Lead-Lag Live

Weston Nakamura on Japanese Political Shifts, Yen Carry Trade Dynamics, and China's Strategic Economic Policies

• Michael A. Gayed, CFA

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Unlock the secrets behind Japan's unexpected political shifts and their seismic impact on financial markets. Discover how Takaichi, a staunch right-wing conservative, has shaken up the political scene by opposing rate hikes and backing a weaker yen, leading to a surprising surge in the Nikkei index. Join Weston Nakamura, with his extensive institutional finance background, as he dissects these developments and offers insights into how political currents are swaying market movements, inviting you to join the conversation and deepen your understanding of these dynamics.

We venture into the complexities of the yen carry trade and challenge conventional wisdom around its unwinding. Question the assumptions about the rapid closure of a multi-decade trend and the reliability of certain market indicators. We dive into the nuances of market correlations, revealing how experienced and novice traders alike navigate these conditions, and the significant role individual strategies play in shaping market outcomes.

Turning our gaze to China, we explore the nation's strategic economic maneuvers in response to global monetary policies. Reflect on the parallels between China's actions and historic market behaviors, while considering the implications of state-led interventions on the global stage. Delve into the intricate dance between yen fluctuations and investor sentiment, especially for those with NISA accounts, and the political undercurrents that could reshape market behaviors. Join us for a compelling narrative that intertwines market analysis with political strategy, offering a rich tapestry of insights for every market enthusiast.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

However, there is one difference, one different candidate Takaichi. It's a woman who is basically kind of a woman embodiment of Shuzo Abe, with a little bit more kind of right wing conservatism kind of sprinkled in there. But she was actually becoming the favorite. And she, where she differed, was everybody else more or less like opined on the Bank of Japan, as they should not be, opined on the Bank of Japan, as they should not be, but about, you know, their rate policy. And everyone was kind of on board with like Bank of Japan normalization as well as like independence, like that's their kind of job and we're not going to, you know, wade into that. But she was the only one who was kind of anti rate hikes, pro JGB buying. She even said that weak yen is a wonderful thing, it's not a bad thing, it's a wonderful thing. Ok, so that's a very stark difference. That's the candidate that actually started to surprise and win. So you see, the first round of elections she actually came in at the top spot, and not only that, and got the most votes.

Speaker 2:

But she got more votes than expected last time I did this with weston nakamura was black monday in japan in august, when suddenly everyone became an expert on the reverse carry trade, which is funny because weston and I have been talking about it for some time. I myself turned quite bullish on that day, august 5th, seeing something along the lines of I thought they would rally the shit out of the market after that, which they did?

Speaker 1:

Nikkei went up 10% that next day after you said that it was unbelievable.

Speaker 2:

Yeah, exactly, and everyone became ultra bearish. That day, fix hit 65. And now everyone forgot about the reverse carrier trade and maybe it's time for a reminder. So if you're watching this on YouTube, linkedin, on my accounts or on Weston's, we can see your comments. So let's make this interactive. I know it's late.

Speaker 2:

On the East Coast I'm staying up Weston's, obviously in Japan. So we're doing this different times of the year. But if you want to engage, ask us questions. So we're doing this different times of the year. But if you want to engage, ask us questions. Please don't hesitate to do that. We'll be able to see that and bring it up live. The last time, like I said, we did this, we had 30,000 live views. I don't think we're going to get that high because the markets were crashing everywhere and everyone was high-fiving us, but overall, we're in good reach here. So, with all that said, my name is Michael Guy, a publisher of the Lead Lag Report. Joining me for the referral is Mr Weston Nakamura, across the spread himself. If you don't know Weston, you really do need to follow him. I say that sincerely. His commentary, his research, he is off the charts and I think he's got some tremendous perspective when it comes to Asia. So we're going to talk about Japan and let's talk about China. I've seen people say that China has brought chopsticks to a gunfight.

Speaker 1:

That's what I said and I was told that was inappropriate. I don't know In today's environment.

Speaker 2:

I don't know if that's wrong or not, but we'll definitely end on that. Weston, people already know about your background, but just for those who don't quick 30 seconds about who you are and why you're qualified to even talk about this stuff?

Speaker 1:

Oh, I'm not qualified. I'm qualified to even talk about that stuff? Oh, I'm not qualified. I'm some, but I am. I'm a guy who's unqualified but nevertheless talking about this. No, what I do is so I used to work in institutional finance on the trading side and also equity sales japan equity sales for mostly hedge, for hedge funds, long short hedge funds and I basically what I do is I try to look for things that from a more so like a us based kind of normal investor of like us equities and things like that and things that they would be concerned about, that they're missing, or things that they should be concerned about that they're missing from other parts of the world, mainly from asia, like things that stem out of asia that can and have and will impact the value of your portfolio, and so I try to point those out, and so so I do that via Substack, youtube and other mediums as well. So that's what Across the Spread sort of mission statement is.

Speaker 2:

All right, so I'll start with the easiest question I can start with. Is the reverse carry trade over? And I know that sounds like a silly thing to say out of the gate, but I find it strange to me that people think that something has been ongoing for two decades gets resolved in two trading days. And I'll take it a step further. Everyone then references the point that you look at the CFTC positioning, everything's flipped long yen and the assumption is that that means that the reverse carry trade must be over. It can't possibly be that simple.

