Transcription
Japan's finance minister just signaled the beginning of a massive 900 billion repatriation of US assets. And this move could spark a simultaneous collapse in the dollar, stocks, and bonds. And I've got the proof.
Now, this has happened before, and I'm going to show you exactly how to position your portfolio before it hits again because this time could even be more volatile. It has everything to do with the relentless collapse in the yen to 40-year lows. I know what you're thinking, Steve. What does the yen have to do with my 401k? You're about to see everything.
And we take a look at this chart of the Japanese yen to US dollar spot exchange rate. What you can see is every time that blue line is headed higher, it means the yen is weakening against the dollar. And it just hit 40-year lows. And here's the problem. If they're able to reverse that trend, it's going to pull the rug right out from underneath the US equity market, the bond market, and the dollar.
And right now, the plan from Japan's finance minister, well, she just called for the nation's massive pension funds to increase their investments in domestic assets with the hope of boosting the yen from nearly four decade lows and spurring a rally in bonds. And how they're going to do it? By telling them to sell all of their US assets, bring that money back home to the tune of $900 billion.
"Our priority is to encourage households as well as pension funds including the GPIF to increase their investment in Japanese financial assets. We intend to pursue policies that support that objective."
Because the problem is the reason the stock market's been going higher isn't just because of earnings and AI and all the money flowing in. It has everything to do with money coming out of Japan into the US markets. And if it reverses, everything's going to unwind because this is one of the world's largest pensions with 1.8181 trillion in assets. The problem is half of that is sitting right here in the US because the fund has maintained it as equal 25% allocation across four asset classes. That's domestic or Japanese stocks, foreign stocks, domestic bonds, and foreign bonds. The next scheduled review is not until 2030.
So, the problem is right now they're trying to change everything about this fund and get them to pull all this money back into Japan, boost the yen, cause their market to go up. But if they do that, it's going to unwind one of the biggest carry trades in the world and cause US assets to come crashing down.
Besides rate differentials with the US that have weighed on the currency, the yen has also been under pressure from capital outflows and concerns about the Bank of Japan's independence. Well, that's the real issue here is nobody really wants to hold the yen. So, every time money comes into these big pension funds or financial institutions, they dump the yen and they go off and buy US financial assets. We're talking stocks, the dollar, treasuries, you name it, they're buying all of it in a big way.
Now, the challenge is every time the Bank of Japan says they're going to raise rates, what does the market do? It dumps more money out of the country because they don't want to invest in the bond market there when it's continuing to go higher. But the problem is, as I said, let's talk about your portfolio and how to adjust for it.
Because the reality is when you overlay the NASDAQ 100 in red against the Japanese yen to US dollar spot rate in blue, you can see a relatively strong relationship here. And the problem is the Japanese yen has been underpinning the entire US stock market along the way. And let's talk about your portfolio here because I want to understand the link and what you need to be thinking about because if this happens, what you want to be thinking is I want to start curtailing my equity exposure. Why is that? I'm going to show you why you're going to want to buy the next dip and in a big way.
But let's take a look at the link here. Let's go back to 2024 here. Let's do a little bit of a history lesson. And what do you see? The yen to dollar spot rate comes crumbling down. That means the dollar is weakening. The yen is rallying. And look what happens to the NASDAQ 100. It goes down. You see the same thing in early 2025. The yen to dollar spot rate is going down. Again, the yen is rallying and the NASDAQ comes down. And why is that? Because every time the currency unwinds, people that are short the yen, they have to unwind that trade, meaning they've got to sell US assets, come back and buy the yen, or they get crushed on both directions. And you can see it even here right around 2026, the spot rate came down and the market dipped as well.
Now, if you're concerned about the impact of this on your portfolio or even worse, what I'm about to show you on how fragile the US markets are right now and you want to know, Steve, how are you positioned? What could I do with my portfolio? Or how about some amazing trades so I can profit on this? Well, I've got two incredible trading systems. One that tracks machine positioning, the other that uses momentum indicators. And in both of those, I tell you how I'm positioned, tips you can use for your portfolio, and all of those trades. All you need to do is grab those links in the description below. Sign up, use a coupon code, you get a free 30-day trial, and you'll have everything you need to know to profit on what's about to hit the markets. I'll see you there.
But if they're able to pull anywhere close to 900 billion in assets, it's going to cause a complete disruption in US markets. Everything's going to come crashing down. But what about the bond market? Is that at risk as well?
