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 been almost 8 months since my Bitcoin bull market prep post Bitcoin – Pump up the Volume. It feels like it’s time to check in and see how things are going. I don’t know how accurate Rekt Capital’s estimation of progress will turn out to be but it feels about right. When I talk to people about Bitcoin, which I probably do far too much, I’m still stunned to find how little the halving cycle is understood. Nobody is interested in buying in the bear phase, but when the price starts going up and making news, people start asking if they should be getting involved.
For those of us who bought in the bear market, this is supposed to be the fun part. However, the timeline has been strangely depressed. I think a lot of people got sucked into alts and memecoins when they were rallying earlier this year and are stuck there. This is why I tell beginners to focus on Bitcoin. As volatile as it may appear to outsiders, it is actually quite predictable. So, what’s going on at the moment?
ETFs
The spot Bitcoin ETFs that launched in the US in January have been wildly successful. Blackrock’s IBIT took just 137 days to reach $20 billion in assets. The fastest before that took 985 days. The ‘sell the news’ traders did not come out of this well. The five US spot ETFs are at around $56.5 billion in assets. There is nothing complicated here – increased demand for a finite asset is going to have an effect on price and year-to-date the leading crypto asset is up a little over +50%.
What’s more, Blackrock CEO Larry Fink, previously a crypto sceptic, is regularly on TV talking about his belief that Bitcoin is a legitimate financial instrument which has a role in portfolios. Note the repost from Michael Dell:
Larry might be talking his own book, but he has actually grasped another thing that the majority of people are missing: that rather than a get-rich-quick scheme, Bitcoin is actually a defensive asset that can protect against currency debasement and other economic ills.
I’ll say that again: Bitcoin is a defensive asset. Let’s be real here, it’s not going to replace fiat currency as the base layer of the financial system. Governments have far too much invested in the status quo to let it go. And they are going to continue recklessly printing fiat money and inflating their debt. That money is going to go down in value against hard assets over time. Read Harden up your assets for more on that.
Guess who else seems to have just changed their opinion on Bitcoin?
You think Dimon flipped and doesn’t own any? Dips are for buying in the bull market folks.
Ever the opportunist, Donald Trump has seized on the Democrat’s hostility towards crypto and is speaking at a Bitcoin conference in Nashville later this month. I like the orange coin much more than I like the orange man but a Trump victory in November would likely be a full-bull mania catalyst.
Who are your bets on for Prez these days?
Never mind the parabolics, it’s the banana zone!
Maybe this cycle will be different. Nothing is certain in life. We could be wrong here after all. But if we’re not, the next phase of the bull market is banana-shaped. Raoul Pal is a bit excited:
Ahhhh, liquidity
Summer in Japan officially starts now. It’s going to be a hot one and there will be much call for regular liquid refreshment. And, what comes after summer?
That’s right, rate cuts in the US!
Jerome Powell is now pretty openly signalling that he intends to begin cutting this year, possibly as soon as September. The market believes him too. The biggest investing lesson I learned in the last few years is that liquidity drives markets. Liquidity is coming back and Bitcoin is thirsty. Don’t get me wrong, stocks love liquidity too but Bitcoin slurps it up with the highest intensity of all.
I don’t know if I’m as bullish as Raoul, but I’m not far off.
So, to sum up, we’ve got an asset that has been through three consecutive 4-year bull/bear cycles and is potentially 40% of the way through the current bull phase. We’ve got a bullet-dodging potential US President speaking at a Bitcoin conference. We have the kings of fiat finance changing their tune. And JPow is about to cut rates.
Am I forgetting anything? Oh, yeah. Ethereum ETFs look set to go live next week!
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.
Being a financial planner by trade, I try to organise our financial future as efficiently as possible without going overboard. My wife and I both work and we have a reasonable income. We have a plan, we know what our numbers are for later in life and the big events in between. Most of all, we are flexible in that plan – our core investments are set and forget, but they can be adjusted easily. The tactical stuff is fun for me and I see it as a bit of a challenge.
Of course, things can go wrong: ill health, accidents, economic change and shifts in specific industries. You prepare for these as best you can and get on with living. Eat well, exercise, look both ways crossing the street, buy insurance etc. etc.
