Unlock the secrets of the global margin call and understand why the yen's strength could be a critical point of failure in finance with macro researcher Weston Nakamura. In this fascinating episode, we uncover the latest developments in the yen carry trade and its ripple effects on markets like the NASDAQ and Russell 2000. Nakamura provides a deep dive into the Japan Ministry of Finance's interventions and their knock-on effects, drawing intriguing parallels with the post-1990s bubble burst era in Japan.
We also revisit the infamous 2008 financial crisis through the lens of the carry trade, particularly focusing on the AUD/JPY currency pair and its significant role in market volatility. Listen as we dissect the monetary policy mismatches between Japan and other global economies, and how geopolitical tensions and rising oil prices are adding layers of complexity to Japan's economic landscape. Nakamura explains the profound impact of these dynamics on the Japanese yen and the broader economy, especially given Japan's dependency on imported oil and the socio-political ramifications of rising energy costs.
In the latter part of the episode, we explore the unique investment behaviors of Japanese NISA account holders and their growing interest in U.S. equities amidst a depreciating yen. Discover how this shift is influencing global equity markets, particularly the S&P 500 and NASDAQ, and consider the potential for a reverse carry trade scenario. We also discuss the broader market trends driven by systematic and CTA flows, and what the future holds for Japan's interest rate policies under the Bank of Japan. This episode is packed with expert insights and analyses that will keep you well-informed on the shifting tides of global markets.
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
my name is michael guy at, publisher of the legal
report.
Uh, join me for the hour.
Here is mr weston nakamura who,if you haven't seen his stuff,
he's got some incredibleresearch and analysis,
phenomenal sub stack, and he andI have actually talked about
the carrier trade before, uh,towards the end of last year as
a very likely scenario.
He and I think we're about thecarrier trade before, towards
the end of last year as a verylikely scenario.
He and I.
I think we're both early but,as I emphasized, being early is
(00:29):
not wrong as long as you don'tshort.
That's the key to this stuff,which people don't seemingly
understand.
So, weston, for those who arenot familiar with you, before we
get into the heart of thematter, talk about your
background.
Who are you?
What have you done throughoutyour career?
Speaker 2 (00:54):
And what's the mood in japan right now?
Um, start with the latter moodprobably is what, um 1990, you
know, uh bubble burst might havefelt like, I guess I don't know
.
Um, yeah, hi, my name is westonaguilar, from across the spread
.
Um, I do macro research andanalysis with an asia focus that
relates to and impacts globalmacro markets, specifically from
more of the DM US equity market, investors, lens.
(01:15):
So when I talk about thingslike the Bank of Japan, the Yen,
jgbs and stuff like that, I'mnot talking to, like, jgb
investors None of you are JGBinvestors, I would assume, and
JGB investors probably don'tlisten to me.
Actually they do, but I'mtalking from the point of why
this matters to people and isbeing severely undercovered, and
so therein lies risk and oralpha.
(01:36):
So that's kind of my niche.
I'm also a professional clownand so oftentimes I'll just
throw in what I think ishumorous.
That's up for, again, themarkets to debate.
But yeah, that's pretty muchwhat I do, and so I have a sub
stack and I also have a YouTubechannel as well, all right.
Speaker 1 (01:56):
So I want to start with a softball question which
is from YouTube.
Did Japan just blow up theworld?
I mean, what is going on here?
I mean I'm making light of it,similar to, by the way, when I
when I was making light of itwith david lynn in august, when
I first brought up the wholethesis of the reverse character
trait but I mean how serious uhis is.
(02:17):
This is what's going on andwe're getting to the background
of it.
But let's just talk about thehere and now.
Speaker 2 (02:21):
So, um, you started calling it, um, I don't know if
it was you specifically, but youknow I I associate you with the
term uh, global margin call.
I believe I've been saying thecrowd strike.
Jpy is the crowd strike of uh,of global markets, which is kind
of the same thing.
But you know, crowd strike forthose who don't know, you know
(02:44):
is a very recent sort of eventwhere you have the single point
of failure across all like ITsystems and like took down, like
you know, airline systems, likeso many things are impacted.
Jpy is that the JPY strength iscurrently that of markets and
when you start, you know likeyou're seeing like risk off now.
But at first this was triggeredbasically on July 11th, on CPI
(03:10):
Day.
Us CPI comes in soft at 8.30 amEastern Time.
Then that initial knee-jerkmove, a softer CPI would imply
Fed rate cuts coming easier,financial conditions markets up,
sort of thing, and so you sawNDX futures actually jump on
that print.
But then, about 13 minuteslater, you saw dollar-yen go
(03:32):
from about 162 handle down tolike 157, half in span of a half
an hour.
That was a yen intervention,that was a Japan Ministry of
Finance intervention, buying ofdollars slamming down of USDJPY
and that was also top tick forthis kind of, you know, from
(03:52):
that NASDAQ all time high momentas well, as you know, dollar
yen as well as other various yencrosses, and from then on we
were just kind of down and down,and down and down and that all
stems back to patient zero,which is the end, carry trade
being unwound.
Yen strength, yen short,covering.
This is position exiting right.
(04:13):
Um, and at that point, at youknow, in the, in the first, like
, call it two weeks or so, thatwasn't again, it wasn't a risk
off event because you saw the,the russell 2000, like
outperforming the nasdaq by 20percent or whatever the hell
insane number.
You know it was um, so, andoutperforming I mean like
actually rising, not likesinking, less so, um, that
(04:36):
wouldn't necessarily be.
Or like a risk off in the senseof um, obviously they're, you
know, like equity, that's anequity, small cap index that's
being bid up.
Risk-off is what I'm talkingabout, like kind of what's
happening in Japan right now,where it's just indiscriminate,
anything, that is a stock ticker, I don't care what it is, where
it was trends that had beenexisting prevailing, then
(04:56):
reversing.
So that's why you get theRussell 2000 to skyrocket as the
(05:19):
NDX is plummeting because thoseare long NASDAQ, shortq, short
russell.
You know pairs, if you will,being unwound, but those aren't.
Like you know people headdiving first, like you know, uh,
head first into nose, dive headfirst into, like long the
russell or something, that's all, that's position exiting and
position unwinding.
But now you're getting therussell to plummet and all that.
(05:42):
And then you're getting thelast two days.
Friday you have the Topics Index, the broad-based Topics Index,
to now underperform the NASDAQfor the first time since this
July 11th moment.
And the Topics Index is abroad-based index with something
like 1,600 stocks and it'scap's cap weighted.
(06:04):
It's much more diverse, it'snot as heavily skewed like the
SPXs towards like five names.
You saw that index gettingcrushed.
And then you start seeing youknow, like I forgot the Nikkei.
And then today you start seeingtopics index futures circuit
breaker.
You have a JGB futures circuitbreaker.
You have JGB Futures CircuitBreaker.
(06:24):
You have JGB Yields gettingcrushed.
You have MUFG, mitsubishi UFJFinancial Group, the largest
mega bank stock, which had beena huge outperformer which I'm
long, by the way, or I was longgetting absolutely crushed like
down 20% today.
And so you know, what you'reseeing is nothing to do with
(06:47):
fundamentals per se, but you'renow hitting the point of like
scrambling around and forcing ofpositions to unwind and you
know having certain limit ordersand you know levels just
getting triggered, one afteranother, another deleveraging
and all that.
But it really does all stemback to just, you know, the
shorting of the end carry tradebeing long, max peso being long
(07:10):
USD, jpy, aud, jpy or whateverit is that often correlate with
these other risk assets.
Speaker 1 (07:16):
Right, it's a literal margin call mechanically.
This was always the thing thatI was arguing, and I always
argued that that would be thespark for a credit event,
because that does at some pointtranslate to higher volatility,
as we're seeing, and then highervolatility translates into
credit spreads widening, whichwe're going to touch on too.
But let's take a step back.
Let's talk about what exactlythe carry trade is.
(07:37):
I am blown away and I'm veryfortunate and I may say this
with complete humility.
I may say this with completehumility the number of people
that have come out and said inmy case, I was early on it, but
I was ahead of everybody else,highlighting this as a risk.
I'm very humbled by it, but Idon't know if people really
fully understand what the carrytrade is, despite me explaining
it.
So, in your words, what is thecarry trade?
(07:58):
Why in the world does it matter?
Speaker 2 (08:00):
So let me just say that the reason that I think
that question in and of itselfis a very particularly important
question is because there is nosingular definition of it.
And I don't think that peoplerealize that there is no
singular definition of it.
So we have to first start withthe premise that there are many
definitions of it.
So when people say, like that'snot the carry trade, there can
(08:21):
all be the carry trade.
So let's just first start there.
So there isn't, like whatever Isay, your definition, yeah,
that too.
That doesn't mean mine is wrong, that doesn't mean yours is
wrong.
There are multiple definitions.
So people have to realize thatthere are different definitions.
Carry trade is the mostbasically in kind of this
context is borrowing in a loweryielding currency, which is
(08:43):
default.
The yen, jpy rates are on thefloor, even with this rate hike,
and then you take thoseproceeds and then you invest in
a higher yielding currency,which is basically anything else
relative to the yen and JPYrates, and then you capture that
kind of the yield spread, theyield differential, and that's
essentially what the carry tradeis.
(09:03):
But then I've also given thisexample like how it comes in
various different forms.
I mean they could be.
Carry trades can be somethinglike very conservative
strategies for people who arejust taking like kind of you
know, nightly income so long asthe yield spread remains intact
and they get credited to theiraccounts or they get debited,
you know, depending on thatyield spread and all that.
(09:24):
But it's just like a long-termsort of thing that you just it's
almost like a like a, like a uhbuying treasuries and leaving
it buy and hold until maturity,like long dated, and just get
you know kind of uh coupons,like paid.
It's supposed to be like thatkind of sense.
It can be anything from that tohighly, highly levered, um, and
just like half percent move, or, let's say, a five percent move
(09:47):
in USDJPY, which is what theinterventions do is wipe out in
five handle increments at a timecan wipe out a five percent
nominal yield spread betweenUSDJPY.
And then an example I give,though, is that people don't
realize that Warren Buffett hasessentially a JPY carry trade as
well, in which so warrenbuffett is famously invested in
like five of these japanesetrading houses, and those are
(10:10):
like very complex megaconglomerates that are in so
many different areas and sectorsand and things like that that
it's almost impossible to dobottom-up like research on.
They have, like you know, athousand subsidiaries.
You know ranging the spectrumof like convenience stores to
interest in various othercountries, but by and large,
they're seen as like commodityplays.
They rise and fall withcommodity prices for the most
(10:32):
part.
And so what he did was likeyeah, he upped his stake in um
famously in april or march orapril of 2023, which kicked off
the nikkei upside, but he'sopened that position the equal
weight, five of the largestJapan trading houses in like
August of 2020.
And when he did that, he issuedBerkshire Hathaway issued yen
(10:56):
denominated bonds at very low,if not like you know, like kind
of sub 1% coupon, and he usedthat those proceeds to fund his
long trading house positions.
So what he did was I say it's avery brilliant macro trade he
(11:18):
went in August 2020, warrenBuffett went short bonds, long
commodities, before commoditiesand interest rates skyrocketed.
But in that sense, that's acarry trade that he has on as
well.
So that could also be definedas a carry trade too.
So, to answer your question,all of those and then more is
what a carry trade is.
Speaker 1 (11:38):
So, similarly to there's a lot of definitions,
there's a lot of different waysof calculating it right.
So there's a question here fromJustin on X how big is the
carry trade?
