Mike Green, of Simplfy, has also written alot about passive and the valuations equities could go to. What I have not seen is anyone adressing the Rest of World managers performance being tied to S&P and the amount of capital from abroad being put into US cap weighted indexes. Also no mention of Swiss central bank's US equity position. Are there other CBs doing the same? Do the country's wealth funds tie performance to S&P?
That’s the case with all bubbles really. Switzerland, Norway, Singapore etc aren’t really major economies in the sense that their population is very small and their wealth is either derived from oil reserves like Norway and financial services like Switzerland and Japan. These countries have a large amount of “wealth” that needs to be put somewhere hence the large sovereign wealth funds putting liquidity in the S&P 500 and other Western indexes where the passive bubble has made it an easy money glitch. In any which case the point that I make (which is largely inspired from Micheal Burry and Horizon Kinetics’ point of view) about it being a crowded theatre and the exit being very small when smoke starts filling up stands even more true then. If there are entire countries like the ones I’ve outlined and also places like South Korea (basically a U.S. vassal) from where large amounts of wealth is tied into passive funds and the market starts crash hard in a situation where large scale QE isn’t possible because of its inflationary impacts then there’s more of a reason for these countries and their funds to dump their index holdings on a large scale to safeguard their “national wealth”.
Thanks for the write up, the situation doesn't look great but I think the japanese government has many levers they can pull to address it's inflation problem so it probably wouldn't serve as the trigger you are pointing it out as for a global financial meltdown. Also the most levered companies of the carry trade I assume would have gotten out already to a more risk manageable level back last summer when the carry trade fears were headline news. I do agree with investing in value oriented companies, in fact looking through your posts I decided to start a position in Miramar. I also started a position in a slightly expensive but very high quality Japanese company with a very large moat.
It’s not a global financial meltdown I’m pointing towards haha. I think if you believe a 15-20% correction in global equity prices that I’ve outlined and a few hedge funds or financial institutions getting burnt by a margin call is a recession then well no it’s not. All I’m saying is that the overvalued names like Mag 7 tech, Palantir, US semis etc will have their valuations fall down to earth. On Japan, the larger cap names in my opinion carry a lot of froth and I’d stay away from them particularly financials. There’s still a lot of value to be found in smaller cap net nets however.
On the topic of levers that the Japanese govt has then I believe that it has none as I’ve tried to outline in the article. If you believe that there are any specifics that can be a valuable addition then I’d love to hear them out.
Lastly, thank you so much for your kind words they truly mean the world to me
I'm not sure if you have considered the apathy of the electorate in Japan to their countries politics and foreign relations. turn out is about 50% which I think gives them
leeway to implement possible fiscal policies to tackle inflation. I haven't taken a look in depth as to which categories are increasing but 1. Japan is in the process of continuing to restart their nuclear reactors to lower energy costs 2 Japan has infamously have always had tariffs on some of the agriculture products they consumed, sometimes really large ones like rice. if food is hurting in the short term and the categories going up have high tariffs, they could consider lowering tariffs in the short term for inflationary relief. 3. Japan government has shown willingness to direct industry to pursue goals aligned with national interests, for example just a few years ago when EVs were all the craze, Japan put together the heads of the battery makers and automakers to ask them to collaborate and cooperate to compete in the global market, they could do the same to address the goods or services shortfall whichever one are the causes of the current inflation and incentivize investment in those sectors as a more long term solution to the problems be it automation in agriculture for more efficient food production or whatever it is that they need.
Nuclear power will at max contribute 30% to Japan‘s electricity needs and that’s if all reactors open (not happening so fast). The rest 70% coal natural gas oil has to come from somewhere and those prices will remain high in the medium term atleast looking at the current oil and gas market. Japan’s imported rice even with tariffs is cheaper than domestic rice, they cannot reduce tariffs too much since the cost of farming is so high in Japan that it’s an electoral marketing tool to appease farmers. In a deeply divided and unstable Japan, the LDP can and will not do it.
I’m sorry but the third point you said sounds like something either a LLM or a high schooler would suggest. When was the last time that the Japanese successfully innovated anything after the 90s? Nada. The EV battery strategy failed, Japanese producers lost even more market share despite heavy government investment. Japanese private companies are more interested in investing in the US than investing in Japan since well the U.S. is the only remaining global market where their products (cars, electronics etc) still sell more than their Chinese equivalents due to tariffs. The return on investment in Japan for these conglomerates does not make it worth it even with government backing and no capitalist wants to do charity—that’s not what capitalism is. Automated farming again— electoral agenda cannot happen, LDP needs votes.
Also macroeconomics 101 dictates that inflation cannot just be controlled by fiscal measures, there needs to be monetary measures accompanying it. Even the country with the most fiscal leeway in the world—the U.S.— has to commit to both monetary and fiscal operations to control inflation. Just look at Powell from 21-23 as an example.
