Albert Edwards Is In Love With This Asset That Hasn't Had A Losing Year Since 2007

Tyler Durden's picture

Albert Edwards is in love, but what makes it somewhat awkward is that the object of his affection is not living flesh and blood but a major asset, one which he calls "probably the most fantastic investment of the last decade", and one which so many others have called the "widowmaker" for the simple reason that they have shorted it, shorted it again, and shorted it some more, only to always lose money because as their adversary that have the most irrational, most childish and most desperate central bank in the world: the Bank of Japan.

The security in question is the 10 Year Japanese Bonds (JGB), and what makes it fascinating, is that according to Edwards, it has not had a down year since 2007!

Here is Edwards explaining his love for the JGB:

Name me a major asset that has not seen one single yoy decline since the start of 2007? Clearly not equities or commodities. What about bonds? Again clearly not corporate bonds. What about 10y government bonds? I?ll give you a clue. It?s not the US, UK or Germany, all which saw negative yoy returns, most notably in 2013.


The only major asset to have seen continuous positive yoy returns since before the Global Financial Crisis is 10y Japanese bonds, now yielding -0.06%. In a world of negative policy rates, I am scratching my increasingly bald head as to where, if anywhere, yields will bottom. Why bother with global equities when you can own the JGB (see below)?!




Japanese 10y bond yields yesterday crashed below zero to a record low of minus 0.06%. How low can they go? And having followed Swiss bond yields into negative territory (Swiss 10y yields currently stand at -0.5%), is this a shape of things to come for the US and Europe? Japanese 10y bonds, as I highlighted on the front cover, are the only major global asset class that have not seen a negative yoy return at any time since the Global Financial Crisis at the start of 2007 (see chart below comparing Japanese 10y total return to US and German 10y).



To be sure, Edwards remains very bearish on the economy and the stock market, which is also why he is very bullish on bonds, and especially those of Japan because he thinks the NIRP farce has only just begun, and the result will be far more negative rates, and thus soaring prices:

I believe that the next recession will bring deeply negative rates, however damaging it might be to bank profits, and I see central banks implementing restrictions for holding cash. And as Vincent Chaigneau, SG?s head of bond strategy, pointed out to me a few days ago when the US 10y Note was 1.68%, ?If in one year that same note (then a 9y) trades at minus 0.32% (down 200bp) then the T-Note will have delivered a total return of 19%. Not bad indeed!

Is Edwards right? Well, Kyle Bass would disagree, but Bass underestimated just how cornered Japan is: after all, for the central bank of the nation with the 400% total debt/GDP the opportunity cost of doing idiotic things is very low, which explains not only NIRP but also why the WSJ in a post earlier urged Kuroda to monetize oil. After all, it's not like the BOJ has any credibility left.

But that's also the biggest risk: as Edwards himself admits, "can the plunge in JGB yields into negative territory be seen as a vote of no confidence in Abenomics? It certainly can..." But if the central bank's confidence is shattered, what is there to prevent bondholders from simply selling their JGB holdings on concerns the BOJ will no longer be the marginal price setter of the JGB, and convert the proceeds into some currency that does not belong to a debt banana republic (or, gasp, gold)?

In other words, the more bonds the BOJ monetizes, the closer we are to the endgame for not only the BOJ, but for Japan: after all without the BOJ's backstop purchases, the yields on Japanese bonds would be comparable to those of Venezuela.

And since the only reason to buy JGBs is to frontrun the BOJ's own purchases, the risk here is that of terminal confidence failure in the BOJ.

Yes, Japanese bonds have generated positive returns for the past 9 years, but all it takes is just one moment of sheer central bank stupidity, or outright insanity, to destroy everything. The BOJ had just such a moment one month ago when it launched NIRP. What if the next moment is its last?

In fact, in a world in which the last, and increasingly more risky, counterparty are central banks themselves, isn't owning the one asset that has zero counterparty risk the best option?