I think the BOJ has a balancesheet of $5 trillion Japanese
bank runs.
Now I've seen figures that say$20 trillion.
Lynn Alden actually sent me aDM saying that number doesn't
make sense to her given the waymoney supply growth works.
But it's still a big numberregardless, and she and I went
(12:00):
back and forth as far as whatthat could look like.
But do we have any sense of howmuch leverage the boj?
Yeah, well.
Speaker 2 (12:08):
So that's another thing too, because everyone has
a different definition andbecause a lot of it is
especially in the institutionalside is done, you know um, not
off balance sheet per se, butit's not done in a sort of you
know uh, exchange, you know litmarket, if you will.
It's done very much OTC, and soit really is impossible to like
(12:30):
again, like you could argueabout that all you want to, but
it's just, it's not possible tocalculate period.
So let's see, I have somethingabout that though it was from, I
think it was like MUFG Research.
Basically, they basically haveJPY liabilities as foreign
currency in USD.
So the carry trade is thehighest level since leading into
(12:54):
the 2008 financial crisiscurrently, and it has shot up
significantly, kind of brokenout and shot up significantly in
2020, since 2022 yeah, 2022really, when JPY started to melt
down.
Speaker 1 (13:10):
And, by the way, there's a lot of interesting
research around how the carrytrade was one of the reasons
that 2008 happened the way ithappened.
I mean, I don't know if peoplereally understand that point.
Speaker 2 (13:22):
Yeah, yeah, so the RBA, the Reserve Bank of
Australia, printed a researchreport you guys can look it up
about.
People really understand thatpoint.
Yeah, yeah, that that was, um,that was.
So the rba, the reserve bank ofaustralia printed a research
report, um, you guys can look itup uh, about japanese retail
investors.
Retail investors who had engagedin the carry trade leading up
to 2008 which basically trickledinto, you know, the, the
selling of yen, and really aud,jpy was the carry trade of
(13:42):
choice.
Um, I think that there wasmaybe like a four and a half
percent like nominal yieldspread differential between
Aussie rates and JPY rates andthat the ballooning of that had
essentially kind of indirectlyor maybe even directly helped
fund the long subprime mortgage,like instruments that then blew
up, and so it was like, if Ithink it was June or July of
(14:06):
2008.
So in between Bear Stearns andLehman Meltdown, you saw like a
face ripping short cover of thecarry trade and you see AUD
plummet like I don't know, likeby almost by half within, like
you know, three months or so.
So it's insane, so that's aproblem.
Then jpy obviously, you know,uh, skyrocketing and that was a
(14:29):
massive carry trade unwind.
Um, but I think after afterjuly 2008.
I think things were fine inmarkets after that, if I
remember correctly.
Speaker 1 (14:37):
Oh no, no, they weren't at all yeah, my memory
is a little fuzzy on whathappened and the lagged effects.
It's like this has been theother thing which I've kept on
stressing.
I even put that post outearlier.
It's still on Instagram.
I said the lagged effects willhit when everybody thinks they
never will.
Right, and we got to that pointeven just.
I think anecdotally I can saythat from the financial advisors
(14:58):
I've talked to the last severalmonths here and individual
investors.
I shared this post.
I want to get your thoughts onthis, because the comment now
I'm seeing a lot on X is they'regoing to print money.
Here comes the burr.
It's coming back, okay.
So I put this post out.
Here comes the burr, theprinting of all the more just in
response to this.
So I put this post out.
I want to get your response tothis.
(15:18):
I said they can't print theirway out of this one.
This is about a rate hike cyclemismatch with Japan.
They'll worsen the dynamic bycutting rates because then the
interest rate differentialnarrows.
If that narrows, that shouldput more upward pressure on the
yen.
I mean, am I off on that?
That the solution isn't assimple.
Speaker 2 (15:37):
No, that's not really up for debate, that's pure fact
.
That's what's happening.
You have a monetary policymismatch, directional mismatch.
You know that's what you'resaying.
Right, the fed yes, the fed isdone ripping every, not the fed.
The world x japan is done,ripping rates higher um.
And some are cutting the bankof england.
Just cut um.
(15:58):
And the fed.
So who cares if they do it inseptember or if they just signal
it in July or if they do two?
And if they do like this, whoreally cares?
The general direction is mostlikely Fed funds rates aren't
going to rip another 5 percenthigher.
Probably not, and more likelythey will either flatten out and
(16:21):
or fall.
Either flatten out and or fallum.
So that directional reversalwould sort of help the yen,
because that was um a big partof why the yen got destroyed
versus usd in the first place,starting in 2022, when they
started ripping rates higher andboj was steadfast and keeping
yield curve control and stufflike that just, you know,
(16:41):
maintained no matter what,unconditionally, almost um.
So now you have that happeningand at the same time you have
the Bank of Japan, I guess on ahiking cycle as far as that's a
find in Japan.
But yeah, you have once again acontinued difference in
interest rate policy.
Just, the polarity has nowflipped.
Speaker 1 (17:03):
Yeah, so key to my thesis.
In August, when I first reallybrought this up, I said the
issue is not so much the yen,the issue is oil priced in yen,
because oil is denominated indollars and as oil rises and the
yen weakens, for a country thathas to import all of its energy
(17:23):
, that becomes a real problemfrom a cost push inflation
standpoint.
And now you've got the specterof war again.
Who knows three, four, I don'tknow what world war we're on now
anymore between Iran and Israel.
But how does the movement ofoil impact anything as it
relates to this?
Or is this just underway?
We can't really kind of expectanything to throw it off.
Speaker 2 (17:44):
So in the near term as in the immediate term.
By the way, let's clarify foreveryone, as far as also for
ourselves too, we're ondifferent time horizons too.
I just opened shorts on Nikkeifutures and DX futures last week
.
This morning, before this, Iwas scrambling to trim some of
(18:08):
those USDJ Yen futures position,stuff like that.
I'm also long MUFG and took afucking, like you know, 40% hit
in the last two days.
After that wiped out the yearto take gains in two days.
So my time horizon is veryshort as opposed, you know,
relative to yours.
You also have a very differentrole as ETF vendor.
You also have a very differentrole, um, as etf vendor.
(18:31):
Um, so oil prices in theimmediate term, like I wouldn't.
I would say just general,generally speaking, um, oil
prices or otherwise, I wouldn'tlook, read too deeply into like
current shorter term intradaymarket movements as what the
collective markets are tellingus is happening and like
extrapolate some giant recessionthesis or something like that.
Like you're applying short-term, shorter term market green and
(18:54):
red blinking ticker, umbehaviors and movements that are
often tied to like forcedposition exiting, unwinding,
that sometimes are triggered byothers uh, you know, you know
other other markets or othertickers that have nothing to do
with having to liquidate thatposition, except for the fact
that it's owned by the samemanager who has to liquidate
things.
So I wouldn't extrapolate toomuch.
(19:14):
But in the outside of theshorter term trading world that
I personally would live in, yeah, oil prices are a key driver.
So, markets-wise, oil pricesprobably are the key driver of
JPY from a markets perspective,just because you know
(19:35):
commodities markets, justbecause of the fact that Japan
has to import so much oil whichis priced in USD, oil or energy
subsidies coming in Japan andall that.
That's why the bank of Japanhad just released their outlook
report to the quarterly outlookreport, in which they revised
down CPI because of energysubsidies that are coming, but
(19:56):
then therefore they had torevise up the next year's year
on year.
You know base effects but yeah,there there is sometimes
invisible in charts, like clearyou know oil versus USD JPY
alignment, that alignment thatoccurs.
So yeah, when you have likeMiddle East conflict and stuff
like that, that's not good forthe Japanese.
(20:17):
You know on the ground personand speaking of that too, and
kind of outside of markets.
I think it was Lynn Alden whorecently kind of asked about are
people in japan like actuallypaying attention to, like the
actual jpy rate itself?
And I think that that's that'snot a stupid question at all.
That's a fair question, becausepeople why would they otherwise
(20:38):
?
Right?
But my answer to her was yeah,absolutely, they are like that
is, like this is front page news, like the rate itself, um, and
people who never used to payattention to it, they, they know
that, like the yen, is the yengetting destroyed environment
andgetting-destroyed environmentand that's a bad thing, not a
good thing, good for exporters,whatever, no, no, no, this is a
very, very bad thing.
And they also know that they'repaying a lot more for especially
(21:00):
energy-related costs, and tothe point where nursing homes
are going around room by roomevery hour to make sure that
people aren't trying to tough itout by not having their ACs on
and stuff like that.
And the Japanese regular peopleare trying to figure out what
other personal expenses to haveto cut, because air conditioning
(21:22):
and all that is an inevitablerising cost that they have to
live with.
So, yeah, so they know thatthere's something about, even if
they don't know the mechanics.
They just know that there'ssomething about like weakening
yen and the prices that theyhave to pay for energy costs.
Those are somehow linked andthey're very pissed off about it
(21:43):
.
And then that feeds into, bythe way, politics, which is what
feeds into what we saw in thislatest interest rate policy,
this shock rate hike out of theBank of Japan this past week.
So, yeah, that's a huge part ofit.
Speaker 1 (21:57):
And there was and I believe it still is, a
tremendous amount of shortspeculative positioning against
the yen, which is not just thecarrier trade, but just people
were shorting the yen to makemoney, right, so everyone was so
one sided on this.
I've made this point before.
The risk is that you get thisuncontrollable short squeeze.
Now the yen's been movingpretty aggressively, obviously,
especially today.
Let's talk about some pointswhere, from your perspective as
(22:20):
a trader, you'd say OK, now itmight be enough.
What level for the yen are youtalking about when you say OK?
I actually want to buy into thisas far as the equity side, the
risk-on side.
Okay, Well if you want to shareyour experience, you've got
some chart to show.
Speaker 2 (22:36):
yeah, yeah, so here's what.
So, yeah, you know that chartthat I had tweeted out a chart
earlier about of the of NDXfutures, nikkei futures futures
and jpy um, very highlycorrelated also of nvidia as
well, because I know that youlove that stock so much and um
(22:56):
and the character as well.
Speaker 1 (22:57):
Please, please, tell everybody that I'm not crazy,
that part of the oh, that'ssarcasm nvidia.
Come on, man, it's like it'sthe poster child for the carrier
trade.
I don't know why people don'tsee is the correlation is is
clear, the causation is there.
Speaker 2 (23:11):
Well, yeah, so let me just tell you Okay.
So there's something calledNISA accounts, n-i-s-a.
If you don't know what that is,and if you're an equity, if
you're a US equity investor andyou don't know what Japan NISA
is, you need to know what thatis Okay.
(23:33):
Is you need to know what thatis okay nisa is?
It stands for nippon investmentsaving, savings, whatever the
hell it stands for.
The uk has a similar scheme andwhere you basically get to
invest um tax-free up to acertain amount.
That got revamped in.
That existed for a while, butthat got revamped in january
2024 and since then there havebeen an enormous amount of new
NISA accounts being opened andnew assets flooding into those
NISA accounts that are investingin USD stocks, s&p 500, nasdaq
(23:58):
100, and a single single stockwhich always makes that kind of
top 10 list, and that is tickerNVDA.
Okay, now why are they doingthat?
The Japanese aren't buying USequities because of American
exceptionalism or whatever thehell.
They're fleeing.
The yen is what they're doing.
The yen is, or cash holdingsare, more than 50% of Japan,
(24:22):
household assets of financialassets, more than 50%.
So relative, if you want kindof a context.
I think the US is about 15%.
Japan is a massive cash hoarding, cash saving society.
