Thursday, March 22, 2012

Dennis Gartman: "Buy Assets Across the Board in Yen Terms"

In yesterday's Globe and Mail, Mar­tin Mid­dlestaedt says Japan­ese yen's 40-year bull mar­ket is at a turn­ing point. He also writes about bet­ting against (short­ing) the yen and in favour of risky assets. The recent decline (Den­nis Gart­man believes this is a trend to hitch hike on) of the yen is not only a wel­come break for Japan­ese exporters, and cur­rency spec­u­la­tors wish­ing to cap­i­tal­ize on its falling val­u­a­tion; it is a wel­come devel­op­ment (risk-on) for hedge funds, as it pro­vides a basis for a resur­gence in short-yen carry trades.

Here are some snippets:

- Den­nis Gart­man, is con­vinced that the long advance of the yen is finally over. He’s urg­ing investors to sell the cur­rency short, a trade he thinks will work for years as Japan’s eco­nomic prob­lems con­tinue to grow and the cur­rency takes a drub­bing.
– “I think it’s the trade of the next 10 years,” says Mr. Gart­man of the Gart­man Let­ter, a mar­ket advi­sory ser­vice. “The yen is doomed fun­da­men­tally. Japan just has so many prob­lems, none of which are going to go away any­time soon.”
– Its gov­ern­ment debt is twice the size of its GDP, the scari­est ratio in the devel­oped world. To make mat­ters worse, its lofty cur­rency is an obsta­cle for its exporters, it has been fight­ing per­sis­tent defla­tion, and its pop­u­la­tion is aging rapidly.
– “This is one of the slow­est mov­ing train wrecks in the his­tory of finance, but we’re just not quite sure when it clicks over,” says Andrew Busch, global cur­rency strate­gist at Bank of MontrĂ©al’s invest­ment arm.
– Camilla Sut­ton, chief cur­rency strate­gist at Sco­tia Cap­i­tal, says sen­ti­ment “used to be quite bull­ish for yen for a very long time,” but the mar­ket view has “turned wildly neg­a­tive just over the last few weeks.”
– Much of the yen weak­ness occurred after the Bank of Japan said in Feb­ru­ary that it would buy ¥10-trillion worth of gov­ern­ment bonds – in effect print­ing money to finance the government’s debt.
– Another approach advo­cated by Mr. Gart­man has been to buy futures con­tracts on gold and other com­modi­ties and simul­ta­ne­ously sell Japan­ese yen futures. If he buys con­tracts rep­re­sent­ing $1 mil­lion in gold, he then sells futures con­tracts on yen worth $1 mil­lion. “You cre­ate your own syn­thetic deriv­a­tive” that allows pur­chases of assets in yen terms, he says of the strat­egy. “Gen­er­ally I think you should buy assets in yen terms across the board.”
– These some­what com­pli­cated trades will have super­sized pay­outs if the yen falls and the var­i­ous com­modi­ties rise, but will suf­fer large losses if the yen strength­ens and com­mod­ity prices weaken.
– Mr. Gart­man says there is an addi­tional rea­son the yen will likely con­tinue to be weak: Japan­ese com­pa­nies want a cheaper cur­rency to make exports more com­pet­i­tive. “Clearly, the Japan­ese cor­po­rate struc­ture wants a weaker yen. They’re obvi­ously cheer­ing this on.”

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