Trade of the decade!

Hello Boys and Girls,

A trade idea i wanted to get out there, to discuss and evaluate.

The basic position is Long Gold/Short Yen.

Now, to break it up:

1) Long gold : this is basically an inflation hedge, which is where it seems we are going eventually, with Helicopter Ben at the printing press and an ever expanding goverment (U.S) debt which is unlikely to be ever repaid, hence the only politically viable solution would be to print print print again.
2) If we are looking to take a long Gold position, we need to decide on the other half of the trade, sure, US Govt Debt is bad, but Japan is in much much worse state. At 200+ pct of GDP we are in Zimbabwe territory, it's only a question of time, and for those who pay attention BOJ already owns 8% of the Govt debt, which is to say, they are already self financing and no way out. I've read somewhere they put adverts for govt bonds in taxis now, seems like a move of desperation...

Now, there is another benefit of pricing gold in Yen. In USD terms, gold has gone up from 300 to 1500 so a factor of 5, in jpy terms it went from 5000 to 15000 jpy/oz, which is only a factor of 3. So essentially you are getting a 40% discount when priced in Yen. Why you might ask, well my theory is that there are huge ammounts of cash in the system and due to EU situation, the usual fear trades are: long usd, long jpy, long chf, long bonds. Well, CHF said, enough is enough and traders got screwed, hence there is one less instrument to buy, this is part 1. Part 2, is repatriation flows after the Fukushima. So basically, this makes Yen way way overvalued.

Overvalued Yen, eventual economic mayhem (either from Japan, or US, or EU or elsewhere, does not really matter where it starts, Japan is the weak link which will snap under the pressure in either case, the catalyst could be internal or external, the result will be the same) Gold as safe haven and there you go...

A trade of the decade!

(an alternative could be silver/jen or a mix of the two depending on your preference)

Let me know what you think, and if you see any flaws in my reasoning, especially if you see flaws in my reasoning.

Rgrds...

well, wasn't the yen always supposed to be a safe haven currency as well?
If you combine two safe haven currencies (gold & yen) together, you won't get much movement, except if the japanese government really fucks up.
But maybe I am wrong

Custos,

You're exactly right, Jen is a safe haven currency, same as T Bills are a safe haven instrument, but this is exactly what the causes the opportunity. People are buying Yen, whilst the Japanese are moving towards a total collapse. The Japanese government has already f*cked up, just look at their debt, to repeat, there are in the Zimbabwe range already!.

In regards to US bonds, the reason why i would not short them is that at any time, the FED can step up and start buying the bonds with freshly created money, hence keeping the rates low (and allowing the govnment to keep on going) However, this would of course destroy the dollar (which is also what will happen eventually, but of course the Japs are way ahead of the Yanks along the same road)

Rgrds...

Agreed. Short yen may be the trade if not of the year then at least of the first half of the year. For fundamentals, listen to Jim O'Neill:

http://bloom.bg/zT3n8t#ooid=9yOHlhMz...UdXwHE67wbkhI7

The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s dependence on debt to an unprecedented 49 percent.

And looking to the future:

Noda aims to post a primary balance, achieved when revenue matches spending, excluding bond sales and interest payments, by 2020

So:

1) A Balanced budged to be reached by 2020 (7 years)
2) But wait, it's a "primary defecit" which they plan to bring down to 0,

Primary deficit is the deficit which is derived after deducting the interest payments component from the total deficit of any budget.
In other words the total of primary deficit and interest payments makes up the total or fiscal deficit

And currently interest payments are around 30% of tax reciepts, which is around 12 trillion yen. Which is around 2% of GDP (and likely to grow)

3) Currently: "bulging debt has pushed up debt-servicing costs to 22 trillion yen", vs tax revenues at 42 trilliion, which basically means they spend more than half of their revenues on debt servicing, again MORE THAN HALF. And looking at the budget another 26 trillion on social security, which is already more than the whole revenue. Does anyone else finds something strange here? or may be CRAZY?

Also, did i forget to mention the to achieve this budget they also had to issue "special bonds" guaranteed by future taxes (only 2.6 trillion but still) to make total borrowing less on paper (does it fool anyone?)

