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Grexit: For Real This Time?

Sometimes the soberest, most rational analysis can be replaced with a simple fairy tale. And that is the point we’ve reached in Greece’s on-again / off-again sovereign debt crisis. It’s become a modern-day case of The Boy Who Cried Wolf.

We’ve heard for the better part of five years now that a Greek debt default was imminent and that once it happened, we’d have a Greek exit (“Grexit”) from the Eurozone and a disaster of Biblical proportions, complete with human sacrifice, dogs and cats living together, and mass hysteria, to take a line from Ghostbusters.

Investors stopped reacting to Greek news a long time ago. But what if…just if…it really happens this time?

Greece is running out of money, and in order to secure a full payment of its bailout funds, Greece has to present a credible reform package by Friday.

Sounds easy, right?

Wrong. In order to come up with a credible reform package—which would include committing to the labor reforms made by the previous government, reducing pension benefits and continuing to privatize state assets—the ruling Syriza party would be breaking virtually every promise it made to get elected, which would probably lead to its fall.

We’ll see. Past deadlines have proven to be, shall we say, “flexible.” My bet is that Greece and its creditors agree to a list of ambiguously-worded promises that allow both parties to save face and kick this can a little further down the road. Greece will get whatever minimal lifeline it needs to avoid a default, and we repeat this process ad nauseam.

But what if I’m wrong? What if Friday passes without a deal, positions harden, and Greece pushes forward without bailout aid? Greece has a major IMF payment due on May 12 that it would most likely be unable to pay. This would be a Greek default…and would lump Greece in with some truly elite company. Somalia, Sudan and Zimbabwe are the only countries to ever be late on an IMF payment. A Greek default will almost certainly mean a Grexit, as Greece would be left with no other choice than to print money to pay its bills.

So, let’s say it happens this time. So what? What are the consequences of a Greek default for the average investor?

Let’s look at some scenarios.

  1. Your U.S. Treasury bonds are likely to get a lot more valuable. ECB President Mario Draghi reiterated last week that the euro “cannot be reversed” and that “there is no going back to the drachma.” Well, that sounds good, but the ECB has reportedly been preparing for a Grexit for months. And given that the market hates uncertainty, you’ll see investors dumping euro assets and flocking to the safety of U.S. Treasury debt.
  2. Your foreign stock funds will take a hit. I know, I know. You’ve heard the contagion story before. Once Greece goes, investors will assume the worst and dump Spanish and Italian assets in sympathy. I don’t expect any long-lasting effects of contagion. The IMF, ECB and European Commission will make life so difficult for Greece, that Spanish and Italian voters will be scared straight and will shy away from electing their own versions of Syriza. But in the short-term, you can bet it will get dicey.
  3. U.S. stocks—and particularly those with a large overseas presence—will get knocked around. A recurring theme this earnings season has been that a strong dollar is crimping overseas profits. Any action the ECB takes to stabilize the market—quantitative easing, emerging lending, etc.—will push the euro lower relative to the dollar. So if you think the whining about a strong dollar is bad today, you ain’t seen nothin’ yet.
  4. Fed tightening will be off the table for a long time, so don’t expect the CD or savings account rates on offer to get better any time soon. Remember, the last thing the Fed wants is a stronger dollar. So if Greece pulls the Eurozone into uncharted territory, expect the Fed to take measures of its own to prevent unwanted dollar strength.

Do I really see any of this happening?

No, I expect Greece to stay in the Eurozone. Syriza realized a long time ago that it really has no cards to play. If it pushes too far, Europe and the IMF will have to make an example out of Greece in order to keep Spain and Italy honest. Think about the misery that Argentina has endured after defaulting a decade ago. U.S. hedge funds went so far as to seize an Argentine navy ship in port in Africa. Do you think that Greece’s official creditors will be any less ruthless if they believe the survival of the Eurozone is at stake?

We’ll see. Until then, the clock is ticking.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.




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Shinzo Abe’s Win Doesn’t Mean Much for Japanese Stocks

Shinzo Abe’s bet paid off.

With Japan sinking back into recession and the effectiveness of “Abenomics” called into serious question, the Japanese prime minister called a snap election two years early to secure a governing mandate.

Well, he got it. Shinzo Abe and his coalition partners got 68% of the vote, giving him the political support he needed — and four more years — to push through with his economic reforms.

Whether you can really call this a “popular mandate” is open to debate. Only 35% of Japanese voters bothered to show up, showing a remarkable amount of apathy, given how horrendously bad Japan’s economy is.

New data showed that Japan’s recession is even worse than thought. The Japanese economy shrank by an annualized 1.9% last quarter, rather than the 1.6% originally reported. And that drop follows the 7.3% implosion of the second quarter.