That's what 30 years ofdeflation is.
That's literally mattress cashor stuffed in drawers and things
like that.
And why are they doing that?
(24:44):
Because it's a very risk-averseculture.
The kind of thinking is thatbecause Japan's government has
so much outstanding debt, theJapanese government will not be
there for you.
This is what NISA is basicallyadmitting.
The government is basicallyopenly saying the government is
not going to be there for you tofulfill its social security,
(25:07):
all that kind of obligationsthat you paid into.
You are on your own.
You must build financial assets, you must build your cushion,
and it's like a $200,000 USDsort of cushion for retirement
is the figure that's been thrownaround.
So people will just save cashand that's great.
In a deflationary environment,prices don't go up.
(25:27):
People don't even think aboutthis concept of purchasing power
.
Why should they?
Well, that's fine.
But then, when you haveinflation happening and you have
the JPY getting destroyed, thenthat safe haven the supposed
safe haven your 55% of householdnet worth is now a concentrated
long JPY position.
(25:48):
Household net worth in is now aconcentrated long jpy position.
So you went from being like inthe safe haven to now like a
concentrated long, like theworst performing currency for
three years running now.
So people are starting torealize that and there's that is
probably the most significantthing is that like, yeah, there
are short sellers andspeculators and all that who
have record size yen shortpositions on, although those are
(26:09):
being pared back and, you know,closed out.
But the biggest sort of fear, Iguess, um, or the biggest
concern I have, and certainlyprobably the government,
although never acknowledges iscapital flight out of japan.
If, because that's not closingof like short positions, that is
, exiting of a natural long or aholding right, and if it goes,
(26:31):
if it's coming out of japan.
Japan is barely invested, uh,as it is, like the japanese
household as it is, they're,they're in single digit
percentage of stocks, but theyhave flooded into nasdaq stocks
um from year to date to recordlevels, so much so that it like
that that amount exceeds, likethe country's sort of balance of
(26:51):
payments um figure.
In and of itself, okay, it's anenormous amount.
So if you're wondering why theunited states stock market and
the nasdaq has been likeskyrocketing um or like is up so
much against all these very,you know, legitimate bear cases
or or reasons to be skeptical.
It's because of foreign flows,mostly out of Japan, that are
(27:12):
doing this, and they're notbuying US stocks and Nvidia and
stuff like that.
They're not doing that becauseof US-related reasons even.
They're doing it because theyen is melting down and they're
just looking for any non-JPYdenominated asset, but because
the NISA accounts only allow forequities and they don't want to
touch the Nikkei index, whichis much less sexy and it's at
(27:35):
its all-time bubble peaks.
The grass is always greener onthe SPX side, is what I always
say about the Japanese mentality.
And so why not?
Why not buy NDX?
The NASDAQ stocks are thesesexy stocks that they use
themselves Facebook and Meta andGoogle, amazon, all that.
So they invest in those andthat's why they just continue to
(27:57):
go up and up and up and up.
And then another point I'll sayto you, michael, sorry to
continue on rambling like this.
Speaker 1 (28:04):
I love this.
First of all, you're educatingme on things, which I appreciate
, but it's like you'revalidating I'm not crazy and
it's like I was clearly wrong inNVIDIA.
But why was I wrong aboutNVIDIA?
I didn't expect the carriagerate to last as long as it did,
but now it's starting to slowly.
Then, all of a sudden matter.
Speaker 2 (28:20):
So this concept of people need to also understand
that markets, equity marketswell, actually global
cross-asset markets that havelike liquid futures, but
especially equity markets, arevery, very systematically driven
(28:41):
these days Systematic funds andflows.
In other words, they're nothuman beings.
Speaker 1 (28:51):
Human beings are not the predominant, you know daily
active market participants?
Oh, you're telling me that?
It's not the anonymous trollaccounts with a hundred thousand
bots that are following them,tweeting charts and putting
squiggles from their basementswhile their pet hamsters are
sleeping?
You're telling me it's notthose guys?
Speaker 2 (29:05):
oh, I don't know about the pet hamsters part, but
yeah, by and large, yeah, it'snot those guys.
Yeah, so like I think that look, and I don't know why people
don't seem to kind ofacknowledge this, but when you
see very shallow market breadthin the United States, okay, what
(29:26):
is that an indication of?
It's an indication of a lack ofactivity of, you know, actual,
like human stock picking, um,fundamental activity, like XYZ
company, dcf analysis this is agreat company in the S and P,
like top 100 or whatever, andtherefore let's buy shares and
like the absence of that is whatcauses like very, very shallow
(29:46):
market breadth.
But then, in addition to that,look at like what happens during
earnings season, which we're, Iguess we're in the middle of,
in in the us, when you see likedouble digit, you know, or 20
percent gaps up and down.
You know, after earningsreleases in the aftermarket or
in the pre-market the next dayoff of like relatively in line,
maybe a slight miss, maybe aslight beat, but like huge, you
(30:09):
know, gaps.
What that is is that's likethat's when you see the active
human being, you knowfundamentally based capital that
is waiting for results, thatgets the results, and they all
jump in at the same timesimultaneously and that's why
you have these huge, huge swingson an intraday basis, like like
I was.
(30:29):
I wrote in my sub stack, likeyou know, is that really like?
Is that how you know kind offree, free markets are,
efficient markets, price thingslike systematically sort of
driven markets and systematicand CTA flows and funds.
(30:52):
Up until like the interventionmoment of July 11th at 8.43 am
Eastern Time, they were set tolike short JPY long, ndx short,
you know, russell 2000, allthose sort of trends that were
working out like fantastic, andthen they just got blown up.
So there is like that part ofit, like the systematic part of
(31:15):
it.
It's not just like they're notall reflections of human beings
and nor are they reflections ofhuman beings opening new
positions, new longs or anythinglike that.
Speaker 1 (31:31):
A lot of it's just exiting, you know, like existing
positions that people have torealize that that's also price
action explanations.
I will say real quick it is.
I put out that post like twoweeks ago I said they sucked
everybody in with a small caprotation narrative, just as the
character traits about toreverse.
I mean it's amazing how themarket just did that.
It pulled them in just beforethis happened.
A thought came to me as youwere talking about the NISA
accounts and actually Alex Nova,who I haven't chatted with in a
(31:53):
while but, alex, good to seethat you're watching this put
the Wikipedia link to learnabout the NISA accounts With the
opportunity set.
Is the Russell 2000 evenavailable for those investors or
is it just large cap?
Speaker 2 (32:13):
Because I wonder if that explains some of the
differential also between largeand small.
Yeah, it's available doesn'tmean that people are going to
buy it.
Yeah, right, um, you know so,the biggest.
So they like there's variouskind of um funds.
A lot of them are these, likethey're you can call them etfs,
I guess they're, they're.
They're more or less behavelike etfs, um, but the, the
funds that get the biggestinflows, like the top 10 of them
are at the very top, is likethis all country world fund,
(32:37):
right, and it's supposed to be.
I guess it's just a mix of dmequities, that is, 60 like
microsoft and uh, like the toptech stocks.
Okay, so that in itself is thatthe rest of them are from, like
you know, number two to ten arelike sb500, nasdaq, 100 sort of
targeted um uh funds and some,and then sometimes here and
(33:00):
there actually I haven't checkedrecently you do get like an
india fund, because india isalso kind of a.
That's like the non-us sort ofem play out of japan because
japan doesn't want to invest inchina.
Uh, neither does the rest ofthe world, neither does china
itself.
Um and um, you know so.
(33:20):
So you get that every now andthen um, but then, like I said,
every now and then you do see asingle stock ticker that shows
up and that's NVDA.
So that's what they do.
And do you think that thesepeople are diving into earnings
and guidance and listening?
They don't know what JensenWang is saying.
Speaker 1 (33:40):
And the best picture of people on X and social media
aren't either.
It's not fundamentally driven,it's leverage-driven.
It always is leverage-driven.
That's what FOMO is about.
Fear of missing out is whatcreates the desire for leverage.
Speaker 2 (33:55):
Fear of missing out.
But the thing is, when it comesto NISA, it's not missing out,
because Japan's used to beingmissing out.
There's no fear there, japan isso unique that it's happy to
miss out, been happy to miss outfor 30 years.
That's why the Nikkei didn'tbreak its record high from its
bubble pop 30 years ago, untilrecently.
(34:16):
So they're fine with missingout, hence sitting in cash.
What they're not fine with,therefore, is that cash to start
getting burned.
And so now it's just not fearof missing out, it's fear of you
know losing savings Of theirsavings exactly Getting
decimated, and so it might soundnonsensical to therefore find
(34:41):
safety in NVDA shares.
First of all, I don't give afuck what you think.
It is what it is.
It's a cultural difference ofmindset that you have to really
understand via taking yourselfout of your bubble context and
putting yourself in the shoes ofsomebody else from a different
part of the world, and you haveto look at it from that
(35:04):
perspective, like this wholeconcept of American
exceptionalism right, which Ibelieve in.
I truly do believe in thatbecause of American
exceptionalism, americanexceptionalism means that the
rest of the world is thereforegoing to be flooding into and
investing into thisexceptionalism that is America.
Ok, I don't understand whyAmerican exceptionalism equals,
america, only invests in America.
(35:24):
American exceptionalism equalsAmerica only invests in America.
Like there are factors that,because of these global you know
flows into USD, us Treasuries,us stock markets, you have to
therefore pay attention towhat's happening in other parts
of the world, because somethingthere can cause a pull out or a
rush into this exceptionalAmerica, and that has nothing,
(35:48):
that may have absolutely nothingto do with America in and of
itself.
So you know there's, there islike that, that part too.
So just to add on to what youwere saying about people who are
kind of wearing blinders.
There's also like a lack ofpeople who are not acknowledging
that, like, the S&P 500 is notan American or US asset, it's a
global asset class.
So are Euro's treasuries, so isthe US dollar.
Speaker 1 (36:15):
Do you get a sense that the Bank of Japan is
bluffing in terms of gettinghawkish, and I'll tell you why I
frame it that way.
So I put a piece on a sub-stackmy own sub-stack on the Lager
Report from May 10, where theargument that's being made is
that you can't really raiserates in Japan because of the
mortgage rate dynamic andhousing, which also gets
decimated with any sort ofhiking cycle.
(36:37):
I mean, how much more can theBank of Japan do anyway, and do
they even need to if the yen isgoing through this short squeeze
?
Speaker 2 (36:45):
going through this short squeeze Do I think they're
bluffing.
So what you mean by that is arethey going to hike anymore
after this shock hike?
Yeah, okay, first can we justacknowledge that the Bank of
Japan last week okay, I thinkagain this is going to go back
to the American exceptionalismpoint.
(37:05):
Okay, the least marketconsequential for this current
moment central bank that hadtheir policy release is the
fucking Fed, the FOMC, andthey're doing over the nothing
and the promising of a rate hikein September.
What's more important afterthat, the Bank of England, who
(37:26):
actually did cut rates, and thatwas kind of england who
actually did cut rates and thatwas kind of like a 50 50, like
you know, markets didn't reallyknow which way, but arguably you
could either say the fed doingnothing and signaling that
they're going to do something instart, caught in september,
which is something that's beenlong priced in and expected and
speculated about for like over ayear now, or maybe is it that
(37:46):
the bank of japan shock liftedrates basically off the zero
bound, um, like within, viapress leaks from 12 hours
earlier, and then actuallyexecuting it and then remaining
hawkish like governor waderremaining hawkish, uh, after
that I think that might be kindof a much significant,
relatively speaking.
