Garcia: A slowdown in Japan will ultimately flow back to the U.S.

Garcia: A slowdown in Japan will ultimately flow back to the U.S.

SO WHY DOES THAT MATTER TO WALL STREET? LET’S BRING IN GILBERT GARCIA, OWNER AND MANAGING PARTNER AT GARCIA HAMILTON AND ASSOCIATES. GILBERT, GOOD MORNING. GREAT TO SEE YOU. >> GOOD MORNING. THANK YOU FOR HAVING ME. >> ALL RIGHT. WE DON’T TALK ABOUT JAPANESE BOND YIELDS A LOT. AS WE MENTIONED EARLIER IN THE SHOW IN MULTIYEAR HIGHS, HIGHS DATING ALL THE WAY BACK TO MID 2000. WHY ARE THESE YIELDS IMPORTANT. SO RIGHT NOW. >> WELL THERE’S A COUPLE OF QUICK THINGS I THINK IT’S IMPORTANT TO RECOGNIZE THAT THE OUTLIER REALLY IS A 30 YEAR BOND. BECAUSE IF YOU LOOK AT THINGS LIKE THE 10 TO 30 YEAR SPREAD THERE IN JAPAN IS ESSENTIALLY TWICE THE NORMAL SPREAD OVER THE LAST 25 YEARS, INSTEAD OF IT BEING ROUGHLY 85, IT’S NOW ALMOST 160. SO REALLY, ALL THE ACTION OVER THERE IS REALLY HAPPENING IN THE 30 YEAR. D I THINK WHAT’S ALSO IMPORTANT IS TO RECOGNIZE THAT THEY’VE GONE THROUGH A PERIOD OF YIELD CURVE CONTROLS, KEEPING RATES ARTIFICIALLY TOO LOW AND REALLY GOING THROUGH A PERIOD OF DEFLATION. AND I THINK THAT’S ALL NOW COMING TO ROOST. AND YOU CAN SEE THAT DEFLATION, FRANK, IF YOU LOOK AT THEIR STOCK MARKET, IT HAS BEEN OVER THE LAST 25 YEARS, A RETURN OF ESSENTIALLY ZERO OR MAYBE 1% COMPARED TO OUR MARKET, WHICH IS ABOUT 10% ANNUALIZED. GO AHEAD. >> ALL RIGHT. SO YOU’RE SAYING IT’S ALL COMING BACK TO ROUSSEAU. WHAT IS THE IMPACT WE SHOULD ALL BE LOOKING FOR? OBVIOUSLY, THE LOW YIELDS LED TO THE JAPANESE CARRY TRADE ESTIMATES OUT THERE. IT’S ABOUT A $500 BILLION TRADE. AND THE THOUGHT IS IF THE YIELDS RISE THAT MONEY IS GOING TO GO FROM THE U.S. BACK TO JAPAN. NOW IS THAT WHY THIS IS IMPORTANT OR IS THERE SOME OTHER FACET THAT YOU’RE LOOKING AT? >> WELL, I THINK WHAT’S REALLY INTERESTING IS WE KIND OF HAVE THE OTHER SIDE. IN OTHER WORDS, I BELIEVE JUST LIKE WE HAVE THE BOND VIGILANTES BACK IN THE EARLY 80S AND THEN THE ESSENTIALLY THE 90S, I BELIEVE IT’S THE BOND SAMURAI. AND WHAT THEY’RE DOING IS THEY’RE TRYING TO SAY TO THEIR GOVERNMENT, WE CANNOT AFFORD RIGHT NOW WITH OUR HIGH GDP TO DEBT TO GDP RATIO, WE CANNOT AFFORD SIGNIFICANT STIMULUS. WE NEED TO SLOW DOWN THE QUANTITATIVE TIGHTENING, AND WE NEED TO GO BACK TO ADJUST THE ISSUANCE WHERE BEFORE THEY WERE ISSUING MORE ON THE SHORT END. NOW THEY’RE ISSUING MORE ON THE LONG END. I THINK THE BOND SAMURAI ARE TELLING THEM WHAT THEY NEED TO BE DOING. AND I BELIEVE IF THEY DON’T LISTEN, RATES ARE GOING TO GO EVEN HIGHER. AND I BELIEVE WHAT THAT WOULD DO IS LEAD TO A SLOWDOWN IN THEIR ECONOMY, A SIGNIFICANT ONE, WHICH WILL ULTIMATELY FLOW BACK INTO A SLOWDOWN HERE IN THE US. SO THAT’S REALLY THE IMPACT. I THINK IT COULD BE TO A REAL DETRIMENT TO THEIR ECONOMY AND A SLOWDOWN WHICH WOULD FLOW BACK HERE INTO THE US. >> ALL RIGHT. I DO WANT TO POINT OUT WE’RE LOOKING ON KAUAI RIGHT NOW, 93% CHANCE OF A 25 BASIS POINT HIKE. I ALSO WANT TO MENTION CNBC AND CASH. THEY ALSO RECENTLY ANNOUNCED A MULTI-YEAR AGREEMENT, WHICH INCLUDES THE USE OF KASHI DATA FOR EDITORIAL PURPOSES AS WELL AS COMMERCIAL COMPONENTS. SO STRONG CHANCE OF THIS HAPPENING. ACCORDING TO KASHI. VERY STRONG CHANCE. SO IF IT DOES HAPPEN, IS THIS ONE HIKE, DOES THAT SET UP THE SCENARIO THAT YOU’RE TALKING ABOUT? OR IF THERE’S MORE HIKES, IF THIS IS A SERIES OF HIKES, IS THAT THE ISSUE WE SHOULD BE WORRIED ABOUT? >> I THINK THIS IS GOING TO BE JUST A SERIES OF HIKES. I THINK THIS IS JUST THE EARLY STAGES AND I THINK A LOT OF THE CARRY TRADE HAS PROBABLY WASHED OUT LAST YEAR. THERE WILL BE MORE WASHING OUT AS WE CONTINUE TO LOWER OUR INTEREST RATES, AND THEY CONTINUE TO RAISE THEIR INTEREST RATES. AND I THINK THAT WHOLE NEGATIVE CARRY, EXCUSE ME, THE CARRY TRADE WILL GO AWAY. ULTIMATELY THIS IS JUST A NORMALIZATION OF THEIR MONETARY POLICY, WHICH IS REALLY LONG OVERDUE. >> ALL RIGHT. ONE OTHER POINT. YOU SAY THE REAL RATES HERE IN THE US ARE ACTUALLY MORE ATTRACTIVE THAN JAPAN. SO IT SOUNDS LIKE YOU THINK THAT’S GOING TO KEEP THE MONEY HERE. >> THAT IS CORRECT. AND I THINK IN REALITY I THINK THAT’S GOING TO BE THE BACKDROP TO KEEP RATES GOING MUCH LOWER HERE IN THE US. IF YOU LOOK, OUR REAL RATES ARE ROUGHLY ABOUT ON THE LONG END 100 BASIS POINTS TOO HIGH. AND SO THAT’S

Gilbert Garcia, Owner & Managing Partner at Garcia Hamilton & Associates, warns rising Japanese long-term yields could slow Japan’s economy and eventually impact the US, while US real rates remain too high.