However, there are a few bigger things that bother me. I don’t think about them all the time, but they lurk in the back of my mind. For example, I don’t think AI is going to take over my job, but it could change the world considerably – gotta keep up with developments there. I could classify these things as outliers and conspiracies. Some may or may not have a meaningful impact and others feel a little ‘out there’. The best conspiracy theories have an element of truth, though, don’t they?
So, here are a few things I think about and how they relate to money, investing and how big your number should be:
Climate
I must confess, I don’t allow myself to dwell on what we are doing to the planet. We are clearly having an adverse impact and most of the damage is being done by big business interests who will not stop. The paper straws are cute, but they are hardly going to offset the widespread burning of fossil fuels and other environmental destruction. It’s not that I don’t think it’s important – it’s crucial to our survival as a species. I just know there isn’t much I can do about it. I separate our garbage, cut down on plastic and try not to waste resources, but I’m not losing sleep. Half the people in the developed world don’t even believe climate change exists so good luck to us coming together and taking action as a species. Do you remember the Covid mask and vaccine debates?
It is certainly getting hotter though! And it’s hotter for longer than it was before. After 27 years in Japan, it’s noticeable how spring and autumn are shrinking while summer gets longer year by year. What’s that going to be like in 10 years? How about 20?
I hardly think Yokohama will become unlivable in our lifetime but it could become pretty unpleasant. Imagine Japanese summer from April to October! Would that change your planning? Could it mean your ‘number’ needs to be bigger? The ability to escape Kanto, and maybe even Japan, for several months a year could become a key lifestyle choice. Maybe some people will want to escape for good. Wouldn’t that mean that the cooler, more livable climates in the world are going to see an influx of people who can afford to move? Parts of India are already hitting 50°C as a matter of course. That kind of temperature is more manageable in the developed world with aircon but doesn’t higher demand for a cool place mean higher prices?
As we move from climate change to climate crisis, how are governments going to address it? Again, remember Covid? It was all the people’s fault that it was spreading. They had to be stopped from travelling and confined to their homes in some countries.
Climate lockdowns anyone? Do you think they won’t do it?
It’s a dark thought, but people with flexibility financially will fare better than those who are struggling for money. Does that change your number?
Japan’s economic decline
Honestly, this one would bother me more if I was younger. I’m not sure Japan is a place I would be trying to build a life, career or business given the demographics and the economic outlook if I was in my twenties. But I’m not that young any more and I’m happy where I am. I would, however, want my kids to have the opportunity to live and work overseas if they choose.
The yen is a major concern though. My view is that short term it should recover somewhat when America begins cutting rates. I can see it getting to ¥130 or even ¥120 in the next year or so. However, longer term I expect the yen to steadily lose ground, particularly against the dollar. I talked about it in my ‘How screwed is the yen?’ post a year and a half ago. Staying alert for opportunities to earn in other currencies, investing in a combination of domestic and overseas assets and accumulating Bitcoin remain priorities for me.
Financial shenanigans
Grab your tinfoil hats for this one! In simple terms, the money has been funny since the 2008 global financial crisis. A lot of institutions that should have died were propped up at the expense of taxpayers and we’ve been getting screwed ever since. Economies and big business have become addicted to liquidity: cheap money, low rates. Low interest rates foster inflation, which is a tax on us all, but especially a tax on people who do not own financial assets.
Countries have too much debt and are not producing enough to pay it back. Japan is perhaps the worst offender, at least in the developed world. The debt spiral is probably terminal. That’s why the yen is doomed, and after that so are the pound, the euro and the dollar. I covered currency debasement in ‘Harden up your assets.’ There are tools to fight it that need to be deployed. Otherwise, your money buys less and less.
This is why governments are getting interested in the idea of Central Bank Digital Currencies. (CBDCs) At some point, they are going to need to perform a reset and substitute the current failing money with an alternative. And the powers that be never want to waste an opportunity to seize more control.
In essence, CBDCs are just another form of fiat money. But they come with a whole new opportunity for manipulation. Here’s an interesting video of Rishi Sunak being asked how he would enforce national service in the UK:
Controlling ‘access to finance’ is a government wet dream and CBDCs will make it easy. If you think that the possibility of losing permanent residence due to unpaid taxes is bad, wait until they freeze your bank account or apply a negative interest rate to your money until you pay up.
