Posted by Don Martin on Fri, Mar 22, 2013 @ 06:57 PM
Devaluation of the Yen won’t make Japanese stocks go up
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Japanese stocks have the lowest PE ratio, so people ask, why not buy them? Recently Kyle Bass gave a talk at the University of Chicago where he showed how the Yen might become devalued down to 250 per dollar from the current 12 month range of 77.11 to 94 Yen to a dollar. The point is that Japan has reached a point of no return where the debt loads are so great that they will need to inflation their way out of dent and devalue to increase exports. As they run out of financial resources they will have to start printing money to create a buyer for ever-increasing amounts of government debt, which will lead to devaluation.
Japan’s bad demographics, anti-immigration, anti-entrepreneurial policies and customs and refusal to clean out bad debts make it unlikely that things will get better, so increased debt and money printing with subsequent inflation and devaluation are Japan’s future. No one could have imagined the Mexican devaluation of 1994 where the Peso went down 60% and in addition the devaluation caused Mexican stocks to go down 70% denominated in Pesos. When things get bad then retired people want to move their assets to a safe haven, which could result in an outflow of funds from Japan.
Japan’s Central Bank has authority to buy REIT’s (Real Estate Investment Trusts) and ETF’s that hold stocks, so they can buy anything, even foreign assets. The more they print money and buy foreign assets the more the Yen goes down and foreign assets go up in a bubble. This is another source of misleading market activities that create an inefficient market for worldwide assets.
There is the possibly that China has also used excessive debt to create rapidly growing economy. If both nations begin to experience problems, at the same time, from too much debt this will slow down the world economy. Ironically such a slowdown could facilitate a lesser degree of inflation and a reduced probability of a rise in interest rates in the U.S. just as our economy is switching towards a revised version of a full employment economy.*
As the nations that compete against the U.S. get into deeper trouble then, by contrast, our economy becomes the least dirty shirt in the laundry hamper. This will cause foreign capital and skilled workers to come into the country, helping to hold down inflation and interest rates.
There is a popular myth among American investors that because PE ratios and price to book value are very low in Japan that it must be a good place to buy stocks. However Japanese stocks are not well managed so the low PE ratio is not enough to justify buying them. Low PE’s can be a misleading “Value trap” statistic. Buffett refused to buy in Japan because of this, even though their PE ratios are low. Equally important are the quality of corporate earnings. Unfortunately Japanese companies are run for the purpose of producing a civil servant like place to create jobs rather than a lean mean American profit seeking corporation that ruthlessly fires workers to maximize profit.
*I have written an article “Is unemployment data wrong?” and “Will devaluation of the Yen hurt 401k’s?”
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Feb 18, 2013 @ 08:57 PM
The Telegraph ran an article "G20 currency truce shortlived as Japan mulls foreign bond buys" by Ambrose Evans-Pritchard. The article warned that Japan could devalue its Yen by buying foreign bonds and that China would then also do that to prevent the Yuan from going up.
In my opinion, the type of bonds they will buy will be U.S. Treasuries. So these two nations, who are the world's greaest savers, will continue their policy of buying U.S. Treasuries. This will push up the value of dollar denominated bonds, which lowers U.S. interest rates and increases the value of the dollar. When U.S. Treasury bond interest rates change then the rest of the bond market follows, so then corporate bond yields will go down and their prices will go up.
Speculators who buy bonds using low cost margin loans will be tempted to buy even more, thus creating even more demand for bonds.
Investors assume that because the 2% yield on a 10 year Treasury is not enough after taxes to compensate for inflation that interest rates are too low. Then they assume that everyone will sell his bonds and buy stocks in the "Great Rotation". However, if "everyone" is selling bonds to buy stocks then who will buy the bonds?