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dumb_funded's picture
Is China Ready To Launch Yuan-Gold Fix By April?  Thursday February 25, 2016

(I figured since it was such a slow news day, what the hell)
Stuck on Zero's picture

Where's the inflation factor in the J bond price?

ml8ml8's picture

JGB's, the unsinkable Titanic of investments.  Now look over there where Abenomics is rearranging some chairs on the deck...


chumbawamba's picture

Fuck me, I thought it was gold, too.


pods's picture

I thought he was gonna say pussy. That seems to always be in demand.

CHX's picture

No, these are the years 2017-2026...

fx's picture

I beg to disagree. While I do hold physical gold and some gold mining shares there are more assets without counterparty risk. Think of land (farmland or residential). Think of high quality stocks or better yet one's own business. the latter has business risks, no doubt, but rather little counterparty risk.

Farmland or owning appartment(s) or house(s) can at least generate income. Gold cannot, which is its inherent weakness. If nobody would care for gold anymore - whatcha gonna do? It may not be anyone's liability (hence no counterparty risk) but that is true even for the most worthless piece of rock in the mountains. When push comes to shove I would prefer to trade real stuff (food, ammo, gasoline etc) only for similar real stuff. Not for some shining yellow rock that cannot be put to any practical use except exchanging it with somebody. No counterparty risk?

QQQBall's picture

and when they divert your water to urban areas?  When the Monsanto seeds next door blow over and sprout on your land? Plus you get dirty on a farm... whne they jack your property tax assessment amount and the rate and the direct assessments? Hey, social unrest? Just throw the 20 acres in the suitcase. Idjot

sun tzu's picture

The social unrest will be in the cities, not countryside. If there are global riots all across the land, where are you going to run with your bags of gold and how far will you get before someone blows your head off?

Not My Real Name's picture

Read "When Money Dies" by Fergusson. The experience in Weimar shows that the social unrest will come to the countryside too.

TradingTroll's picture

Gold doesnt have counterparty risk? Right. Because when your counterparty doesn't trust you or your gold or can't price 1/10 oz for some groceries,  that's called counterparty risk and gold has it in spades.

Crush the cube's picture

Farmland?  Seriously, are you aware of how deep the bull has dumped on it?  Over half the farmland isn't even owned by farmers or corporates, it's owned by people over 65 who long ago gave up farming.  When the banks blow, than buy farmland, otherwise your going to lose it.  The transfer of farm land to the follow on generations has never been as bad as it has been for the last three decades except for the time of the great depression.  The owners won't give it up because there's no place to put the money.  Just watch what happens when they all need quick cash when their paper assets disappear over night.  There's going to be one massive fire sale, and no farmers to buy, since they're all farming on margin on over valued rented land with depressed commodities prices.

Bad buy, for now.

As far as business, the government is one massive counter-party risk, and on three levels even. 

Moe Howard's picture

Seems you are forgetting property taxes. That is some serious counterparty risk - the worse the government pension and education financing are, the higher your property taxes are going. What are you gonna do, pick up your apartments and move to the next county?

adanata's picture

It may seem incredible to those unfamiliar with PM market fundamentals, but silver bullion is more rare and more valuable than gold; it will outperform gold and is far less dangerous to hold. Not perfect but not bad....  ;-) 

gmak's picture

And yet, it's gone from 45 oz / oz Au, to 80 oz / oz Au.   When did you say that it will outperform gold?  Last I hear, India and China are not rushing into Silver (Ag).

fx's picture

Ag isn't more rare than Au. And it has a major disadvantage: It just takes an awful lot of pounds of silver what one pound of gold could achieve. That being said, Silver is of practical (industrial etc) use, which gold, for all intents and purposes, is not. It is because of that, that silver gets consumed (used up) while the supply of gold actually grows with each passing day. So i do regard Silver as being the better play than gold, ultimately. I just don't know when the tide will turn in favour of silver and maybe platinum would be worth a thought, too. After all, you can "hide" in an ounce of pt almost as well as in an ounce of Au and platinum has practical uses, too. Just not as many as Ag and once the ICE car dies, the days of Pt as a commodity may be numbered ( i doubt it, though).