The public is sleepwalking into this one. You can already imagine how half the population won’t have any issue with it at all. ‘If you don’t have anything to hide, why would you need to keep your money private?’ will be the refrain. People who are well off have no concept of how less fortunate people can run into money trouble and fall behind on bills and taxes. The rich just don’t want to pay for a bunch of ‘layabouts and immigrants’.
The Bank of Japan already has a page on its website about Central Bank Digital Currency by the way. Cute, huh? No plans to implement it at present, but they are looking into it…
CBDC is one thing I think is really worth fighting against, but it will most likely be a losing battle. Sooner or later some crisis will come along and CBDC will have to be implemented ‘for our protection’. You can already see it happening with the AML/CFT mission creep.
Call me crazy, but I think that accumulating Bitcoin and other crypto is the best we can do to prepare for what is coming. Any money sitting in the fiat system will be caught in the net. In many countries, people who want to withdraw a few thousand dollars in cash already have to explain to the bank what they are planning to do with it.
Assuming the number will go up
So there it is. Like you didn’t have enough to worry about! From a financial planning perspective, my take on this is that whatever your number is, you will probably need more.
That’s to say, whatever amount of money you think will be enough to secure your future, maybe add another 10-20% for safety.
This is why I recommend dividing investments into core/strategic and satellite/tactical. The long-term strategic investments are focused on hitting the number. The tactical assets are aiming for a little extra. The crypto holdings are a shot at f**k you money.
Number go up. Act accordingly.
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.
Of the six main asset classes, the one that stands out as perhaps the least understood is bonds. Although most people have a general idea of what bonds are and how they fit in an investment portfolio, they are incredibly complex financial instruments and misconceptions abound. I frequently hear people wonder if there is even any need to own them. So, let’s take a look and see if we can get a clearer picture of how bonds work and why they are useful.
Why do bonds exist?
Bonds are used by governments and corporations to raise capital. If a government issues a bond, it is borrowing money from the public to finance itself. Companies issue bonds so that they can expand operations or fund new business ventures. So if you buy a bond, you are loaning a government or a corporation money.
The key components of bonds
Issuer: bonds can be issued by governments or corporations. Each issuer carries a different level of credit risk, with bonds issued by developed world governments considered the safest. Bonds from issuers with a lower credit rating carry more risk of default and pay a higher yield to compensate for that risk.
Coupon rate: this is the annual interest rate paid to bondholders, expressed as a percentage of the bond’s face value. (often referred to as par value) So a bond with a $1,000 face value and a 5% coupon rate pays $50 a year in interest.
Maturity date: bonds have a specified maturity date when the issuer repays the bond’s face value to the bondholder. Maturities can range from a few months to several decades, influencing the bond’s risk and potential return. A 30-year bond is regarded as more risky than a 5-year bond as more factors can affect the issuer’s ability to repay the debt over longer periods.
Market price: the price of a bond in the secondary market can fluctuate based on changes in interest rates, credit quality and market demand. If the bond’s market value is higher than its face value, it is trading at a premium. If it is lower than face value, it is trading at a discount.
Understanding bond prices
Bonds can be bought and sold on the secondary market after they are issued. A bond’s value in this market is determined by its price and yield. The key thing to understand is that a bond’s price moves inversely to its yield. A bond’s price reflects the value of the income it can provide. So, if interest rates are falling, the value of older bonds that were sold in a higher interest rate environment increases and their price goes up. In a rising interest rate environment, older bonds become less valuable as investors would rather buy newer bonds paying higher yields.
You can see this clearly in the performance of the above iShares TLT long-term treasury ETF. After the 2008 financial crisis, interest rates were kept low to stimulate economic recovery. Just as rates began to drift upwards, Covid happened and rates were slashed again. Bond prices increased significantly in this low interest rate environment and so the price of the ETF rose. When the Federal Reserve began raising interest rates in late 2021, bond prices fell heavily and continued to fall throughout the Fed’s tightening cycle, which is now nearing its end.
You could make a pretty strong argument that now is a good time to be buying a long-term treasury ETF like TLT. When the Fed begins cutting rates, bond prices will recover and investors will be able to capture capital gains along with income.