Having just watched Michael Petis talk about the significant difficulties the Chinese economy faces transitioning to a consumer based economy from an investment driven economy, what is you option on if China can navigate a transition that has been almost impossible to do without major economic problems.
Hi Jim, Pettis is honestly a clown. His takes on everything China related for the past two decades have been completely moronic. From HSRs to EVs he’s been wrong and completely disconnected from reality. I don’t suggest anyone to read him. If you want a bit by bit takedown on why Pettis is completely retarded in his takes then check out Glenn Luk on X and just search Pettis (he explains it best and better than I ever could).
I mean Norinchukin Bank is almost on the verge of collapse. The other banks are more nuanced. Japanese corporate and retail credit is actually very very solid since most loans are backed by hard assets like cash and real estate which are often valued at very discounted valuations. What I fear for is their investment portfolio particularly their investment in U.S. Treasuries and their lending to foreign companies, governments and institutions since once Japanese interest rates start to rise then these people will default all at once since unlike the Japanese people themselves these guys don’t have the best credit record or history and they aren’t retail clients. Overall, it’s not the best that you want to make it in Japan. There’s a reason why SoftBank—net of arm shares— trades at a negative 56 billion USD valuation.
If you are invested in Japan or interested in investing in Japan then look at bargains in smaller cap net nets.
GMO has quite an optimistic view on Japanese equities: "While the broad Japanese equity market looks a bit rich, we see attractive pockets of opportunity. Small value stocks in Japan currently measure as one of the most attractive equity markets that we forecast, using GMO’s 7-Year Asset Class Forecasts, given that group trades near one of its widest discounts to the market on record." https://www.gmo.com/europe/research-library/three-reasons-were-overweight-japanese-equities_insights/
The issue is not with individual equities. Japan has quite a few number of very very cheap micro and small caps trading at net net valuations or even below net cash investments and real estate holdings (check out Altay Capital he’s a beast). The main issue is with Japanese macro policy and the impact that will have on valuations for the rich names that you outlined in Japan as well as the exorbitantly expensive names in the U.S. and other Western markets when the BOJ finally has to take a call and the day of reckoning for them arrives.
I’d say that the net net names in such a scenario would either remain flat or actually do quite well in the environment that I foresee because people will start to realise how much value there is in these names.
Good listen. Any active funds you recommend so I can read their Q commentary ? 🙏
Haha thank you so much. Unfortunately I don’t really buy active funds since I pick all my stocks myself so you’ll have to do your own research.
Fair enough. The horizon kinetics guys have written extensively on the passive bubble too.
Mike Green, of Simplfy, has also written alot about passive and the valuations equities could go to. What I have not seen is anyone adressing the Rest of World managers performance being tied to S&P and the amount of capital from abroad being put into US cap weighted indexes. Also no mention of Swiss central bank's US equity position. Are there other CBs doing the same? Do the country's wealth funds tie performance to S&P?
That’s the case with all bubbles really. Switzerland, Norway, Singapore etc aren’t really major economies in the sense that their population is very small and their wealth is either derived from oil reserves like Norway and financial services like Switzerland and Japan. These countries have a large amount of “wealth” that needs to be put somewhere hence the large sovereign wealth funds putting liquidity in the S&P 500 and other Western indexes where the passive bubble has made it an easy money glitch. In any which case the point that I make (which is largely inspired from Micheal Burry and Horizon Kinetics’ point of view) about it being a crowded theatre and the exit being very small when smoke starts filling up stands even more true then. If there are entire countries like the ones I’ve outlined and also places like South Korea (basically a U.S. vassal) from where large amounts of wealth is tied into passive funds and the market starts crash hard in a situation where large scale QE isn’t possible because of its inflationary impacts then there’s more of a reason for these countries and their funds to dump their index holdings on a large scale to safeguard their “national wealth”.
Thanks for the write up, the situation doesn't look great but I think the japanese government has many levers they can pull to address it's inflation problem so it probably wouldn't serve as the trigger you are pointing it out as for a global financial meltdown. Also the most levered companies of the carry trade I assume would have gotten out already to a more risk manageable level back last summer when the carry trade fears were headline news. I do agree with investing in value oriented companies, in fact looking through your posts I decided to start a position in Miramar. I also started a position in a slightly expensive but very high quality Japanese company with a very large moat.
It’s not a global financial meltdown I’m pointing towards haha. I think if you believe a 15-20% correction in global equity prices that I’ve outlined and a few hedge funds or financial institutions getting burnt by a margin call is a recession then well no it’s not. All I’m saying is that the overvalued names like Mag 7 tech, Palantir, US semis etc will have their valuations fall down to earth. On Japan, the larger cap names in my opinion carry a lot of froth and I’d stay away from them particularly financials. There’s still a lot of value to be found in smaller cap net nets however.
On the topic of levers that the Japanese govt has then I believe that it has none as I’ve tried to outline in the article. If you believe that there are any specifics that can be a valuable addition then I’d love to hear them out.