Speaker 1:

Well, okay, so this is what I'm very glad, and I know you're asking this kind of sarcastically. So since, since our discussion, yeah, there have been many yen carry trade experts that have emerged out of the woodworks, and you know that's fine. The whole approach of like this, this infamous JP Morgan note of the carry trade is not yet done. There's like it's 60 percent, oh, you know, it's 60%, oh, you know there's still 40% left or something like that. Right, as you and I discussed last time, first of all, there's no way everyone has a different definition of what the character is, what kind of format it is. It's not just like the end futures on CFTC and stuff like that. So there isn't a way to calculate it. And even if there is, everyone's going to have a different definition or disagreement of what is and isn't like constitutes, like an actual character. So that's kind of like a very kind of fun discussion. But that aside, the whole like approach of you know is is the character online done or not done? So let's say, jp Morgan Research actually did somehow calculate whatever the actual figure of the outstanding carry trade is and they have concluded that, like 60 of it is, you know, has been unwound. Why is the assumption that the other 40 has to be? Why does the assumption has to be like 100 of the existing carry trade open has to vanish, like that?

Speaker 1:

That's the part that I don't get about that approach that everybody seems to. Everybody seems to like, you know, kind of gravitate around like there's still x amount left. Okay, it could be however much left, that doesn't mean that they're going to be forced exited or, you know, chosen to be exited or anything like that. It just means that there was x amount, now there's x minus y amount. Then that doesn't actually give you any sort of, you know, forward looking perspective or anything at all. So I I maybe I'm just an idiot, but just I don't understand the point of the you know that kind of that, that approach, that the question I know it's not where you're necessarily asking but that is, that is, that is a valid way of thinking about it, just logically.

Speaker 2:

Anyway, right, it's like it doesn't have to be in quotes, finished, it's not like it's a progress bar, right, exactly From that standpoint.

Speaker 1:

And let's even put aside that they could also be put back on during that time where other people are deleveraging. There are better traders. That's why there is people are deleveraging, there are better traders. That's why I always say, especially when you're trading macro markets we all get the same exact markets. We all get the same exact crude oil futures, or AUD JPY cross or whatever it is, we all get the same markets and we also all of us don't know what's going to happen at the end of the day in terms of green, red, blinky ticker markets. Okay, so, markets are actually very, very fair. It doesn't matter if this is your first trade ever, if you've been doing this for like 50 years. Those two things remain true we get the same markets. We don't know what's going to happen at the end of the day. You can't really insider trade. You know global macro assets for the most part. So the case.

Speaker 1:

Why do you have such massive disparate? You know outcomes in terms of trading. Why do people make billions and other people lose everything and then and then some another house and everything right? That's because we're not trading the actual markets. What I say is that we're trading with or against. You know our, our selves. Essentially, that's like the variable, because the constant is the markets.

Speaker 1:

With that said, like when it comes to something like the carry trade or whatever it is, people who are being forced unwound out of that position.

Speaker 1:

There are better traders in those same markets who are buying into what they feel are very sort of not attractive levels, but maybe attractive levels of volatility or whatever it is, and different kind of time prices that they could go in and out of.

Speaker 1:

They could go in and out of, so to calculate the size and how much is left of this, just another one of these impossible sort of you know tasks that I think is very kind of pointless and meaningless. What's more useful, I think, is to see all right. So when the yen carry trade was blowing up last time you and I spoke, everything basically was like correlation of one to the downside and then eventually, though that's not gonna that's that correlation one across. That's not gonna last forever, obviously. So you have to monitor. When do things start to then like kind of de-correlate and when does the following the yen for tick, for tick movements of ndx futures, for example, when does that relevance kind of dissipate and or you know if or if it's going to actually accelerate even more. Like those kind of relationships is what someone should be looking at, and not necessarily like some arbitrary notional amount, that's.

Speaker 2:

That's like that's left out there yeah, I want to be telling people and I really do believe this if, if I've been right about anything in the way this has played out, it's that the reverse carry trade, even though it seemingly only lasted for two trading days, did bring back certain dynamics, most notably the flight to safety trade. Ever since August, whenever the stock market has been down heavy, you see long duration yields fall, you see long duration treasury prices rally, you see credit spreads widen and you haven't seen that really up until that reverse carry trade for a moment and kind of played out. Now I keep saying that's a preview and I keep saying the main event is still coming. Main event is still the bigger reverse carry trade, at least in my view. Let's talk about the more recent price action here. So futures are down pretty hard. Friday, very suddenly, everyone made note of it. This is a little bit different than what happened in August, because this is politically driven. You can argue, explain what's going on. What's the catalyst for the yen move and the Nikkei move today?

Speaker 1:

So an absolute clown this is not my opinion. This is, I guess, a fact An absolute clown was chosen as the next prime minister of Japan. The reason I say this is because, okay, so, this guy, ishiba, he won the ldp, the liberal denmark party, leadership election. He's going to become the next prime minister of japan. All right, good for him. This is his fifth attempted becoming prime minister. Fifth time's a charm. He's been doing this, so he's been attempting this for like something like close to 40 years, which is not a good thing in my view, because that's a guy who guy who is hell bent on he needs to become prime minister. That's it, come hell or high water. At this point, like that's what he is. His goal is OK. So what are his policies? Well, he doesn't have any like actual concrete ideology or something like that. All of that has to be compromised in order for him to fill his, like you know, like 40 year project of an attempt to attempt of finally getting this, this, this leadership role. We'll get to that in a moment, because you know, like what the kind of implications are of what his tenure will look like, you know, under his leadership and all that, and, like I said, you can probably guess what I just said. It's just going to be a big question mark, but what happened on Friday was very, very interesting. I wrote a subsect note about this. Everyone read it for free. It's called. What's it called? It's called did Japan markets just fire another warning shot upon the LDP elections? Now, it was a very interesting day in markets, not just for Japan but globally, because you saw kind of a normal day. You saw equities actually in Japan have been rallying, really all of us kind of China stimulus has been going on to uplift. But the Nikkei index has been rallying for the last six days or so, has been rallying very hard. And then on Friday the cash index closed up about 2.5% or so and that was happening because there was the LDP leadership elections underway and that was happening.