(38:07):
Ok.
So your question of are theygoing to maintain this Right?
No-transcript?
(38:47):
Doing that they had they helpedthey hold these like bond
market group, like investorsurvey groups, like basically
bond market participants, uh,jgb market participants, and
they would get feedback fromthem and essentially, um, they
designed the policy around that.
So when they released how theywere going to trim the pace,
that they were going to trim jgbholdings and all that kind of
thing, which was basically goingto be about 400 billion yen per
(39:13):
quarter down to three trillionyen, so basically half of what
it currently is on a monthlybasis, by the end of was it
fiscal year 2025 or somethinglike that?
Okay, so that was not only justpriced in already, but that was
dictated more, not dictated,but that was already like that
was guided by via bond marketinvestors themselves.
(39:34):
So there's no surprise thereand there's no surprise that
there's no surprise there.
So the if the bank, japan, who'sso kind of focused right now,
is clearly the yen.
Everybody knows this, they knowthat, everybody knows this and
they are, for the first time,acknowledging, at least publicly
, that, yeah, the yen is afactor.
You don't have that lever ofthe QT-ing or the lessening of
(39:57):
QE, of JGB purchases, to hitmarkets on BOJ Day anymore.
So you have that.
So you have like a kind of ahike, a sort of shock hike, and
and it's not just a hike, by theway, and I know it's only 15
basis points, I don't know, it'sonly to 0.25 to a quarter, you
know a quarter percent or 25basis points.
The reason that's significantis because, michael, I'm sure
(40:18):
you remember, but do youremember, leading up to the
first rate hike off of zerounder janet yellen in de,
whatever, 2015,?
Right, how much like not justguidance from the Fed, but like
the fanfare around and like, ohmy God, it's FOMC day, it's lift
off of zero day, and like, andit was understandable because,
you know, after the financialcrisis, rates were like
collapsed down to the floor Fedfunds rates and they were left
(40:40):
there for a very long time.
So who knows what's going tohappen once that kind of lifts
up?
And then they lifted the ratesand then everyone kind of looked
around and was like, did theworld blow up?
And everything was fine.
So in retrospect it looks alittle bit overdone, right, but
still I think that some of thatcaution was warranted.
Well, the Bank of Japan justbasically lifted off zero like
in a shock manner.
Japan Japan did as everyoneelse, as you were saying, is on
(41:02):
the verge of like cutting, sothat's kind of an insane thing.
So why do they do that?
Okay, they'll say that this wasUeda will say that this was a
necessary thing, because anecessary thing because of you
know, we need to get ahead ofthings like currency dynamics or
, like you know, risks ofinflation or whatever it may be.
(41:24):
But he'll say that, like it'sbetter to be ahead of it than to
wait too long.
And then, you know, rip rateshigher, or something like that.
And then he's also saying,though, like he remained very
hawkish and I don't I don'tthink that necessarily it's a
matter of bluffing or notbecause he remained very hawkish
, like people thought, okay, sothey shock, lifted rates, but
then at the conference he'sgoing to just tone it down and
(41:45):
give a dove.
It'll be a net, net dovish ratehike.
It was not a dovish rate hike.
He was saying like, by the way,like you know, because somebody
asked him, what about this 50basis point ceiling?
Right, because that's that'skind of this perception that
there's a 50 basis point ceilingfor boj rate hikes, and he's
like there's no such 50 basispoint ceiling.
So he kind of dispelled thatnow.
Whether or whether or notthat's true we'll see, find out
(42:05):
real time.
But he did explicitly say no 50basis point ceiling.
And furthermore, he's saying,like, as long as, like the
economy and like the dataperforms in line with the
outlook right, not exceeding theoutlook, in line with the
outlook, we will continue toraise interest rates.
Okay, so that could be, I don'tknow up to 1%, 1.5% on the BOJ
(42:27):
policy rate, for which they'vejust now brought up to 25 basis
points.
So now they can move in anormalized 25 basis point
increment at a time.
So if you say, like what?
25 basis points every threemonths or so, you know you can
get to like a 1%, you know,within a year's time.
That seems to be like whatthey're kind of laying out, and
I think that it's not.
(42:48):
The you know the end had alreadybeen crushed down 10 handles at
that point, so it's notnecessarily, at least perception
, wise for the end.
I think that they are reallytrying to do that.
I could also argue too, though,however, that because the yen
got crushed down, that's whythey were able to do it?
Because if they're doing itwith the end that, because the
yen got crushed down, that's whythey were able to do it.
Because if they're doing itwith yen pressed up at 1.62,
(43:09):
then it'll be like oh, nowyou're actually using monetary
policy to affect currency rates,now that it's off of that, but
it's still very, very highUSDJPY.
That's why they could, you know.
So there's a bunch of ways todo that, but I don't think that
they're bluffing per se, but Idon't think it's a bluff or not.
I think that they've actuallytruly lost their whatever shred
of independence that they hadleft at this meeting.
Speaker 1 (43:34):
The counter that I often see is Japan wants
inflation, so why would they tryto squash it now?
Let's talk about that, becausethat is the thing.
It's like they've wantedinflation and now they're
starting to hike rates and it'slike, all right, well, you're
going to hike rates, you'regoing to stop the inflation.
Speaker 2 (43:51):
Right, but Japan's inflation is externally imported
inflation by way of like, Isaid, energy and the yen.
So the Bank of Japan is in thebusiness of like, of not
currency management, butcertainly currency
considerations.
And the thing is that if JapanOkay, so if Japan is like oh
(44:18):
sorry, I'm getting marketnotifications like crazy If
Japan is raising their rates andall that, and they're doing it
because of inflation, as theysay, it's nonsense, because take
Yield Curve Control, forexample.
Yield Curve Control had existedsince September of 2016.
(44:41):
And so when the Bank of Japanshock lifted yield curve control
bans under Governor Kuroda inDecember of 2022, people were
saying, oh, that's the Bank ofJapan finally reacting to CPI
raising above target of 2% inJapan.
And so therefore, now thatinflation has finally reached
Japan, yield curve control isbeing unwound and all that kind
(45:03):
of thing.
Yield curve control had nothingto do with japan's inflation,
like it was in place for years,over a decade.
Before that.
There was no inflation that wasgenerated of japan as a result
of that.
Japan inflation was a result ofglobal inflation that was
occurring not because of yieldcurve control.
So what the hell would theremoving of yield curve control
(45:25):
caps, or like the raising ofthem.
What the hell would that haveto do, have any impact on the
mitigating of inflation that itdidn't cause in the first place?
And I would say the same thingabout, like you know, about the
short term policy rate.
There is the mortgage thingwith floating rate mortgages and
all that because they resetevery five years that in that
(45:50):
time frame.
Essentially what he's saying isthat in that time frame the
policy mix will outweigh thegrowth in real wages and all
that will offset any sort ofincreased mortgage expenses and
all that.
So he basically not brushed itoff, but he acknowledged it, but
(46:12):
with a kind of a very nonsenseanswer.
And yeah, so that's where thatstands.
But yeah, inflation in Japan isnot.
It is kind of a zero sum fromthe Japanese perspective, like
because if energy inflation isoccurring, you're going to spend
less on other things and you'regoing to choose to, not because
you have to, but because thingsare going up.
(46:34):
People are not chasing priceshigher because things are going
up.
People are going to save morebecause prices are going up.
That's how it works in Japan.
Mentality wise.
Speaker 1 (46:43):
I love this point, which is obviously very accurate
.
Japan's debt to GDP ratio islike 280 percent.
Won't rate hikes?
Blow them up.
Speaker 2 (46:53):
No no.
Speaker 1 (46:55):
Yes and no.
The government owns their ownbonds right.
Speaker 2 (46:59):
What does blow them up mean?
And no, they won't, because whywould they blow that on
themselves?
Because they own, yeah, causethey've cornered the JGB market.
And if they do, they're goingto blow it up on the, the,
mostly on that which owns JGBs,which is mostly the bank of
Japan.
But at the same time, you'restarting to see like kind of
(47:25):
relatively speaking, fiscal,like prudence I'm very hesitant
to say that out of Japan, butrelative to how they have been
before, they are starting toacknowledge higher interest
rates means the cost of issuingJGBs has gone up four or
five-fold within the space of ayear, and all that JGBs has gone
(47:48):
up like four or five foldwithin the space of a year, and
all that.
And they're trying to they theyalways try to aim for, like you
know, balancing the budget andall that kind of thing.
But I think that, as it relatesto government debt, currently
the Bank of Japan is trying tounwind or to lessen the amount
of JGB holdings that they have,and it actually it sounds like a
(48:11):
lot Right when you say like OK,they're currently buying about
600 billion yen, 600, 600, sorry, 6 trillion yen worth of JGBs
per month, and they're going totry to bring that down to 3
trillion yen in a very laid out,specific manner within, you
know, in a gradual andpredictable manner within the
next like year or so.
And so that's a minus 50%, youknow, drop.
(48:35):
That sounds like a lot, butwhat that means is that that's
lower.
That's like something like asix or minus six minus 7% less
of JGB holdings on the balancesheet is all it is.
So it might sound like adrastic measure, but the Bank of
Japan is still the player, thenecessary player, and creditor
(48:57):
to Japan, and so I don't thinkit's going to blow anything up
in terms of Japan default oranything like that, because they
could control both levers thefiscal, the issuing as well as
the buying of JGBs, as well as asetting of where the JGB yields
could be via these fixed rateoperations where they're bid for
(49:20):
unlimited at yield level X,which they got rid of, but they
could always reintroduce, asthey say in their latest meeting
.
No, I think that what I alwayssay is Japan is sustainable.
No, it's not sustainable.
Is it more sustainable than wethink?
This supporting of the JGB andJPY markets simultaneously Is
(49:44):
that sustainable?
No, is it more sustainable thanwe think?
Yeah, it can go on longer thanwe think and that's why they are
widow makers.
That's why there's a widowmaker trade Because it's not
sustainable.
People put that trade onBecause the Bank of Japan and
the Ministry of Finance cancarry this on for longer than
people's time horizon.
That's why they get blown up.
So that's the answer.
(50:04):
If you're asking from a tradingperspective, is there going to
be a blow up?
No, your portfolio is going toblow up.
Is there going to in the longerterm?
Like history textbook sort ofcontext, yeah, you'll.
This is not sustainable.
Speaker 1 (50:20):
So we only got about 10 minutes.
But speaking about timeframesand being a trader, I am curious
to hear your thoughts on, atleast very short term, how you
think this plays out.
I myself have said to a lot ofpeople's surprises, I think that
given the fact that everybodyseemingly now is on this reverse
carry trade, my contrarianintent is to go up.
I even put out I was looking atmy analytics on X right and I
(50:42):
had my second biggest impressionday like 5.3 million
impressions in a single day aseveryone started realizing the
reverse carry trade may actuallybe here.
The last time I had somethingthat high was when I was peak
bearish at the end of Octoberand Black Monday was trending
and that entering November endedup being the low.
So let's do a little bit of acontrarian thought process here.
Short term right.
(51:02):
Short term.
Short term right Short term.
Is there a chance that everyonenow is so bearish suddenly that
maybe we have some kind of arip before what I'm saying, a
bigger main event comes and I'mjust talking like maybe for like
a week, not like somemulti-month period.
Speaker 2 (51:17):
Well, what do you mean by bigger main event
Meaning?
Speaker 1 (51:27):
Like, look at Japan.
Like you know, global marketsright now it seems like a pretty
big main event.
