Hello, Profits! : The Reemergence of Japan, Inc
On November 25th, a controversial article that I wrote entitled “The Top Three Trends to Profit from in 2013” was released through the various media outlets of Future Money Trends. It was contentious not because of hyperbolic predictions of a commodities bull market that is admittedly getting long in the tooth, but rather due to the inclusion of a sector that has long been crapped on by both the mainstream financial media albatross and the Alex Jonesian class of alternative investment ideologists.
Japan, Inc was once a feared entity many eons ago, but has since become the butt of many jokes and therefore, the hapless victim of the American fund managers’ put-squad. Japan’s whimsical fiat mistress, the ever colorful Yen, was launched skyward, first because of deflationary pressures (weak economy, natural disasters), then due to Ben Bernanke’s mad scientist experiments with the global money supply ($USD being the world’s reserve currency). Finally, however, there are signs that some normalcy is returning to the markets.
Japan has a rich history of currency debasement attempts, with all such incidents (until now) resulting in near comical disappointment. On the other hand, the United States suffered through no such fate with Helicopter Ben at the helm of the Federal Reserve. The first two rounds of quantitative easing was the shot heard around the world, but the third and de-facto fourth editions of the fabled monetary loosing programs have failed to substantially devalue the dollar. Thus, a gateway for “managed” inflation was open to the Japanese, and they have taken it in stride.
This bodes well for the much maligned Nikkei 225: since the release of my article, the index has shot up 16%, with many shares of Japanese companies making moves of 20% to 30% in only a two month time span. Seeing as how this translates to annualized returns of well over 100%, it is reasonable to believe that some correction will occur soon: in fact, I am anticipating this and would be genuinely surprised not to get it. But will this bull run be sustainable going forward?
The above chart represents a long-term (22 yr) view of the Nikkei index, interposed with the market action of the Japanese Yen. At the peak of its reign, the Nikkei shot past 35,000 points in a parabolic move in 1990 but crashed back down to earth by 1993. Simultaneously, the Yen was making headlines of its own, and charged to a peak of over 130 in 1995, shortly after the Kobe earthquake devastated much of the nation’s infrastructure. The currency immediately gave up its “ill-gotten” gains but continued on a northern trajectory, which was given more fuel following the Fed’s QE programs. However, a paradigm shift occurred in October of 2012, and with a minor exception in November, the Yen is happily spinning into a free fall.
Yes, there is a correction coming up since the Japanese market is clearly overheated and the fundamentals (public announcements from the Bank of Japan) may disappoint many traders. I would watch the Relative Strength Indicator for the Yen, which is massively oversold and portends some kind of deadcat bounce. Also beware of profit-taking since most market participants are not Japan bulls and any hint of hawkishness from the BOJ would see a mass rush to the exits.
However, keep the macro-trend in mind! For 13 years, the Nikkei 225 has been charting a series of lower lows (1990 – 2003), but reversed course ten years ago and is now charting higher lows. This suggests that a bottom support level has been found around 8,000 points and that the trend will continue to build higher from here. Over the last twenty years, Japanese companies faced two major hurdles: competition and an unreasonably high Yen. The Japanese have always been adept at the former, but could do absolutely nothing about the latter. Guess what? That pimple has been popped!
Recently, many investors have taken solace in the fact that the S&P 500 is only a few points off of its all-time high. An argument can be made that if the index can clear 1,600 points, the sky truly is the limit as there would be no technical overhead resistance to clip its wings. Before the champagne breaks out, however, we must be cognizant of the old adage what goes up must come down! For the Nikkei, there is no such worry of gravity as it has already done its worst. Using a variety of technical analysis, it’s reasonable to believe that anywhere from 12,000 to 25,000 points are solid mid- to long- term price targets. Even at 25k, this would still be around 30% below its all-time high.
If you truly believe that economies move in macro-trends and cycles, and that conventional thinking is unproductive and potentially dangerous, you owe it to yourself to consider (re)investing in Japan, Inc!