Gundlach on Japanese Stocks – Very Bullish

Interesting commentary by Jeff Gundlach via Josh Brown with regards to Japanese stocks.  Gundlach is very bullish and has been very right so far.  Me, I prefer not to get involved in equity markets that are being driven by an explicit casino effect courtesy of the central bank….

“But the other consequence has been in the Japanese stock market, which has risen by approximately 30% in dollar terms since November.  A weak yen is good for exports and helps Japanese industries, he said.

Those who bet that Japan’s unfolding crisis would translate to higher bond yields were mistaken, Gundlach said. Japan has succeeded in keeping interest rates low.

Those who believe that quantitative easing helps stocks markets – and also believe that growth and prosperity through strong exports helps an economy – should be particularly fond of Japan’s equity markets.

Gundlach said it’s likely the Nikkei will be up 20% in dollar terms this year.

“Japanese stocks are cheaper than U.S. stocks,” Gundlach said.  “If I was forced to own one stock market, it would be the Japanese stock market.”

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. 1. The effect of JPY depreciation on exports varies from industry to industry, depending upon invoicing conventions. Gundlach, like many others, has oversimplified.

    2. Just because JGB yields haven’t risen yet does not mean that they won’t. Anybody wanting to know how that show ends should watch Kyle Bass’s presentation at Booth this week.

  2. “Me, I prefer not to get involved in equity markets that are being driven by an explicit casino effect courtesy of the central bank…”.

    Guess that would include U.S., U.K., and EU equities. Did I leave any out? I agree with Cullen, “wealth effect” becomes “poverty effect” sooner or later.

  3. Devil as usual in the details. His remarks used a specific word “forced”. I would interpret what he is saying with specific reference to that qualifier “forced”.

  4. I don’t have problem with a government casino effect (as an investing thesis). Some mention that they don’t necessarily trust the Japanese government to carry through. The one thing you can count on the J gov to implement is a policy that extends mercantilism and big corporate chronyism. But, the currency effect is not easily manipulated by the Japanese government … look at the long history of trade negotiations with the US and other times the gov has “talked” up/down the Yen by threatening to change interest rates. The key thing on carry through is a specific policy implementation … right now it is expectations.

  5. On what basis is Japan cheap vs the US? Using a CAPE measure maybe, but not current or forward PE estimates.

    The benefit for Japanese companies of a weaker Yen will be more muted than expected, owing to the fact the big cos have offshored many operations in order to survive the stronger Yen.

    Exports are not that hot, IP is declining.

    I agree that the Nikkei will continue to rise, but more because of the actions of the BoJ than fundamentals.

  6. I trust in my ability to get out in time, it’s the retail buy and hold traders, mutual funds, 401k etc. who’ll be left holding the bag.

  7. Kyle Bass was still a frat boy back in 1994 when foreign investors starting shorting JGBs, the only reason is has yet not gone bust is because he started opening his mouth 3 and not 25 years ago.
    The guy has a 5 year track records and thinks he knows better.
    Finally if you think his logic is sound you probably have not learned a lot from this website.
    IMHO

  8. I can believe you on #1, but Kyle Bass is an idiot who got lucky. If you don’t believe me, check out his 13F forms at the SEC. Great call on Alcatel-Lucent, Kyle!

  9. It is a strange world indeed when the rally in Japan stocks can be upended by a political move on the tiny island of Cyprus. Indeed, Cyprus is causing the euro to fall sharply and equity futures world-wide are down about 1% or more. Who would have ever thought that Cyprus was a key place to pay attention to??

  10. Do you mean that using the measure (CAPE) that actually is highly correlated with long term returns should be ignored in favor of measures (current or forward PE estimates) that are not? Seems to me it should be the other way around.

  11. I have seen Kyle Bass speak on Japan and he seems to lay out a pretty strong case in terms of demographic challenges in a xenophobic closed society, unsustainable overall debt levels, and the risk of the Japanese central bank trying to stoke inflation to 2% where any rise on interest rates will send the country into a tailspin (according to Mr. Bass).

    I think the only point this site would debate Kyle Bass on his assertion that interest rates on the long end of the curve will tick up in this quest to target 2% inflation. I am relatively new to this site, but could you help me out and show me what I am missing or if I am wrong on my assertions? I also understand that betting against JGBs has been a very effective way to hang oneself over the last twenty five years. I would just add so would have been a strategy to dollar cost average investing into the Nikkei over the same time period.

