Smart Money Asia

Harden up your assets!

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.

You are competing against currency debasement.

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.

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?

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:

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!

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 Investment Case for Bitcoin

I made an appearance on Retire Japan TV on 22 January. It was a delightful conversation and many thanks to Ben and Daniel for having me on. In particular, much respect to Ben for tackling the subject of crypto, which he is by no means a believer in! I don’t think I convinced him, but hopefully, I somewhat demystified the idea of crypto, and Bitcoin in particular, as an investment asset.

I have spent the last 6 years learning about and experiencing crypto. Whenever I talk to people who have not been paying much attention, I have to remind myself that they have many misconceptions that I dispelled long ago. Watching the video back, I inevitably found a few parts that I could have explained better, but I think I covered the main points I wanted to hit:

Bitcoin not crypto – I can’t really stress this enough. If you are new to the asset class and you don’t yet have a basic understanding of Bitcoin and its four-year halving cycle, you should not be diving into altcoins. You will get rekt, which is a technical term by the way! The Bitcoin four-year cycle drives all of the price action in crypto. Get a little Bitcoin first, learn about it, and then explore other crypto assets if you are comfortable.

Go forth and diversify! – we touched on Harry Markowitz and efficient frontiers. I have covered this in a post on Asset Allocation. I also wrote a post back in 2018 on Diversifying Through Crypto. With Bitcoin, we are talking about an asset that is only moderately correlated to traditional asset classes. Non-correlation is the name of the game if you are looking for better returns without significantly increasing risk. If you only own stocks, you are not diversified. If you own stocks plus Bitcoin, now you are a little more diversified. Really you need to own a little of every asset class. Diversification becomes more and more important as the amount of capital you have grows bigger, and also as you get closer to spending it. Most people are not diversified enough. Read Ray Dalio, folks!

You are being robbed! – we are not just talking about a little bit of healthy, organic inflation here. Central banks have been printing money and inflating their balance sheets knowing that in the end, it’s the public who will pay for it. When the system makes money, it’s capitalism. And when the system creates a big hole, it’s time for some socialism. The next book on my reading list is Broken Money by Lyn Alden. Ben made the point that other investment assets like stocks and real estate offer protection against inflation, and they absolutely do, but good luck exchanging a fraction of your house to buy goods and services. The difference here is that Bitcoin is a form of money and it is programmed to be deflationary. In my opinion, it will outperform the debasement of Fiat money over time better than stocks or property.

Basic economics – I took a few economics classes back in university. I wish I had been more interested at the time. The first thing that was covered was supply and demand. It is fundamental. Fixed supply with increasing demand = number go up! Jurrien Timmer at Fidelity is an essential follow for understanding the properties of Bitcoin and how it relates to other asset classes. Read up on Metclafe’s Law and network effects. We are talking about a network here.

Misconceptions

There are too many misconceptions about Bitcoin to count. The biggest one is that someone could just make another one. Folks, we’re talking about an asset with a $785 billion market cap. Good luck making a new one that’s going to knock it off its perch. Nobody in crypto is trying to do that. The race for the underlying store of value in the space is over.

That doesn’t mean all the other coins are not investable. Some are better than others and they are simply built to do different things. But that’s a whole new essay that I don’t have time for here.

As for the idea that only a handful of people own most of the Bitcoin. That was a new one on me but it’s simply not true. There’s a great report on that by Grayscale here. Also, if you are looking to figure out what’s going on in the network, Glassnode is an amazing tool. Check out their 2023 Yearly On-chain Review.

I could go on, there are so many misconceptions. Hell, China has banned Bitcoin multiple times. So no one in China owns BTC right?

Integration into traditional finance

The rallying call of crypto folk used to be ‘We’re still early!’. Judging by how little the average person understands the asset class, I think that’s still true, but it is getting less so. A few years ago, Larry Fink, the CEO of Blackrock, was decrying crypto as a tool only used by criminals to launder money and finance terrorism. It’s a familiar refrain from those who feel threatened by the emergence of a system that competes with the one that made them rich. (We see you too, Jamie Dimon) Now Larry has a spot Bitcoin ETF and is on Bloomberg and CNN saying that all financial assets will end up tokenised on the blockchain. Stocks, bonds, the whole shebang. We’re not so early any more.

Of course, a Bitcoin ETF is a tradfi product. You can’t exit it in Bitcoin, only in dollars. But for Japan residents, that does mean it gets taxed as capital gains, not income.