But I guess where I'm goingwith that, where the S&P, for
example, would round trip andgive back all the gains for the
year as an example.
Speaker 2 (51:39):
Yeah, potentially.
Speaker 1 (51:40):
Could you see it move higher?
Speaker 2 (51:41):
first, before that, well, I would say so I don't
know levels-wise, but I would Ithink that.
So, again, in the context of,like just japan, um and or, like
you know, flows, flows into thespx via, like these nisa
accounts and all that, so thethe topics index and like, if
(52:04):
you're getting 99% of the TopicsIndex names getting sold off
indiscriminately and down toofficial correction territory,
then to bear market territorywithin two days, and all that
kind of stuff, the Japaninvestors are invested, of
course, in Japan equities, but
my name is michael guy at, publisher of the legal
report.
Uh, join me for the hour.
Here is mr weston nakamura who,if you haven't seen his stuff,
he's got some incredibleresearch and analysis,
phenomenal sub stack, and he andI have actually talked about
the carrier trade before, uh,towards the end of last year as
a very likely scenario.
He and I think we're about thecarrier trade before, towards
the end of last year as a verylikely scenario.
He and I.
I think we're both early but,as I emphasized, being early is
(00:29):
not wrong as long as you don'tshort.
That's the key to this stuff,which people don't seemingly
understand.
So, weston, for those who arenot familiar with you, before we
get into the heart of thematter, talk about your
background.
Who are you?
What have you done throughoutyour career?
Speaker 2 (00:54):
And what's the mood in japan right now?
Um, start with the latter moodprobably is what, um 1990, you
know, uh bubble burst might havefelt like, I guess I don't know
.
Um, yeah, hi, my name is westonaguilar, from across the spread
.
Um, I do macro research andanalysis with an asia focus that
relates to and impacts globalmacro markets, specifically from
more of the DM US equity market, investors, lens.
(01:15):
So when I talk about thingslike the Bank of Japan, the Yen,
jgbs and stuff like that, I'mnot talking to, like, jgb
investors None of you are JGBinvestors, I would assume, and
JGB investors probably don'tlisten to me.
Actually they do, but I'mtalking from the point of why
this matters to people and isbeing severely undercovered, and
so therein lies risk and oralpha.
(01:36):
So that's kind of my niche.
I'm also a professional clownand so oftentimes I'll just
throw in what I think ishumorous.
That's up for, again, themarkets to debate.
But yeah, that's pretty muchwhat I do, and so I have a sub
stack and I also have a YouTubechannel as well, all right.
Speaker 1 (01:56):
So I want to start with a softball question which
is from YouTube.
Did Japan just blow up theworld?
I mean, what is going on here?
I mean I'm making light of it,similar to, by the way, when I
when I was making light of itwith david lynn in august, when
I first brought up the wholethesis of the reverse character
trait but I mean how serious uhis is.
(02:17):
This is what's going on andwe're getting to the background
of it.
But let's just talk about thehere and now.
Speaker 2 (02:21):
So, um, you started calling it, um, I don't know if
it was you specifically, but youknow I I associate you with the
term uh, global margin call.
I believe I've been saying thecrowd strike.
Jpy is the crowd strike of uh,of global markets, which is kind
of the same thing.
But you know, crowd strike forthose who don't know, you know
(02:44):
is a very recent sort of eventwhere you have the single point
of failure across all like ITsystems and like took down, like
you know, airline systems, likeso many things are impacted.
Jpy is that the JPY strength iscurrently that of markets and
when you start, you know likeyou're seeing like risk off now.
But at first this was triggeredbasically on July 11th, on CPI
(03:10):
Day.
Us CPI comes in soft at 8.30 amEastern Time.
Then that initial knee-jerkmove, a softer CPI would imply
Fed rate cuts coming easier,financial conditions markets up,
sort of thing, and so you sawNDX futures actually jump on
that print.
But then, about 13 minuteslater, you saw dollar-yen go
(03:32):
from about 162 handle down tolike 157, half in span of a half
an hour.
That was a yen intervention,that was a Japan Ministry of
Finance intervention, buying ofdollars slamming down of USDJPY
and that was also top tick forthis kind of, you know, from
(03:52):
that NASDAQ all time high momentas well, as you know, dollar
yen as well as other various yencrosses, and from then on we
were just kind of down and down,and down and down and that all
stems back to patient zero,which is the end, carry trade
being unwound.
Yen strength, yen short,covering.
This is position exiting right.
(04:13):
Um, and at that point, at youknow, in the, in the first, like
, call it two weeks or so, thatwasn't again, it wasn't a risk
off event because you saw the,the russell 2000, like
outperforming the nasdaq by 20percent or whatever the hell
insane number.
You know it was um, so, andoutperforming I mean like
actually rising, not likesinking, less so, um, that
(04:36):
wouldn't necessarily be.
Or like a risk off in the senseof um, obviously they're, you
know, like equity, that's anequity, small cap index that's
being bid up.
Risk-off is what I'm talkingabout, like kind of what's
happening in Japan right now,where it's just indiscriminate,
anything, that is a stock ticker, I don't care what it is, where
it was trends that had beenexisting prevailing, then
(04:56):
reversing.
So that's why you get theRussell 2000 to skyrocket as the
(05:19):
NDX is plummeting because thoseare long NASDAQ, shortq, short
russell.
You know pairs, if you will,being unwound, but those aren't.
Like you know people headdiving first, like you know, uh,
head first into nose, dive headfirst into, like long the
russell or something, that's all, that's position exiting and
position unwinding.
But now you're getting therussell to plummet and all that.
(05:42):
And then you're getting thelast two days.
Friday you have the Topics Index, the broad-based Topics Index,
to now underperform the NASDAQfor the first time since this
July 11th moment.
And the Topics Index is abroad-based index with something
like 1,600 stocks and it'scap's cap weighted.
(06:04):
It's much more diverse, it'snot as heavily skewed like the
SPXs towards like five names.
You saw that index gettingcrushed.
And then you start seeing youknow, like I forgot the Nikkei.
And then today you start seeingtopics index futures circuit
breaker.
You have a JGB futures circuitbreaker.
You have JGB Futures CircuitBreaker.
(06:24):
You have JGB Yields gettingcrushed.
You have MUFG, mitsubishi UFJFinancial Group, the largest
mega bank stock, which had beena huge outperformer which I'm
long, by the way, or I was longgetting absolutely crushed like
down 20% today.
And so you know, what you'reseeing is nothing to do with
(06:47):
fundamentals per se, but you'renow hitting the point of like
scrambling around and forcing ofpositions to unwind and you
know having certain limit ordersand you know levels just
getting triggered, one afteranother, another deleveraging
and all that.
But it really does all stemback to just, you know, the
shorting of the end carry tradebeing long, max peso being long
(07:10):
USD, jpy, aud, jpy or whateverit is that often correlate with
these other risk assets.
Speaker 1 (07:16):
Right, it's a literal margin call mechanically.
This was always the thing thatI was arguing, and I always
argued that that would be thespark for a credit event,
because that does at some pointtranslate to higher volatility,
as we're seeing, and then highervolatility translates into
credit spreads widening, whichwe're going to touch on too.
But let's take a step back.
Let's talk about what exactlythe carry trade is.
(07:37):
I am blown away and I'm veryfortunate and I may say this
with complete humility.
I may say this with completehumility the number of people
that have come out and said inmy case, I was early on it, but
I was ahead of everybody else,highlighting this as a risk.
I'm very humbled by it, but Idon't know if people really
fully understand what the carrytrade is, despite me explaining
it.
So, in your words, what is thecarry trade?
(07:58):
Why in the world does it matter?
Speaker 2 (08:00):
So let me just say that the reason that I think
that question in and of itselfis a very particularly important
question is because there is nosingular definition of it.
And I don't think that peoplerealize that there is no
singular definition of it.
So we have to first start withthe premise that there are many
definitions of it.
So when people say, like that'snot the carry trade, there can
(08:21):
all be the carry trade.
So let's just first start there.
So there isn't, like whatever Isay, your definition, yeah,
that too.
That doesn't mean mine is wrong, that doesn't mean yours is
wrong.
There are multiple definitions.
So people have to realize thatthere are different definitions.
Carry trade is the mostbasically in kind of this
context is borrowing in a loweryielding currency, which is
(08:43):
default.
The yen, jpy rates are on thefloor, even with this rate hike,
and then you take thoseproceeds and then you invest in
a higher yielding currency,which is basically anything else
relative to the yen and JPYrates, and then you capture that
kind of the yield spread, theyield differential, and that's
essentially what the carry tradeis.
(09:03):
But then I've also given thisexample like how it comes in
various different forms.
I mean they could be.
Carry trades can be somethinglike very conservative
strategies for people who arejust taking like kind of you
know, nightly income so long asthe yield spread remains intact
and they get credited to theiraccounts or they get debited,
you know, depending on thatyield spread and all that.
(09:24):
But it's just like a long-termsort of thing that you just it's
almost like a like a, like a uhbuying treasuries and leaving
it buy and hold until maturity,like long dated, and just get
you know kind of uh coupons,like paid.
It's supposed to be like thatkind of sense.
It can be anything from that tohighly, highly levered, um, and
just like half percent move, or, let's say, a five percent move
(09:47):
in USDJPY, which is what theinterventions do is wipe out in
five handle increments at a timecan wipe out a five percent
nominal yield spread betweenUSDJPY.
And then an example I give,though, is that people don't
realize that Warren Buffett hasessentially a JPY carry trade as
well, in which so warrenbuffett is famously invested in
like five of these japanesetrading houses, and those are
(10:10):
like very complex megaconglomerates that are in so
many different areas and sectorsand and things like that that
it's almost impossible to dobottom-up like research on.
They have, like you know, athousand subsidiaries.
You know ranging the spectrumof like convenience stores to
interest in various othercountries, but by and large,
they're seen as like commodityplays.
They rise and fall withcommodity prices for the most
(10:32):
part.
And so what he did was likeyeah, he upped his stake in um
famously in april or march orapril of 2023, which kicked off
the nikkei upside, but he'sopened that position the equal
weight, five of the largestJapan trading houses in like
August of 2020.
And when he did that, he issuedBerkshire Hathaway issued yen
(10:56):
denominated bonds at very low,if not like you know, like kind
of sub 1% coupon, and he usedthat those proceeds to fund his
long trading house positions.
So what he did was I say it's avery brilliant macro trade he
(11:18):
went in August 2020, warrenBuffett went short bonds, long
commodities, before commoditiesand interest rates skyrocketed.
But in that sense, that's acarry trade that he has on as
well.
So that could also be definedas a carry trade too.
So, to answer your question,all of those and then more is
what a carry trade is.
Speaker 1 (11:38):
So, similarly to there's a lot of definitions,
there's a lot of different waysof calculating it right.
So there's a question here fromJustin on X how big is the
carry trade?
I think the BOJ has a balancesheet of $5 trillion Japanese
bank runs.
Now I've seen figures that say$20 trillion.
Lynn Alden actually sent me aDM saying that number doesn't
make sense to her given the waymoney supply growth works.
But it's still a big numberregardless, and she and I went
(12:00):
back and forth as far as whatthat could look like.
But do we have any sense of howmuch leverage the boj?
Yeah, well.
Speaker 2 (12:08):
So that's another thing too, because everyone has
a different definition andbecause a lot of it is
especially in the institutionalside is done, you know um, not
off balance sheet per se, butit's not done in a sort of you
know uh, exchange, you know litmarket, if you will.