    I guess Jeff Gundlach and Kyle Bass are both making the same argument at the end of the day; this time is different.. :-)

  12. I am curious to know why there is so much rage against Kyle Bass? I have seen him speak and I could possibly accuse him of arrogance, but calling him an idiot doesn´t seem to be justified. I actually found him to be rather bright (but thats not saying much coming from me) :-)

    Other than Alcatel-Lucent investment and him being a frat boy, what other major bad calls has he made? I am sincerely interested because I respect his view. Thanks for the help.

  13. http://pragcap.com/i-want-to-come-back-as-the-federal-reserve-you-can-intimidate-everybody

    There is more up to date info from Cullen on longer-term rates being a function of short-term rates, but that’s a good starting summary. If Bass’s premise rests on “unsustainable overall debt levels” and “interest rates on the long end of the curve will tick up [against the targets of the BOJ],” that’s where most students of modern monetary systems like Japan’s will find it to fall flat.

  14. He’s been talking about this short Japan trade sometime after the great financial crisis. So far he has lost a bunch of money because he doesn’t understand how the plumbing of our monetary system works (due to his hard view of money) and inability to admit he is wrong.

    The backlash against Kyle you see on this site comes from a bunch of people who want to feel better that they ‘know’ better than a guy who runs a 2 & 20 shop.

    Personally, I listen to Bass because he is smart and uses a framework vastly different from mine.

  15. Indignado – Bass may be smart, but he’s wrong about the debt of a nation sovereign in its own currency. I’m sure he is quite the expert on Japan by now, but since he doesn’t understand that not all debt is the same he’s hacking in the wrong forest. Unfortunately for Bass, once you stake your entire career on such a public bet it becomes nearly impossible to be open to the truth. Krugman also misunderstood sovereign debt, but has slowly been changing his mind. Whereas John Mauldin and Peter Schiff are in Bass’ boat. Mauldin would have to apologize for his book “End Game” and backtrack on years worth of work…. that’s going to take a HUGE paradigm shift AND the guts to deal with the public embarrassment. I think it will be years, if ever, that we see any of those 3 guys open to the truth. Bass keeps saying “within 2 years” every year for at least 4 years now. Schiff usually says “12 to 18 months” every 12 months. So this has been going on for years. The smugness you’re getting from long time pragcap readers is that we’ve known about this issue since the day we started reading this site and we get shat upon on other sites when we try to enlighten others. So don’t mind us having fun at Bass’ expense here.

  16. Perpetual Neophyte. Thank you very much for passing this link on. I will check it out.

  17. Thank you for the explanation. I agree with you that Kyle Bass is smart. I must admit, I don´t understand everything he is speaking about (I don´t have a deep background in finance and get bit lost with some of the vernacular) but I think I have a pretty solid handle on his thesis.

    I am just trying to navigate these troubled financial waters and keep my boat a float and make a little headway. Building on the navigation analogy, I will keep Kyle on board for what I see as a very useful source, while at the same time continue to digest the view here of how the monetary system works.

  18. Fair enough. I can understand long time readers frustration, particularly if other sites make it a goal to discredit this site; this is petty. The only thing I would add is that closing off to others perspectives because of pride is not a strong strategy.

    I think there is room for introducing demographics, national psychology, trade trends and regional politics into the debate of what will happen to Japan going forward. Just because the readers on this site don´t agree with his view that there will be a bond crisis in Japan, does not mean all of his work on the subject is trash.

    I would say to the readers here to at least look at the work Kyle Bass has done on this subject and try and think outside of the box and with an open mind… Just food for thought.

  19. There is no backlash against Kyle Bass.
    Just people tired of hearing the same non-sensical BS coming from the financial press, IMF, EU “experts”, investment wanking economists, contributors in the FT and WSJ etc…and then the rather irrelevant Kyle Bass.

  20. Since last couple of days i’ve spend my time to get this kinds of business information. Right now I’m quite pleased to find this info. Big thanks to you!

  21. Agreed. I was trying to figure out which market is left for Cullen to invest in – perhaps he has an all Brazilian, Canadian, and Indian stock portfolio?