Speaker 1:

You know the votes are being cast. This is not like a general election, by the way, where, like the population votes was tens of millions of people. This is a couple hundred of the top ranks of the LDP leadership and so it's very easy and quick to count. You know a couple hundred votes. You get results, like you know, within an hour. So, round one, there's nine candidates and they're all basically this more or less the same. Okay, because they're all the same political party. So there's not, like it's going to be like a massive difference between one or another. Like, yeah, you can like, yeah, you can like.

Speaker 1:

You know a lot of people, you know a lot of people are going to say, like that, I'm an idiot for saying that and I'm very ignorant, probably, but I, that's how I'm, that's what the reality is, right. However, there is one difference, one different candidate takaiji. It's a woman who is basically kind of a woman embodiment of shuzo abe, with a little bit more kind of right-wing conservatism kind of sprinkled in there. But she was actually becoming the favorite and she, where she differed, was everybody else more or less like opined on the Bank of Japan, as they should not be, but about, you know, their rate policy. And everyone was kind of on board with like Bank of Japan normalization as well as like independence, like that's their kind of job and we're not going to, you know, wade into that. But she was the only one who was kind of anti rate hikes, pro JGB buying. She even said that weak yen is a wonderful thing. It's not a bad thing, it's a wonderful thing, ok, so that's a very stark difference.

Speaker 1:

That's the candidate that actually started to surprise and win. So you see, the first round of elections she actually came in at the top spot, and not only that, and got the most votes, but she got more votes than expected. Number two. But she didn't get enough to actually, you know, win outright for that first round, so she had to do a runoff with the number two person. That would be Ishiba, the guy who ultimately wins. So it be ishiba, the guy who ultimately wins. So it's easy, well, versus her.

Speaker 1:

Okay, that result comes out at around 2 2 pm in japan. So they do a second round and the vote results for the second round come out after japan markets, cash equity markets close. You know, cash equity markets close at like 3 pm and so those votes came out at like 3 15 is 320. Ok. So essentially, what markets were doing was that in the in the last call up 30 minutes or so into cash flows, into Friday's cash flows, you saw a ramp up in Nikkei equity indices as well as in dollar yen going, you know, up of a full percent from you know, from the open, above a full percent from you know, from the open.

Speaker 1:

All on this assumption that this woman, takauchi, is going to win and become the next prime minister of Japan, and she's apparently. You know Abenomics. Part two is coming back. Ok, so that's so. Boj normalization that's not going to happen, basically, is kind of what's kind of the bet, and that was being reflected in markets. And then when, stunningly, when that didn't happen, it's not so much that this Ishii Bell guy got elected that the markets, that Nikkei fell like 5% at the PM, reopen at 4.30 PM but at dollar yen crashing like several handles down. It's not because of him being prime minister, it's that markets were pricing out a very kind of dovish, I suppose, or anti-normalization stance, prime minister Tadouchi, to basically, you know, price that out, and so you just got Japan assets to crash.

Speaker 1:

The weird thing, however, was that the rest of the markets were kind of fine, like they were almost totally insulated, like look at global equities in Europe, us, all that you would expect uk footsie and the dax index and euro stocks, as well as, like you know, nasdaq and you know e-minis and all that just to at least be down. You know a percent and a half at least or something like that, right, but that wasn't the case at all. Same with the yen as well. You saw, like just pure yen strength against everything, against every, every major currency, every em currency against gold, and yet things like other major costs, like aud, usd, euro, dollar, euro, pound, whatever it is, we're actually like kind of they close the the friday session like literally unchanged, you know like zero percent or plus, minus, you know one or two basis points, whereas the yen is making like a 2% move. This is a major currency pair, right.

Speaker 1:

So it was a very weird thing where this was like a very Japan idiosyncratic event, obviously. But the fact that that didn't spill out into other cross-asset macro markets on on multiple or on at least two different major ass classes equities and and fx that's what was very kind of unusual. So I was thinking either the rest of the world is going to have to catch down and you're gonna have like a semi-black monday again, you know, not like a down 12 like the last time you and I talked. Either that or there might be a potential trading opportunity when cash open happens this morning in Japan, because cash equity market in Japan didn't have yet a chance to actually react to any of this. This is all happening after the fact, right, and I thought maybe this is just purely futures driven, just pure kind of algos and all that. And so single stock traders or single stock investors have you know, the cash equity markets haven't actually reacted yet.

Speaker 1:

So let's see what happens at 9 am this morning and maybe it'll just be like futures, just ramp back up and something like that. Or you'll get a crash, a temporary crash, and then you get like certain kind of single stocks in Japan then buy like into falling knife, which is something that I did earlier, that I talked about in my note. I did get a fill. I am up 8% for now. It wasn't as quick as I had hoped, this recovery, but the cash indices are still down right now and it's very puzzling to me that it's not being spilled out. So that actually might then argue for the yen. Carry. Trade is over, has been over. It's no longer connected to the rest of everything else like it was, you know, a month and a half earlier, right, um?

