Time to short Japan's 'bad governance' stocks, hedge fund says | Hacker News Reader

Time to short Japan's 'bad governance' stocks, hedge fund says

japantimes.co.jp

21 pointsPaulHoule19 comments

What's behind the Japanese stock rally when the economy itself is as moribund as ever? People piling into assets that offer at least a hope of returns, instead of a guaranteed loss if they stick to fixed deposits etc in an era of high inflation?

I don't know exactly, but when I visited Japan a year ago, I was struck by how inexpensive and high-quality everything was compared with the US and Canada. Japanese inflation and interest rates both remained very low for decades, while inflation has been extremely high in North America, and yet in terms of exchange rate, North American currencies were getting much much stronger relative to the yen. When you think about it, this is actually very weird.

Imagine that in 2012, $1.00 = 100 JPY and this buys the same tube of toothpaste in both countries. Then ten years later in 2022, that toothpaste still costs 100 yen in Japan, but costs $2.00 in the USA. Naively, you'd expect therefore that the yen has gotten more expensive, and the exchange rate to be around $2 = 100 yen, or else there's a major arbitrage opportunity for North Americans to buy Japanese toothpaste. (Imagine this is not just toothpaste, but virtually all consumer goods).

Then you find out that in fact, the exchange rate has gone the other way, where $1 USD buys something like 150 yen. Despite this, toothpaste is still 100 JPY in Japan, and $2 in the USA. How do you square this difference?

This doesn't necessarily bode well for the Japanese family or consumer (as their low prices may be a result of their low wages), but in terms of international competitiveness, it's a strong sign. It means that Japanese companies can make a killing on exports and tourism. From a mathematical standpoint, there are only two ways to balance this price difference: either Japanese productivity is much better than was previously priced-in, or else they have huge inflation coming shortly down the line. The former will be good for Japanese stocks and the latter case will be good for the yen (as the central bank would have to increase interest rates and/or sell US treasuries to protect the currency).

There is a fundamental reason for low inflation / growth in Japan: demography. No children, very aging population. I think normalizing growth by population growth would give some interesting insights about "real" growth, or lack thereof.

Perhaps, but the above is not a point about Japanese growth, but rather competitiveness. I'm not sure that population decline connects directly with Japanese hotels, razors, and toothpaste becoming rapidly more globally competitive, even if it's just Japan treading water while the rest of the world gets more expensive. Usually you'd expect it from a country with a strong "demographic dividend" of a young working population. An increase in competitiveness can apparently happen with or without population growth, with or without inflation, and with or without increasing wealth for Japanese families, and with or without inflation.

For example, Japan was also getting more competitive in the 1970s-1980s, but at that time it happened alongside a population boom, young workforce, economic growth, inflation, and a strengthening Japanese consumer. This time, it's more like Japanese companies getting internationally competitive while their economy declines and their workers accept lower wages and lower standards of living, with high rates of industrial production amidst shrinking domestic demand. Again, not so good for Japanese families perhaps, but that's not what competitiveness is necessarily about.

1. A lot of Japanese companies hoard money instead of returning it

2. Supposedly the Japanese government is trying to get them to 'return' it to shareholders

3. Some people believe the currency will go up making these bags of cash more valuable in dollar terms

4. Warren Buffet figured out he could borrow money in yen at a lower interest rate than their stocks pay out, use it to buy yen denominated stocks, and basically print free money. You can't do that but a lot of people are buying what he's buying.

I still don’t understand why shorting is legal as it provides no value and enables hedge funds to extract value using illogical tricks.

> as it provides no value

Contra:

> Advocates of short selling argue that the practice is an essential part of the price discovery mechanism.[52] Financial researchers at Duke University said in a study that short interest is an indicator of poor future stock performance (the self-fulfilling aspect) and that short sellers exploit market mistakes about firms' fundamentals.[53]

> Such noted investors as Seth Klarman and Warren Buffett have said that short sellers help the market. Klarman argued that short sellers are a useful counterweight to the widespread bullishness on Wall Street,[54] while Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.[55]

> Shortseller James Chanos received widespread publicity when he was an early critic of the accounting practices of Enron.[56] Chanos responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other "financial disasters" over the years.[57] In 2011, research oriented short sellers were widely acknowledged for exposing the China stock frauds.[58]

[…]

> Several studies of the effectiveness of short selling bans indicate that short selling bans do not contribute to more moderate market dynamics.[61][62][63][64]

* https://en.wikipedia.org/wiki/Short_(finance)#Views_of_short...

Per §History in above, short selling has been around since 1607 and the very first stock market (Dutch) and the Dutch East India Company.

In the US, the SEC examined it in 1934, 1937, 1963, and 1976:

* https://www.investopedia.com/articles/investing/110614/why-s...

This 2021 article examines the topic of banning short selling:

* https://www.morningstar.com/funds/should-shorting-stocks-be-...

On the one hand, yes to all that, and shorts are equivalent to going long against everything else so must necessarily exist in some form.

On the other hand, shorts (at least as implemented) are prone to cascading in both positive and negative directions, and are also an "obvious" reminder of how the "stock-market" economy is utterly divorced from the "production" economy.

"Price discovery" is a lie when it is also "price creation".

> "Price discovery" is a lie when it is also "price creation".

Hence temporary bans are common when the market is volatile.

Good answer here. We probably need a lot more shorters than we currently have inorder to enjoy short phases of relative price equilibriums.

Even if one accepted on face-value that shorts provide no value and enable hedge funds to extract value with "illogical tricks," I don't understand how that would justify making them illegal.

I'm not saying the justification doesn't exist, but I don't think the reasons you articulated are sufficient.

You don't think "the only way to profit from a stock is to make it go up" sets very perverse incentives too?

> Other small groups in the business world make their contribution to distress by raids on our markets with purpose to profit from depreciation of securities and commodities. Both groups are within the law; they are equally condemned by our public and business opinion; they are by no means helpful to the Nation.

Hoover

https://www.npr.org/2021/02/15/966877259/wall-street-short-s...

Does downvoting posts serve a purpose in setting their ranking? Shorting stock has the same effect for price.

Have you tried googling or asking chat-gpt? That is what I do when I don't understand things.

It's not that they want the answer. If they did they would've googled. It's just to express how they hate hedge funds (or generally anyone rich).

I found this bit of research

https://arxiv.org/abs/2107.11255

One thing I know is that most people who sell short lose since the market does tend to go up over time.

Because it provides price discovery opportunities and liquidity.

"It should be illegal because I don't like it" is not a very convincing argument

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