Effective or not, the election means that Abenomics will be in effect for at least another four years.

Here’s why that victory doesn’t matter.

Japan Has Serious Demographic Problems

I don’t want to rag on Abe, and I’m actually very supportive of his reform agenda. But try as he might, Abe can never be Japan’s Reagan or Thatcher. As sick as Britain and America were before the Reagan and Thatcher revolutions, the problems facing both countries were political. A politician with sufficient charisma (Reagan) or cojones (Thatcher) could have fixed them.

The issues Japan faces are not political; they’re demographic.

Japan is the oldest country in the world with a quarter of its population already over the age of 65. Japan’s population peaked seven years ago at 128 million and hasn’t stopped shrinking since — Japan has about a million fewer citizens every year. By 2060, the Japanese government estimates that Japan’s population will have shrunk to 87 million people, and as much as 40% will be older than 65.

That’s a problem, to say the least. In a modern economy, consumer spending is the dominant contributor to GDP. But consumer spending requires consumers, and Japan has fewer of them every year. And the ones they do have are older and more inclined to save than spend.

Let’s look past consumer spending for a minute. What about real estate? It’s hard to imagine home prices enjoying much of a sustained rise given that there are fewer buyers every year. Given the importance of home equity to household wealth — and given the importance of performing mortgages to the banking system — it’s hard to imagine real estate being anything other than a serious economic drag for decades to come.

And that drag will appear in both commercial and residential real estate. Fewer Japanese citizens also means less demand for office space and retail space.

Nevertheless, Shinzo Abe is making a real effort at spurring growth, as hopeless as it might be. Let’s take a look at what his policies might mean for the yen, for Japanese bonds, and for Japanese stocks.

Japanese Stocks Still in Trouble

Two major planks of Abenomics are aggressive monetary stimulus and increased government spending. Both of these suggest that the yen will continue to sink, particularly versus the dollar. After years of record budget deficits and creative Fed policy, the United States is slowly returning to more “normal” policy, while Japan is moving the other direction with gusto.

Adjusted for the relative sizes of the economies, Japan’s current quantitative easing program is about three times bigger than “QE Infinity” was at its largest.

The yen story is straightforward. Barring the occasional short-covering rally, the yen should continue to fall. But the story with Japanese bonds is far more complex.

Normally, wildly aggressive money printing and deficit spending causes bond yields to rise in anticipation of inflation. Well, Japan has no inflation, and bond yields are kept low by the aggressive buying by the Bank of Japan. The Bank of Japan is, for all intents and purposes, buying bonds faster than the treasury can print them.

That speedy buying means that Japanese bond yields should stay near record lows for now … though I eventually see yields soaring to unpayable levels when the yen’s orderly decline turns into a rout.

What about Japanese stocks? The iShares MSCI Japan ETF(EWJ) has been quiet of late, trading in a relatively tight trading band since May of last year. And this is not simply a case of stock gains being offset by currency losses; the WisdomTree Japan Hedged Equity ETF (DXJ), which hedges its exposure to the yen, has had a fantastic run over the past two months. But its year -to-date returns have been nothing special, underperforming the S&P 500.

The deteriorating economic picture appears to be roughly balanced by quantitative easing. Unlike American quantitative easing– which was exclusively the purchases of government bonds and mortgage securities — the aggressive Japanese variety includes purchases of Japanese ETFs.

Bottom Line

Normally, I prefer to be on the same side of a trade as the central bank. They have more money than I do, seeing as how they can print money at will. But in this case, I essentially see a transfer of ownership. Disillusioned Japanese and foreign investors are selling their shares to the Bank of Japan and reinvesting their funds elsewhere.

I don’t expect much of a rally from EWJ or from Japanese stocks in general. If you want to wager on Japan, stick with shorting the yen.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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Japan’s ‘Surprise’ Recession and How You Should Trade It

I saw a headline this week that actually made me laugh out loud: “Japan’s economy makes surprise fall into recession.”

Surprise? Really?

Japanese GDP shrank by 1.6% last quarter after shrinking by 7.3% in the second quarter. The culprit? Japanese consumer spending, which was much weaker than expected. Consumer spending makes up about 60% of Japanese gross domestic product, and Japanese consumers have snapped their wallets shut following a sales tax hike earlier this year.

The only surprise here should be that economists didn’t see this coming. Japan has seen GDP fall in three of the past four quarters. The only quarter that saw growth — the first quarter of 2014 — was an outlier skewed by the pending sales tax hike. Japanese shoppers went on a spending spree in the first quarter in order to avoid the new sales tax.

The media is calling this a failure of Abenomics, and it is — sort of. But I would argue it goes much deeper than that. The bigger failure is that economists thought Abenomics ever had any chance of success. Of the 59 quarters that have passed since 2000, the Japanese economy spent 21 of them shrinking.

