Those of us old enough to have lots of stock market battle scars will, if prompted, recall vividly the stock market collapse that occurred as we entered the 21st century.

The portfolio I was managing at the time had a large position it had held for about a decade in a transformative tech firm. It was the last thing I wanted to sell, but it was tech and my fund owned a lot. Undecided, I flew to the west coast to attend the company’s annual analyst day. Everything sounded fine …and then came the Q and A session with the CEO and his heir apparent.

An analyst asked what I thought was an incredibly obsequious question–what do you think has been your greatest accomplishment as founder, owner, CEO? The reply was surprisingly revealing–the greatest accomplishment was that success gave him the ability to give jobs to his friends (like the soon-to-be new CEO). The new CEO then satepped to the midrophone and berated the audience for not understanding how hard it would be to have eps grow faster than, say, 5%. In other words, his aspirational goal was to have the firm not lose ground to inflation.

I sold everything.

A decade+ of stagnation later, activist investors tried to unseat the founder’s friend. It took them years to overcome the founder’s resistance. But they were finally successful. I bought a bunch. The stock has been up by over 10x since, or about 3x the performance of NASDAQ. My wife and I are now making charitable donations to unwind.

My thought?

The current cabinet in Washington, chock full of wealthy business people, seems to me to be unusually inept at, well, doing things. Maybe its main super power is the ability to become friends with powerful entrepreneurs.

what it is

The mechanics are simple: borrow Japanese treasury bonds, sell them and use the proceeds to buy US Treasuries.

You end up being:

–short the yen, a perennially weak currency

–short the (tiny) interest payments on the Japanese bonds

–long the dollar

–long the (larger) interest payments on the Treasuries.

Since the early 1990s, this has been a great place to be.

You profit through two positive spreads:

–the interest income difference between the high yield on Treasuries and the much lower yield on JGBs, plus

–the foreign exchange difference between the relatively strong dollar and the super-weak yen.

This situation has been caused by two factors:

—–the peaking of Japanese GDP growth in 1993, due to aging of the domestic population and the government’s unwillingness to accept foreign workers, and

—–trade barriers that protect relatively inefficient domestic firms from foreign competition.

(an aside: sound familiar?)

why it appears to be ending

Trump’s economic plan is based on three ideas:

–having the Federal Reserve lower interest rates

–applying tariffs to imports, collecting money for the Treasury, but making foreign goods more expensive to US buyers, and

–shrinking the domestic workforce by deporting immigrants.

In other words, he’s more or less copying the Japanese playbook that has produced three decades of economic stagnation. This seems to imply that the spreads that made the yen carry trade so lucrative will ultimately disappear, as the US gets poorer. The most benign explanation I can come up with is that the administration experts just don’t know the basics of how the economic world works in this century.

specific consequences aren’t 100% clear, to me.

What is clear, in my view, is that they’re unlikely to be good.

The plain vanilla version of the carry trade is what I’ve described above. But we live in a multi-flavor world, where the yen carry trade doesn’t stand alone. To the extent that the big international banks are involved, selling JGBs would only be one element in a multi-asset investment strategy. If one element becomes riskier, the banks’ primary concern will be to control the enterprise-wide level of risk. That might come down to simply covering yen short positions. But it could just as well involve de-risking elsewhere–say, unwinding risky crypto or euro trades.

It’s likely, also, that there are private equity or hedge funds with limited overall scope, but who have made a good living for years based on yen carry alone. It’s hard to predict how they might act.

Two final things:

–after thirty+ years of economic stagnation, Japan seems to finally be rejecting the samurai mindset that has produced the current misery. I wonder how long it will take us?

–one of the pillars of strength of Japan during this period has been tourism. Big city shopping, gourmet food, ancient shrines…have all attracted foreign visitors in large numbers. In our case, though, I imagine the possibility of being shot by ICE or imprisoned in a warehouse in the middle of nowhere–or in a real prison in El Salvador–will act as a deterrent to potential vacationers.

Normally, I don’t like to use financial jargon like this. Most often, I’ve found the users typically end up being the least thoughtful and well-informed and are simply muddying the water, substituting jargon for real comprehension and insight. Even if that’s not the case, there’s the chance that the person you’re talking with simply won’t understand what you’re trying to communicate.

Still, this is what has come out of my fingers this morning.

The basic (and, I think, correct) idea is that equity markets tend to be led by the subset of stocks investors believe are exhibiting the fastest and highest quality earnings growth. But, after a significant run, the gap between winners and losers becomes wide enough that market attention shifts (rotates, as they say) toward the stocks that have been left behind.

There are a host of reasons why this happens. But they all come down, I think, to relative value. In the most extreme case, the long-term winners already have all of the good stuff that can happen priced into them, at the same time as laggards are trading at deep discounts to their liquidation values. So the former will, at least for a while, either go sideways or down, and the latter will either go sideways or up. In any event, the laggards will make up ground on the market leaders.

I think that we’re at one of these inflection points right now, where value stocks will perform well and growth stocks will lag behind. As I see it, this is not a radical change in market direction. I continue to think that a key element in the administration economic strategy, if that’s the right word, is to engineer a continuing sharp drop in the dollar that will serve as a tailwind for export-oriented and import-competing industries. Where the workers will come from to fuel this uplift is an issue left unaddressed. Assuming I’ve read Washington correctly, the best stock market strategy is to find companies with solid businesses and that have the combination of foreign revenues and domestic costs.