Most corporations don't last over a century. In forty years the majority of the members of the Dow 30 stocks were deleted from that list. Are corporatations really as reliable of an investment as a Treasury bond? The investors who complain about low interest rates must remember that they get a hidden form of compensation in terms of the value of a liquid, safe haven asset in a world full of risky Black Swan stock bubbles. Economist John Taylor calculated that short term rates need to be at negative 2.25% in order for the economy to be in equilibrium. This implies long term Treasuries should yield close to zero percent, so be grateful that at least you get 2%. When an economy is too risky to invest in then it seems logical that if there were no FDIC insurance then investors should pile into whatever bank was the least riskiest and deposit their funds there. In that case the law of supply and demand would make rates negative. Of course there is FDIC insurance, but it stops at $250,000 and Japan and China have trillions. Individual corporate bonds are often illiquid and have huge Broker-Dealer spreads or markup-markdowns, so that leaves (pardon the pun) by default, only the U.S. Treasury to invest in.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Dec 28, 2012 @ 01:52 PM
Japan’s plan to create inflation and devalue the Yen won’t help their stock market and may hurt your 401k
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Japan’s new Prime Minister Mr. Abe (pronounced "Ah-bay") is pressuring the Japanese Central Bank to pursue an inflation target so as to create inflation and to devalue the Yen. In theory this will allow debtors in Japan to repay their debt more easily and allow more exports which in theory will allow for more corporate profits, thus making Japanese stocks go up. Japanese stocks are at very low Price Earnings (PE) ratios, so this implies the stocks are underpriced and should go up.
This line of thinking is wrong. Japan and many other countries have a policy of using publicly traded companies as a way to create jobs even if the companies are pressured into doing things that don’t make a profit. Thus the increased exports and increased sales won’t result in greater profits, so Japanese stock prices will not go up.
The other problem with the plan to devalue the Yen is that other countries will also try competitive devaluations, so Japan may not succeed in its goals. If that happens, then the Japanese stock market will not go up. See the Wall Street Journal article about this.
The Developed world has tried competitive devaluations since the financial crisis of 2008 and no one has really benefited from it. The result of these devaluations is to cause investors to flee to Emerging Markets in search of higher returns. This causes more growth to shift to EM countries and thus the Developed countries may fall further into recession. However, this accidental creation of growth in EM countries can indirectly result in more sales in the U.S. as Developing countries buy more things from the Developed world.
The effect on American 401k’s is that Americans could be tempted to buy Japanese stock (through mutual funds) in their 401k only to see it go down. People could be tempted to “short sell” the Yen only to get whipsawed in violent currency market turbulence.
The only way for the Developed world to fix their economies is through a combination of corporate tax cuts, debt forgiveness, worker retraining, wage cuts and elimination of wasteful government spending.
I have written an article “Japan’s monetary policy” and “Shiller PE10 for Japan”.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Jul 20, 2012 @ 02:56 PM
How Will the Euro Collapse Affect 401k Values?
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The trade weighted dollar index published by the St. Louis Fed shows a high in 2002 of 130 and a recent low of 95 in 2011 with a current value of 101.819. If the Euro breaks up then it will probably retouch its old lows below $1.00 so the dollar index will retouch its old highs. This will hurt investments in foreign currencies. It will hurt U.S. corporations that export things, it will hurt U.S. corporations that use offshore subsidiaries as tax shelters. When a tax sheltered offshore subsidiary loses money the parent company can’t take advantage of the loss and get a tax deduction, so those shelters are two-edge sword. Ironically a rising dollar will reduce demand by foreigners for U.S. stocks and real estate because they would be more expensive in relative terms.
In another year or two the European Central Bank (ECB) will be forced to simply print money and buy government bonds at par even if the value has dropped. Excessive money printing could create inflation which would result in a much needed devaluation of the Euro. It will lead to a flight out of the Euro. Then the ECB’s credibility will be lost and only German taxpayers can save the Euro. Eventually German voters will tell their politicians the solution is to break up the Euro. This means letting the German banks that hold bad debt from southern Europe’s PIIGS countries go bankrupt. And it means spending the taxpayer’s money on rebuilding Germany’s damaged economy instead of subsidizing PIIGS countries that engaged in the reckless, selfish creation of real estate bubbles while Germans refused to have a real estate bubble.
The damage to Germany from a Euro breakup are allegedly higher than if they subsidized the PIIGS members of Euro. But the German subsidies of PIIGS countries would spiral out of control and create antagonism between Germans and southern Europe, so it would be better for Germans to pay extra for the more reliable solution of closing down the Euro and ending the uncertainty of the Euro’s problems.
Will investors say all I got from a Euro breakup was this worthless coin?
What will benefit from a rising dollar are Treasuries because foreign institutional investors can’t use bank deposits because the tiny $250,000 FDIC limit is too small, so institutions will buy Treasuries.
It is way too early to buy depressed European stocks because the continent has not yet reached the peak of their crisis.