And in many of the quarters that had GDP growth, the “growth” is mostly a result of poor comps from the previous year. It’s not hard to show “growth” when your previous year’s results were awful.

A little quantitative easing (OK, a lot of quantitative easing in the case of Abenomics) is not going fix an economy this broken. Hey, I’ll give credit to Prime Minister Shinzo Abe and to Bank of Japan Governor Haruhiko Kuroda for making the effort; at current exchange rates, Japan’s quantitative easing program  is about three times bigger than Ben Bernanke and Janet Yellen’s “QE infinity” adjusted for the size of Japan’s economy. Kuroda is buying bonds at a rate equal to 16% of Japan’s entire economy, every year, until further notice.

So, what is the story here? Textbook economics says that making this kind of liquidity available should goose consumption and business investment. Why isn’t it working this time around?

Before I get too wonky on you, let me ask you a question: When Bernanke pushed long-term interest rates lower via QE, did your elderly mother or grandmother react by spending more money?

I’m guessing the answer is no.

Lower interest rates are a boon to younger consumers, as it allows them to purchase cars, homes and other big-ticket items with a lower monthly payment. But people in or near retirement generally aren’t the ones buying things on credit.

Well, Japan has a lot of consumers that fit your mother or grandmother’s profile. It’s the oldest country in the world with a quarter of its population already over the age of 65. Japan’s population peaked seven years ago at 128 million and hasn’t stopped shrinking since — Japan has about a million fewer citizens every year. By 2060, the Japanese government estimates that Japan’s population will have shrunk to 87 million people, and as much as 40% will be older than 65.

Japan already had the lowest long-term yields in the world before Abenomics kicked in. Dropping the benchmark rate from 0.6% to 0.5% — even to zero — isn’t going to convince a company to make major new investments, particularly when they already have overcapacity.

Quantitative easing cannot manufacture real demand. But it can cause stock and bond prices to rise, and the newly printed money makes it way into the capital markets. For this reason, I’m reluctant to recommend that you short Japanese stocks or bonds right now.

The safer bet is to short the Japanese yen. And the easiest way to do this is via the ProShares UltraShort Yen ETF (YCS). YCS is a leveraged fund that rises when the yen falls vis-à-vis the dollar. Be careful here; during times of market turbulence, traders sometimes cover their carry-trade shorts, which can drive the yen sharply higher in the short-term.

Given that YCS is a leveraged fund, you can lose a lot of money very quickly. So, YCS is better viewed as a shorter-term trade than as a long-term, buy-and-hold position.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long YCS. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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Shorting the Yen: The Closest Thing to a “Risk-Free” Trade to Close 2014

There is no such thing as a “risk-free trade.”  No matter how good an investment thesis looks on paper, there can always be a curve ball you never saw coming.

That said, the closest thing to a “risk-free trade” you’re going to find for the remainder of 2014 is to short the Japanese yen.  Barring another market scare that causes hedge funds to cover their yen shorts and close their carry trades, the yen is all but guaranteed to sink lower.  This isn’t particularly good for American exporters.  But at least in the short term, it adds another major source of liquidity to drive stock prices higher.

Last week, central bank shenanigans were the biggest force behind the market’s moves.  The Fed finally tapered its “QE Infinity” bond-buying program to zero.  That’s been their plan for months, so it came as no real surprise.  The Fed did, however, use slightly more optimistic language when describing the labor market, which Fed watchers took as a cue that short-term rates might be rising a few months earlier than previously thought.

Maybe…or maybe not.  I don’t expect the Fed to raise rates much if at all for another 9-12 months.  But it doesn’t really matter.  The central bank news that sent the market flying on Friday came not from the Fed but from the Bank of Japan.

The BoJ announced it was taking quantitative easing to levels that would make Fed chair Janet Yellen blush.  The BoJ will be increasing its balance sheet by 15% of Japanese GDP per year and will triple its purchases of ETFs and REITs.  Topping it off, Japan’s government pension fund will be upping its allocation to equities from 24% to 50%.  Relative to the size of Japan’s economy, this is the biggest quantitative easing boost in history.

This won’t end well for Japan.  Quantitative easing may stave off deflation for a time.  But it won’t reignite growth or encourage new borrowing by Japanese companies. Japan is already sitting on overcapacity and has some of the poorest returns on investment in the developed world. Worse, at the risk of sounding morbid, there are fewer Japanese consumers to sell to every year. Japan is the oldest country in the world with a quarter of its population already over the age of 65. Japan’s population peaked seven years ago at 128 million and hasn’t stopped shrinking since — Japan has about a million fewer citizens every year. By 2060, the Japanese government estimates that Japan’s population will have shrunk to 87 million people.