UncleChopChop's picture

wouldn't silver be more practical for day-to-day applications? in terms of a 'go bag', then the value density of gold is the way to go. but in terms of having a day-to-day currency to do local transactions, i would think the smaller 'denominations' of silver would be more handy. i mean, how is someone going to "make change" for you when you buy a weeks worth of groceries with a 1 oz gold coin? start 'clipping' the coins and weighing it out? i dont know. is that what they do in failed currency regime states like zimbabwe?

Moe Howard's picture

Most new silver provided to the market is as a mining byproduct of other commodities. As the global economy crashes, less low cost silver will be entering the market.

chumbawamba's picture

Um.  No.  Notwithstanding your hopes for outperformance, silver bullion is in fact not rarer than gold.

I am Chumbawamba.

falak pema's picture

So its better than gold & silver voodoo worship?

Rakshas's picture

munch munch munch ..... oh cool ......farmer put out a salt lick ..........munch munch munch 

Kirk2NCC1701's picture

Not a Bernie Madoff Fund?

FlipFlop's picture

Somehow I would feel uneasy holding this stellar bond...maybe it reminds me too much of Madoff's fund, indeed. Stable returns, but only the God knows what is going on...until we all know.

seek's picture

"for the central bank of the nation with the 400% total debt/GDP the opportunity cost of doing idiotic things is very low"

I LOL'd. The smart/funny Tyler wrote this one.

BadKiTTy's picture

Is it just me but when I read ZH now the screen automatically scrolls down to the fcuking ad at the bottom!!! 

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) BadKiTTy Feb 25, 2016 3:44 PM

Pretty soon it'll hijack your mouse and click it too

CapnJackDaniel's picture

"Sometimes it makes me watch porn." Gold

(You mean charts . . . right? Right?)

ozzzzo's picture

It's just you. You forgot to install an ad blocker.

Bay of Pigs's picture

The very definition of FUBAR.

flysofree's picture

Kyle Bass should get job that he is qualified for: minting nickles at US Gov Mint or as a night watchman at U of Texas gold vault.

Dr. Engali's picture

Maybe you two should compare bank accounts.

Dr. Engali's picture

Well if he likes the Japanese ten year he's got to live the U.S 10 year. There's still fiat to be made before we embrace NIRP.

CHX's picture

Is that priced in Yen, US dollar, or gold ? NIRP paper??? Thanks, but... no thanks. But if you like them Japenes bonds, you can keep them 2, and I wish you the best of luck... (you will need it).

gwar5's picture

Exactly. Yen has been clubbed like a baby seal.

A is A's picture

Some days I feel like I'm in the Twilight Zone. Albert Edwards is going long the 10 year JGB?!?! Now I've seen everything.

mendigo's picture

Approaching singularity point.

I need more power Scotty.

Kefeer's picture

"We need more power BARRY"; I believe that is more 21st century.

QQQBall's picture

and.... its gone!

johmack2's picture

"To be sure, Edwards remains very bearish on the economy and the stock market, which is also why he is very bullish on bonds" which means he expects a flight to safety. Anything good for bonds is good for property and tangibles??

Cutter's picture

This is why the short yen strategy will pay off. There is a limit as to how far Japan can go with negative rates. Who of us would pay interest to hold a bond? At some point, not in the distant future, it will occur to everyone holding JGBs, probably at the same time, they need to sell. As the 10 year yield rises rapidly the BOJ will have two choices: watch Japan quickly go bankrupt or print and buy every bond being sold. The yen will become monopoly money. The BOJ wont really have a choice.

uhb's picture

"we advise our clients to invest all assets in canned meat and shotguns"-critter

aminorex's picture

.., isn't owning the one asset that has zero counterparty risk the best option?

So, bitcoin then.