People ask what will happen to their 401k if the dollar is devalued. They should instead be concerned about the possibility that their stocks could go down regardless of whether their stocks are in a 401k or held directly. Look at how (CMG) Chipotle stock crashed today down 21% in a day. When the dollar goes up then foreign tourists can’t afford to eat our burritos.
I wrote an article “Two things about devaluation you must know” where I discussed the possibility that an old paradigm was broken. It has not been broken as the dollar remains the least dirtiest shirt in a dirty clothes hamper of the world’s major currencies.
Investors should seek independent financial advice.
Posted by Don Martin on Tue, May 29, 2012 @ 09:51 PM
Would real estate held in 401k be a good investment during a devaluation?
If the dollar were devalued would that make real estate go up or down? It is tempting to think that if the dollar was devalued that foreigners would rush in to buy real estate thus making the price go up in local dollar terms. If a currency is devalued then that may induce a period of low interest rates which will help increase the value of real estate (if people believe the currency has become so undervalued that no more devaluations will occur and if foreign funds flow into the U.S.to buy low cost things). A devaluation would help move toward a full employment economy which would help real estate go up.
Will the dollar be worth as little as this coin during devaluation?
However, if investors believe that a country will be perpetually devaluing its currency then the country’s interest rates will need to rise to higher than normal levels to compensate for that risk. If interest rates rise suddenly to very high levels then that will kill off the real estate market. Most real estate is financed by debt and much of it is adjustable rate loans, so a sudden rise in interest rates could be a problem for real estate values. Also commercial real estate even if bought for cash attracts investors when bond yields are low, so if bond yields go way up then new buyers of real estate may think they can make more by investing in bonds, assuming they think that interest rates have peaked and stabilized.
The crucial valuation component of real estate is the rental cash flow. If a devaluation of the dollar occurs the tenant will pay the landlord with devalued dollars and the building’s cash flow will not improve (in international currency terms) and thus it is possible the building will not go up to match real estate values in other countries.
A gigantic mistake would be for real estate investors to use a mortgage denominated in a foreign currency because after a devaluation then the loan balance principle payments would be dramatically higher. This happened recently in Hungary when borrowers used Swiss Franc loans and when the Forint was devalued the borrowers had to pay the loan in expensive Swiss Francs.
In general, a currency devaluation stimulates the economy and will make depressed real estate go up because it creates jobs that enable people to afford to increase their demand for more real estate.
During the coming global recession I expect Europe to be depressed and to do a devaluation of their currency and America will be a relative value safe haven thus funds will flow into the U.S., making the dollar go up. In anticipation of this it has already started. The coming devaluation of Greek currency after they leave the Euro will produce a chance to buy their real estate at a discount. The idea of buying real estate after a devaluation makes more sense if the local economy is dependent on cash based purchases rather than adjustable rate mortgages. If the U.K.devalued, since they are dependent on rapidly adjusting adjustable rate loans, then their interest rates could go way up making their real estate unaffordable, thus permanently pushing down their real estate values. Perhaps a hedge fund could short U.K. real estate and go long Greek real estate, but only at the right time and probably it would be imposssible to hedge these two trades or to do it at the same time.
If an investor holds real estate in a 401k that is risky because they are many tax traps, including lost tax savings opportunities, associated with that. It is far better to hold rental real estate outside of a retirement account.
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Aug 03, 2011 @ 09:00 AM
* Use an Institutional class (“I” class) open-end no-load mutual fund
* Shop for quality: get low risk (high credit quality) rather than high yield
* Buy only mutual funds that hold investment grade bonds
* Avoid mutual funds that try to dilute their holding of investment grade bonds with junk bonds, examine what percentage of each credit grade is in the bond fund
* Don’t use closed-end mutual funds
* Don’t use passive index funds – get actively managed funds
* Avoid most bond ETF’s except for very large, seasoned ones holding only Treasuries
* Don’t buy individual bonds – the Broker markup/markdown is a terrible hidden cost unless you are truly wealthy
Try to pay the Broker as little as possible
When interest rates go up then bond prices go down
When inflation increases then interest rates go up, thus hurting bond prices
It is not cost effective for retail investors to buy individual bonds, they should use mutual funds
Less is more: the high yield junk bond asset class has produced a lower total return than the asset class of lower yielding quality bonds (because of bankruptcies by junk bond issuers)
If the dollar goes down that could cause inflation, which damages bonds. However, most countries want to have competitive devaluations so it is difficult for our government to make the dollar go down. Further, only 17% of goods are imported, so a devaluation of 20% would create one-time extra amount of inflation of 3.4% on top of the usual 1.5% inflation.
