Then, in 2010, we looked around. Nothing was very cheap. But Japanese stocks had been going down for 20 years. What were the odds that they would recover sometime in the next decade? We didn't know. But compared to other bets, Japanese stocks looked good.
We went long Japanese stocks.
But what to put on the other side? What had been going up all the while Japanese stocks were going down? Japanese bonds! Easy peasy...we went short yen bonds. "Buy Japanese stocks; sell Japanese bonds."
That looked like a bum trade for the first couple of years. But in 2013, it was, well, golden. Japanese stocks rose more than 50%. Meanwhile, Shinzo Abe goosed the inflation rate up to 1%.
This had the effect of sending the yen down 15% against the dollar. Great for Japan's exporters. Terrible for Japan's fixed income securities.
So, we made good money on both sides of the trade last year. By our rough, back of the envelope ciphering, our Trade of the Decade is up about 50% so far...with 7 more years to run.
What will happen in those next 7 years? Oh, dear reader, you're asking a lot for a free service. But we'll take a crack at an answer anyway. What the heck. It's still near the first of the year. A good time to look ahead and try to see what's coming our way.
Last year, as we turned off the lights and closed the doors, heading off for the holidays, Ben Bernanke was saying goodbye to the Fed. He did not apologize for having missed the biggest financial train wreck in 60 years. He did not say he was sorry for sending America's central bank on a fool's errand...trying to save every fool banker and speculator in the country. He did not issue a mea culpa for enabling the economy's addiction to cheap credit either.
That last point deserves elaboration. Mr. Bernanke announced on Dec. 18th that the long-awaited 'tapering off' had begun. The end of the world did not come. Neither stocks nor bonds seemed got the shakes or the chills. Commentators and Wall Street shills- who see silver linings without clouds - told us that this proved what every investor already felt in his heart: that this boom is for real.
But what it really showed was that this taper was not for real. Shrewd investors figured it out. Having gotten the economy addicted to cheap credit, there is now no graceful way out. The 'tapering' announcement was like cutting the ribbon on a new methadone treatment center; nobody expects to go cold turkey.
There is no way the current stock market boom (with its collateral 'wealth effects'), nor the incipient 'recovery' (if there is one), nor the bond market (home of the serious money), nor the federal budget (with more debt than anyone), nor household budgets can survive significantly higher interest rates. Thanks to Mr. Bernanke's maladroit and naive policy moves, the whole shebang now needs artificially low rates just to stay more or less in the same place.
A real recovery typically brings higher rates as borrowers compete for limited savings. But, this time, no major economy can stand the upswing of the credit cycle. So, the fix is in. Central banks have spread out the clean needles. They're serving orange juice. What else can they do? They're trapped by their own policies, and speculators know it.
China stimulates its economy to produce more. America stimulates its economy to consume more. With even more debt than the US, Japan is caught in the middle. It cannot stand the deflation that comes with low-cost Chinese imports. And it can't afford to lose its US customers. Shinzo Abe has become the biggest pusher on the planet, stimulating the Japanese economy to produce and consume, with a lower yen... and a higher inflation rate. Coincidentally, he also knows that Japan's debt cannot be paid off; it will have to be inflated away.
He may not succeed. But in the meantime, he's locked-in to a program of aggressive stimulus. And our 'Trade of the Decade' still looks good.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.