So, Japan’s quantitative easing won’t “fix” Japan.  But it will lower the value of the yen as liquidity sloshes out of Japan and into higher-yielding assets abroad.

There are plenty of ways to trade Japan’s quantitative easing bonanza.  The easiest is by buying shares of the ProShares Ultra Short Yen ETN (YCS).  This is a leveraged fund, so be careful.  YCS rises about 2% for every 1% fall in the value of the yen relative to the dollar, and vice versa.

As I said, there is no such thing as a risk-free trade.  But barring a massive intervention by the Fed or ECB to prop up the yen, this is about as close as we’re going to get.

Disclosures: Long YCS in Tactical ETF portfolio.

This article first appeared on

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 





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Will Scotland Leave? Polls Say Maybe. Market Says No.

Thursday is the big day.  After the polls close, we’ll know if the United Kingdom remains united or if Scotland will be going it alone.  With just a few days to go, the race is a statistical dead heat.

Data from


Given that we’re talking about the potential breakup of a major banking and financial power, a founding member of NATO, a nuclear power, and a permanent member of the UN Security Council, you would expect the markets to be on edge.  Yet investors seem far more preoccupied with the Fed’s schedule for raising interest rates (deliberating the precise date of the Fed’s decision to raise rates by 25 basis points is as inane an argument as  how many angels can balance on the head of a pin, but that is another story for another day).

Yes, the British pound has fallen sharply against the dollar over the past two months (see chart).  But then, the euro has been selling off vis-à-vis the dollar as well, and in any event, the pound‘s declines still put it positive territory over the past year.  The dollar’s recent strength could just as easily be attributed to the expected tightening of Fed monetary policy.


How should we interpret this?

It would appear that the market is discounting a Scottish “No” vote (i.e. a decision to stay in the Union).

As a general rule, betting markets are more accurate than opinion polls in predicting political outcomes such as elections, which makes sense: people tend to take their answers a lot more seriously when money is on the line.  Apart from the action in the capital markets, betting sites would seem to confirm that the United Kingdom will prevail.  The odds of Scotland leaving are only about 22%, according to predictions market site Intrade.  And gambling site Betfair puts the odds of Scottish independence at about 5 to 1.

Still…what if, perhaps inspired by a Braveheart movie marathon, the Scots surprise everyone and do vote for independence.  What happens then?

MarketWatch’s Matthew Lynn argues that a “Scoxit” would be an economic non-event and the rest of the UK would be better off without Scotland, citing, among other things, Scotland’s older, sicker demographics , its higher public spending per capita, and its declining oil revenues.  A UK without Scotland would likely be more market friendly and more economically dynamic.

In principle, I would agree.   And in the long term—assuming the rump UK didn’t do something suicidal like exit the EU in 2017—Lynn is probably right.  But a lot can happen in the meantime.

Here are a few possibilities:

  • Scottish banks would flee Scotland en masse for London. The Royal Bank of Scotland (RBS) and Lloyds (LYG), which owns the Bank of Scotland, have both already indicated they would leave Scotland.  Any bank that didn’t leave would be at risk of having no viable guarantor to bail them out during the next crisis.  Certain “real economy” companies—think Scotch whisky maker Diageo (DEO)—would have a harder time rearranging their businesses.  But expect capital and business to move south of Hadrian’s Wall.
  • The uncertainty that comes with a “yes” votes spills over into Europe, further undermining Europe’s economic recovery as companies withhold new investment until the dust settles.
  • Investors panic that a UK split-up will give strength to separatists in Spain and Belgium, and we return to the “bad old days” of 2010-2012 when it appeared that Europe was coming apart at the seams.

So, what should we do if the Scots vote yes?   I would err on the side of caution by raising at least a little cash.  I don’t expect a Scottish yes vote, and even if we do get one I would expect the fallout to be relatively contained.  We may even get a nice buying opportunity in potential “contagion” markets like Spain.

My advice: Wait and see.  If the Scots vote to secede, we could have a nasty correction in European shares.  If this happens, use it as a buying opportunity to pick up shares of solid blue chips like Spain’s Banco Santander (SAN), BBVA (BBVA) and Telefonica (TEF)—all solid multinationals with a large chunk of their operations outside of Europe.  But wait for the dust to settle first.  I should emphasize that we really are in uncharted territory here.  We’ve seen plenty of countries disintegrate in recent decades, with the Soviet Union and Yugoslavia being the two biggest that come to mind.  But none has been as systemically important to the world financial system as the UK.

In the meantime…you might need to pour yourself a tumbler of scotch to ease any anxiety going into Thursday’s vote.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.