Speaker 2:

right or the complicated factor is china, so that's why I'm bringing this up, so I put this post. I said if, if the china move is China, so that's why I'm bringing this up, so I put this post. I said if the China move is real, as well, as the stimulus measures are getting announced, and you started seeing that huge melt-up, I said commodities are like hell, the Fed's fucked, you get another round of inflation. This is going to get much more complicated because Japan, if the reverse carry trade is not done, is still a negative, but the market is going to see anything that China does as being bullish for commodities, which is bullish for inflation, which should be bullish for risk on assets.

Speaker 1:

All right. So here's the thing is what I was talking about with like kind of the mission statement, if you will, of a cross spread or the purpose or like the niche, you know, developments out of Asia that impact global markets. The reason that I have, you know. So I've started across the spread, like about a year ago, a little bit less, and I've been basically writing almost solely about Japan, whereas in my previous podcast, market to the Podcast, I would actually spend a good amount of time talking about China. My goal was always what matters, for this is why I use the term green and red ligny tickers, like actual markets themselves. I don't care about like fundamentals of, like the real world economy and stuff like that. I care about our marked market value of our portfolios and price action, stuff like that and what's moving up. China impacts the real economy, japan impacts more so the financial markets. That's why it's been kind of more balanced, as you that way. However, in the past week you are seeing a massive slew of you know some policy action, as well as a lot of jawbone and promised and yet to be delivered, and who knows if they will be actually delivered, but nonetheless, a ton of you know, actual market support, equity market support, out of the PBOC and out of China. That's why now, like China actually does now matter, because now they're actually directly impacting the green and red blinking ticker financial markets world.

Speaker 1:

And yes, you are right, the Japan thing is very much, so also very much, tied to China as well. What I said in my note I think I tweeted out too was that what happened was when you saw that 5% crash on the Nikkei futures, ishiba, the guy who just got elected, he is a, he was a former defense minister of Japan and he's also a China hawk. So if Japan, if the Nikkei, was just like up you know 5% or so last week, riding off the coattails of what the PBOC is doing and like the double digit gains in you know China A shares and Shanghai and Hang Seng indices and all that, and if it's basically just doing that, well then this guy's you know election just wiped out all of the China led upside out of, you know, out of Japan indices. So there's also that too, because Japan did outperform like E-minis, nasdaq and all that as China was wrapping up, you know, over the course of this kind of stimulus like unveiling over the last several days.

Speaker 2:

Do you get a sense that the China stimulus is going to be enough to cause some bit of a self-fulfilling momentum move here, that it's not just sort of initial euphoria that then results in disappointment? You mean for like the real economy? Well, at least for the financial markets, for China's markets I mean you look at emerging markets here in the US. All of those went vertical right, because so much of that is China-driven.

Speaker 1:

Like, honestly, to me, like you know, this is we've seen this movie before, I don't know how many times. This isn't any different, like literally, I don't know if anyone remembers. But first of all, okay, why did they do this? Now it seems very obvious and some people will say it, but it seems like not enough people are kind of pointing this out. But the reason that they have finally, finally, are like acting on like kind of big bazooka measures, and all that is because the Fed finally cut rates. So they couldn't do. They couldn't do massive easing and stimulus until that happened, because the currency would be crushed.

Speaker 1:

Ironically, once they started doing all this, the yuan has been strengthening quite a lot. Now it has a six handle, but that's because, just like Japan was for the first half of 2024, china was getting sold off as the EM, that it was it's currency and it's bond market. You know, like it's Chinese yields, for example, don't rise with like the USDC and each pair together like like they fundamentally should, just in the same way that JGB yields rise as dollar yen rose like alongside it. That shouldn't be happening, but it's happening because people are just dumping Japan assets, because they're treating it like an emerging market that they want nothing to do with from the central bank, from the central government, from various different angles toward the housing market, for the equity markets, for, like, individuals getting kind of, I guess, lower income individuals getting cash payments supposedly None of this has actually happened, by the way Only like the kind of marginal rate cuts to their various policy rates. But, yeah, so when you have that happening, like we have seen this movie before, and the last time I could remember actually seeing this movie and by when I say this movie, I mean like when people are talking about this is the Mario drug, the Chinese version of the Mario drug like whatever it takes moment, yeah, whatever it takes. Yeah, whatever it takes moment. Right, so the last time. So China did have another whatever taste moment.

Speaker 1:

This was not the first one. Do you remember when the last one was? The last one was the day that the fed began to hike rates back in march of 2022. That day, that foc day. Well, like, whatever was march 16th, 2022 or whatever, okay, and everyone knew that that was the day that the fed was going to hike off of 0, 25 base points. That was well telegraphed and all that. They were way behind the curve and all that. So that was a well-known thing, well priced in. Nobody was surprised when that happened. But before you know, that happened on that very day during like these hours. Right, let's say today would be like that.

