US Panic: The Great Liquidation Just Started

Election Outcomes and New Prime Minister's Agenda [00:00]

• The recent Japanese election resulted in a new Prime Minister, San Takichi, who secured a 2/3 supermajority, granting her significant power to implement policies without gridlock.
• Her platform emphasizes nationalism, defense, and crucially, a pro-stimulus agenda involving significant government spending, tax cuts, and a suspension of the food tax.
• This approach of flooding the system with money, a strategy reminiscent of past economic policies, aims to stimulate the economy by putting more money into citizens' pockets.

"And her message to Japanese voters is, I'm going to put more money in your pocket and I'm going to spend more on everything."

Market Reaction and Interest Rate Spike [04:48]

• Immediately following the election, Japanese financial markets reacted with a significant spike in the 10-year interest rate, reaching 2.35%, its highest level in 27 years.
• This surge in rates, while seemingly small compared to US rates, is a historic and extreme shift for Japan, which has experienced decades of near-zero or even negative interest rates.
• The market's reaction suggests concern over the potential economic consequences of the new government's stimulus-driven policies.

"And then everybody does the same thing. It's a paper race to the bottom, a feared currency race to the bottom. And there's really only one thing that wins."

The Carry Trade and Its Unwinding [06:43]

• The "carry trade" involves Japanese investors borrowing money in Japan at virtually 0% interest, converting it to USD, and investing in higher-yielding US assets like stocks or bonds (previously offering around 5% returns).
• This strategy allowed for substantial profits by pocketing the difference between the low borrowing cost in Japan and the higher returns in the US, a trade that has been lucrative for decades.
• However, with Japanese interest rates now exceeding 2% and US rates at around 4%, the profit margin has significantly narrowed, making the carry trade less attractive and potentially unprofitable, especially when considering currency risk.

"But what's changing? Well, that 0% loan is no longer 0%. It's now over 2%. US interest rates have come down at the same time. They're no longer 5%, they're now 4%."

Implications of Carry Trade Unwinding for US Markets [08:08]

• If Japanese investors decide to unwind their carry trade positions due to reduced profitability, they will need to sell their US assets to repay their now more expensive loans in Japan.
• This mass selling of US stocks and other assets can lead to a decline in stock prices, potentially triggering automated selling mechanisms in ETFs, pension funds, and leveraged funds, leading to a broader market downturn.
• A preview of this effect was observed approximately 1.5 years prior when Japan indicated a potential interest rate increase, causing a mini-meltdown in US markets.

"More selling means what? Stock prices go down. And then when the stock prices go down, you kick off this whole automated selling thing that goes on with ETFs and pension funds and the leveraged funds and the margin calls a bit like what we've seen in the silver markets, right?"

Japan's Foreign Reserves and Potential Debt Sales [10:36]

• Japan holds approximately $1.4 trillion in foreign reserves, primarily in US dollar assets.
• The new Prime Minister, facing pressure to fund her stimulus and tax cut promises without excessive borrowing, is eyeing these surplus foreign exchange funds.
• This could lead to Japan selling US government debt to finance its domestic tax cuts, a move that would increase the supply of US debt in the market.

"Now, what does it mean? She might sell US government debt to fund Japanese tax cuts. So, she's sort of raiding the piggy bank that holds American IOU."

Impact of US Debt Sales on US Economy [11:59]

• Increased sales of US debt by Japan would lead to a drop in bond prices and a rise in US interest rates.
• Higher US interest rates translate to increased borrowing costs for mortgages, car loans, and corporate financing, reducing company profits and consequently impacting stock prices.
• This scenario also strengthens the US dollar, making US exports more expensive and further harming trade.

"Look, if Japan starts selling US debt, what happens? Well, first more as US debt for sale means the prices drop and interest rates rise."

Geopolitical Alignment and Potential Conflicts [13:44]

• Despite the potential economic risks to the US, former President Trump has been notably supportive of the new Japanese leadership, partly due to Japan's commitment to invest $550 billion in the US and agreements on rare earths.
• Both leaders share a focus on defense spending, strong national identities, and a tough stance on adversaries, suggesting a geopolitical alignment.
• However, Trump's endorsement is of a leader whose fiscal policies could directly undermine his goal of increasing US stock market values.

"So, from a geopolitical standpoint, this makes sense. Plus, let's face it, Japan is essentially another colony of the United States, right?"

Strategies for Investor Protection and Profit [15:39]

• In situations with numerous moving parts like currency fluctuations and interest rate changes, a structured framework is crucial for investors.
• Doing nothing or panic selling are identified as the worst strategies; instead, understanding the structure and having a plan is key.
• The advice is to own assets that governments cannot print, such as gold, silver, and high-quality companies with real earnings and low debt.

"My mentors taught me is that when the government starts printing, you don't fight it. You own what they can't print."

Following the Money and Identifying Vulnerabilities [17:45]

• Investors should "follow the money" by tracking where large capital flows are moving and understanding the reasons behind these movements.
• Key indicators to watch include rising Japanese interest rates and strengthening of the Yen, which signal Japanese investors potentially bringing money home.
• Investors should consider reducing exposure to rate-sensitive US stocks, such as high-debt growth and tech companies, and assets like commercial real estate that rely on low interest rates.

"So, how do we know that's going to happen? Watch Japanese interest rates. If they keep rising, more money leaves the US. Watch the yen. If the yen strengthens, it means Japanese investors are bringing money home, right?"

Opportunities Amidst Market Pressures [19:21]

• While rising US rates due to Japanese selling could harm many sectors, some areas might benefit, such as US banks.
• A strengthening dollar could also help companies that import goods.
• The most crucial aspect is having a pre-planned exit strategy for investments that are highly exposed to these potential market shifts, rather than reacting emotionally during a downturn.

"But that same pressure also creates opportunities. If US rates go up because of Japanese selling, US banks could benefit."

The Long-Term Outlook: Asset Classes and Company Quality [20:29]

• The video advocates for automating sell rules for vulnerable assets and shifting towards quality stocks with strong fundamentals, low debt, and the ability to raise prices regardless of economic conditions.
• Companies with unique products or loyal customer bases that allow for price increases can potentially outperform inflation.
• The overarching theme is that as governments print more money, paper currency loses value, making hard assets and resilient businesses more attractive investments.

"So, if we get more inflation, which I think we will, yes, you can be in gold, but you might also want to be in some of the greatest businesses in the world because they have the ability to simply raise their prices and go up faster than inflation."