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My Gut Feeling for April 5, 2024: Who Said You Can’t Go Back Home

My Gut Feeling for April 5, 2024: Who Said You Can’t Go Back Home

April 04, 2024

Photo by jun rong loo on Unsplash

Japan in the 1980s had a stock market that was the global darling. In 1986, the Tokyo Stock Exchange granted membership to six non-Japanese “gaijin” firm. Morgan Stanley, for which I worked at the time, was one of those firms. In conjunction with that event, I was sent out to Tokyo to join a group of talented employees to set up the operation and transfer our knowledge to local staff. So, before I turned twenty-six years old, I jetted out to Tokyo to begin my International career. [Scott M., I am certain that you are reading this.] Before you think that this was fun and exotic, it was before cable TV, the internet, modern medicine, and cell phones changed our world. I worked my butt off while the wives took Japanese language classes and listened to the armed forces radio. We got our fix of Budweiser (BUD) beer and Fritos from the local army PX, through my college fraternity buddy, John W. who was stationed at the American Embassy, but was actually a CIA officer.

It was interesting to live in Japan at that time during that nation’s go-go years when it seemed that the Land of the Rising Sun was going to take over the global economy. I knew better. In fact, my wife and I took a delayed honeymoon in Phuket, Thailand. One evening we dined with couples from Canada, the United Kingdom, and another nation from the British Commonwealth (it may have been Australia, but do not quote me). The others around the table were all convinced that Japan was indeed the economic power of the future and would rule the world. I knew better. I retorted that one hundred years prior, the United Kingdom was expected to be the global economic powerhouse. Then in the 1970s, it was supposed to be Saudia Arabia with its petroleum wealth. Both did not last. I said the same would happen to Japan. It did.

Recently, on February 22, 2024, the Japanese Nikkei 225 (N225) stock index average eclipsed its old high price level. That price level was set just over thirty-four years ago on December 29, 1989, at 38,915.87, not long after my wife and I repatriated with our infant son from Tokyo to the United States. That young child is now an up-and-coming plaintiff attorney in New Jersey and has his own infant child, our first grandchild, a girl.

Source: Telemet

Japan suffered from massive deflationary pressures combined with stock prices (in terms of Price / Earnings ratio) that made the United States’ dot-com stock boom seem cheap. Taken together, this caused a dramatic decline in the N225 index. It also sent Japan into a nearly three-decade-long recession. Unfortunately, Japanese leadership suffered from a combination of hubris, misogyny, monetary ignorance, and hegemony. This was nothing new as it was ingrained in the culture. Forty years prior it resulted in the Pacific War. In the 1980s, it was the Japanese economic bust.

One failed leader after another controlled the Japanese government until along came the late Shinzo Abe who served as Prime Minister from 2006-07 and again 2012-20. He brought along his own economic theory, referred to as Abenomics. At the heart of Abenomics was monetary reflation, increased fiscal government spending, and regulatory reforms. While we can debate whether Abenomics was optimal or not, in some, but not all ways, it succeeded. You can see from the chart above that the N225 finally bottomed out in 2012.

For the first time in a long time, I have decided to put some capital into Japan. My only concern is that the Japanese Yen (JPY) is weak and getting weaker. Hence, I wanted a vehicle that would inoculate our investment against a weak JPY. Once such vehicle does exist, the WisdomTree Japan Hedged Equity Fund (DXJ). This exchange traded fund (ETF) invests in Japanese stocks and indexes while hedging out the currency component. We call this in the derivative world, a Quanto Fund.

Understand that we (and you) may already have exposure to the Japanese economy through multinational companies such as Apple (AAPL), Coca-Cola (KO) or McDonalds (MCD). We cannot avoid those exposures and they are already baked into those holdings, so there is no need to fret as the corporate treasuries already hedge their forex (foreign currency) risk.

Our holding in DXJ is limited to our Growth Portfolio though I could make an argument to also qualify it for our Consumer Portfolio. Still, now we are only dipping a toe into DXJ and not going in too deep.

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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC  was long AAPL, DXJ & MCD  - although positions can change at any time.

Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is affiliated with Kingswood Wealth Advisors Services, a registered investment advisor.

For more information on investing with LakeView Asset Management, LLC call us at 702-749-9343 or request more information by clicking on the contact button on the top right-hand corner of the website or by emailing Scott at srothbort-lakeview@kingswoodus.com or Carly at crothbort-lakeview@kingswoodus.com. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ

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