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?