Conversely, having held interest rates low for longer than most other developed countries, Japan is now in a rising interest rate environment as the Bank of Japan attempts to slow down inflation. This means the price of Japanese Government Bonds is likely to fall.
Why own bonds?
Investors may choose to own bonds for a range of reasons. Those reasons include:
Steady income – particularly applicable to retirees and investors who require income for other reasons
Capital preservation – if held to maturity, bonds issued by institutions with strong credit ratings come with a low risk of loss of capital
Portfolio diversification – bonds offer a good counterbalance to equity market volatility
Capital appreciation – as above, bond prices can appreciate when central banks are cutting interest rates
A hedge against economic downturn – in the US and Europe, inflation is cooling and economies are slowing. This means the income from bonds will be able to buy more goods and services, making bonds more attractive
How to buy bonds
For a typical retail investor, there is no need to buy individual bonds. Just like equities, investors can choose from a range of active or passive strategies offered by bond funds or bond ETFs. Generally, a passive ETF provides perfectly adequate exposure to bonds without any stress or hassle. For example, Blackrock’s iShares ETF series offers 135 different bond ETFs – more than enough to build a diversified bond allocation. The fixed income part of a well-diversified portfolio will generally contain a blend of shorter/medium/longer-term government bonds along with an allocation to more risky corporate and emerging market bonds.
Be sure to pay attention to your base currency when you build such a portfolio. If you are planning to spend the money in the UK eventually, you should be looking at UK Gilts as the core of your bond holdings rather than US treasuries. Don’t be afraid to engage professional help if you are not comfortable organising this yourself.
As to whether owning bonds is really necessary or not, that’s obviously an individual call to make. I would comment that if you are young and just getting started with investing a little money every month, averaging 100% into equity ETFs is a perfectly acceptable strategy for the first few years.
However, after you have been investing for some time and have built up a larger pool of capital, it is probably time to start thinking about diversifying into other asset classes to protect against sharp drawdowns in equity markets. Bonds become a useful tool as you shift from an aggressive capital accumulation strategy to a more balanced portfolio that offers growth and income with a degree of capital preservation.
Hopefully, this post goes some way to explaining what bonds are, how they work and the benefits of investing in them. Feel free to comment or send questions any time!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
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.
If you have been following my posts on crypto, you probably have at least a general understanding of the Bitcoin halving-driven 4-year cycle. If you have really been paying attention to the space, you will have noticed that each bull market leg of the cycle is accompanied by a craze of some sort. I choose the word craze deliberately because, to the rational individual and long-term investor, these speculative frenzies appear exactly as such: crazy!
In 2016/2017, it was ICOs. In 2020/2021, it was NFTs. And in 2024/2025, the craze is for memecoins.
Initial coin offerings (ICOs) were crypto’s equivalent of an initial public offering (IPO). And projects seeking to raise money for their new blockchain, app or service launched them left and right during the 2016/2017 bull market. That period saw an explosion of ICOs. Ventures with absolutely no use case for a blockchain launched on the blockchain. New coins pumped and pumped and dumped. Scams abounded, fraud ran wild and fortunes were made and lost.
A few projects survived and thrived. Ethereum completed its token presale in 2014 and launched in 2016. Investors got rich and the protocol is still developing and innovating today. It was the introduction of the Ethereum ERC-20 token standard that kicked off the ICO boom. Launching an ERC-20 token was far easier than launching an independent blockchain. And launch they did, in their thousands. Notable survivors include AAVE, Filecoin and Chainlink. The majority of ICOs however, did not make it.
If ICOs were looked down on then NFTs were truly hated. Who would have thought all those monkey JPGs would end up being worthless??? The first mover, and arguably the coolest non-fungible tokens were Cryptopunks. A collection of 10,000 8-bit-style avatars, launched on Ethereum (aha!) by Larva Labs in 2017, punks were an experiment in the tokenization of assets. Each punk was different and could only be owned by one person at a time. Initially, they were given away but by 2022, some punks were selling for millions. Punk 5822 sold for a record $24 million (8,000 ETH) in February 2022.
Many imitators followed, and soon the market was awash in Bored Apes and Miladys. Just like ICOs, some collections survived but the eventual crash in prices was inevitable.