Last year this was the way to go.

Full-year 2025

EAFE +27%

NASDAQ +20.4%

S&P 500 +16.4%

Russell 2000 +11.8.

If we look at the results so far this year, however, they stack up as follows (prices as of just after 10am est this morning):

EAFE +8.8%

Russell 2000 (smaller-cap, US-oriented) +6.7%

S&P 500 +1.6%

NASDAQ -0.9%.

If I’m correct, and we are experiencing a counter-trend rally, we’ve already closed the gap between the Russell and the S&P, but there’s still a way to go to close the gap between it and NASDAQ. If I had to bet–I don’t want to, however–this is more an issue of time than of valuation differences.

Note, too, that the US continues to lag the rest of the world’s stock markets, as it has since the inauguration put the country’s current economic strategy in place.

the Financial Times

That’s where I read a recent article on the state of the US fast food industry. I’m relying on the information in it, which I would be extremely hesitant to do with a US-based periodical, for two reasons: I don’t own any fast food stocks, other than indirectly through index funds and don’t have any current intention to buy; and the only reliable and informed news publications I’m aware of are the FT, the Economist magazine and the owner of both, the Nihon Keizai Shinbun.

Anyway, the article argues that the fast food industry in the US is in trouble. In a typical recession, customers who eat at fast food places during good times brown bag it to work and prepare their other meals themselves at home. However, people who eat at more expensive restaurants when the economy is booming typically trade down to fast food in the kind of weak economy we’re experiencing in the US today.

The FT’s recent survey of US fast food companies says that’s not happening now. It appears that the culinary habits of the more well-off haven’t changed, despite higher food prices.

At some point, fast food may become beaten down enough that more than all the bad things that could ever happen have already been factored into stock prices. Or it may be that deep value investors, who make their living doing this kind of investing, will sense that we’ve passed the bottom and that a rebound is under way (some may be doing this now, although I personally have no current desire to participate), on the idea that the brand names alone are worth, say, 2x , or 3x, the stock price.

Looking at this a different way, watching fast food stocks may be a way of getting an early alert that the strategy of holding companies with foreign revenues and $US costs is becoming long in the tooth.

My answer is “Yes.”

If we look back into the last century (when I started managing equity portfolios), the world equity markets experienced a number of seismic changes that tilted the balance in favor of foreign stock markets over the US for decades. They were:

–the world forced Japan to revalue its currency in the early 1980s, sparking the years-long flowering of the domestic Japanese economy, at the expense of export-oriented manufacturing. This is the reverse of the change it appears to me that the Trump administration is trying to accomplish in the US (a second key difference being Washington’s violent ICE campaign of terror, which, from an economic point of view, will likely negate some/all of the benefits of dollar devaluation

–faced with the wreckage of the Chinese economy under Mao, his 1978 successor, Deng, replaced central economic planning with “socialism with Chinese characteristics,” meaning capitalism, which resulted in an explosion of economic growth for decades there

–European countries formed the European Union in 1993, triggering a surge of economic growth there as countries and industries expanded to serve the much-enlarged common market.

This situation changed very dramatically as the new century dawned:

–there was an explosion of economic growth through internet-related companies, mostly based in the US, that began right around the turn of the century

–Deng died in 1997 and was ultimately succeeded by Xi, who, fearing the demise of the Chinese Communist Party, reinstituted (economic growth-inhibiting) central planning control from Beijing.

–the Japanese working population peaked in 1993, but the country declined to tap the brain power of women workers and continued to oppose immigration. The country has been pretty much a spent force since

–EU members began to chafe as individual country authority was supplanted by Brussels, with the result that the UK, arguably the union’s most important member, voted to secede from the union in 2016.

The result of all this was that world portfolio investment shifted dramatically away from areas now perceived as weak to the new source of strong economic growth, the US.

Today:

–Xi has been forced, kicking and screaming, to reembrace Deng initiatives to avoid the collapse of the Chinese economy that his Maoist policies was leading to

–the UK is (hard to believe, but the case) starting to realize what a horrible mistake Brexit was. So maybe Europe has bottomed

–US voters, on the other hand, have put in power an administration that appears to have two economic goals: to shrink the domestic workforce, using terror as a key tactic; and to lower interest rates (whether the economy needs this or not, I think). ICE and tariffs are the two main tools. As I see it, tariffs differ from income taxes in two ways: they obscure the fact of taxation; and, because they’re a tax on consumption, they’re paid disproportionately by the less wealthy.

Foreign holders of US Treasuries seem to believe that the result, if not the purpose, of lowering interest rates will be to create inflation that will reduce Treasuries’ real value. If press reports are correct, foreign central banks have so far moved to protect themselves from this move by hedging their dollar currency exposure, generating the sharp decline in the US currency we’ve experienced since the inauguration.

The result, I think, is that global investors, still with massive weightings in US securities, are trying to do two things: reduce their overall exposure to the US, and shift their US equity orientation toward the well-understood emerging markets model. My impression, which really is only a guess, is that US-based investors are farther long in this process than the rest of the world.