"Little-Known 'Mr. K.' Just Set Up the Best Trade of Our Lives."
That was the headline to the December 2016 issue of my True Wealth newsletter.
It turned out to be a great trade...
Subscribers that followed my recommendation made 34% gains (before we switched out of the position last month).
"If Mr. K does what he says he's going to do – and we have no reason not to believe him – then we could potentially make more on this one trade than we have on any other investment in our lifetimes," I said. "This trade could run a few years."
The trade started in late 2016. It worked all the way through 2017.
I thought we had a few more years left.
But... well... uh-oh...
Last week, Mr. K. publicly raised doubts about how long the tailwind for Japanese stocks could last.
Japan's main stock market fell 2.5% the day he spoke. And Japan's currency – the yen – soared.
So who is Mr. K.? What did he say? And should we believe him?
Let me answer each of these, quickly...
Mr. K. is Haruhiko Kuroda, the head of Japan's central bank. In late 2016, I wrote:
He fears that Japan is backsliding again into deflation. He simply won't stand for it. And he has the power to prevent it from happening.
Kuroda set extreme targets, and he planned extreme measures to hit those targets. Specifically, he forced the interest rate on the 10-year Japanese government bond to near zero. And he's been trying to force inflation up to 2%.
Investors in Japanese stocks (like us) saw this as a one-way bet. It was a recipe for ultra-low interest rates and ultra-stimulative government policies. That should cause soaring stock prices. We bought.
It worked. Then, last week, Kuroda started to change the script. Here's what he said...
Prices will move to reach 2% in around fiscal 2019. So it's logical that we would be thinking about debating exit at that time too.
The thing is, Kuroda doesn't just want inflation to reach 2%. He specifically wants to dramatically overshoot that 2% target. And even when he spoke last week, he said that this "overshooting commitment" is still in place.
Here's what he said back in 2016, around the time we put on our True Wealth trade:
Given that the inflation rate in Japan has been lower than 2% for a long period, it is necessary for the public to experience the process whereby the inflation rate actually exceeds 2% before converging to the 2% target. Through such experience, the perception that annual inflation will be around 2% will take hold among the public.
Japan is nowhere near overshooting 2% inflation. And it won't be in 2019, either.
Long story short, Kuroda ain't doin' nothin'.
He might be talking about doing something...
But he ain't doin' nothin'.
The one-way bet is still in place. Buy Japanese stocks.
You want to own Japanese stocks today... Kuroda will continue his aggressive stimulus policy. But there's another important piece to this trade...
Highs and Lows
NEW LOWS OF NOTE LAST WEEK