Understanding Treasury default
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If the government is close to defaulting and covers up the problem by stalling for a few more years then the marketplace will anticipate a future default and gradually begin to sell off their Treasuries. The current budget agreement signed 8-2-2011 did not really fix or change anything! It increases the chance that on 12-31-2012 the same problem will occur again to be settled by the winners of the 2012 election. So during the month of January, 2013 Congress and the president will debate and the Treasury will operate with inadequate funds, procrastinating on paying its expenses for a few weeks until the next dispute is settled in February, 2013.
Probably a recession will occur in 2012 and there will be a flight to safety benefitting Treasuries in 2012 and 2013 so probably Treasuries will not experience a risk premium increase in rates in 2012 and 2013. The inflationary blow-up of Treasuries could be many years from now. In the Great Inflation of 1965-1982 it was not until 14 years after 1965 when rates went to extreme levels, except for a brief time in 1972.
The risk of Treasury default is a misunderstanding because the government owns the world’s best printing press and the debt is payable in our own currency. The U.S. has more natural resources such as gold bullion, coal, oil, natural gas, metals, farmland than the rest of the developed world combined.
I have written “Boost yield on liquid assets” and “Bond investing during low rates”.
For an alternative please see:
Investors should seek independent financial advice.
Posted by Don Martin on Thu, May 19, 2011 @ 12:32 PM
Effect of disinflation on investing
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People inquire about disinflationary investments, real estate bubble deflation, reducing inflation. The economy is starting to slow down due to anticipation of the end of the Fed’s QE II stimulus. QE II ends June 30 but the funds allocated for it will be exhausted a few weeks earlier than that so it is almost over. State and federal governments are tightening their budgets. 20% of the population has borrowed against their retirement accounts. Private sector borrowing (except for student loans) has continued to decline as those who need a loan can’t get one and those who can qualify don’t want a loan. I am concerned that the Fed will try QE 3 and get a reputation for cheapening the value of the dollar in order to prop up asset prices and then eventually QE4 and QE 5 will be unable to stimulate economic activity because investors will not trust its ability to stimulate the economy.
Is Quantitative Easing full of holes?
As liquidity is withdrawn from the market then investment prices will decline. Add to this the risk that leveraged investors such as hedge funds are supported by the ability to buy reasonably priced Put options on equities and they could suddenly lose this vital support and be forced into margin selling which could trigger more “Flash Crashes” or October, 1987 crashes.
I have written “
QE2 and the Fed losing credibility” and “
Odds of another Oct. 1987 crash”.
The Emerging market economies are more fiscally sound than the U.S., so they may be a place to invest for the purpose of reducing the risk of dollar devaluation, or the risk of developed country government insolvency. Important: Get more information in my free Special Report about emerging market currency investing.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, May 13, 2011 @ 02:36 PM
Risks of a dollar devaluation: what if the old paradigm has been broken?
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People worry about the dollar being devalued and how a dollar devaluation effects the stock market, how a dollar devaluation effects real estate and what to invest in to protect against a devalued dollar.
As I have written before the goal of the government is to devalue the dollar as a way of making it easier to create jobs (we have more unemployment than Europe or Japan or Asia). Economist Martin Wolfe said in the Financial Times that in terms of competitive devaluations that the dollar “must win” this currency war with other countries and will win because of the power of the U.S. dollar and the U.S. Federal Reserve.
Of course the old model is that if the world falls into a recession then everyone sends their assets to the U.S. But that old model was based on decades old behavior where in the old days the U.S. had a huge share of the world economy. Now the Emerging Markets have 52% of the world economy, the U.S. has 25% So the old paradigm is probably broken and so a recession won’t help make the dollar go up because its alleged safe haven status not as good as before.
Over-paying for inflation insurance
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Investors have panicked about the risk of inflation and investor greed has caused some to panic buy and overpay for inflation sensitive investments, especially in commodity futures markets, with the result that allegedly inflation-protected investments are prohibitively expensive. Further there is the risk that the fear of inflation could be wrong. What if the economy falls back into recession and demand for commodities, which has been mainly from China, turns out to have been a “misunderstanding” caused by speculators. I wrote about this in “Inflation protected investments overpaying for insurance”.
