Cortés, Against the Herd

Those of you who watch Fast Money on CNBC (I don’t) are undoubtedly familiar with Steve Cortés since he’s one of the regulars. He is also the founder of Veracruz, a market research firm. In Against the Herd: 6 Contrarian Investment Strategies You Should Follow (Wiley, 2012), itself a fast-paced book, he shares some of the fruits of his and his firm’s research.

The themes are (and with one exception I won’t be a spoiler and tell you which way he positions himself) China, Japan, gold, the housing market, market volatility, and the U.S.

Here I’ll share Cortés’s take on Japan. In a chapter entitled “Dolls Are Meant for Children” he predicts a “severe demographic and fiscal implosion” for Japan, arguing that the country’s problems “are utterly terminal [and] there is literally no escape from the death spiral.” (p. 35) The chapter’s title, by the way, refers to the doll Yumel, which serves “as a fake grandchild for the massively growing legions of lonely, geriatric, grandchildless Japanese.” (p. 34)

In the 1980s Japan seemed unstoppable economically. The Nikkei reached a closing high of 38,916 in 1989 and eight of the ten largest companies in the world by market cap were Japanese. Super-low rates and a strong yen created “the tinder for a classic bonfire of reckless investment.” (p. 41) As we know, the bubble popped. The Nikkei declined over 80% to a 2009 low of 7,055, in the early 1990s values of commercial real estate fell 87%, and deflation set in.

Japan is now in an “inescapable” bond trap, with a debt-to-GDP ratio over 200% and a debt-to-private GDP ratio at 240%. For the past 20 years Japan has been able to sell its bonds to domestic insurance companies, individual Japanese savers, and public pension plans. “But the famously thrifty Japanese are fast drawing down savings and the trajectory is certain and points toward an aging nation of net spenders, not savers. Japan began the two lost decades with a savings rate at 16 percent. It has slowly dipped to 2 percent and will soon likely head to negative territory.” (p. 46)

If Japan has to tap the international fixed income market, rates will have to rise. “According to hedge fund titan Kyle Bass, every 1 percent increase in the Japanese government’s cost of capital will consume an astounding 25 percent of total government revenue. He states, ‘For context, if Japan had to borrow at France’s rate, the interest burden alone would bankrupt the government.’” (p. 48) Japan would have to roll out its printing presses and devalue its currency.

Cortés offers some ideas on how to capitalize on Japan’s impending doom, the simplest being shorting the yen and buying the U.S. dollar.

Cortés’s writing is fine in small doses, formulaic for the length of a book. He tries to ease the reader into investing concepts by invoking pop culture images. For instance, in the chapter on gold, he starts with MC Hammer, moves on to John Travolta, then the Bible (well, I guess that wouldn’t qualify as pop culture), Richard Simmons, John L. Sullivan, Three’s Company, and finally A Man for All Seasons. This goes on chapter after chapter after chapter after chapter…. It starts to wear thin pretty quickly.

But for those who like to think in macro terms Cortés’s book offers six contrarian (or semi-contrarian) theses supported by well-reasoned arguments and sufficient though not overwhelming data.