It's done very much OTC, and soit really is impossible to like
(12:30):
again, like you could argueabout that all you want to, but
it's just, it's not possible tocalculate period.
So let's see, I have somethingabout that though it was from, I
think it was like MUFG Research.
Basically, they basically haveJPY liabilities as foreign
currency in USD.
So the carry trade is thehighest level since leading into
(12:54):
the 2008 financial crisiscurrently, and it has shot up
significantly, kind of brokenout and shot up significantly in
2020, since 2022 yeah, 2022really, when JPY started to melt
down.
Speaker 1 (13:10):
And, by the way, there's a lot of interesting
research around how the carrytrade was one of the reasons
that 2008 happened the way ithappened.
I mean, I don't know if peoplereally understand that point.
Speaker 2 (13:22):
Yeah, yeah, so the RBA, the Reserve Bank of
Australia, printed a researchreport you guys can look it up
about.
People really understand thatpoint.
Yeah, yeah, that that was, um,that was.
So the rba, the reserve bank ofaustralia printed a research
report, um, you guys can look itup uh, about japanese retail
investors.
Retail investors who had engagedin the carry trade leading up
to 2008 which basically trickledinto, you know, the, the
selling of yen, and really aud,jpy was the carry trade of
(13:42):
choice.
Um, I think that there wasmaybe like a four and a half
percent like nominal yieldspread differential between
Aussie rates and JPY rates andthat the ballooning of that had
essentially kind of indirectlyor maybe even directly helped
fund the long subprime mortgage,like instruments that then blew
up, and so it was like, if Ithink it was June or July of
(14:06):
2008.
So in between Bear Stearns andLehman Meltdown, you saw like a
face ripping short cover of thecarry trade and you see AUD
plummet like I don't know, likeby almost by half within, like
you know, three months or so.
So it's insane, so that's aproblem.
Then jpy obviously, you know,uh, skyrocketing and that was a
(14:29):
massive carry trade unwind.
Um, but I think after afterjuly 2008.
I think things were fine inmarkets after that, if I
remember correctly.
Speaker 1 (14:37):
Oh no, no, they weren't at all yeah, my memory
is a little fuzzy on whathappened and the lagged effects.
It's like this has been theother thing which I've kept on
stressing.
I even put that post outearlier.
It's still on Instagram.
I said the lagged effects willhit when everybody thinks they
never will.
Right, and we got to that pointeven just.
I think anecdotally I can saythat from the financial advisors
(14:58):
I've talked to the last severalmonths here and individual
investors.
I shared this post.
I want to get your thoughts onthis, because the comment now
I'm seeing a lot on X is they'regoing to print money.
Here comes the burr.
It's coming back, okay.
So I put this post out.
Here comes the burr, theprinting of all the more just in
response to this.
So I put this post out.
I want to get your response tothis.
(15:18):
I said they can't print theirway out of this one.
This is about a rate hike cyclemismatch with Japan.
They'll worsen the dynamic bycutting rates because then the
interest rate differentialnarrows.
If that narrows, that shouldput more upward pressure on the
yen.
I mean, am I off on that?
That the solution isn't assimple.
Speaker 2 (15:37):
No, that's not really up for debate, that's pure fact
.
That's what's happening.
You have a monetary policymismatch, directional mismatch.
You know that's what you'resaying.
Right, the fed yes, the fed isdone ripping every, not the fed.
The world x japan is done,ripping rates higher um.
And some are cutting the bankof england.
Just cut um.
(15:58):
And the fed.
So who cares if they do it inseptember or if they just signal
it in July or if they do two?
And if they do like this, whoreally cares?
The general direction is mostlikely Fed funds rates aren't
going to rip another 5 percenthigher.
Probably not, and more likelythey will either flatten out and
(16:21):
or fall.
Either flatten out and or fallum.
So that directional reversalwould sort of help the yen,
because that was um a big partof why the yen got destroyed
versus usd in the first place,starting in 2022, when they
started ripping rates higher andboj was steadfast and keeping
yield curve control and stufflike that just, you know,
(16:41):
maintained no matter what,unconditionally, almost um.
So now you have that happeningand at the same time you have
the Bank of Japan, I guess on ahiking cycle as far as that's a
find in Japan.
But yeah, you have once again acontinued difference in
interest rate policy.
Just, the polarity has nowflipped.
Speaker 1 (17:03):
Yeah, so key to my thesis.
In August, when I first reallybrought this up, I said the
issue is not so much the yen,the issue is oil priced in yen,
because oil is denominated indollars and as oil rises and the
yen weakens, for a country thathas to import all of its energy
(17:23):
, that becomes a real problemfrom a cost push inflation
standpoint.
And now you've got the specterof war again.
Who knows three, four, I don'tknow what world war we're on now
anymore between Iran and Israel.
But how does the movement ofoil impact anything as it
relates to this?
Or is this just underway?
We can't really kind of expectanything to throw it off.
Speaker 2 (17:44):
So in the near term as in the immediate term.
By the way, let's clarify foreveryone, as far as also for
ourselves too, we're ondifferent time horizons too.
I just opened shorts on Nikkeifutures and DX futures last week
.
This morning, before this, Iwas scrambling to trim some of
(18:08):
those USDJ Yen futures position,stuff like that.
I'm also long MUFG and took afucking, like you know, 40% hit
in the last two days.
After that wiped out the yearto take gains in two days.
So my time horizon is veryshort as opposed, you know,
relative to yours.
You also have a very differentrole as ETF vendor.
You also have a very differentrole, um, as etf vendor.
(18:31):
Um, so oil prices in theimmediate term, like I wouldn't.
I would say just general,generally speaking, um, oil
prices or otherwise, I wouldn'tlook, read too deeply into like
current shorter term intradaymarket movements as what the
collective markets are tellingus is happening and like
extrapolate some giant recessionthesis or something like that.
Like you're applying short-term, shorter term market green and
(18:54):
red blinking ticker, umbehaviors and movements that are
often tied to like forcedposition exiting, unwinding,
that sometimes are triggered byothers uh, you know, you know
other other markets or othertickers that have nothing to do
with having to liquidate thatposition, except for the fact
that it's owned by the samemanager who has to liquidate
things.
So I wouldn't extrapolate toomuch.
(19:14):
But in the outside of theshorter term trading world that
I personally would live in, yeah, oil prices are a key driver.
So, markets-wise, oil pricesprobably are the key driver of
JPY from a markets perspective,just because you know
(19:35):
commodities markets, justbecause of the fact that Japan
has to import so much oil whichis priced in USD, oil or energy
subsidies coming in Japan andall that.
That's why the bank of Japanhad just released their outlook
report to the quarterly outlookreport, in which they revised
down CPI because of energysubsidies that are coming, but
(19:56):
then therefore they had torevise up the next year's year
on year.
You know base effects but yeah,there there is sometimes
invisible in charts, like clearyou know oil versus USD JPY
alignment, that alignment thatoccurs.
So yeah, when you have likeMiddle East conflict and stuff
like that, that's not good forthe Japanese.
(20:17):
You know on the ground personand speaking of that too, and
kind of outside of markets.
I think it was Lynn Alden whorecently kind of asked about are
people in japan like actuallypaying attention to, like the
actual jpy rate itself?
And I think that that's that'snot a stupid question at all.
That's a fair question, becausepeople why would they otherwise
(20:38):
?
Right?
But my answer to her was yeah,absolutely, they are like that
is, like this is front page news, like the rate itself, um, and
people who never used to payattention to it, they, they know
that, like the yen, is the yengetting destroyed environment
andgetting-destroyed environmentand that's a bad thing, not a
good thing, good for exporters,whatever, no, no, no, this is a
very, very bad thing.
And they also know that they'repaying a lot more for especially
(21:00):
energy-related costs, and tothe point where nursing homes
are going around room by roomevery hour to make sure that
people aren't trying to tough itout by not having their ACs on
and stuff like that.
And the Japanese regular peopleare trying to figure out what
other personal expenses to haveto cut, because air conditioning
(21:22):
and all that is an inevitablerising cost that they have to
live with.
So, yeah, so they know thatthere's something about, even if
they don't know the mechanics.
They just know that there'ssomething about like weakening
yen and the prices that theyhave to pay for energy costs.
Those are somehow linked andthey're very pissed off about it
(21:43):
.
And then that feeds into, bythe way, politics, which is what
feeds into what we saw in thislatest interest rate policy,
this shock rate hike out of theBank of Japan this past week.
So, yeah, that's a huge part ofit.
Speaker 1 (21:57):
And there was and I believe it still is, a
tremendous amount of shortspeculative positioning against
the yen, which is not just thecarrier trade, but just people
were shorting the yen to makemoney, right, so everyone was so
one sided on this.
I've made this point before.
The risk is that you get thisuncontrollable short squeeze.
Now the yen's been movingpretty aggressively, obviously,
especially today.
Let's talk about some pointswhere, from your perspective as
(22:20):
a trader, you'd say OK, now itmight be enough.
What level for the yen are youtalking about when you say OK?
I actually want to buy into thisas far as the equity side, the
risk-on side.
Okay, Well if you want to shareyour experience, you've got
some chart to show.
Speaker 2 (22:36):
yeah, yeah, so here's what.
So, yeah, you know that chartthat I had tweeted out a chart
earlier about of the of NDXfutures, nikkei futures futures
and jpy um, very highlycorrelated also of nvidia as
well, because I know that youlove that stock so much and um
(22:56):
and the character as well.
Speaker 1 (22:57):
Please, please, tell everybody that I'm not crazy,
that part of the oh, that'ssarcasm nvidia.
Come on, man, it's like it'sthe poster child for the carrier
trade.
I don't know why people don'tsee is the correlation is is
clear, the causation is there.
Speaker 2 (23:11):
Well, yeah, so let me just tell you Okay.
So there's something calledNISA accounts, n-i-s-a.
If you don't know what that is,and if you're an equity, if
you're a US equity investor andyou don't know what Japan NISA
is, you need to know what thatis Okay.
(23:33):
Is you need to know what thatis okay nisa is?
It stands for nippon investmentsaving, savings, whatever the
hell it stands for.
The uk has a similar scheme andwhere you basically get to
invest um tax-free up to acertain amount.
That got revamped in.
That existed for a while, butthat got revamped in january
2024 and since then there havebeen an enormous amount of new
NISA accounts being opened andnew assets flooding into those
NISA accounts that are investingin USD stocks, s&p 500, nasdaq
(23:58):
100, and a single single stockwhich always makes that kind of
top 10 list, and that is tickerNVDA.
Okay, now why are they doingthat?
The Japanese aren't buying USequities because of American
exceptionalism or whatever thehell.
They're fleeing.
The yen is what they're doing.
The yen is, or cash holdingsare, more than 50% of Japan,
(24:22):
household assets of financialassets, more than 50%.
So relative, if you want kindof a context.
I think the US is about 15%.
Japan is a massive cash hoarding, cash saving society.
That's what 30 years ofdeflation is.
That's literally mattress cashor stuffed in drawers and things
like that.
And why are they doing that?
(24:44):
Because it's a very risk-averseculture.
The kind of thinking is thatbecause Japan's government has
so much outstanding debt, theJapanese government will not be
there for you.
This is what NISA is basicallyadmitting.
The government is basicallyopenly saying the government is
not going to be there for you tofulfill its social security,
(25:07):
all that kind of obligationsthat you paid into.
You are on your own.
You must build financial assets, you must build your cushion,
and it's like a $200,000 USDsort of cushion for retirement
is the figure that's been thrownaround.
So people will just save cashand that's great.
In a deflationary environment,prices don't go up.
