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In 2000, Bill Bonner announced his first 'trade of the decade'. Sell stocks, buy gold. Anyone who did so should have done very well indeed. So we've been waiting for a decision from Bill on his next trade of the decade. It came this week. Sell US Treasuries, buy Japan.
I can't find much to argue with here. We've been bullish on Japan for a few years. While things haven't exactly gone our way, the case for buying has got better, rather than worse. The currency is weakening, which should help the export market. Japanese stocks, particularly small caps, remain ludicrously cheap.
This year, says Wall Street veteran Byron Wien, investors may finally "focus on the attractive valuations of dozens of medium-sized companies in a market selling at one quarter of its 1989 high". Note that the TSE Small Index trades on a price/book ratio of 0.77 times. That's got to make it the world's cheapest index.
'Sell Treasuries' makes perfect sense too. But in Britain you can swap Treasuries for gilts. US investment group Pimco is already getting started. This week, it said it will be a net seller of gilts this year. Why? Supply and demand. One of the biggest buyers of gilts over the last year has been – via quantitative easing (QE) – the Bank of England. With QE ending, the private sector is about to have to take up the slack. And what a lot of slack there is.
The Debt Management Office expects to issue around £190bn worth of gilts in 2010/2011, while, with an election in mind, Gordon Brown has been unable to explain exactly how his government plans to reduce the speed at which we are adding to our national debt. On "the current trajectory" of borrowing and spending, says Pimco's head of global portfolio management, a downgrade to the UK's credit rating is no longer a remote possibility – it is a matter of when, not if.
All this means yields have to rise (we will have to pay people more to take on the risk of lending us money) and gilt prices are bound to fall. So 'sell gilts, buy Japan' seems like a good trade of the decade to us.
But I've another in mind too. There is a consensus that this will be the decade of the East. Every single pundit out there is talking up Asia at the expense of the West. I'm not so sure. China, the supposed driver of the rise of the East, has its own problems: huge capital misallocation; a growing asset bubble; an ageing population; too much spare capacity; iffy export markets; uncertain property rights and a corrupt bureaucracy, to name but a few.
Even if the Chinese growth miracle both exists and can continue, we know GDP growth isn't always correlated with stockmarket performance, particularly when the stockmarkets in question are already expensive. So if you want to stick with the equity markets and feel like having a contrarian decade, how about this trade of the decade: sell East (except Japan), buy West. More on this next week.
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Merryn Somerset Webb
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