Playing Mr. Kuroda's Wild Ride
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Here's the easiest trade to make in the history of Earth:
Buy Japan. Sell Europe.
The reasons have nothing to do with fundamentals, and everything to do with the strategic thinking behind policy.
Inflation Can Be Good
The new head of the Bank of Japan, Haruhiko Kuroda, is determined to end the generation of deflation that has devastated his country's economy like Godzilla plundering paper Tokyo.
Once his predecessor leaves the job on March 19, a few weeks from now, Kuroda will embark on an unprecedented program of yen easing. He will be buying assets with a view toward weakening the yen and creating inflation. He will be increasing the yen supply drastically.
Inflation, you see, is not an altogether bad thing. When prices go up producers get more, which means they can spend more. And consumers are encouraged to spend more because as the prices are going up, the value of what's in their pocket is going down. Inflation, in limited degrees – and Kuroda's target is just an inflation rate of 2%, about the US rate – actually stimulates growth. It encourages people to go into their mattresses and buy assets, and it encourages corporations to break into their cash hoards and invest.
It's stimulus. It's not as good as the stimulus you get from actually spending government money, but it's stimulus. That means the value of the yen goes down, but the value of Japan's economy goes up. It means Japan is going to start growing again.
Don't Bet On US, Either
Contrast that with the policy in Europe, which is being run by Germany.
There you have both fiscal and monetary drag. Governments are being told to spend less, to tax more, which means they can't grow. And the supply of Euros is being kept in check with super-low interest rates at the center, in Germany. The only game available to traders is speculating, back-and-forth, on policies at the periphery, in Italy and Spain and Ireland. You sell them as austerity deepens, you buy them as austerity relents. It's not a fun game, because it's not a fun place to hold assets these days.
And guess where American policy is taking its cues? From Europe. Combine the payroll tax hike, reduced government spending, and sequestration, and we're going to be hitting a headwind of 2.5% against our GDP growth starting next month. That means that unless the private economy grows at a rate over 2.5%, we're going to be in recession again.
This is the “stupid recession” I warned about. It is completely man-made. Lower energy prices mean that the U.S. economy is actually poised for growth, but policymakers are deliberately preventing this from happening, for political reasons.
How to Play
The lesson here is simple: there is no austerity fairy. Anyone who believes that taxing more and spending less is going to stimulate growth is wrong – you can take their money. Anyone who thinks that deflation is going to lead to growth, that keeping the money supply down like the gold bugs do is a sane policy, is insane and you can take their money.
How? The easy way is to sell instruments like the SPY, which bet on the U.S. economy, and buy ETFs like EWJ (NYSEMKT: EWJ), which bet on Japan. Trades like placing a negative bet on the Euro, through instruments like FXE (NYSEMKT: FXE), the Currency Shares Euro Trust, or (if you're braver) DDR (NYSE: DDR), the Market Vectors double short Euro, also look good, especially if you're buying some Japanese assets alongside.
I don't usually play currencies and economies this way, so please feel free to offer other good trades to take advantage of this in the comments. Or just make fun of my thesis--it's your call.
DanaFBlankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!