(25:27):
People don't even think aboutthis concept of purchasing power
.
Why should they?
Well, that's fine.
But then, when you haveinflation happening and you have
the JPY getting destroyed, thenthat safe haven the supposed
safe haven your 55% of householdnet worth is now a concentrated
long JPY position.
(25:48):
Household net worth in is now aconcentrated long jpy position.
So you went from being like inthe safe haven to now like a
concentrated long, like theworst performing currency for
three years running now.
So people are starting torealize that and there's that is
probably the most significantthing is that like, yeah, there
are short sellers andspeculators and all that who
have record size yen shortpositions on, although those are
(26:09):
being pared back and, you know,closed out.
But the biggest sort of fear, Iguess, um, or the biggest
concern I have, and certainlyprobably the government,
although never acknowledges iscapital flight out of japan.
If, because that's not closingof like short positions, that is
, exiting of a natural long or aholding right, and if it goes,
(26:31):
if it's coming out of japan.
Japan is barely invested, uh,as it is, like the japanese
household as it is, they're,they're in single digit
percentage of stocks, but theyhave flooded into nasdaq stocks
um from year to date to recordlevels, so much so that it like
that that amount exceeds, likethe country's sort of balance of
(26:51):
payments um figure.
In and of itself, okay, it's anenormous amount.
So if you're wondering why theunited states stock market and
the nasdaq has been likeskyrocketing um or like is up so
much against all these very,you know, legitimate bear cases
or or reasons to be skeptical.
It's because of foreign flows,mostly out of Japan, that are
(27:12):
doing this, and they're notbuying US stocks and Nvidia and
stuff like that.
They're not doing that becauseof US-related reasons even.
They're doing it because theyen is melting down and they're
just looking for any non-JPYdenominated asset, but because
the NISA accounts only allow forequities and they don't want to
touch the Nikkei index, whichis much less sexy and it's at
(27:35):
its all-time bubble peaks.
The grass is always greener onthe SPX side, is what I always
say about the Japanese mentality.
And so why not?
Why not buy NDX?
The NASDAQ stocks are thesesexy stocks that they use
themselves Facebook and Meta andGoogle, amazon, all that.
So they invest in those andthat's why they just continue to
(27:57):
go up and up and up and up.
And then another point I'll sayto you, michael, sorry to
continue on rambling like this.
Speaker 1 (28:04):
I love this.
First of all, you're educatingme on things, which I appreciate
, but it's like you'revalidating I'm not crazy and
it's like I was clearly wrong inNVIDIA.
But why was I wrong aboutNVIDIA?
I didn't expect the carriagerate to last as long as it did,
but now it's starting to slowly.
Then, all of a sudden matter.
Speaker 2 (28:20):
So this concept of people need to also understand
that markets, equity marketswell, actually global
cross-asset markets that havelike liquid futures, but
especially equity markets, arevery, very systematically driven
(28:41):
these days Systematic funds andflows.
In other words, they're nothuman beings.
Speaker 1 (28:51):
Human beings are not the predominant, you know daily
active market participants?
Oh, you're telling me that?
It's not the anonymous trollaccounts with a hundred thousand
bots that are following them,tweeting charts and putting
squiggles from their basementswhile their pet hamsters are
sleeping?
You're telling me it's notthose guys?
Speaker 2 (29:05):
oh, I don't know about the pet hamsters part, but
yeah, by and large, yeah, it'snot those guys.
Yeah, so like I think that look, and I don't know why people
don't seem to kind ofacknowledge this, but when you
see very shallow market breadthin the United States, okay, what
(29:26):
is that an indication of?
It's an indication of a lack ofactivity of, you know, actual,
like human stock picking, um,fundamental activity, like XYZ
company, dcf analysis this is agreat company in the S and P,
like top 100 or whatever, andtherefore let's buy shares and
like the absence of that is whatcauses like very, very shallow
(29:46):
market breadth.
But then, in addition to that,look at like what happens during
earnings season, which we're, Iguess we're in the middle of,
in in the us, when you see likedouble digit, you know, or 20
percent gaps up and down.
You know, after earningsreleases in the aftermarket or
in the pre-market the next dayoff of like relatively in line,
maybe a slight miss, maybe aslight beat, but like huge, you
(30:09):
know, gaps.
What that is is that's likethat's when you see the active
human being, you knowfundamentally based capital that
is waiting for results, thatgets the results, and they all
jump in at the same timesimultaneously and that's why
you have these huge, huge swingson an intraday basis, like like
I was.
(30:29):
I wrote in my sub stack, likeyou know, is that really like?
Is that how you know kind offree, free markets are,
efficient markets, price thingslike systematically sort of
driven markets and systematicand CTA flows and funds.
(30:52):
Up until like the interventionmoment of July 11th at 8.43 am
Eastern Time, they were set tolike short JPY long, ndx short,
you know, russell 2000, allthose sort of trends that were
working out like fantastic, andthen they just got blown up.
So there is like that part ofit, like the systematic part of
(31:15):
it.
It's not just like they're notall reflections of human beings
and nor are they reflections ofhuman beings opening new
positions, new longs or anythinglike that.
Speaker 1 (31:31):
A lot of it's just exiting, you know, like existing
positions that people have torealize that that's also price
action explanations.
I will say real quick it is.
I put out that post like twoweeks ago I said they sucked
everybody in with a small caprotation narrative, just as the
character traits about toreverse.
I mean it's amazing how themarket just did that.
It pulled them in just beforethis happened.
A thought came to me as youwere talking about the NISA
accounts and actually Alex Nova,who I haven't chatted with in a
(31:53):
while but, alex, good to seethat you're watching this put
the Wikipedia link to learnabout the NISA accounts With the
opportunity set.
Is the Russell 2000 evenavailable for those investors or
is it just large cap?
Speaker 2 (32:13):
Because I wonder if that explains some of the
differential also between largeand small.
Yeah, it's available doesn'tmean that people are going to
buy it.
Yeah, right, um, you know so,the biggest.
So they like there's variouskind of um funds.
A lot of them are these, likethey're you can call them etfs,
I guess they're, they're.
They're more or less behavelike etfs, um, but the, the
funds that get the biggestinflows, like the top 10 of them
are at the very top, is likethis all country world fund,
(32:37):
right, and it's supposed to be.
I guess it's just a mix of dmequities, that is, 60 like
microsoft and uh, like the toptech stocks.
Okay, so that in itself is thatthe rest of them are from, like
you know, number two to ten arelike sb500, nasdaq, 100 sort of
targeted um uh funds and some,and then sometimes here and
(33:00):
there actually I haven't checkedrecently you do get like an
india fund, because india isalso kind of a.
That's like the non-us sort ofem play out of japan because
japan doesn't want to invest inchina.
Uh, neither does the rest ofthe world, neither does china
itself.
Um and um, you know so.
(33:20):
So you get that every now andthen um, but then, like I said,
every now and then you do see asingle stock ticker that shows
up and that's NVDA.
So that's what they do.
And do you think that thesepeople are diving into earnings
and guidance and listening?
They don't know what JensenWang is saying.
Speaker 1 (33:40):
And the best picture of people on X and social media
aren't either.
It's not fundamentally driven,it's leverage-driven.
It always is leverage-driven.
That's what FOMO is about.
Fear of missing out is whatcreates the desire for leverage.
Speaker 2 (33:55):
Fear of missing out.
But the thing is, when it comesto NISA, it's not missing out,
because Japan's used to beingmissing out.
There's no fear there, japan isso unique that it's happy to
miss out, been happy to miss outfor 30 years.
That's why the Nikkei didn'tbreak its record high from its
bubble pop 30 years ago, untilrecently.
(34:16):
So they're fine with missingout, hence sitting in cash.
What they're not fine with,therefore, is that cash to start
getting burned.
And so now it's just not fearof missing out, it's fear of you
know losing savings Of theirsavings exactly Getting
decimated, and so it might soundnonsensical to therefore find
(34:41):
safety in NVDA shares.
First of all, I don't give afuck what you think.
It is what it is.
It's a cultural difference ofmindset that you have to really
understand via taking yourselfout of your bubble context and
putting yourself in the shoes ofsomebody else from a different
part of the world, and you haveto look at it from that
(35:04):
perspective, like this wholeconcept of American
exceptionalism right, which Ibelieve in.
I truly do believe in thatbecause of American
exceptionalism, americanexceptionalism means that the
rest of the world is thereforegoing to be flooding into and
investing into thisexceptionalism that is America.
Ok, I don't understand whyAmerican exceptionalism equals,
america, only invests in America.
(35:24):
American exceptionalism equalsAmerica only invests in America.
Like there are factors that,because of these global you know
flows into USD, us Treasuries,us stock markets, you have to
therefore pay attention towhat's happening in other parts
of the world, because somethingthere can cause a pull out or a
rush into this exceptionalAmerica, and that has nothing,
(35:48):
that may have absolutely nothingto do with America in and of
itself.
So you know there's, there islike that, that part too.
So just to add on to what youwere saying about people who are
kind of wearing blinders.
There's also like a lack ofpeople who are not acknowledging
that, like, the S&P 500 is notan American or US asset, it's a
global asset class.
So are Euro's treasuries, so isthe US dollar.
Speaker 1 (36:15):
Do you get a sense that the Bank of Japan is
bluffing in terms of gettinghawkish, and I'll tell you why I
frame it that way.
So I put a piece on a sub-stackmy own sub-stack on the Lager
Report from May 10, where theargument that's being made is
that you can't really raiserates in Japan because of the
mortgage rate dynamic andhousing, which also gets
decimated with any sort ofhiking cycle.
(36:37):
I mean, how much more can theBank of Japan do anyway, and do
they even need to if the yen isgoing through this short squeeze
?
Speaker 2 (36:45):
going through this short squeeze Do I think they're
bluffing.
So what you mean by that is arethey going to hike anymore
after this shock hike?
Yeah, okay, first can we justacknowledge that the Bank of
Japan last week okay, I thinkagain this is going to go back
to the American exceptionalismpoint.
(37:05):
Okay, the least marketconsequential for this current
moment central bank that hadtheir policy release is the
fucking Fed, the FOMC, andthey're doing over the nothing
and the promising of a rate hikein September.
What's more important afterthat, the Bank of England, who
(37:26):
actually did cut rates, and thatwas kind of england who
actually did cut rates and thatwas kind of like a 50 50, like
you know, markets didn't reallyknow which way, but arguably you
could either say the fed doingnothing and signaling that
they're going to do something instart, caught in september,
which is something that's beenlong priced in and expected and
speculated about for like over ayear now, or maybe is it that
(37:46):
the bank of japan shock liftedrates basically off the zero
bound, um, like within, viapress leaks from 12 hours
earlier, and then actuallyexecuting it and then remaining
hawkish like governor waderremaining hawkish, uh, after
that I think that might be kindof a much significant,
relatively speaking.
(38:07):
Ok.
So your question of are theygoing to maintain this Right?
No-transcript?
(38:47):
Doing that they had they helpedthey hold these like bond
market group, like investorsurvey groups, like basically
bond market participants, uh,jgb market participants, and
they would get feedback fromthem and essentially, um, they
designed the policy around that.
So when they released how theywere going to trim the pace,
that they were going to trim jgbholdings and all that kind of
thing, which was basically goingto be about 400 billion yen per
(39:13):
quarter down to three trillionyen, so basically half of what
it currently is on a monthlybasis, by the end of was it
fiscal year 2025 or somethinglike that?
