Little-Known 'Mr. K' Just Set Up the Best Trade of Our Lives
Editor's note: Today, we're wrapping up our special Digest holiday series with new research from our colleague Steve Sjuggerud.
In today's essay – adapted from the December issue of True Wealth – Steve shares the details on one of his highest-conviction investment ideas for the upcoming year. As you'll see, Steve says this opportunity has all the makings of "the ultimate trade"...
Little-Known 'Mr. K' Just Set Up the Best Trade of Our Lives
Last month, Mr. K gave a speech – in Nagoya, Japan.
Nobody in America paid attention. Heck, more than 99.9% of Americans have no idea who "Mr. K" even is...
But the plotline that Mr. K laid out sets us up for what could be one of the greatest trades of our lives.
You can see Mr. K.'s speech here, so you can read it yourself if you would like. However, the speech was a bit technical – so it's easier if I share the important points with you and go over their implications.
If Mr. K does what he says he's going to do – and we have no reason not to believe him – then we could potentially make more on this one trade than we have on any other investment in our lifetimes.
Those are strong words, I know... But Mr. K's setup is that good.
This trade could run for a few years. Your downside is strictly limited, as I will explain. And your upside potential is dramatic.
Let me explain it all to you...
What 'The Ultimate Trade' Looks Like
Before I share with you exactly who Mr. K is, and what he is doing, let's think together about what "the ultimate trade" setup would look like...
Whether we're buying a house or buying a stock, we want to have two things in our favor:
- The general investing environment.
- The specific investment opportunity.
Let's think of these two things in terms of buying a house...
What "setup" do you want to see when buying a property?
For the general investing environment, ideally, you'd want a few basic things to be in place...
You'd want low interest rates, an improving economy, falling unemployment, and a government that was in "easing" mode (trying to stimulate the economy, as opposed to putting the brakes on).
That sounds pretty simple. But all that stuff doesn't come together too often...
Typically, we need to be coming out of a recession to see all those things come together. And we've had recessions about once a decade lately. (Surprisingly, we've only had three recessions in the last 34 years.)
That's the general environment. For this specific investment opportunity, personally I would want to find a property that's...
- A great value,
- Overlooked by other investors, and
- In the start of an uptrend (it's no longer falling in price).
(These are my good ol' cheap, hated, and in an uptrend criteria.)
When you combine the general and the specific criteria, we start to look pretty demanding...
We want a general investing environment that only comes along once a decade or so... And then we have specific demands about what we want see when we buy.
How could all of this possibly come together for us?
Well, to be honest, it doesn't always happen perfectly. But when it does, we can have an absolute windfall. And the last time it really came together for us in a big way was at the end of 2012...
How We Made 62% on This Setup the Last Time Around
"The No. 1 Opportunity of 2013: Abe's Revenge." That was the headline of my January 2013 issue of True Wealth. (It came out in mid-December 2012.)
In hindsight, that issue was a perfect "case study" for today's trade. The setup conditions are extremely similar. Let me explain...
When I wrote that issue in late 2012, Shinzo Abe had just been elected as Japan's leader. Japan had fallen into recession – again – in May of 2012. Abe was determined to use every means necessary to jumpstart the economy. We saw that setup and knew what it could do for the stock market.
The general environment was exactly what we wanted to see. And stocks were cheap, hated, and in the start of an uptrend. We had to get in.
In that issue, I said: "I expect Abe's revenge will create a massive bubble in Japan's stock market, and trigger a potentially significant fall in Japan's currency."
Back then, we had our perfect setup... The general environment was ideal: Interest rates were low, and Abe was going to stimulate the economy to an extreme degree.
Our specific investment was perfect too, as we'll show you in a moment.
In short, we got it exactly right. Japanese stocks soared after we bought – Japan's benchmark stock index rose more than 100% in less than a year and a half. And Japan's currency lost more than 30% of its value.
Fortunately, I recommended a way to trade Japan where we could take advantage of both of these predictions. It was an investment where we could:
- Capture the upside in Japanese stocks, and
- Avoid the downside in Japan's currency.
This investment is based on a simple idea... You make money as Japan's stock market goes up... And you don't lose money as Japan's currency falls.
We sold for a 62% gain in almost three years.
I predicted Japan was our "No. 1 Opportunity of 2013," and I was exactly right.
Today, we have an extremely similar setup...
Exactly Who Is Mr. K? And How Can He Make Us Rich?
"Mr. K" is Haruhiko Kuroda – the head of Japan's central bank...
Kuroda – Mr. K – is worried...
He fears that Japan is backsliding again into deflation. He simply won't stand for it. And he has the power to prevent it from happening.
In his speech earlier this week, he made it crystal clear that he is pulling out all the stops to "reflate" Japan's economy.
The end result of Kuroda's actions should be a repeat of 2013. Japan's currency falls dramatically, and Japan's stock market soars.
"Extremely powerful economic stimulus measures are being implemented, both on the monetary and fiscal sides," Kuroda told the crowd in Nagoya.
Mr. K will do his part through the central bank, putting "powerful monetary easing" in place. The broader government will do its part, too...
Mr. K said the Japanese government will "steadily implement its large-scale stimulus measures, amounting to 28 trillion yen." That's US$250 billion in stimulus.