Speaker 1:

That said day, like suddenly out of nowhere, out of beijing, comes like suddenly like these massive kind of stimulus programs that they just start to just unleash and they would tell, like literally saying to like hey, long, only asset managers, this is bottom tick by chinese equities. They're literally saying stuff like that. And chinese equities went on a massive, massive rally. And it was not a rally, it was a short squeeze. But you saw, like you know, alibaba with tets and all that. Those were up like 20 percent or so in the last like hour of trading when that dropped, okay, and then the fomc was time for the fomc later that day, and then so kind of things kind of paused, right, because nobody is going to rush in to buy Chinese equities before the Fed initially start the hike rates. And once the FOMC delivered that rate hike, as well telegraphed and as well priced in, then you saw this massive rally in the NASDAQ and all that like up 2.5%, and people were saying like why would the NASDAQ rally like 2.5% 3% into the close on a rate hike? And they're making all these ridiculous reasons to find reasons like us related reasons, when in reality, it was because there was a massive effing bazooka that was shot out of china a verbal one, a jawbone one at that, but nonetheless. You know, mario druggy, you know whatever takes moment was shot out of china on fomc day and that just paused and then that continued and that continued for like weeks and weeks later and people are trying to think of, like the Fed reasons for that.

Speaker 1:

So, literally, we've seen this before, and so what happens is this is how the movie goes you get the short squeeze. This time it's probably going to be like you're going to get some like long, you know, long long. These are actual long positions in as well, but yeah, that kind of feeds upon itself. You know, momentum gets momentum and it always comes at times where, like it's never like an ideal time to buy US equities, like they never look like attractive. They only look always attractive relative to other things, but they're never like cheap enough. They're never like unless it's like super ridiculous financial crisis like 2008 type of things, or COVID or whatever financial crisis like 2008 type of things, right, or covet or whatever. But otherwise, you know, people are happy to buy china or like allocate money to china because it's always just beaten down so much and they think that there's valuation there, and so they do that.

Speaker 1:

And you get the david teppers and all that um, who are, who are long, and then they go on tv and then they talk about it and they, when they do that, by the way, when david tepper's Tepper's on CNBC talking about how he's long China, you know why he's doing that.

Speaker 1:

He's not doing that because this is like some charity, like, oh, let's help, let's help these, like the viewers, like with the stock dip. He's doing that so that you guys not maybe you viewers, but so that the general public buys up equities that he can sell into. Like I guarantee that he's either selling into that, as he's saying that, or at the very least he's done buying. He's not like continuing to buy, right, but you get that and then the you know policy doesn't come or just it's forgotten about and fizzles out. And then you know you get this slow, like slump back down and then kind of macro fundamentals of structural problems within China still exist and all that, and then it just disappears, and that can disappear very quickly, and then it's just a rinse and repeat. So this is no different, really, it really isn't like the names and the programs are different, fine, they always are. So therefore, that's a consistent thing.

Speaker 2:

So that's what we're seeing right now but is there a chance, though, that if, if they see the equity markets turn around, they'll they'll go even harder? It's like I am reminded a little bit of during the covid crash. The fed kept on trying to do things to stop the covid crash and they kept on escalating right because they had already committed so much stimulus in the last week or last few days. I mean, I get the sense that china can't really back down. So if they see their markets starting to tank again because of some doubt, they're going to come in even harder.

Speaker 1:

Yeah. So what I talked about throughout 2022 or what was it? Yeah, 2023. But during, when I had a market death podcast I'm going to cover this was what I said was at the time, and I still hold this belief is that so you guys remember COVID zero, china's COVID zero policy? Right, I called it stimulus zero.

Speaker 1:

Okay, china, xi Jinping, was instituting a stimulus zero policy. In other words, he was instituting a policy very much like COVID zero. That was clearly a very stupid and ineffective policy. That he just was the stubbornness and all that they just kind of held on to and held off to and one day just kind of toss it out the window as if it never happened, right? So I said, look, at any point they could turn this like stimulus zero policy of not providing this kind of bazooka thing or whatever that you were seeing this past week. That could just turn on a dime suddenly.

Speaker 1:

However, when that happens, I don't other than the initial burst upwards. I think that it's actually going to be a bad thing in terms of like bulls on China, for the fundamental economies as well as for financial markets, because the initial move again it's like a very much short squeeze driven, so it's position exiting If China hadn't been doing anything when they really needed to for the last call two years or so, right through, like every single like macro data point and like just plumping stock markets and weakening yuan and ever stronger fixes on, you know, the daily fix right for the, the midpoint fix for the daily fixing for the yuan and and all these kind of measures that they're, these nibble around the edges, measures extend. They're doing everything except for, like the big giant bazooka, massive rates slashing in. You know the post 2008 sort of, you know china stimulus, that kind of revived the world, if you will, which, so we'd like they've done it before. They're choosing not to do it again and they're holding back on it. I think that if they, what I said then and what I still believe now is that I think that if they do that, it's actually going to be like it's, it's gonna backfire, because people are going to start to think like, okay, china hadn't been doing, providing any of this through horrendous you you know, by every measure. Horrendous like it's markets, financial conditions, economy that called for that, but now they've flipped on stimulus zero. So how bad actually is it now? Like if they had been avoiding it or if they've been staunchly, like you know, against it, but now they've suddenly changed their mind. What do they see in this opaque economy that we don't see it? But now they've suddenly changed their mind. What do they see in this opaque economy that we don't see? And then you're going to get, you know, maybe a short-lived upside, and if that happens, it's just, it's kind of the same thing as kind of the interventions.

Speaker 1:

The worst thing that could happen with the intervention, or the worst thing that could happen with like a policy like this out of China, is that they step in, they do a very non-free market sort of heavy-handed activity by the state, and markets kind of, you know, do what they're, react the way they hope for, but then they actually come right back right In this case, like China's equity is about to start to fall again. Then what? Then you're really screwed. And then when markets see that you just shot this massive cannon, this bazooka, and then the markets kind of deflected it and are now resuming the downside, then they're going to rightly or only it's going to become a self-filling prophecy of believing that the policy is ineffective and then you get killed.

