Editor's Note: Our readers always benefit from our global perspective. We're sharing this Private Briefing interview with our readers because it gives them a unique window into the one profit play that beat George Soros to the punch - and delivered returns that were more than 60% greater than what Mr. Soros himself enjoyed. Here's Bill...
KYOTO, Japan - I can't think of any Westerner who has a better handle on Japan-related investment opportunities than our own Keith Fitz-Gerald.
And there's a reason for that. Keith, the Chief Investment Strategist here at Money Map Press, married into a Japanese family many years ago and spends at least part of each year living in that country.
That's given Keith an unrivaled global vantage point and has given his readers the kind of "first-mover" advantage that usually leads to big profits.
Let me share a story that illustrates my point...
Everyone knows that billionaire George Soros is a genius investor. In 1992, for instance, he famously made $1.7 billion - at today's exchange rates - shorting the British pound sterling.
More recently, in February 2013, The Wall Street Journal reported that Soros and some of this country's other big hedge-fund players had been reaping billions in windfall profits by betting against the Japanese yen - capitalizing on the fact that the Asian giant was forcing down its currency in an attempt to save its economy.
According to the newspaper, Soros in particular had made nearly $1 billion since November 2012 on wagers against the Japanese currency, which had skidded about 20% during the prior four months.
And he had lots of company. Such hedge-fund heavyweights as David Einhorn's Greenlight Capital, Kyle Bass's Hayman Capital Management LP, and Daniel Loeb's Third Point LLC had also been making big money on the falling yen. Indeed, in that story last February, the Journal reported that betting against the Japanese currency [had] "emerged as the hottest trade on Wall Street over the past three months."
I always laugh when I recall that story.
You see, back in a February 2012 interview here - a full year before that Journal story ran - Keith predicted the yen was soon to swoon. And he even showed us an ETF that offered an easy way to profit.
In short, Keith was eight months ahead of Soros and Co. His simple-to-deploy strategy yielded a peak gain of more than 71%. That gave us the chance to earn about 60% more than Soros ... all because of that first-mover advantage I referenced.
Since Keith's in Japan right now, I figured we could use the opportunity to circle back with our chief investment strategist and gauge his current thinking on the world's No. 3 economy.
Here's a partial transcript of that interview...
Bill Patalon III: I know you try to spend part of each year in Japan. On this trip, you've now been there long enough and have been out and about to process what you're seeing and perhaps do a bit of analysis, too. I know that Japanese stocks are off about 11%, year to date, and that there are worries about the new consumption tax increase. What's the sentiment right now: Is it improving, or is it sagging?
Keith Fitz-Gerald: This is a great and timely topic, BP. In classic Japanese fashion, many in the nation are looking beyond the short-term market gyrations. The Olympics, in particular, have breathed new life and new hope into the nation at a time when this kind of an upbeat outlook is very much needed.
Bill: But there are still issues in the near term, aren't there?
Keith: There certainly are.
Bill: The new "consumption tax," for instance?
Keith: That's right, BP. As of Tuesday, the national consumption tax jumped from 5% to 8% - a hefty increase, and the first since 1997. There are some concerns about a "repeat" of the last debacle, since that last big hike led to 15 years of deflation and sluggish growth.
Bill: Deflation that "Abenomics" is now attempting to reverse...
Keith: That's right, BP.
Bill: Keith, you were one of the first investment strategists to really understand the investment-market implications of Abenomics - and to show folks how to profit, because you predicted what was in store for the Japanese yen.
Given that fact, how is Prime Minister Shinzō Abe's economic plan faring, and what's your outlook for the PM's economics program?
Keith: Abenomics is now at the point where the proof has to be forthcoming. There is some data indicating inflation is taking hold but, at the same time, there remain concerns about wages, the standard-of-living quality, and economic development. Like many people, I remain skeptical that it's going to work... at least as envisioned.
Bill: I saw that, on Friday, there was new data out that - on the surface - seemed to indicate that the Abenomics economic platform was working. But when you drill down, there are issues with the numbers, aren't there?
Keith: Yes, there certainly are. As you noted, a new report out Friday showed that consumer prices here in Japan rose again in February - seeming to indicate that Tokyo's push to halt 15 years of deflation might actually be working.
But the increase was largely the result of a surge in costs resulting from post-Fukushima energy imports - and not due to prices increasing because of rising consumer demand.