The hate for NFTs was most intense from photographers, artists and other creators. There was an undeniable scaminess to the space and the money was too easy. Digital art went crazy regardless, with some genuinely innovative artists emerging. In March 2021, Beeple sold an NFT of a digital collage of his work for $69 million. At Christie’s, no less! Beeple still produces an impressive output of bizarre, and often disturbing artwork – find him here.
NFTs originated on the Ethereum network, but the 2020/2021 cycle saw the emergence of a new player: Layer 1 blockchain Solana. Solana uses a proof-of-stake mechanism to provide smart contract functionality. For the uninitiated, that means you can build stuff on it. NFT platforms, decentralised exchanges and more. Solana and its native SOL token flourished during the last bull market and, more importantly, it survived the chaos that followed.
And then came the memes
Memecoins are by no means new. DOGE, widely credited as the original memecoin, was created as a joke back in 2013 with the image of a shiba inu dog named Kabosu as its logo. Doge may have been a joke coin but Kabosu was a real dog, owned by a kindergarten teacher from Sakura, Japan. Kabosu and her owner became surprise celebrities in their own right and there was genuine grief when Kabosu passed away in May 2024. (RIP)
Meme Stocks and ‘Dumb Money’
Meme-based investments are not limited to crypto. You may be familiar with Keith Gill, better known as Roaring Kitty, who sparked the craze in GameStop (GME) shares that literally took down hedge funds in a short squeeze in January 2021. If you haven’t seen the movie ‘Dumb Money’, I highly recommend it.
Roaring Kitty caused a commotion last month, suddenly returning to X with a barrage of memes and kicking off another run in GME that almost made him a billionaire just last week!
The craze of the current crypto bull run has clearly been memecoins. In particular, the frenzy has been driven by the relative ease of creating new memecoins on Solana. These coins are typically inspired by internet jokes, memes and satire. They are fun and crazy, not serious investments. And yet, some traders have run up impressive returns.
Dogs are as popular as ever. The Bonk Inu (BONK) memecoin was designed to support the Solana community. It launched on Xmas day 2022 when SOL was trading at around $11.40, down some 96% from its peak of $260. (yes, yikes!) BONK was airdropped to various NFT projects, artists and collectors. Almost 300,000 wallets were created to receive the airdrop and within a week of launch, the token had risen over 2,000%. Much volatility followed!
BONK doesn’t do anything. However, the Solana and BONK communities found ways to incorporate the token into various protocols, such as De-Fi, NFTs, gaming and payments. It can be used for direct exchange, to buy NFTs, as in-game tokens/rewards, and more. It currently has a market cap of around $1.9 billion.
Astonishingly, there are now some 967 Solana memecoins trading with a total market cap of around $9 billion! Celebrities are getting in on the act, with Caitlyn Jenner and Iggy Azaelea launching their own coins. You can smell the lawsuits already…
So what do you meme?
Smart traders will undoubtedly make money in memes. However, for most this isn’t going to end well. Personally, I don’t own or trade any of these coins and I am certainly not recommending you go 100x long on Dogwifhat coin. However, the latest craze is fun to watch while providing genuine insight into where we are in the bull market cycle. Here’s how it goes: money flows into Bitcoin and Bitcoin rises. (have you seen those ETF inflows?) Then traders rotate into the L1s and L2s and they pick up. Next, the money moves to the various altcoins from larger cap to small and lastly, there’s a memecoin frenzy. This repeats with increasing intensity as the bull run builds to a crescendo. If you are trying to time your way out of the market, the memecoins act as a useful indicator of froth and irrational exuberance.
At some point in the next 12-18 months we will see Bitcoin well above its previous cycle all-time-high of $69k – which is where it sits now, incidentally. Now it becomes important to pay attention to the rotation I mentioned above. Ethereum finally turns on the afterburners, Solana goes stratospheric, AI coins go supersonic. And finally, the memes blast off.
The meme mania is the exit sign, a glowing beacon. There is only one way out and not everyone is going to fit through the door at once. Your crypto holdings have outperformed every other asset class. You have been steadily taking profits and now it’s time to push the button one last time. You must not hesitate. Unfasten your seatbelt, stand up and walk calmly to the exit, before the crush.
Last one out, turn out the lights.
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.
Smart Money Asia 