Other resources

The first time I looked at Bitcoin was in early 2017. My friend came back from a conference and said “We need to buy Bitcoin!” and handed me a report called ‘How to position for the rally in Bitcoin’, which was actually published in 2015 by Adamant Research. I read that and thought he was probably right. Adamant is still publishing analysis and their latest report is called ‘How to position for the Bitcoin boom’. You can find all their analysis here.

I mentioned Microstrategy on Retire Japan TV. Their Bitcoin dashboard is quite something and can be used to compare Bitcoin returns to other assets.

So there you have it. Not content with being allowed to talk for an hour, I have now written a post to further clarify my thoughts.

The halving is in April. I would expect a couple of months of sideways chop in crypto prices, maybe even a big juicy drawdown. That’s all part of the ride. Check in on me in 12-18 months!

2024 – Here goes nothing!

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!

Bitcoin – Pump up the Volume!

Just under three years ago, I wrote a post titled Bitcoin – It’s About to Get Loud. When I published it on 17 December 2021, Bitcoin had just broken the previous all-time high of $20,000. I knew it wasn’t done yet and the real mania was still to come. This cycle, I’m here a year early to remind you we are going again. It’s time to pump up the volume!

One of the things I love the most about crypto is how few people care about it. It reminds me that this is still a niche asset where asymmetrical returns are possible. If you are a regular person with no interest in crypto, there are only two times when it might appear on your radar: when the price is really high, or when it has crashed. It must seem pretty random, but what if I told you it’s not random at all.

Probably the most important event to understand in Bitcoin is the halving, which occurs approximately every four years. Bitcoin is ‘mined’ by a network of computers performing complex calculations to compete for the next ‘block’. The halving is where the reward for mining a block gets cut in half. This effectively halves the rate at which new Bitcoins are released into circulation.

Already I can feel technically-minded people leaning forward in their seats saying ‘Tell me more’. I can also feel non-technical people’s eyes glazing over as they drift away to a place where nobody ever talks about blockchain technology. I feel you. Luckily, I am just too busy/lazy to launch into a full description of mining, block rewards and hashes. However, if you want to know why the value of Bitcoin will probably go up over the next 1-2 years, you do need to get a basic understanding of this stuff. I like this Bitcoin Halving post on Investopedia because it’s barely a 5-minute read and it’s written by Investopedia and not some laser-eyed Bitcoin evangelist. You should at least read that. Technical people – you can read the Bitcoin Whitepaper.

What is going on these days?

Evangelist’s aside, I follow a lot of crypto traders. I first understood the Bitcoin 4-year cycle from @rektcapital and I still like the charts he posts, such as the one below:

We are currently in year 4 of the cycle, with the halving due in April/May 2024, marking the beginning of the new cycle. You don’t have to be a technical analyst to see that we have broken out of the bear market phase. That doesn’t mean it is up only from here, there will likely be significant retraces before and after the halving. If this cycle at least rhymes with the two that came before, 2024 will still offer nice opportunities to accumulate, and 2025 is when it really gets loud! Remember, the mania phase of previous bull markets came in 2017 and then in 2021. On 11 May 2020, the day of the previous halving, Bitcoin opened at $8,755. At the height of the bull market in November 2021 it peaked at around $68,789. That’s an increase of about 685% in a year and a half. Does that number grab your attention perhaps?

The catalysts for the bear/bull phases of each cycle change over time. The breakout this week was fuelled by one that is long overdue: the prospect for approval of spot Bitcoin ETFs in the United States. Yes, despite many other countries already approving ETFs that hold actual Bitcoin in their portfolio, the Securities and Exchange Commission in America has been dragging its feet on this one. I don’t fully understand the reason for its reluctance but it seems to be political. Elizabeth Warren in particular has it in for crypto and loves to bypass reality in claiming that every bad thing has been funded by this shady new asset class. (and not the US dollar…) The SEC has approved futures-based ETFs that track price changes by buying and selling derivative contracts but has stubbornly rejected all applications for a spot ETF. However, that may be about to change. Grayscale took the SEC to court over its ‘arbitrary and capricious’ rejection of the conversion of the Grayscale Bitcoin Trust to an ETF and won. The D.C. Circuit Court of Appeals closed the book on this case on 23 October and now the SEC has to find another excuse to deny or it has to approve. Also lined up, waiting for approval are names like Blackrock, Invesco and Fidelity. These big players will bring significant demand to an asset with a fixed supply. The funny thing is, the SEC could have approved spot ETFs in the depths of the bear market and no one would have cared. By delaying for this long, the SEC may find itself forced to approve ETFs right as the new bull market begins, unwittingly cranking the volume to 11.