Bill: I saw where some economists were differentiating between "good inflation" and "bad inflation."
Keith: That's probably a good way to describe it. Abe is looking for "good inflation" - the kind you'd get from escalating consumer spending. The other kind - the "bad inflation" - is what they seem to be getting.
Bill: Folks are worried that the last tax increase kicked off, or presaged, the deflationary cycle - and don't want to see history repeat itself.
Keith: Here's what's happening, BP. Right now the government is talking about "front-loading" the fiscal budget to offset the anticipated drops in consumption and effects of looming tax increases. That's clearly thinking ahead but there's also a degree of, shall we say, "cooking the books" associated with a move like this. At the same time, the country's currency - the Japanese yen - has been strengthening again. That will, of course, be counterproductive in that it can only work against Abenomics.
Bill: So the currency remains the real challenge for the immediate future?
Keith: That's right, BP. This, of course, is related to the deflation-fighting effort at the consumer level, and that remains the biggest challenge for Abenomics.
Bill: You have a talent for noticing things that "give life" to your economic projections and financial analyses... I remember, for instance, the one you offered a few years back in which Japanese housewives were collaborating to find the best shopping deals and were then sharing that data - underscoring that the economy there wasn't as strong as many believed.
Is there perhaps an anecdote you can relate or an observation you've made that illustrates what you're seeing now?
Keith: For the first time I can recall - and I'm talking a long time here - groceries have gotten a lot cheaper. Clothing is much the same, with shoes, in particular, standing out.
Interestingly, big cars that used to be in demand at premium prices are considerably less expensive, while "mini" cars that used to be inexpensive have gotten a lot more pricey. This reminds me of the SUVs in America that were so expensive but now are dirt cheap on the used car lots following the financial crisis. Smaller, more fuel-efficient cars have replaced them as "in-demand" items.
Sushi is another intriguing example. I recall paying $200 or more for sushi dinners here back in the 1980s. Our son, Kunihiko, and I recently stuffed ourselves silly in Tokyo and the entire bill for both of us was less than $30. Bear in mind, he's on the Japanese National Fencing team so he can really eat. Same quality, same taste, and great restaurant.
These and other items validate the deflationary fight being undertaken by Abenomics, but also raise significant doubt in my mind that the effort will ultimately be successful.
Bill: So it sounds like the "short-the-yen" trade - which you jokingly referred to as the "widow-maker" trade the first time we talked about it - is still the best profit play here.
Keith: That's how I see it. I believe the yen remains the single most investable asset associated with Japan today. The balance of Abenomics rests almost entirely on "Corporate Japan" being able to pass price increases through to a consumer base that I am not certain will tolerate it. Profit margins have to be maintained, and I am not sure that can happen across the board.
Bill: The simplest way to do that continues to be the ProShares UltraShort Yen ETF (NYSE: YCS) - an ETF that's designed to rise in value as Japan's currency declines. You were right on the money with that call, and our subscribers ended up with a 71% gain.
Keith: And there's more where that came from.
Bill: Given what you've told me here, Keith, is Japan an investable economy right now?
By that I mean ... beyond the "widow-maker" trade?
If so, is there a sector, industry, or company you like? Also, are there any that scare you?
Keith: Aside from the currency play, I believe that gerontology - the so-called "graying of Japan" - remains a viable pursuit, with influences (and profit potential) in everything from robotics to medicine. There will be key opportunities pioneered here that will translate into our own aging society shortly... but the path to monetization is not clear to me just yet.
Bill: What about e-commerce: I know there are some who believe that the tax increase will push more shoppers onto the web.
Keith: As you know from our many talks, BP, I see big things for e-commerce and the web in general - throughout Greater Asia. So this should be additive.
Bill: Any final observations or projections for Japan? For that part of the Asian region marketplace?
Keith: Despite what you hear in the media, links between China and Japan are growing. I have noticed huge numbers of Chinese on this trip, especially in Tokyo. This strikes me very much the way I saw Japanese moving around the world in the 1970s and 1980s... growing wages and advancing savings and wealth are opening the world. This trend, too, will ultimately point the way to new profit opportunities.
Bill: Keith, this has been fascinating. Thanks for taking the time to talk to us about this.
Keith: I'm always glad to talk with the Private Briefing folks, BP.