If commodities go down this will reduce inflation which in turn reduces the ability of the government to devalue, since inflation is one of the reasons for a currency to become devalued by the marketplace.
A pyramid of money:
analogious to the pyramid scheme of excess money printing.
These two things (paradigm breakage and a commodities bust) will affect the dollar in opposite ways. The question is which one will be stronger? My guess is that commodities will eventually recover and so will the Emerging Markets. Meanwhile the U.S. is mired in intractable unemployment (only 20% of the lost jobs have been recovered-at this rate it will take several years in the future to get back to normal) and a huge inventory of foreclosed homes with an inadequate amount of qualified buyers. So the balance is weighted towards the U.S. government's need to stimulate through devaluation is greater than for a commodities bust to create panic buying of dollars.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Apr 29, 2011 @ 03:22 PM
SP index reached new highs this week since 2008 crash. This week the most prominent bearish advisor, David Rosenberg, said that the market may go higher (on a short-term technical basis). Inflation continues to go higher. Precious metals set new records. Oil is very high. So it looks like the bearish case is dead, right? Wrong!
Bubbles can last for years. The great mortgage and real estate bubble began in 1997 and continued until mid-2007 and took a year to die when Lehman went bankrupt in 2008.
The stock market is a very unreliable, emotional, unprofessional indicator. The market is very inefficient most of the time. Ben Graham said the market is at times a weighing machine and other times a voting machine. The economy has been manipulated by QEI and QEII, by a law banning “mark to market” accounting for poor quality loans held by banks, by artificially low interest rates, by huge fiscal stimulus.
The hard cold facts are that 16% of the population is unemployed or underemployed, a record number of actual or potential foreclosed homes have not been sold, and about half of all home sales are foreclosures or short payoff sales. To cure unemployment requires 300,000 new jobs every month for several years non-stop and this has not been done since the late 1990’s and is actually rarely occurred in history. To cure the economy more private sector lending needs to be done but can’t be done because potential borrowers don’t qualify under new, tighter rules.
Further, the facts are that, per Robert Shiller, the market’s 10 year P.E. is about 22 versus a norm of about 15-16, implying a substantially overpriced market. My observation is that the Crash of 10-19-1987 was due to the U.S. dollar rapidly declining which caused foreigners to withdraw from the market. Now the dollar is declining and reaching close to a new low, which if breached could provoke foreigners to sell U.S. stocks. Further the market has been propped up by a very low margin rates and very low VIX that allows hedge funds to buy Put options that allow them work with the extreme risk of being levered up 4 to 1 or even 10 to 1. Hedge funds have only been prominent participants in the last 20 years, so today the market could experience more volatility than was experienced before 1990. So a currency devaluation now could pose more risk today than it did during 1987 crash. During 1987 the U.S. dollar was artificially high due to artificially high interest rates, so it needed to come down; its decline was orderly and was not a sign of economic weakness. Today the declining dollar is not orderly and is a symptom of a weak economy with significant structural problems.
I have written “has the economy recovered enough to justify the stock market prices?” and "the effects of QEII will be negated by a market crash”.
This is not the time for bears to capitulate. The risk of a foreign currency crisis, a VIX crisis, a Flash Crash, a margin call on over-leveraged hedge funds (any one of which can lead to a mega Flash Crash) and no resolution of the economy's structural problems make this a good time to get prepared for a crash, not a time to abandon a bearish position.
This is an example of independent financial advice.
Posted by Don Martin on Thu, Apr 28, 2011 @ 03:18 PM
Investors worry: will the dollar collapse, what are investments for a Dollar devaluation, when will the dollar collapse? This is a risk I have written about in “
Emerging market currency investing” and “
Asset allocation with a crashing dollar”.
There was a good article in the Wall Street Journal today about a dollar rout.
The principles of investing are to avoid trying to get rich and instead focus on investing in quality investments that are diversified. So in regards to the risk of a Dollar rout perhaps a solution is to invest in a diversified portfolio of foreign currency denominated bonds with the attitude of seeking safety rather than seeking a windfall profit. One must be careful to avoid poor credit quality bonds and to try to stay close to short term maturities because rising inflation in Emerging Markets is hurting bonds in those countries.
The old paradigm of the dollar going up in value whenever a recession or a panic occurs may have been broken and a new paradigm may be that Emerging Markets are the new safe haven from the insolvent behavior of the developed countries.
This is an example of independent financial advice.