As an unbiased analyst it is hard to come to any other conclusion about Japan, and I am going to put it lightly: Japan is scre#ed! As a consequence, we believe higher interest rates globally are unavoidable, as Japan, now the largest foreign holder of the US Treasuries (together with China, the second largest holder), turns from buyer of Treasuries to net seller. So in our equity portfolio we are making sure that our companies have strong balance sheets and/or significant free cash flows to pay off debt, if (more likely when) interest rates rise.

Rocky Humbert responds:

Mr. Vitaly is a most astute observer– and while his conclusions may be correct, he is not, as he claims an "unbiased analyst." I assert that no one is capable of being an "unbiased" analyst. This is a philosophical– not financial– statement. The stories that Mr. Vitaly tell have been told before: I spent the better part of 1995 to 1999 being short JGB's, and I even have a framed screenshot of the day (9/11/98) when 3-month Yen Libor interest rates traded negative. Been there. Done that. Now, when I'm tempted to short JGB's, I look at that screenshot, slap my wrist, and put the phone receiver back down.

A long-term speculation with severe negative carry is like a pounding headache. It's debilitating and distracting, and eventually one reaches the point where simply waking up with no headache is a joy. I wish good luck to my friends who short JGB's…just make sure that you have plenty of aspirin nearby.

As for macro commentary, I'd like to share the following comments from a much less-esteemed, but more widely-read analyst about the economic funk:

The litany of economic woes at times seems endless…energy, the oxygen of industrial life, has become so costly and politically controlled that the US can no longer be certain of enough fuel to keep its factories running and homes heated. The real median income of American families jumped 64% from 1950 to 1970, but has crawled up by less than 1% a year in the past decade. Weekly real take-home pay has been declining for two years. That gauge of American economic health, the stock market, has been sharply depressed. While these travails are felt most acutely in the US, the situation is common to nearly all Western nations. The world money system that function like a Swiss watch for a quarter-century has been sending off alarms. Gold has become the refuge for a world fearful of returning to an economic jungle.

Source: Time Magazine, April 21, 1980. 


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