A note on ETFs for Japan residents:

As you may know, the tax treatment of crypto gains in Japan is less than friendly. Gains are reported as miscellaneous income and are taxed at your highest marginal rate, with a maximum of 55% often mentioned in reports. I would note here that your marginal rate depends on how much you earned in the previous year and, depending on your income, you may pay significantly less than 55%. Here is a useful summary of the Japan tax treatment. Another key point is that there is no offset of losses on crypto – ouch!

ETFs, however, are not taxed like crypto, even if they hold it. They are taxed like stocks. That means you pay the flat 20% on gains. Unless you are a Bitcoin purist and want to hold the real thing, a Bitcoin ETF or fund may be the smart play tax-wise, particularly if your plan is to ride the bull market and sell, rather than hold for the longer term. You will need a brokerage account that gives access to overseas ETFs of course.

The macro backdrop

Like it or not, Bitcoin and crypto have become widely traded assets. This makes them susceptible to changes in the macro landscape, just like any other risk asset. It’s no coincidence that the end of the 2021 mania phase of the bull market ended right as inflation picked up and the Federal Reserve and other central banks entered a rate-tightening cycle. As I said, the catalysts may change each cycle, but there is always something behind big moves. So as we approach the end of the Bitcoin 4-year cycle, it’s interesting to note that we are coming to the end of the economic tightening regime. Most likely the US is heading for recession, perhaps early in 2024 – the timing is never easy to call. Risk assets will not fare well. That means stocks, and probably also crypto. If you feel like you should have bought more during the bear market, there will likely be bonus opportunities. Remember March 2020? Right before the halving. Risk assets in freefall. And then the central banks hit the printers. Catalysts…

So what should I do?

I beg you to educate yourself. I wrote a post called Crypto Curious, right in the midst of the 2021 bull market. A lot of it still stands up and there are some good resources in there. Maybe take a look. (Yes I’m well aware that monkey JPEGs went to zero, deservedly so. There will be something else this time around, there always is)

Early-stage bull markets are for dip buyers. If you’re still trying to accumulate, do it on red days. One of the reasons I follow traders is that I don’t really read charts, but these guys will always tell you if we are at support or resistance. You want to bid at support where possible. More on that from Investopedia.

You need to understand the difference between Bitcoin and altcoins. Bitcoin leads the market. If it bleeds, alts bleed more. Altcoins can outperform if you pick the right one, but they come and go. You are taking more risk and if you are new to this you should exercise extreme caution. I own Ethereum and there are a couple of other coins I like – they will crash 95% at the end of the bull market. Only go in with eyes wide open and have a plan for how to hit the exit.

Knowing when to sell is the hardest thing. Everyone fails at this, even skilled traders. The mania phase is intoxicating and it always feels like there is more to come. You have to take profit, you have to do it regularly and avoid getting sucked back in once you’re out. It all sounds easy now but it’s not. The bull market creates more bagholders than millionaires by far.

Follow me on Twitter and I will do my best to guide you through all the noise. Bring a sense of humor!

And so, without further ado…

Q4 Market Outlook – Where’s my ¥40,000?

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…

The 2024 NISA – NISA Forever!

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…)

Nikkei ¥‎40,000? Thinking outside the box

After all the doom and gloom of 2022, 2023 has been a pleasant surprise for some brave investors. It looks like stocks actually did bottom in October last year and if you own US big tech and Japanese stocks you’re enjoying a bumper year!

And now comes the big question? When do I sell?

In case you forgot, the idea of investing is to buy low, sell high and beat inflation in your base currency. Sounds simple doesn’t it? Personally, I’m pretty good at the first part. Fear is easy to spot. Granted, it takes some guts to run towards the carnage when everyone else is running away, but I have successfully conditioned myself to embrace the pain in markets and buy stuff when it’s on sale.

In my experience, the selling part is harder than you think it will be. Because it’s generally time to sell when people are euphoric and euphoria is kind of addictive. It’s even harder to sell when things are simply good – they could always get better right? And you don’t want to leave money on the table.

I was watching the Nikkei News Plus 9 program on BS TV last night and a very serious-looking guy from Monex Securities was talking about Japanese stocks. I think he is the chief strategist at Monex and he identified what looks a lot like a double top in the Nikkei 225 chart. Ok, I had noticed that too. He explained that he thinks that means the index will likely trade in a range of approximately ¥‎31,000 to ¥‎33,000 for a while. I wish I had a video of it – he described the range as a box, and at one point he handed the presenter an actual cardboard box with Nikkei 225 written on it and asked him to look inside. The presenter rummaged around and came out holding four crisp ¥‎10,000 notes. Yes, the Monex guy explained, once the Nikkei breaks out of the box, it’s going to ¥‎40,000! Wahey!