Let's take a look at this chart. Because when we look at long-term JGB yields, those are in blue, against 10-year Treasury yields in red. What you can note is, well, there's not a whole lot of a relationship between them at all. In fact, what you can see since about late 2023 is there virtually none. You've seen interest rates in Japan go higher, but in the US, they've been, well, largely sideways. So, the question is, how do you trade the bond side of your portfolio? Well, hang tight. I'm going to show you exactly what's going on in the Treasury market. But first, we need to understand even more about what's going on in Japan and if they're able to pull it off.
Because Japan's biggest public pension fund will likely ignore finance minister Satsuki Kadyama's call to boost domestic investment. And why is that? Because the Government Pension Investment Fund, which again is one of the world's largest, follows a rigid investment framework that is reviewed, well, once every 5 years, and its latest review was completed in 2025, meaning the next one, as I said earlier, is not until 2030. So, if this gives you any hint about buying any dip, well, now you're starting to see it because these pension funds, they're going to keep buying US assets.
Now, in the short term, maybe they could squeeze people out of their positions. But this is why you see every time the market dips, it tends to rebound. You can thank Japan. Some market participants reviewed Kadyama's remarks as an attempt to stem the yen's latest slide and the government sell-off in bonds. And that's absolutely true because the problem in Japan is inflation for the first time in decades is starting to run out of control. The underlying issue is wages aren't keeping pace. Meaning we're already seeing signs of stress in Japanese households. We're even seeing signs of small, mid-sized businesses, their bankruptcy rate is increasing at a rapid pace. So the issue here is they need to get the yen to reverse. They need to get yields down, where the problem is their whole economy is going to come crashing with it.
And her comments seem to be interpreted as a verbal intervention, especially aimed at halting the rise in yield. And again, this all ties back to the big problem. The Bank of Japan says, "Look, we're going to raise rates to get the currency to go up." And the market says, "We think you're going to have to raise them a whole lot more." So, it keeps driving market rates higher and higher. The issue is Japan's got a massive amount of debt. The other problem is businesses can't afford higher interest costs, and next thing you know, the whole thing comes unglued.
But the pros are saying, "Forget it. This trade is not going to end." Because according to Goldman, carry trades faced the best conditions since 2000. Of course, remember what happened after that was the dot-com bubble burst. But this is what's called the carry trade. And this is exactly what's going on in Japan because Goldman currently favors funding trades using the yen, referring to the technique of borrowing in a relatively low-yielding currency and investing in one where they're higher. So, keep in mind, as the yen continues to go down, the cost to repay those loans in yen, well, it goes down too, making this a fantastic deal. So, you just get some yen short it, and then you go off and buy high-yielding US assets or anything else around the world, and next thing you know, you've got a winning trade.
And Goldman said the yen is a top funding candidate over the longer term. In fact, Japan's currency is trading near a 40-year low versus the dollar. And while the threat of official intervention is ever present, the bank expects it to keep weakening unless there's a change in the macro backdrop, saying very clearly, "You should buy the dip at every opportunity." But there's a big problem.
Now, we're going to talk about what's going on in the bond market here, but underneath the US market, well, the structure is weakening in a big way. So, we could get a double hit here. We could see the US market start to fall apart. At the same time, money goes rushing back to Japan.
Because subdued equity volatility at the index level, despite the latest war headlines, offers investors an opportunity to hedge a tricky and long summer. Now, this is a problem because wait till you see what's going on in the volatility market.
Now, I'm going to show you a chart here of the VIX. And if you're not familiar what that is, it's what the volatility of the S&P 500 is. So, as the VIX goes up, the moves of the market, they get bigger. And as we see the VIX go down, well, it means the market moves in very small increments. And there's a huge problem because when we look at a chart over the last five years of the VIX, what we can see is this zone right down here where I circled in red. This is where you get down to right around 16 or below on the VIX. I want you to see that it tends to not go a whole lot lower than it is now. And there's a second problem because once it gets down to these levels, it tends to go up. And what's the risk of the VIX going higher? When the VIX tends to go up, it means the market is about to come down.
And the problem is when we start to look at single stock volatility, it's flashing a massive red flag. So you can see there's an issue. If Japan is successful in getting money to repatriate, they're going to sell a bunch of US assets. At the same time, we're seeing the VIX at a low point that tells us it's about to reverse and take stocks with it. The low VIX reading masks extreme dispersion with single stock volatility more than three times higher. In fact, the likelihood that this gap narrows over the summer is high, accompanied by spikes at the index level, whether caused by repricing of monetary policy or further geopolitical jitters, or maybe money flowing out of the US and back to Japan. And that's the problem because if we see the VIX spike, well, again, it's going to take the market with it.
