If you have a Tsumitate NISA with 15 years remaining, you can choose to leave the money contributed up until the end of 2023 in there for 15 years. Again, from 2024 any new contributions will go to the new NISA.
Investment Strategy
I encourage you to give some thought as to how to allocate the investments in the new NISA. Again, the post I mentioned earlier may help.
There is one trade-off I am particularly focussed on here: growth vs. income. Your forever NISA investment will benefit from not being charged the 20% tax on capital gains or dividends. So which should you try to maximise? The short answer here is probably a combination of both, but let’s do some thinking about it:
For the ¥1.2 million per year that has to be invested in mutual funds, I don’t think it will be possible to generate income. Mutual funds generally re-invest dividends, so they are part of the investment return, but unless they have a distribution share class, they don’t pay dividends out. If anyone finds a mutual fund, available for NISA, that actually pays out dividends, please do chime in – I would be very interested to hear about it. For now, I’m going to assume that such funds are not available. In that case, for the ¥6 million (¥1.2 mill x 5 years) that you invest in mutual funds, it would make sense to go for growth. I will be looking for high-growth-focused funds for this part of the allocation. (note that growth stocks generally pay no/low dividends as any earnings the company makes are reinvested to spur further growth)
For the remaining ¥2.4 million a year, that’s ¥12 million, I am tempted to strongly focus on dividend-paying stocks and/or dividend stock ETFs. If you can generate a 4% dividend return on ¥12 mill, that gives you a tax-free ¥480,000 per year in income alone. And, of course, these stocks will probably also grow in value over time if you are patient. Now, nobody is retiring on ¥480,000 a year but over 25 years, for example, that’s ¥12 mill in your pocket. Not bad, huh?
Of course, there’s a pretty good argument for investing the ¥12 mill into a fund that reinvests the dividends so you get the compounding effect over the term of the NISA. I have no objection to that. I just like the idea of collecting my ¥480k tax-free every year and either spending it or reinvesting it myself.
Also, after a discussion with Ben at Retire Japan, I discovered that under the new NISA rules, you can sell assets and then re-use the tax-exempt amount to invest in a different asset, which is a huge improvement on the current system. Thanks, Ben for pointing that out! See this FAQ on the FSA website.
So those are my thoughts. I would love to hear from anyone who looks at the NISA opportunity differently. Drop me a line or come and tell me I’m wrong on X. (yes, we have to call it that now…)
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
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