Kuroda is going for it. It's interesting to see. He is specifically introducing an "inflation-overshooting commitment." He said:
The Bank judged it necessary to adopt more forceful measures to raise inflation expectations and introduced an "inflation-overshooting commitment." Specifically, under this commitment, the Bank will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI exceeds 2% and stays above the target.
Kuroda's inflation target is 2%... But he actually wants to see much higher inflation than that. He wants Japan's inflation to be so high it will force a change in people's perceptions. Here's what he said:
Given that the inflation rate in Japan has been lower than 2% for a long period, it is necessary for the public to experience the process whereby the inflation rate actually exceeds 2% before converging to the 2% target. Through such experience, the perception that annual inflation will be around 2% will take hold among the public.
So how will Mr. K achieve his goal? He has two plans:
- Keep interest rates at zero or lower, and
- Print money.
Typically, central banks control short-term interest rates, and the free market dictates long-term interest rates. That's the way things are conventionally done.
Mr. K is slapping tradition in the face. He has made it clear that he is going to control long-term interest rates, too. He calls it "yield curve control," or YCC.
In short, with YCC, Kuroda has told the market that he is going to keep long-term interest rates in Japan at 0%. If you loan your money to the government for 10 years, you will be paid nothing – or less – for that money.
Let's step back and try to take in the big picture here...
Kuroda wants interest rates of 0%. And he wants inflation rates of 2%. He is going to "overshoot" on both of these. He won't be happy until inflation is over 2% and interest rates are at less than zero.
When you think about it, what he wants is for the typical Japanese investor to lose money (compared with inflation) by leaving his money in the bank. He is forcing money out of cash and out of bonds. What can Japanese investors do? Where can the money go?
One sure place is the stock market...
Mr. K won't stop at influencing short- and long-term interest rates. He will also influence the stock market...
A Bloomberg headline a couple weeks ago said: "Owning Half of Japan's ETF Market Might Not Be Enough for Kuroda."
Its first sentence read: "Japan's central bank already owns more than half of the nation's market for exchange-traded stock funds, and that might just be the start."
Normally, government intervention is not a good thing. And in the long run, this will be bad... as all of those exchange-traded funds (ETFs) Kuroda bought will have to be sold someday. But not today. Right now, this creates a "backstop" for any downside risk. Mr. K buys on days that the market opens lower.
All this action by Mr. K creates a fantastic opportunity for us.
We know Japanese investors are being heavily penalized for having money in the bank or in bonds (losing money to inflation in both cases). And we know Japanese investors are being heavily "encouraged" to invest in stocks – with Mr. K protecting their downside risk.
Interestingly, investors either haven't noticed or are not taking the bait, yet...
How to Buy Stocks at 1986 Prices
Today in the U.S., the Dow Jones stock index is at all-time highs of more than 18,000...
The less-talked-about Nikkei 225 stock index is also near 18,000. It's nearing nine-month highs.
The Dow Jones index and the Nikkei 225 index haven't always been around the same value, like they are today...
On the last day of 1989, the Dow Jones stock index was around 2,750. On that same day, the Nikkei 225 index was – get this – around 39,000.
These two were so far apart, it was hard to ever imagine them crossing.
Since then, the Dow Jones index is up 550%. (It's actually up almost 1,200%, including dividends.)
Meanwhile, the Nikkei 225 index is down 55% since 1989.
One group of stocks is up over 1,100%, including dividends. Another group of stocks is down 55% across a quarter-century-plus.
After a massive gain in one index, and a massive fall in the other, which group of stocks do you think would be cheaper today? The Dow Jones in the U.S.? Or the Nikkei 225?
This question is too easy. The Nikkei is incredibly cheap... Today, it is trading around 17,000. In 1986, it was also trading around 17,000.
It's not often you can buy things at 1986 prices – back when a box of Corn Flakes cereal was just $1. But you can buy at 1986 prices today, with Japanese stocks.
When you size up Japan in more typical stock market valuation terms, it's still incredibly cheap. Morgan Stanley recently wrote that Japanese stocks are trading in the bottom 5% of long-term historical valuations (based on the forward price-to-earnings ratio). It's cheap.
It's hated, too. International investors have given up on Japan...
This, my friend, is an unbelievable setup... I love it...
Let's sum it up:
The general investing environment in Japan couldn't be more perfect – Mr. K is ensuring the best possible investing conditions.
But also, the specific investment couldn't be more perfect. Japanese stocks are cheap, hated, and in the start of an uptrend.
Thank you, Mr. K! This is an ideal setup. Make sure you take advantage of it.
Good investing,
Steve Sjuggerud
Editor's note: As part of our special holiday series, we're offering Digest readers a significant discount off the normal cost of some of our most popular research.
Right now, you can try Steve's True Wealth advisory – which comes with our 100% risk-free guarantee – for more than 50% off the usual price.
And if you haven't tried True Wealth, there has never been a better time to do so...
Longtime readers know that no one has been more bullish (or more correct) about U.S. stocks than Steve over the past several years. Time and again, Steve told his subscribers to stay long... don't panic... the bull market wasn't over yet.
Now – following last month's big presidential election – Steve has updated his bull market "blueprint"... and in his brand-new issue, published just before the holidays, Steve details exactly what he expects for U.S. stocks and other markets in 2017 and beyond. He also shares his six top opportunities to take advantage of right now, including his absolute favorite way to profit from the rally in Japanese stocks. Click here for the details.