Speaker 1:

So I think that that that's the biggest risk. I think that China waited too long to institute anything for, and I think that now it's just gonna kind of make people wonder what the hell is actually going on. And then, if the markets actually don't continue this, then the markets are gonna say like they have no bullets left, they have nothing off their sleeve. That was supposed to be the big bang and didn't really work. And then you're not. Then at that point I'm you know you're not going to be able to revive it. You could throw the kitchen sink at it. You're not, it's not gonna. It's not gonna work. So that's kind of how I feel about it.

Speaker 2:

I would think commodities would be the tell on that first. I mean right, commodities are agreeing with the optimism.

Speaker 1:

With regards to that, I would say that I personally I don't touch Chinese equities to short nor to long, and it's nothing to do with my kind of Western political, free market, capitalist democracy ideology or whatever. There's nothing to do with that in terms of ideology, but it has everything to do with the fact that I tell people all the time look, you can invest or you can trade China all you want to, but you just have to make sure that you understand what it is that you're trading. You're not trading in capitalism, not that US or Japan or whatever is pure free market capitalism either, but it's called the Chinese Communist Party. Ok, it's not a secret, all right. So, like, if you're running like DCF models and like kind of Western based valuations, valuations are not the reason that you should be going long or short something in China. It's a policy, it's a top down policy thing. Ok, so if you want to trade it, you have to know what moves those green and red blinky tickers traded. You have to know what moves those green and red blinky tickers, and that's much more of a reading of you know government bodies or people, behavior and priorities and incentives and all that. It's more of a game of that and that's not a game that I know. Ok, I know how that game I would like to think that I know you know as much as that game works in Japan in terms of like things like interventions and JGB buying and stuff like that. That's also not free markets at work, but I understand more or less how those policies are implemented. I can read those institutions as best as I can, so I'm comfortable. You know training that I'm not. I'm not. But because I don't know when China could step in at any moment with a headline real or fake. That's why I can't know when China could step in at any moment with a headline real or fake. That's why I can't touch China. You know to either direction.

Speaker 1:

So to what you were just saying, if you want to play, there are derivatives, right. You can trade the Aussie dollar, for example, or you can trade base metals. You know like iron ore is ripping and all that, right and there's a bunch of stuff. But like FXI ETF, like that's again, that's just because it's listed in the New York Stock Exchange does not mean that it's now part of a capitalist system. No, that's still part of, still very much part of you know.

Speaker 1:

So go ahead and do it. Just make sure that you understand you're not trading like Alibaba because of you know their, their price price of Booker or whatever the hell it is Like that's a totally irrelevant metric. You're trading like what is the policy outlook regarding that company and its shares? Basically, that's how you should go about doing it, and if you're comfortable doing that, you know, go knock yourself out. But if you are long because, like, chinese stocks are cheap and they go up, that's the worst thing that could happen, because then you think that you figured it out and instead you've actually just gotten lucky and you don't even know that and then, just so, you have false confidence and then you're going to go in bigger size and you're going to get burnt, as many people of it you know who go long or short china eventually do.

Speaker 1:

So I personally don't touch it. I'd rather trade the derivatives of it all Aussie dollar and whatnot, like silver right now is ripping, correlated right now to CNY and stuff like that. So that's what I would do. But I would just look at, I would also look at just make sure you look at like USDCNH as a barometer of what's happening with Chinese policy and people say, like how is that a barometer? It's like managed currency. Well, so what? If it's managed, it's still a barometer. If it's a managed cart, yeah, but it's a managed economy. So therefore it's an accurate barometer. So that's how I look at that.

Speaker 2:

If you had to choose one investing in Japan's markets today or China's markets today for a trade which would you choose?

Speaker 1:

I already went, I already did. I was hoping for the giant blast down at 9 am, which I got, and I got I had to move my limit order up. But yeah, no, because I know, you know, and the thing is like In reality. I probably don't know about either market equally, but I've convinced myself that I'm more comfortable trading Japan and therefore I won't do stupid panicky things because once again, we're not trading markets, we're trading with or against ourselves. So, because it's a psychological thing, I can trade Japan a lot better, I could know when to get out, when you know, and I could prevent my losses and all that kind of stuff and no profit, profit.

Speaker 1:

Whereas china, I know that, I don't know, and I'm just like I'll just be panicked that at any moment papa bear, she can come in and just do god knows what and, you know, throw a wrench in the like, in everything. So so, yeah, that's what I do. And also I mean I wouldn't ever, not ever, but I wouldn't necessarily buy into you get. I mean you asked me if I had to pick one today, I wouldn't buy an index that's up like 18 in the last six days, or whatever. I'd rather buy one that just got trashed because of an ldp election results no, that's a.

Speaker 2:

That's a fair point. Last time you and I chatted you were talking about the, the connection between the, the carry trade, and some of these retail traders from Japan buying US large cap tech, in particular stocks like Nvidia. Any major changes to that? I mean tech has, I think you can argue, largely struggled relative to other sectors which are getting some better relative momentum as of late. But is that activity still?

