Our Trade of the Decade

Founder Bill Bonner

Not much action in the stock market. Not much action in any markets.

So, let's turn to look at how our new "Trade of the Decade" is doing.

In a word: terrible.

You probably don't remember. But at the start of 2000 we announced our first "Trade of the Decade."

"Sell stocks. Buy gold," we said.

That trade worked out so well we can scarcely believe we recommended it. Stocks had their worst decade since the 1930s. Gold had its second best, rising from around $300/oz to over $1,200/oz (from memory).

Pretty darned good, if we say so ourselves.

So, at the start of 2010, we took another wild guess: "Sell Japanese bonds. Buy Japanese stocks."

This trade involved no special insight about what is going on in Japan. As to that we hadn't a clue. We don't speak a word of Japanese, other than sayonara...

Our trade was based not on a hard look into the future, but a quick look at the past. Japanese government bonds had been going up for 20 years... as the Japanese feds issued a slew of them. A generation of investors had said sayonara to their money after betting against them.

Meanwhile, Japanese stocks had disappointed investors for two decades. After the crash of 1990, they lost 75% to 80% of their value. Each time they appeared to be going back up they soon fell again.

So, we figured that the trend of the past 20 years would probably not last another 10 years. Specifically, we thought it was unlikely that the Japanese could run up their debt beyond 200% of GDP – far beyond the point of no return – without causing a sell-off in bond prices.

Then the money currently flowing into bonds would need a new home. Where else but stocks?

So far, this hasn't happened. The trade has gone against us... or at least not in our favor.

Whatever It Takes

But we now have the new Japanese government on our side. It is vigorously trying to destroy the yen. From Bloomberg:

Japan plans to use its foreign-exchange reserves to buy bonds issued by the European Stability Mechanism and euro-area sovereigns, as the nation seeks to weaken its currency, Finance Minister Taro Aso said.

"The financial stability of Europe will help the stability of foreign-exchange rates, including the yen," Aso told reporters today at a briefing in Tokyo. "From this perspective, Japan plans to buy ESM bonds," he said. The purchase amount is undecided, Aso said.

Yes, dear reader: Despite government debt more than two times the size of the economy, the new government of Shinzo Abe is committed to lending to other bust governments.

And it is looking to the Bank of Japan to support its own reckless borrowing, just as the European Central Bank supports Europe and the Fed supports the U.S. Mr. Abe wants the central bank to print more money.

How much? "Whatever it takes" is the new slogan. That's what Mario Draghi promised worried bond investors last July. And it's what Ben Bernanke has promised too. He'll keep the printing presses going "as long as necessary" to bring unemployment down to 6.5%.

Whew! That's all we can say.

"Whatever it takes" is not a phrase generally associated with prudent bankers. So, either times have changed in some fundamental way... or these bankers aren't very prudent.

So which is it? A: a "new era"? Or B: reckless central bankers?

We'll go with B. And we'll bet that our "Trade of the Decade" will come right before we break out the Dom Pérignon on Dec. 31, 2021.

Killing the Yen

Honest Abe's government may not completely kill the yen in the next eight years, but it'll almost certainly do it some damage.

We notice, too, that some serious analysts are coming around to our point of view. Although this is usually a negative development, in this case our position is so far out of the money that it's lonely. From Swiss asset manager Felix Zulauf:

Japan's economy is not doing well and still suffers from deflation. The pronounced deterioration of Japan's current account and the disappearing ability to finance her own large budget deficits are forcing some important changes. The new government in Japan, led by the LDP and Prime Minster Abe, has a 2/3 majority in parliament and can push through their own will without any problem. Abe wants some increased deficit spending, on top of a budget deficit that is already near 10% of GDP. He wants the Bank of Japan to finance a big part of it by printing new money and thereby weakening the yen and targeting 2% inflation...

If the currency continues to decline against all the others, there will be tremendous lift to Japanese equities.

Sell Japanese bonds. Buy Japanese stocks. Check back with us in eight years to see how it turned out.



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