Now, let's take a look at some evidence here because what we've got is a single stock volatility chart against overall market volatility. Now, the single stock volatility, that's in blue. The VIX, that's in black. That's the chart I just showed you a moment ago off from my trade screen. So, look at this. As single stock volatility rises in late 2025, what happens? The VIX doesn't really fall right away and then it shoots higher and takes the market with it. Let's fast forward to the end of 2025. What happens? We see a pullback in single stock volatility. It shoots up and the VIX surges again. The market comes crumbling down. Let's fast forward. How about in January? We see single stock volatility rising all the way through April, and next thing you know, the VIX blows off right alongside with it and again takes stocks down. How about we move forward right around June? We see the same setup.
Now, what is the problem we're facing? Look at this. Single stock volatility is the highest it's been in about two years. And look at the VIX. It's at one of the lowest levels in the last five years. And if this chart holds true, what it's suggesting is we're about to see a massive volatility hit in the market. And what is it going to have the impact from? Well, earnings.
Because volatility has fallen to a seasonal sweet spot according to Barclays. But this is unlikely to last. The strategist noted that the recent decline in the VIX has coincided with a calendar window typically associated with reduced price swings. So what we're seeing is every time the VIX gets down to these levels, this is important to understand, it tends to reverse, and that is the problem we're facing as we head into earnings seasons.
Now, he notes typically a short-lived period with the start of earnings season potentially reintroducing the upside pressure on the VIX. And why would we expect that? Well, what are we going into earnings seasons thinking? That we're going to hit these huge numbers. But there's a problem. Remember, capex was rewarded with higher stock prices. Today, as these AI companies report perhaps even more capex spending, the market realizes they're going to have to issue shares. And that is not a good sign for the market because it means they're also going to be reducing their share buybacks, meaning there's going to be a net supply of shares hitting the market. And that's not something we've seen for a very long time. And the bar has been set high with profit growth expectations for the S&P 500 index at 24%. And what does it mean when the bar is set high? Well, it means the expectations the market hitting it are extremely low, suggesting there's more downside risk to the markets as we head into earnings.
But we're going to look at a chart of that in a moment because according to UBS, there's something called their Turbo Lens. Never heard of this before until today. It's signal is flashing red at 0.9 on a scale of minus1 to one, meaning it's almost at the max. And this is the highest reading since mid-September 2025. The sort of level that's tended to be predictive of VIX spikes in the past. In fact, UBS derivatives strategist said the gauge points to extreme market fragility just as earnings are about to kick off. And well, they're absolutely right.
Let's take a look at the chart from UBS. This is their volatility indicator and the VIX. So, we've got their Turbo Lens shown in orange here and the VIX shown in black. And check this out. Let's go all the way back to early 2025. And what do we see? The Turbo Lens is hitting right up here around 50 where it is now. And the VIX was at a very low level, right where it is now. What happens? They reversed. Let's move forward to around September of 2025. We see the same thing. The Turbo Lens gets right up around 50 and starts to come down. At the same time, where was the VIX? Seeing it at very low levels before it spiked and the markets came down with it. How about we fast forward now all the way up to the beginning of 2026. Remember that long move higher in the VIX? Well, it's predicted by the Turbo Lens. And how about in June? What do we see? It's touching 50 once. It touched 50 twice. We saw a little spike in the VIX and everybody came in and shorted volatility. Now we're back near the 5-year lows. At the same time, the Turbo Lens is sitting right back at 50, suggesting we're about to see an unwind in the market.
Let's take a look at the VIX. Let's go back to my trade screen over the last 90 days. And what do you see in the VIX? It hits these low levels right around 16 or slightly below. But let's compare it to the market. Now, let's look at the SPY ETF over the last 90 days. And what do you see? An all-time high. Then you see a lower high and then a lower high. And now you see a potential breakout. That could be a massive fake out. And that's the problem because what we're sitting on here is again all the reasons why I'm suggesting you should cut back on your equity exposure. It's not just the yen. It's the fragility of the underlying market structure and the combination of the two.
But what about the bond market? Well, I promised you we'd talk about that. And here you can see TLDT. This is a long bond ETF. Every time it gets down to these levels, what happens? It reverses. In fact, you can see it can reverse in huge ways. So even if Japan were to start dumping Treasuries and repatriating them, which the odds are pretty low it's going to happen, nevertheless, at these levels, you've got a lot of potential for upside in the bond market.
So now you can see coming full circle. Japan is going to try to bring money back home. Maybe they will, maybe they won't be able to. I don't know. But underneath there, you now see the market is very fragile. We're coming into earnings season. There's a lot of high expectations. There could be big misses. And if that happens, you're going to want to have money to buy the dip because these pension funds are going to do that. You want to be looking to be long somewhere around the intermediate to long into the treasury curve.
And with that, I'm Steve Van Meer. Thanks for watching. Thanks for being fans. Bye now.