Forgive my cynicism, but I immediately began wondering if it might not be time to get the hell out of Japanese stocks! There wasn’t a lot of explanation going on about how the index goes from the box to ¥‎40,000. I’m no technical analyst, but it sounded a lot like hopium to me. Still, the guy is the chief strategist at Monex so I assume some research went into this.

The US market is looking interesting too. The S&P 500 is up +18% so far this year. Fantastic! However, dig around a little and you find that it’s actually only seven stocks that have driven those returns. Those stocks are, of course, big tech and the narrative that’s driving them, in case you’ve been living under a rock, is AI. Feeling euphoric yet?

So it’s possible that things are a little overdone. All bets are on the Fed hiking rates again at month-end and leaving them there for at least the rest of the year. History does not bode well for a soft landing from an extended period of irresponsibly loose monetary policy followed by a burst of inflation and a breathtakingly fast tightening cycle. This generally does not end well. There is a lot of talk of the stock rally broadening out but it’s early days and if the tech companies sell off, the last one out the door can probably turn the lights off for a while.

So is it time to sell? If so, how much and how do you do it?

First of all, let’s take a breath and remember that we need to consider core and satellite holdings separately. The core being the 70-80% of a portfolio that is broadly diversified, and satellite being the 20-30% we may have in something a little sexier. We’re not talking about simply dumping all of our investments because the market might go down.

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

Satellite holdings are generally invested in assets that add a little more spice to your overall portfolio. They sometimes have a higher risk/return profile and may change over time depending on market conditions and what is hot.

So let’s say, for example, you’re living in Japan and you have a core portfolio invested in an internationally diversified range of assets that is matched to your risk profile and base currency. However, over the last year or so the weak yen has prevented you from investing more outside Japan. Meanwhile, the rise in inflation meant that sitting in JPY cash was a dumb idea and so you’ve been allocating to a range of dividend-paying Japanese stocks to make sure you preserve your spending power. And low and behold, somebody lit a fire beneath the Japanese equity market and your boring Japanese boomer stocks are mostly up between 20% and 50%!

The man at Monex says the Nikkei is going to ¥‎40,000 and, much as you are intrigued by that idea, you are not sure you share his confidence!

What do you do?

Quite the dilemma, albeit a nice one to have. So what do the options look like?

Sell the lot – the gains are way more than the dividends you are going to earn over the next 12 months, so take a break and come back when things are cheaper again.
Sell part of your holdings – you’ll be happy you took some profit, but if the Monex guy is right, ka-ching!
Roll the dice and keep it all – there’s ¥‎40,000 in that box!

Of course, there is no correct answer and it depends on your personal situation, risk profile blah blah blah. For the record, I’m in the option 2 camp. I’ve been selling incrementally and I try to sell on green days. If nothing crazy happens I’m looking to gradually cut my holdings in about half. That said, in the process of accumulating Japanese stocks I have found some that I think are keep-forever-type companies.

I still think the Bank of Japan is going nowhere fast on adjusting rates and if inflation comes down, there will be less pressure on them to take action. But if that pressure builds and it looks like they might blink, I go option 1 in a hurry.

US big tech I’m not so concerned about. Everyone should own some of that for the long term, and if you are buying index funds you probably own more than you realise!

So prepare for a hard landing while hoping for a soft one. And learn from the experience as you go.

Today marks 26 years since I landed in Japan. There’s a lot to be thankful for!

And if the Nikkei hits ¥40k I will get a box and take a photo with it.

Still bearish anon?

The crypto Twitter community has not been much of a fun place to hang out this past year or so. Down bad, pissed off, fighting about Jpegs and shitcoins. FTX gone. Binance in trouble? Tether in trouble? The SEC suing Coinbase and declaring everything bar Pokemon cards a security.

It’s called the bear market and everybody hates it.

Then suddenly a shining knight comes riding over the horizon on a giant black stallion, leading an army of gleaming warriors.

Holy shit, it’s Blackrock and the institutions…

I remember the rallying cry during the 2018/2019 bear market was ‘The institutions are coming!’ And now, a whole market cycle later, they are here.

And everybody hates it.