Speaker 1:

ongoing. Yeah, I'm glad you brought that up. Actually there has since black monday. Yeah, that kind of put a pause on then, because before that it was like you couldn't. The nisa year to date was the greatest thing ever and the yen was the worst thing ever. So, like getting out of, like your cash in and just buying like nvda or buying the All Country World Fund or the S&P 500, like all that a yen-based investor of the S&P 500 was making a lot more return, like the return profile is a lot better than a USD-based, us-based investor of that same S&P 500 index, because you're getting the currency appreciation part as well. So things were working out great until one day the negate dropped like 11 in a day and the day before that it dropped or you know, the trading day before that friday before that, it was down five percent, the day before that is on two percent, and so on. So so that definitely put like a pause on things.

Speaker 1:

As I told you last time, I said that it's not necessarily going to stop people from hating the yen or think that the yen is like a safe haven or like, oh, I should actually just keep my mattress stuffed with, like you know, paper bills. They're going to restart. I mean, a lot of Nisa flows are kind of like just automatic anyway, you know, it's just like like just automated. Automated like kind of you know monthly, kind of monthly out of your paycheck buying, but it's going to restart, and when it does, though, it's just going to be weighted more towards foreign equities, especially with, like, the NASDAQ hitting record highs Once again, while the Nikkei has to get to it's like 4% off, maybe more now at this point, off of those like June or July 11th intervention smackdown moment highs, but the flows have changed and they've trickled. They've not come to a trickle, but they have slowed down. The ones that are, that are still existing, they are more waiting towards, proportionally towards foreign equities than they are the split for domestic and foreign. Now, I'm also glad that you brought that up too, because there's also this. So I said a moment ago that there really isn't a difference in any of the candidates for the LDP election.

Speaker 1:

Let me contradict my own statement. The thing about this guy, ishiba as well, that's unique is that he had, in the past, brought up this subject of, or this idea of, taxing capital gains, which is the exact opposite point of what nisa is nisa's a program of, you know, tax-free investment. What does that mean for nisa then? And so since then he's been saying, like you know, since he won, he's been saying over and over again, like, oh, like, that's no, I want to support, like tax-free investment in nisa type of programs and all that kind of stuff. But. But people just seem to keep like they just seem to remember that about him.

Speaker 1:

And Kishida, the last guy who just sadly walked out, you know is done as prime minister. When he became prime minister, like two or three years ago, whatever he tried to institute or just began talking about increasing capital gains tax on investments and then like, then you get plummeted as a result, then you had to walk that back so and that was like a called a sheet of shock at that time. So people are kind of now hesitant that this guy has this reputation of wanting to tax, you know, capital gains at the midst of everybody markets, blowing up on these investors and now what you're going to get taxed on when you're selling, when you were just told that you wouldn't be. So there is that kind of hindrance. People aren't believing this guy. So it's a matter of sentiment, it's not a matter of a policy.

Speaker 2:

That's the relevance for GISA, or the update, if you will Question from somebody on X go back to the yen. Yen level you focused on before August 4th was, I think, the 152 level. Any levels you see as critical support or resistance at the present time, is there something that is some level for you, weston, that the yen hits that's like, oh shit, time to go all in or time to go all out.

Speaker 1:

Yeah, so I look more. So I'm still looking more at Yan Futures because I had a long Yan Futures position that was getting killed and I was close to I actually did start to stop out like my first layer, but then the Friday surprise blast up, got me back profitable. But if you look at Decembercember yen futures, you'll just again, it's just the round numbers. So 69, 0.0069 that's where you saw bottom in jpy futures and blasted through the seven handle or 0.007. So that's what I go off of, and not necessarily off of like this spot rate, and I can't like people always ask me like what's that you know kind of equate to for the spot rate, and I can't the reason I can't give you, like you know, even you know I can give you like a sort of like a you know a figure, but that's only relevant for that day, because we're talking about, first of all, we're talking about something that's being quoted as JPY USD, not USD JPY. And second of all, and more importantly, we're talking about futures Futures trade. They don't trade in line with the underlying. They only do if they kind of convert at expiry.

Speaker 1:

But we just rolled September futures over to December, so now you have a whole bunch of time. You have the full quarter left till expiry as the front month of, you know, december, the end futures trading, and so you're, you know you can have like, oh you know, like over a one percent difference in in that right. So I mean, like friday, for example, you saw what was it? Dollar yen go to what? 146, 146, third, 146, 48, 146, 50, I guess you call it. I mean, yeah, I guess that's a level, but what's more likely of a level, how about the round level of 69 on yen, which is where, on yen, futures, words bounce off of where you had 24 000 contracts trade and immediately shoot upwards through seven, you know the 70 handle, and and back upwards. So I would just like just just keep using, like those, those levels, they, they seem to be, they seem to be working, they seem to be working much more so than arbitrary spot dollar yen levels of resistance.

Speaker 2:

And all that, Wesson, since I know you want to get back to trading. Talk about your sub stack and other ways that people are going to reach out to you. I don't want to get back to trading.

