Why “an ordinary Japanese person” cannot beat the market — Shun Nakahara's Today's Word, updated July 20



The majority will surely be defeated

The Japanese feel comfortable being with everyone. However, there are environments where being with everyone guarantees a loss. That environment is the market. The market is one of the few places where a small minority destroys the majority. In a democracy based on majority rule and majority-behavior, the market is a thing that mocks and scorns such principles.

And apparently, it will be the same this time as well. Many sentiment indicators had fallen to unprecedented levels in June. In the June study group, it was pointed out that “if you just look at sentiment, it’s comparable to the Lehman shock and far below the pandemic.” Fiscal stimulus is absent, but conditions for autonomous rebound had already been set.

Then information came as reinforcements. According to Bank of America (BoFA) monthly fund manager survey, fund managers are taking extremely bearish positions. The survey shows that equity allocations are at the lowest since October 2008, and money market funds (MMFs) are at their highest since 2001. Fund managers reporting that they are taking lower risk, on net, reached 58%, a record high surpassing the global financial crisis. In other words, they are reducing stocks and shifting those stocks from globally diversified investments to US defensive names, while holding large cash reserves. The consensus is high inflation risk, followed by a global recession, hawkish central banks, and systemic credit events. Fund managers have already built positions to cope with such extremely pessimistic risks. On the other hand, inflation is expected to decline over the next year, the strongest since the financial crisis. This implies an outlook for lower interest rates. BoFA strategists say their own bull-bear indicator shows the “greatest bearishness.”

The assets most held by fund managers, and likely the most vulnerable going forward, are long USD and crude oil/commodities, ESG-related assets, cash long positions, and US Treasuries short. Among these, investors are particularly bearish on European and Japanese equity markets.

With conditions like this lined up, it seems almost unavoidable that Japanese stocks rise, even without any favorable news. And it’s clear that being bullish on the US dollar over the long term is extremely dangerous.