Bullish calls on the Japanese yen in a couple of my services have paid off very well. So have a separate currency play and (more recently) a foreign short-term bond ETF that benefits indirectly from currency moves.
But can that run continue? And how can you profit?
Well, one of my biggest reasons for buying the yen and other currency recommendations is very straightforward: Central bankers are losing control. The Bank of Japan is a prime example, as virtually every action it has taken recently has had the opposite effect.
The BOJ wanted to boost stocks by launching more QE. Stocks fell. The BOJ wanted to tank the yen by cutting rates into negative territory. The yen surged. The BOJ wanted to support the Japanese economy and encourage more risk-taking by spewing happy talk far and wide. The economy sank back toward deflation and recession, and steel safes flew off the shelves as ordinary Japanese citizens rushed to stash physical cash in their homes rather than in the banking system.
So in a sense, these investment recommendations were anti-banker plays … and they’ve worked out very well. Not just in Japan, but elsewhere.
|Can the rally in the yen continue?|
Here in the U.S., the Fed, the Obama administration and many mainstream Wall Street economists continue to claim the economy is in great shape. But with all those bubbles I talked about Friday either already bursting or on the cusp of doing so … and the latest economic data suggesting growth is rapidly decelerating … that talk looks more and more out-of-touch by the day. It completely misses the huge impact the credit and economic cycles have on investment markets.
The economic problems have important ramifications for the U.S. dollar, too. The greenback rallied significantly against many other currencies because U.S. growth was supposed to be so much stronger than foreign growth. But if our economy is now rolling over and joining the rest of the world in the soup, that eliminates a bullish argument. It also should lead to more “carry trade” unwinds (click the link for an explanation).
As a matter of fact, even the man known as “Mr. Yen” thinks the currency has more room to run. The former Finance Minister in Japan, Eisuke Sakakibara, earned that nickname for his ability to guide the direction of the Japanese currency in the 1990s. Now, he says the yen’s rally this year is going to persist.
[Read More – The Consequences of Reckless Lending – Mike Larson]
|“We could breach the 100-yen-per-dollar level.”|
His take: We could breach the 100-yen-per-dollar level, after already rallying from around 120 at the time of my initial yen long positions to 108 or so today.
So no, I don’t believe this move in my favorite currency-related investments is over, even as there will undoubtedly be corrections along the way. That should have positive spillover effects for things like gold and gold shares and low-risk foreign bond funds and ETFs.
For the stock market, it’s more of a mixed bag. If the dollar loses more ground because the U.S. economy is sinking and central bank policy is backfiring, that should hurt economically sensitive, higher-risk stocks. But it should continue to put a bid under the less-cyclical, “safe yield” stocks I’ve been bullish on for some time.
Just look at the vast performance gap between something like the Financial Select Sector SPDR Fund (XLF) and the Consumer Staples Select Sector SPDR Fund (XLP) to see what I’m talking about. XLF hasn’t made a new high since last July, while XLP just hit an all-time high.
In other words, if you want to make money in this market, keep your eye on the relative value of different kinds of money. I know I am!
What thoughts do you want to add here? Is the dollar likely to fall further against my favorite currencies, including the yen? Or is it poised to rally? What impact will that have on the stock market, if any? How are you profiting from these trends? Hit up the comment section and weigh in.
It’s the start to another week … and judging from the lively discussion at the website, many of you are fired up and ready to go! Central bank policy, and the impact on the markets, was the biggest issue on the table.
Reader Chuck B. said: “This is a most tenacious bubble – it doesn’t seem to want to pop. What that means, of course, is that when it does inevitably burst, it is going to do far more damage to the economy than if it had popped at an earlier stage.
“I fear that, even at 87, I am going to see my second Great Depression – or Greater One that could make the first seem like child’s play. It could mean the end of the nation I grew up in – or what remains of it, as the politicians panic.”
Reader Badger10 said: “We have a debt problem in our country and it’s being ignored. High debt doesn’t sustain growth. We are getting volatility again at these higher levels, which is a sign of topping action in the market.
“The media is so bullish that it scares me. But after seven years of ZIRP, it’s losing its effectiveness.”
Reader Debra added: “How nice of past and present Fed chairs to allow us to join their family reunion! As usual, none of them knows which way is up. So of course they always have the deer-in-the-headlights look if anyone asks a substantive question. The incompetence quotient is sky-high for sure.”
Reader Ross L. said: “I believe the Fed members are a bit like the Wizard of Oz from the classic film. They want us to believe they are all knowing and powerful, but like the movie, they have nothing to do with reality. They are riding the wave of their particular breed of fame, trying to be somebody.
“To the average American citizen, they don’t mean diddly-squat but they will continue to have something to say regularly. To me they are mostly blowing smoke. The bond markets don’t believe them either, as far as I can tell.”
Lastly, Reader Bill said: “If everything was fine, they would pay me interest on my money. Low and zero interest rates alone prove that the financial world is in bad financial shape.
“These people are paid to try to deceive us. No telling what would happen if they expressed their fears and the truth. Greenspan could have not been as incompetent as he appeared to be in the end.”
Thanks for sharing, and please do keep those comments coming. Bond traders don’t seem enamored with central bank policy, and neither do the men and women trading precious metals. Stocks are still trying to hang in there … but can that really persist much longer? I’m skeptical.
The problem with experimental, untested, theoretical policies is that they often backfire when unleashed in the real world. The Federal Reserve and other central banks are finding that out now, as QE and negative interest rates are crushing financial stocks the world over.
The mechanism, as the Wall Street Journal notes, is falling profit margins. A bank’s “Net Interest Margin,” or “NIM,” is the difference between the yield a bank can charge on things like deposits and what it can charge on loans or earning on longer-term investments. Central bank policies are crushing NIMs, and kneecapping one of the biggest sectors of the stock market in the process.
The Burj Khalifa in Dubai may lose its “world’s tallest building” title … because another taller building may rise out of the desert nearby. Developer Emaar Properties is planning to construct the creatively named “The Tower” over the next few years, promising that it will just eclipse the height record set by its neighbor.
Jordan Spieth suffered an epic meltdown on Sunday at the Masters golf tournament, preventing a repeat title. The green jacket went to 28-year-old Englishman Danny Willett instead.
So is Mr. Yen on target – and if so, are you profiting from the currency’s move against the dollar? What do you think about the problems in the banking sector? Is that going to undercut the market rally? Have you visited the Burj Khalifa, or Dubai? And if so, what do you think of the building boom there? Let me hear about it below.
Until next time,