Wait a minute…isn’t this supposed to be what everyone was hoping for? Blackrock filed for a spot bitcoin ETF, and so did Fidelity and Wisdomtree. Invesco is reviving its application. Everyone wants to launch a US spot Bitcoin ETF, and when I say everyone…

Jokes aside, this is a big deal. Blackrock is the world’s largest asset manager with about $8.6 TRILLION under management. The iShares range has over 400 ETFs. They have only ever had one ETF proposal rejected by the SEC. These guys mean business.

And they are not the only Tradfi (traditional finance) institution getting into crypto. Schwab offers BTC and ETH. Deutsche Bank is applying for a digital asset license in Germany. The institutions are actually coming this time.

So why all the hate? Well, Bitcoiners have a romantic rebellious streak, and it seems like many of them really thought they were going to be the alternative to Tradfi. But unfortunately, that’s not how the world works. Did people really think that Wall Street was going to let them keep all of this? They were either going to kill it or take it, and they haven’t been able to kill it…

Here’s an interesting thought:

Not much to say about that, except that it seems like a high-probability outcome, and you would want to own both ‘clean’ and ‘dirty’ types if possible…

Being bearish though, that’s another matter. It’s crazy to me that we have gone through the standard -80% crash, Luna, 3AC, FTX debacle, SEC crackdown etc. etc. etc. and Bitcoin is still at $30,000! That’s ¥4.2 million! It’s even more crazy how bad the mood has been, despite the insane resilience on display. If it’s not dead by now, it must be pretty damn hard to kill!

Admittedly the mood, and the price, have been lifted somewhat by the Blackrock news, but I would still say that the overall sentiment in crypto is pretty bearish. (people who aren’t involved in crypto assume it’s long since dead I imagine)

This tweet from Hugh Hendry in response to a gold investor caught my eye:

Making price predictions on BTC will almost always make you look silly, especially in the short term. However, a 3x or 5x move in the next couple of years is something that Bicoin could manage on retail fever alone. What would it look like with a raft of shiny new US ETFs approved?

Don’t stay bearish too long anon.

Nikkei 225 ¥30,000+, is it too late to buy Japanese stocks?

Japanese stocks have broken out, with both the TOPIX and the Nikkei 225 at levels not seen since August 1990. The inbound tourism revival is in full swing and foreign investors, including the great Warren Buffett, are pouring in. So is it too late to get involved?

After a volatile year for stocks in 2022 and a big drop in the yen, it feels like there is a lot of money sitting on the sidelines. And while ‘scared money don’t make money’, Japanese stocks have been quietly putting together a world-beating two quarters. Here is a selection of year-to-date performance numbers:

Nikkei 225 +19.1%, Toyota +7.5%, Honda +30.6%, Fast Retailing +26.7%, ANA Holdings +12.8%, Keisei Electric Railway +44.6%, Kyoto Hotel Ltd +9.25%, Panasonic +32.8%, JFE Holdings +17%, Marubeni Corp +31.4%, Hub Co Ltd +28% (yeah boiiii!), Japan Tobacco +16.6%, Takeda Pharmaceutical +10.8%, Yaskawa Electric +38.2%.

You get the picture. Japanese stocks are on a tear and not many people saw it coming. Not so the eternal Japan Optimist, Jesper Koll. I had to smile at the title of his recent post ‘We’re all bullish Japan now…’ I’ve seen countless bullish articles on Japanese stocks this last week – suddenly everyone is jumping on the train.

Jesper has of course been riding this train for some time and does a great job in his post of identifying the reasons for the surge in Japanese risk assets. If there’s one lesson that we all should learn from the past few years, it’s that liquidity drives markets. And as developed markets go, Japan is the last remaining source of cheap money. As the US and European central banks raise rates to fight off inflation, the Bank of Japan has, predictably, kept things very easy. There was a slight blip as a new governor took over at the BOJ and a host of people, who should know better, speculated that he would be forced into tightening monetary policy and blowing up the bond market just to fit their narrative. Ueda-san quickly put such rumours to rest and confirmed that policy will remain easy for the foreseeable future.

Jesper rightly points out other factors in the rise of risk assets in Japan: inflationary fiscal policy, a refreshing wave of pro-shareholder regulation, the expansion of NISA, increased business investment and a rising corporate metabolism. To that, we can add a few sector-specific catalysts: the weak yen providing a tailwind for exporters, Chinas’s economic reopening boosting commodities and shipping-related business, and the inbound tourism revival pushing up travel-related stocks.

However, none of this means much without that steady stream of delicious liquidity; mmmm zero interest rates and yield curve control are still on the menu!

