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!

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.

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…

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.

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…

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 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…)

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Nikkei ¥‎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?

  1. 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.
  2. Sell part of your holdings – you’ll be happy you took some profit, but if the Monex guy is right, ka-ching!
  3. 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.

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.

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.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Nikkei 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.

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 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!

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’m not your financial adviser but…

How are people getting their financial advice these days? After 3 years pretty much at home during covid I’m wondering how it all works now. You used to have some bloke at the pub giving you stock tips, now it’s all on Twitter? When I first started in the business I used to call up guys at investment banks who knew way more about finance than me and try to blag them into meeting me. Are people still doing that? Maybe you just dance on TikTok these days?

I don’t have as much time to write this blog as I used to, so I apologise for the big gap between posts. (I wasn’t exactly prolific before, I know) However, if you only have time to write once in a while it does sharpen you up somewhat. So let’s get to the point.

I’m not your financial adviser, but you really need to get things organised. I sound like your dad, don’t I? What are you going to do with your life??? Let’s try and boil it down to the basics. Where are we and what should you be doing?

As WBC’s go, I enjoyed the World Baseball Classic much more than I’m enjoying the World Banking Crisis, but at least we are learning some stuff. The US treasury backstopped the banks. That means everyone else is going to have to backstop their banks or all the money is going to flow to the US as the least risky jurisdiction. Liquidity bottomed in October. If you don’t know what that means, listen to this podcast. The stock market bottomed around then too. Inflation is unlikely to just go away, but the Fed has raised rates about as high as they can go. Maybe another 25 bps in May but that’s about it. That doesn’t mean they will start cutting. We could sit around the 5.25% mark for the rest of the year.

Whichever way you slice it, it doesn’t look good for the yen. I discussed that here. If you are holding yen and not planning to spend yen in the future then you need to seriously consider your options. Drop your phone number in the comments and I will happily call up and shout at you like your dad.

So what should you do? Well, I may have mentioned this before, but you need to figure out your base currency and have a diversified portfolio. Diversified means cash, bonds, equities, property, commodities and alternatives, allocated according to your risk profile. If you are smart, you will want to spice it up a little by taking a core/satellite approach. 70-80% goes into the diversified portfolio, that’s the core. The other 20-30% goes into satellites. The satellites you want to own in this environment are gold and bitcoin. If you think bitcoin is silly then just buy gold. Gold mining stocks are a leveraged play on gold – maybe toss some of those in too. Ideally, your diversified portfolio should be rebalanced once a year so it doesn’t grow three heads and deviate from your risk profile. Clear?

You can either:

  1. Do this yourself
  2. Get someone to help you to do it
  3. Pay an asset manager to do it for you (except maybe the bitcoin part)

Any combination of the above is fine. There’s no shame in wanting to spend your time doing other things and paying someone competent to take care of this for you. Just be aware that for number 3, you will probably need to work with a financial adviser to find the right product and not all financial advisers are the same. Some may not have your best interests at heart.

And that’s it – what was that, like a 3-minute read? I hope the weather forecast is wrong and it doesn’t rain all through cherry blossom season so you can get out and enjoy it. I’m not really going to call you up, but ask me anything, any time. 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.

Do you want to be right, or do you want to make money?

February 2023…wow, where does the time go? Our daughter was born almost a year ago, and when I think about it now it feels both like yesterday, and an age ago. The mind sure can play tricks on you sometimes.

Remember the Lehman crash? Was that really almost 15 years ago? It’s clear as day to me still, but an awful lot has happened since then. I remember in late 2008 listening to what, for me, was an early podcast. It was called the Financial Sense Newshour, and it is still going today. Boy, was that some doom and gloom! You see, they were looking at the government response to the meltdown, which was basically printing money and bailing out the banks, and discussing how this was going to destroy the global economy as we know it. The advice was to get into your bunker, buy gold and other precious metals, and wait for the storm to hit.

I knew a couple of people back then who took this to heart. They stopped buying stocks and only invested in metals. They were ready for the total debasement of Fiat currency as we knew it. And for a few years that was actually a solid strategy. Gold outpaced stocks until around April 2013. After the lines crossed though, gold was left in the dust and these guys missed out on, perhaps, the greatest bull market in stocks in their lifetimes.

They are still waiting to be right about armageddon today. They see no way that governments in developed markets with a ton of debt (hey, Japan!) can survive without destroying their currency, and paper assets with it. And, of course, they are right! It’s totally unsustainable over the long term. However, as Japan has proven, you can keep printing money and propping everything up for a hell of a long time before the music actually stops.

In the meantime, life goes on. Opportunities arise. March 2020 was one of those opportunities. I hold my hand up and say I didn’t see that one clearly enough at the time, but as risk assets plummeted, the thing to do was buy them! Not to be too hard on myself, I did buy them, but nowhere near aggressively enough.

The purpose of this post is not to prepare you for the unwinding of this gigantic, unsustainable debt bubble, although prepared you should be. It is simply to try to make you aware of something perhaps even more terrifying: You don’t really know what you are doing. Not just you, of course. Me, too. All of us. We think we know. We think we are smarter than the herd. But we are just human beings, governed by fear and greed, trying to think our way past our emotions.

Stocks go up if you hold them for the long term. That’s it. If you buy a bunch of stocks, hold them and don’t sell them, you will make money. If you buy them when nobody else wants to buy them, you will make even more money. It’s really as easy as that. And nothing you believe, no matter how true it might turn out to be eventually, is likely to change that.

Do you want to be right, or do you want to make money? I think about this question sometimes. I get this with Bitcoin sceptics a lot. They are usually smart people, often quite technical and analytical. And they look at Bitcoin and say things like: “I don’t see this ever being used for day-to-day transactions” or “There’s no way governments will ever let this take over from actual money that they control”.

I don’t disagree with them on either count. In fact, they are probably right. However, the value of Bitcoin will likely go up regardless. And I can make a number of solid arguments for why that is the case, and these people will not care. Which is totally fine. I’m not interested in being right, or in convincing them. I’m interested in making money.

As an aside, there’s a neat little segment in this podcast, which comes around the 52-minute mark, where legendary investor Howard Marks describes how talking with his son helped him overcome his knee-jerk scepticism about Bitcoin. If you think you might need a little help overcoming your own scepticism, then maybe start by reading my encouragingly titled Bitcoin is Dead post.

Back in April 2019, I wrote a short post about how Bitcoin was in an accumulation phase. It was a really short post, because I didn’t actually understand very much about Bitcoin at the time and was just quoting other people’s work! But I owned some, and I was pretty sure I was going to make money. The Bitcoin price was about $5,200 then. It had shot up to $20k in the 2017 bull market, crashed back to $3k in short order, and was gradually being accumulated ahead of the next halving in 2020. The 2021 bull market which followed saw it peak at $69k.

And so here we are in February 2023 in an accumulation phase. You might hate Bitcoin. You certainly might hate crypto and crypto bros. You might have lost money on FTX or Luna. You might worship Charlie Munger and think that a 99-year-old man is a good source of opinion on blockchain technology. But we’re in an accumulation phase regardless. The halving is around April/May next year. And in the bull market that follows, where quite coincidentally central banks might just have cut rates to head off some devastating crisis, it will hit prices that will make your eyes water. Especially if you don’t own any…

Do you want to be right, or do you want to make money?

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.