Oh, and wait, did their forecasts assume future growth on average 2%+ (can't remember the exact range) and at the same time next year forecast is at -0.4%....

The lack of response to this thread has surprised me a bit, i guess that means hardly anyone understands what this all means, but i will keep updating for the record...

Rgrds...

Zek, I'm inclined to agree, but noone needs firestation thinking around here so... you're wrong because:

Yen - they've got a shedload of debt, but it's almost all domestically owned, meaning it can be repatriated should a storm come a brewing, unlike the US where it's about half.

But more importantly, they're not printing yen. While they're not printing, US and UK is, therefore Yen by default appreciates. Similarly gold - gold hasn't appreciated, the increase just reflects the lower value of the dollar (same as equity rises recently).

Thirdly, strong currency doesn't equal strong economy (see Iceland).

Triphop,

1) The fact that the debt is domestically owed, only means that so far they've been able to finance their debt using local savings, it does not change the fact that the debt is growing faster than the economy and the saving hence they are running out of financing and hence they will have no option but to print. Actually the fact that the debt is domestically owned, leaves them no option to default as that would screw the electorate. (printing will do the same of course, but that's a silent way of doing it)

2) They are printing, last time i looked BOJ has their own QE programs, but i agree, they are behind the curve, this makes me believe they will most likely step it up sooner rather than later as strong yen is killing the economy.

3) I'm not implying that stong currency and strong economy are link. My main thesis is that it's the unsustainable government debt which will lead them to print and hence lead to Yen devaluation. Central banks can stop the QE, but printing to cover the deficit is much harder to do once it gets going, it kind of feeds on itself.

Thanks for the input, let me know what you think.

Rgrds...

1) Leaves them open to foreign investment though, an option not open to other countries already hitting limits of foreign debt
2) True
3) Damn, you spotted the straw man!

It is pretty compelling. Even 1) is weak because if it gets so out of control existing channels can't service debt, who's going to want to invest? And losing safe haven status could have a firesale effect with money moving fast out of the currency.

In which case, what can go wrong?
- Risk on environment if you believe we've come to the end of the crisis. Ahem.
- Timing of Japan losing safe haven status

Timing I think is the biggest risk. Maybe one to scale?

Triphop,

Timing is of course an issue, and there are 2 approaches.

1) Take a long term view, with no leverage, and just sit and wait.
2) Try to enter once the tides finally shift, in this case you will most likely miss the initial run up, which will most likely be in the back of intervention as the case with CHF, just in the news today:

"Prime Minister Yoshihiko Noda pressed the central bank for “bold” action to counter the currency's gain"

but in the long run, it will not make that much difference if you miss the 10% of 10,000% run.

Personally, i'm going for both, as in, taking an unleveraged bet now, and will be taking a stab at establishing a leveraged position once the Yen breaks the 200day SMA.

In terms of the risks, i really think it's a win/win situation.

Right now we have 2 forces at work, Natural Deflation and Man Made Inflation battling each other out, like 2 tectonic plates. One of them will give, unless you believe policy makers are god like in their ability to balance on a knifes edge. Gold, will rise in either case, as it reacts to credit stress, this is why Gold went up in price in the 30s. So, if they manage to inflate the economy you win, and in case deflation takes hold Gold will still rise.

Rgds...

Rgrds...

Sounds pretty considered approach zek. Interestingly, there was an unwinding of real positions last week on UJ, as opposed to record shorts on EU. The current BoJ floor is definitely one to watch.

If it does go belly up, I believe we'll see it happen very quickly. As for policy makers and their lack of god-like powers, it reminds me of a scaled up version of the subprime hot potato between banks. The difference is this time it's central banks playing with national debts. Not going to be pretty that's for certain.

So far so good on both sides of the trade.

As could have been expected, Japanese made further announcements of increase in the bond buying and more rhetoric against the strong yen.

The show has just begun. Act 1 Scene 1

Sterling work (yen work?) Zek. UY made all the classic moves... consolidation, fake upswing, stop hunt below before giving it a rock solid move upwards.

As first acts go, that was a stormer

Good things cme to those who wait...

Act 1 Scene 2