Lastly, thank you so much for your kind words they truly mean the world to me
I'm not sure if you have considered the apathy of the electorate in Japan to their countries politics and foreign relations. turn out is about 50% which I think gives them
leeway to implement possible fiscal policies to tackle inflation. I haven't taken a look in depth as to which categories are increasing but 1. Japan is in the process of continuing to restart their nuclear reactors to lower energy costs 2 Japan has infamously have always had tariffs on some of the agriculture products they consumed, sometimes really large ones like rice. if food is hurting in the short term and the categories going up have high tariffs, they could consider lowering tariffs in the short term for inflationary relief. 3. Japan government has shown willingness to direct industry to pursue goals aligned with national interests, for example just a few years ago when EVs were all the craze, Japan put together the heads of the battery makers and automakers to ask them to collaborate and cooperate to compete in the global market, they could do the same to address the goods or services shortfall whichever one are the causes of the current inflation and incentivize investment in those sectors as a more long term solution to the problems be it automation in agriculture for more efficient food production or whatever it is that they need.
those are just some examples that come to mind
Nuclear power will at max contribute 30% to Japan‘s electricity needs and that’s if all reactors open (not happening so fast). The rest 70% coal natural gas oil has to come from somewhere and those prices will remain high in the medium term atleast looking at the current oil and gas market. Japan’s imported rice even with tariffs is cheaper than domestic rice, they cannot reduce tariffs too much since the cost of farming is so high in Japan that it’s an electoral marketing tool to appease farmers. In a deeply divided and unstable Japan, the LDP can and will not do it.
I’m sorry but the third point you said sounds like something either a LLM or a high schooler would suggest. When was the last time that the Japanese successfully innovated anything after the 90s? Nada. The EV battery strategy failed, Japanese producers lost even more market share despite heavy government investment. Japanese private companies are more interested in investing in the US than investing in Japan since well the U.S. is the only remaining global market where their products (cars, electronics etc) still sell more than their Chinese equivalents due to tariffs. The return on investment in Japan for these conglomerates does not make it worth it even with government backing and no capitalist wants to do charity—that’s not what capitalism is. Automated farming again— electoral agenda cannot happen, LDP needs votes.
Also macroeconomics 101 dictates that inflation cannot just be controlled by fiscal measures, there needs to be monetary measures accompanying it. Even the country with the most fiscal leeway in the world—the U.S.— has to commit to both monetary and fiscal operations to control inflation. Just look at Powell from 21-23 as an example.
Hi Dragon,
Having just watched Michael Petis talk about the significant difficulties the Chinese economy faces transitioning to a consumer based economy from an investment driven economy, what is you option on if China can navigate a transition that has been almost impossible to do without major economic problems.
Thanks
Jim
Hi Jim, Pettis is honestly a clown. His takes on everything China related for the past two decades have been completely moronic. From HSRs to EVs he’s been wrong and completely disconnected from reality. I don’t suggest anyone to read him. If you want a bit by bit takedown on why Pettis is completely retarded in his takes then check out Glenn Luk on X and just search Pettis (he explains it best and better than I ever could).
What do you think to holding Japanese banks through this period?
I don’t really know much about Mitsubishi Bank so I’ll reserve comment haha.
I mean Norinchukin Bank is almost on the verge of collapse. The other banks are more nuanced. Japanese corporate and retail credit is actually very very solid since most loans are backed by hard assets like cash and real estate which are often valued at very discounted valuations. What I fear for is their investment portfolio particularly their investment in U.S. Treasuries and their lending to foreign companies, governments and institutions since once Japanese interest rates start to rise then these people will default all at once since unlike the Japanese people themselves these guys don’t have the best credit record or history and they aren’t retail clients. Overall, it’s not the best that you want to make it in Japan. There’s a reason why SoftBank—net of arm shares— trades at a negative 56 billion USD valuation.
If you are invested in Japan or interested in investing in Japan then look at bargains in smaller cap net nets.
Yes, a small part of my portfolio is in Mitsubishi which is one of the more solid Japanese banks.
GMO has quite an optimistic view on Japanese equities: "While the broad Japanese equity market looks a bit rich, we see attractive pockets of opportunity. Small value stocks in Japan currently measure as one of the most attractive equity markets that we forecast, using GMO’s 7-Year Asset Class Forecasts, given that group trades near one of its widest discounts to the market on record." https://www.gmo.com/europe/research-library/three-reasons-were-overweight-japanese-equities_insights/
The issue is not with individual equities. Japan has quite a few number of very very cheap micro and small caps trading at net net valuations or even below net cash investments and real estate holdings (check out Altay Capital he’s a beast). The main issue is with Japanese macro policy and the impact that will have on valuations for the rich names that you outlined in Japan as well as the exorbitantly expensive names in the U.S. and other Western markets when the BOJ finally has to take a call and the day of reckoning for them arrives.
I’d say that the net net names in such a scenario would either remain flat or actually do quite well in the environment that I foresee because people will start to realise how much value there is in these names.