Okay, so that was not only justpriced in already, but that was
dictated more, not dictated,but that was already like that
was guided by via bond marketinvestors themselves.
(39:34):
So there's no surprise thereand there's no surprise that
there's no surprise there.
So the if the bank, japan, who'sso kind of focused right now,
is clearly the yen.
Everybody knows this, they knowthat, everybody knows this and
they are, for the first time,acknowledging, at least publicly
, that, yeah, the yen is afactor.
You don't have that lever ofthe QT-ing or the lessening of
(39:57):
QE, of JGB purchases, to hitmarkets on BOJ Day anymore.
So you have that.
So you have like a kind of ahike, a sort of shock hike, and
and it's not just a hike, by theway, and I know it's only 15
basis points, I don't know, it'sonly to 0.25 to a quarter, you
know a quarter percent or 25basis points.
The reason that's significantis because, michael, I'm sure
(40:18):
you remember, but do youremember, leading up to the
first rate hike off of zerounder janet yellen in de,
whatever, 2015,?
Right, how much like not justguidance from the Fed, but like
the fanfare around and like, ohmy God, it's FOMC day, it's lift
off of zero day, and like, andit was understandable because,
you know, after the financialcrisis, rates were like
collapsed down to the floor Fedfunds rates and they were left
(40:40):
there for a very long time.
So who knows what's going tohappen once that kind of lifts
up?
And then they lifted the ratesand then everyone kind of looked
around and was like, did theworld blow up?
And everything was fine.
So in retrospect it looks alittle bit overdone, right, but
still I think that some of thatcaution was warranted.
Well, the Bank of Japan justbasically lifted off zero like
in a shock manner.
Japan Japan did as everyoneelse, as you were saying, is on
(41:02):
the verge of like cutting, sothat's kind of an insane thing.
So why do they do that?
Okay, they'll say that this wasUeda will say that this was a
necessary thing, because anecessary thing because of you
know, we need to get ahead ofthings like currency dynamics or
, like you know, risks ofinflation or whatever it may be.
(41:24):
But he'll say that, like it'sbetter to be ahead of it than to
wait too long.
And then, you know, rip rateshigher, or something like that.
And then he's also saying,though, like he remained very
hawkish and I don't I don'tthink that necessarily it's a
matter of bluffing or notbecause he remained very hawkish
, like people thought, okay, sothey shock, lifted rates, but
then at the conference he'sgoing to just tone it down and
(41:45):
give a dove.
It'll be a net, net dovish ratehike.
It was not a dovish rate hike.
He was saying like, by the way,like you know, because somebody
asked him, what about this 50basis point ceiling?
Right, because that's that'skind of this perception that
there's a 50 basis point ceilingfor boj rate hikes, and he's
like there's no such 50 basispoint ceiling.
So he kind of dispelled thatnow.
Whether or whether or notthat's true we'll see, find out
(42:05):
real time.
But he did explicitly say no 50basis point ceiling.
And furthermore, he's saying,like, as long as, like the
economy and like the dataperforms in line with the
outlook right, not exceeding theoutlook, in line with the
outlook, we will continue toraise interest rates.
Okay, so that could be, I don'tknow up to 1%, 1.5% on the BOJ
(42:27):
policy rate, for which they'vejust now brought up to 25 basis
points.
So now they can move in anormalized 25 basis point
increment at a time.
So if you say, like what?
25 basis points every threemonths or so, you know you can
get to like a 1%, you know,within a year's time.
That seems to be like whatthey're kind of laying out, and
I think that it's not.
(42:48):
The you know the end had alreadybeen crushed down 10 handles at
that point, so it's notnecessarily, at least perception
, wise for the end.
I think that they are reallytrying to do that.
I could also argue too, though,however, that because the yen
got crushed down, that's whythey were able to do it?
Because if they're doing itwith the end that, because the
yen got crushed down, that's whythey were able to do it.
Because if they're doing itwith yen pressed up at 1.62,
(43:09):
then it'll be like oh, nowyou're actually using monetary
policy to affect currency rates,now that it's off of that, but
it's still very, very highUSDJPY.
That's why they could, you know.
So there's a bunch of ways todo that, but I don't think that
they're bluffing per se, but Idon't think it's a bluff or not.
I think that they've actuallytruly lost their whatever shred
of independence that they hadleft at this meeting.
Speaker 1 (43:34):
The counter that I often see is Japan wants
inflation, so why would they tryto squash it now?
Let's talk about that, becausethat is the thing.
It's like they've wantedinflation and now they're
starting to hike rates and it'slike, all right, well, you're
going to hike rates, you'regoing to stop the inflation.
Speaker 2 (43:51):
Right, but Japan's inflation is externally imported
inflation by way of like, Isaid, energy and the yen.
So the Bank of Japan is in thebusiness of like, of not
currency management, butcertainly currency
considerations.
And the thing is that if JapanOkay, so if Japan is like oh
(44:18):
sorry, I'm getting marketnotifications like crazy If
Japan is raising their rates andall that, and they're doing it
because of inflation, as theysay, it's nonsense, because take
Yield Curve Control, forexample.
Yield Curve Control had existedsince September of 2016.
(44:41):
And so when the Bank of Japanshock lifted yield curve control
bans under Governor Kuroda inDecember of 2022, people were
saying, oh, that's the Bank ofJapan finally reacting to CPI
raising above target of 2% inJapan.
And so therefore, now thatinflation has finally reached
Japan, yield curve control isbeing unwound and all that kind
(45:03):
of thing.
Yield curve control had nothingto do with japan's inflation,
like it was in place for years,over a decade.
Before that.
There was no inflation that wasgenerated of japan as a result
of that.
Japan inflation was a result ofglobal inflation that was
occurring not because of yieldcurve control.
So what the hell would theremoving of yield curve control
(45:25):
caps, or like the raising ofthem.
What the hell would that haveto do, have any impact on the
mitigating of inflation that itdidn't cause in the first place?
And I would say the same thingabout, like you know, about the
short term policy rate.
There is the mortgage thingwith floating rate mortgages and
all that because they resetevery five years that in that
(45:50):
time frame.
Essentially what he's saying isthat in that time frame the
policy mix will outweigh thegrowth in real wages and all
that will offset any sort ofincreased mortgage expenses and
all that.
So he basically not brushed itoff, but he acknowledged it, but
(46:12):
with a kind of a very nonsenseanswer.
And yeah, so that's where thatstands.
But yeah, inflation in Japan isnot.
It is kind of a zero sum fromthe Japanese perspective, like
because if energy inflation isoccurring, you're going to spend
less on other things and you'regoing to choose to, not because
you have to, but because thingsare going up.
(46:34):
People are not chasing priceshigher because things are going
up.
People are going to save morebecause prices are going up.
That's how it works in Japan.
Mentality wise.
Speaker 1 (46:43):
I love this point, which is obviously very accurate
.
Japan's debt to GDP ratio islike 280 percent.
Won't rate hikes?
Blow them up.
Speaker 2 (46:53):
No no.
Speaker 1 (46:55):
Yes and no.
The government owns their ownbonds right.
Speaker 2 (46:59):
What does blow them up mean?
And no, they won't, because whywould they blow that on
themselves?
Because they own, yeah, causethey've cornered the JGB market.
And if they do, they're goingto blow it up on the, the,
mostly on that which owns JGBs,which is mostly the bank of
Japan.
But at the same time, you'restarting to see like kind of
(47:25):
relatively speaking, fiscal,like prudence I'm very hesitant
to say that out of Japan, butrelative to how they have been
before, they are starting toacknowledge higher interest
rates means the cost of issuingJGBs has gone up four or
five-fold within the space of ayear, and all that JGBs has gone
(47:48):
up like four or five foldwithin the space of a year, and
all that.
And they're trying to they theyalways try to aim for, like you
know, balancing the budget andall that kind of thing.
But I think that, as it relatesto government debt, currently
the Bank of Japan is trying tounwind or to lessen the amount
of JGB holdings that they have,and it actually it sounds like a
(48:11):
lot Right when you say like OK,they're currently buying about
600 billion yen, 600, 600, sorry, 6 trillion yen worth of JGBs
per month, and they're going totry to bring that down to 3
trillion yen in a very laid out,specific manner within, you
know, in a gradual andpredictable manner within the
next like year or so.
And so that's a minus 50%, youknow, drop.
(48:35):
That sounds like a lot, butwhat that means is that that's
lower.
That's like something like asix or minus six minus 7% less
of JGB holdings on the balancesheet is all it is.
So it might sound like adrastic measure, but the Bank of
Japan is still the player, thenecessary player, and creditor
(48:57):
to Japan, and so I don't thinkit's going to blow anything up
in terms of Japan default oranything like that, because they
could control both levers thefiscal, the issuing as well as
the buying of JGBs, as well as asetting of where the JGB yields
could be via these fixed rateoperations where they're bid for
(49:20):
unlimited at yield level X,which they got rid of, but they
could always reintroduce, asthey say in their latest meeting
.
No, I think that what I alwayssay is Japan is sustainable.
No, it's not sustainable.
Is it more sustainable than wethink?
This supporting of the JGB andJPY markets simultaneously Is
(49:44):
that sustainable?
No, is it more sustainable thanwe think?
Yeah, it can go on longer thanwe think and that's why they are
widow makers.
That's why there's a widowmaker trade Because it's not
sustainable.
People put that trade onBecause the Bank of Japan and
the Ministry of Finance cancarry this on for longer than
people's time horizon.
That's why they get blown up.
So that's the answer.
(50:04):
If you're asking from a tradingperspective, is there going to
be a blow up?
No, your portfolio is going toblow up.
Is there going to in the longerterm?
Like history textbook sort ofcontext, yeah, you'll.
This is not sustainable.
Speaker 1 (50:20):
So we only got about 10 minutes.
But speaking about timeframesand being a trader, I am curious
to hear your thoughts on, atleast very short term, how you
think this plays out.
I myself have said to a lot ofpeople's surprises, I think that
given the fact that everybodyseemingly now is on this reverse
carry trade, my contrarianintent is to go up.
I even put out I was looking atmy analytics on X right and I
(50:42):
had my second biggest impressionday like 5.3 million
impressions in a single day aseveryone started realizing the
reverse carry trade may actuallybe here.
The last time I had somethingthat high was when I was peak
bearish at the end of Octoberand Black Monday was trending
and that entering November endedup being the low.
So let's do a little bit of acontrarian thought process here.
Short term right.
(51:02):
Short term.
Short term right Short term.
Is there a chance that everyonenow is so bearish suddenly that
maybe we have some kind of arip before what I'm saying, a
bigger main event comes and I'mjust talking like maybe for like
a week, not like somemulti-month period.
Speaker 2 (51:17):
Well, what do you mean by bigger main event
Meaning?
Speaker 1 (51:27):
Like, look at Japan.
Like you know, global marketsright now it seems like a pretty
big main event.
But I guess where I'm goingwith that, where the S&P, for
example, would round trip andgive back all the gains for the
year as an example.
Speaker 2 (51:39):
Yeah, potentially.
Speaker 1 (51:40):
Could you see it move higher?
Speaker 2 (51:41):
first, before that, well, I would say so I don't
know levels-wise, but I would Ithink that.
So, again, in the context of,like just japan, um and or, like
you know, flows, flows into thespx via, like these nisa
accounts and all that, so thethe topics index and like, if
(52:04):
you're getting 99% of the TopicsIndex names getting sold off
indiscriminately and down toofficial correction territory,
then to bear market territorywithin two days, and all that
kind of stuff, the Japaninvestors are invested, of
course, in Japan equities, but
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