Speaker 1:

So I've been working on this kind of overview of what China's doing and if anybody who's familiar with my work from the market of the podcast there's an episode called china turmoil week or something like that. Okay, I'll likely put a description for, or leave a link in the description for it, but I basically go through an entire week of of absolute turmoil that happened in in china, in china's markets, and so, like, I go through like a like a day-by-day thing. Like nine you know, this is like okay, tuesday 9 15 china pre-market casual. This is where, like, they set the yuan fixed rate. This is where, like the you know indices opened. This is what happened. Here's what happened with, like the you know, the real estate sector. These people want to go protest, like the shadow bank industry, that these asset want to go protest like the shadow bank industry, that these asset managers that suddenly don't have their principal, let alone their kind of you know, 7% coupons that they're demanding, and they want to go protest. And then police showed up at the door, told them to protest and then they got softened up, like, so I'll go through like each kind of like day and I want people to like just watch that, just to remind yourselves at times like these, like that happens in china too, okay, and then, in addition to that, like this is what that other episode I was talking about with from when they started hiking, when the fed started hiking rates and china's just snuck in like that last everything you know it takes or whatever it takes moment. That was actually from when I was at real vision and when I released that. I'll put a link to that too and take a look at that and again these and just just like, watch those two things and you'll see like what's currently happening isn't any different. You know, the whatever case moment is currently happening and then it results in inevitably results in the china turmoil week, sort of thing. So I'm kind of putting all that together and I'll put that, just compiling that for for cross-thread right now as we speak. But yeah, otherwise, just be aware that china for the moment does now matter for green and red blinking ticker markets, so that is going to be, uh, intense focus of mine. Oh, I'm sorry.

Speaker 1:

I just want to say one more thing too, about just a quick update on the bank japan. You know we're giving this kind of new, new administration, so we're actually now it. As far as japan policy is concerned, we're in a state of like. We have no idea what the hell is going on anymore, because governor Ueda and company did not change interest rates, they didn't lift interest rates at their last meeting and they gave a very dovish press conference.

Speaker 1:

If you will, and if you take a step back and you look at what the Bank of Japan, not like kind of meeting to meeting, but if you look at the bigger picture, right, the Bank of Japan, specifically Governor U guida, is a horrendous communicator to markets and all that. And you know, I mean again, it's because he got like arm twisted into this job that he shouldn't be having. But if you just look at it, like from in april of this year, he literally was like yen problem, currency problem, what, whatever do you mean? And then the currency went for the dollar, yen went from like1.50 to $1.50 to $1.60 and got smacked down but had to get Yen intervened upon. That's because he did that kind of whole act of like whoa, what do you mean? Currency, like what currency? And that was like all over papers and everything like bad Japan governor does not think that there's a currency problem and so he like he doesn't. She's like overacting. If you will right, then you have, you know, july like shock rate hike and all that kind of thing.

Speaker 1:

The japanese like kind of media japanese investors they're not necessarily like they weren't necessarily kind of pissed off or, like you know, shocked at that, but they were. They were more disturbed about the communication, or the lack thereof, that they would do that, not the actual rate hike itself and all that they're saying, like the blow up in markets and all that. It's because you didn't fucking communicate, it's because you like leak things through the media. And so this past meeting there's a lot of community questions about, like communication issues, because the last meeting between the last two meetings, that's when, you know, black monday happened. They shot rate hike, they had their press conference and then black monday happened, like you know, two days later, and so this is the meeting that followed. That they're like dude, what the hell explain yourself. At that meeting he said that this last big fan meeting he basically said we will do a better job at communicating, followed by like a horrendous communication of other other things, of what their policy direction is.

Speaker 1:

So we don't know what the Bank of Japan is thinking or doing or saying is basically the thing. They're not on a path of this or that. They might be, but we don't know. We have to kind of erase all that and look at the bigger picture. They go to extreme ends. They're hawkish, they're selfish, they care about the currency, they don't care about the currency. So that's happening on the bank dependent monetary policy front.

Speaker 1:

In addition to that, you have this guy Ichiba, who is going to be the new prime minister, appointing new people in the Ministry of Finance and all that kind of thing, and, like I said, he has no actual ideology because his goal has been a 40-year goal to, like you know, fifth times a charm finally got into the prime minister role, and so he's just going to do whatever it is that he needs to do. And so he's just going to do whatever it is that he needs to do, and so we don't have necessarily a read on him either. Is he going to tax capital gains? Is he not going to? You know he just did a flip this weekend.

Speaker 1:

This guy has been very critical of the Kuroda Bank of Japan, you know, extremely easy policy. He's been very supportive of rate hikes this whole time, like up until yesterday over this weekend when he gave an interview to nhk broadcast in which he said and I tweeted about this he literally said bank, japan must say you know, keep policy easy. Like dude, you just had your entire thing. You've been trashing corotto for like years and now that the markets blew up on you five percent like because nikki feeders blew up on you five% upon your announcement Now you suddenly are like no, let's get that Sandra Bank put in, like you're a ridiculous douche pickle clown. You haven't even started yet. So, as far as Japan policy is concerned, we have no idea who these people are, what they're doing, what the prerogative is or anything like that. Whatever they say, you have to take with many grains of salt and don't actually think that that's what the policy is. They're just very bad at communicating and or just have very unrelated motives. That's what I'll end on.

Speaker 2:

With regards to I love unfiltered Weston Nakamura. Everybody, please make sure you follow. Sorry for the rant, no, I love it. That sounds great. Everybody, please make sure you follow Weston on X and I'm sincere when I say this Check out his sub stack. He really did a very good, awful research. Appreciate those that stayed up watched this relatively late. We'll see how this week plays out, but everybody, enjoy the rest of your nights or, if you're in Asia, rest of your free day.

Speaker 1:

Wes, I appreciate you, Thanks. I appreciate you inviting me every time Japan blows up. Let's do this again.

Speaker 2:

You're the go-to guy man, that's it. The whole world's the one apart. I'm telling you Wes, you got to do a show with me. Thanks everybody for watching Cheers. Thanks a lot guys.

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Michael A. Gayed, CFA

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