A lot has been made of Berkshire Hathaway’s investments in Japan’s big five trading companies. And without wanting to diminish the fact that one of the world’s greatest living investors is buying in Japan, a lot of the coverage ignores the blindingly obvious: Warren pigged out at the last cheap money buffet in the world! He issued debt in yen at around 1% to buy quality companies that pay 4% income. It’s an exquisite arbitrage, but hardly a ringing endorsement of corporate Japan. If interest rates remain high in the US and low in Japan, you can bet he will be back. That man can’t turn a good deal down!

So, the big question is, if you don’t have much exposure to Japanese stocks already, is it too late? Once more it’s fascinating, and somewhat alarming, to see almost total consensus from commentators: the market is going to keep going up! I’m not one to fight the trend, but when everyone thinks one thing is going to happen it’s usually time to open your eyes to the exact opposite scenario…

Quoting Jesper himself here: ‘after more than thirty years, a positive break-out above the historic “Bubble Peak” of 40,000 on the NIKKEI stock index is finally becoming a realistic prospect over the next 15-18 months.’

So let’s be cautiously optimistic here, while keeping in mind the second part of Jesper’s post, what could go wrong? If you’re serious about owning Japanese stocks, I urge you to read the post yourself, but clearly, the number one thing that could derail this rally is inflation refusing to die down as expected, forcing the BOJ to take action on yield curve control and interest rates. My personal take on this is that any attempt to ‘normalise’ rates will be met with chaos and a hasty U-turn, but the damage will get done very quickly amongst the chaos. There’s obviously an argument here for long-term investors to ride out the storm and wait for the rebound, but I would prefer not to ride into that storm with too much JP stock exposure myself.

So if you own JP stocks already, enjoy the ride, but keep an eye on those inflation numbers and an ear to any rumblings from the BOJ. If you are planning on getting in now, then you are probably not too late but you don’t have a lot of cushion on the downside, so act accordingly.

It’s all about the D!

Ok, terrible clickbait title, I know. But you clicked it and you’re here? Nice, I’ll keep this one short.

I wrote this Bitcoin is Dead post on 6 June 2022 when the Bitcoin price was around $30k, and here we are on 12 April 2023 and the price is once more around $30k. Feels different on the way back up doesn’t it?

When FTX went down it felt like the end, but what we just witnessed was a standard Bitcoin bear market. An 80% drop from the peak is the norm in the 4-year cycle. $69k to $16k – close enough. Here’s a great video of Bill Miller x2 talking about why they’re bullish on Bitcoin. Check out the price ticker in the top-right corner.

That’s called conviction ladies and gentlemen. Likewise Michael Saylor and Microstrategy, whose Bitcoin position just made it back into the green.

Anyway back to the D. The D of course stands for Demand. You knew that. When you have an asset with a known, fixed supply, all you need to ask yourself is ‘What is going to happen to demand?’

The US seems to be doing its best to block crypto, and specifically using the recent bank crisis as cover for removing on and off-ramps to crypto. That would be bad for demand, right? Yes, maybe, but what happens to demand for things when people are told that they can’t have them? Oooh, Bitcoin is too risky for you so we need to protect you…

Meanwhile, Hong Kong is ramping up on crypto. If America wants to block innovation then guess what? It’s just going to move elsewhere. Good thread on Hong Kong’s crypto reopening here.

Is demand going to keep rising? That’s all you need to ask yourself. If you think no, then stay out of it. If yes, then you want to own it. What do you think CBDCs, the ultimate big brother government-controlled money, are going to do for demand for a decentralised, permissionless protocol like Bitcoin?

So, $30k. Are we too late? Did we miss the bottom? Probably, yes. The idea was always to dollar-cost-average through the bear market. Will we get another bite at lower prices? That depends more on the macro situation than anything else. Remember March 2020? The whole world went into a panic about covid and BTC sold off from around $9.5k to $6.5k. It would take something like that to get back to $16k again, which I would say is unlikely. However, we are not yet done with this Fed tightening cycle and a summer recession is looming. A significant sell-off in risk assets is very much on the table. It takes guts to buy then, but take a look at the BTC chart from March 2020 to today.

Can you see the March 2020 panic? It’s the little red candle in the bottom left (8 candles from the left) That’s the one that had everyone terrified. If we get another one of those, what are you going to do?

For more on the thinking behind investing in Bitcoin, read my previous post: Do you want to be right, or do you want to make money. The D doesn’t stand for difficult, folks!

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