Ep 61: Shorting Japan's Debt
Tres Knippa joins Stansberry Radio to discuss why he believes now is the time to short Japan's debt.
Tres Knippa is a professional trader and broker on the floor of the Chicago Mercantile Exchange. Mr. Knippa has been trading the futures markets for over 17 years and is a member of the Chicago Mercantile Exchange.This week Tres joins Stansberry Radio to discuss why he believes now is the time to short Japan's debt.
You'll also hear from Stansberry's own Dr. David Eifrig. "Doc," as we like to call him, is editor of the excellent Retirement Millionaire and Retirement Trader newsletters.
Doc and Aaron discuss several important topics... including the best way to protect yourself from some of the most corrupt elements in America... why the government isn't addressing "mental health" issues, even after recent mass shootings... and how he takes a boots-on-the-ground approach to understanding the economy.
Doc and Aaron discuss several important topics... including the best way to protect yourself from some of the most corrupt elements in America... why the government isn't addressing "mental health" issues, even after recent mass shootings... and how he takes a boots-on-the-ground approach to understanding the economy.
Aaron Brabham: Welcome to another episode of Stansberry Radio. I'm Aaron Brabham. Filling in for Porter, who's on a family vacation this week, is S&A's very own Dr. David Eifrig. Doc, as we call him in the office, is the analyst for Retirement Millionaire, and the 104 for 104 straight closed wins track record for Retirement Trader. Doc, welcome to Stansberry Radio.
Doc Eifrig: Thank you, and thanks for having me again.
Aaron Brabham: Now, Doc, I know you are the retirement millionaire and you like to travel a lot. I have no idea where you're at. Give our listeners kind of what you're up to these days.
Doc Eifrig: I am actually sitting at a kitchen table in Bozeman, Montana, at the moment and have a flight out this afternoon. I'm heading down to Denver, and I'll be staying a couple days up snooping around in Wyoming this weekend. And then I'm off to New York City next week for a conference. So that's what I'm up to.
Aaron Brabham: So for our listeners out there that might not be familiar with Doc, I know one of the things you believe in is kind of the feet-on-the-ground approach. I know you write about it in a lot of your newsletters. Porter and myself, we take this big macro theme and we're a little bit more doom and gloom. But you take the real numbers and you look at the trends and you talk to local storeowners all around the country, and you kinda get a bead on what's going on. And, look, last year you killed it.
You were the MVP for Stansberry, big congratulations to you there. Your track record was the best ever for Retirement Trader of any newsletter that we know of, and Retirement Millionaire was also fantastic. Kind of tell our listeners a little bit about when you're out and about meeting these people, what your thought process is, and what kinda questions you ask.
Doc Eifrig: Sure. First of all, I can tell you're down in Florida when you say "feet on the ground," because out here right now it's you gotta have boots on. Man, there is snow on the ground. So we got boots on down here and –
Aaron Brabham: That's a good place.
Doc Eifrig: Yeah. The fact is Retirement Trader, interesting enough, if things stay where they are, then tomorrow we're gonna have another four trades close out for winners, and so that'll be 108 trades – series of trades in a row – closed out for winners. So that's kind of exciting. Eventually, we will have some losers in there, but we're trying to keep that alive and make money for readers. Yeah, and I mean I think the bottom line for me is I enjoy getting out there and snooping around, turning the rocks over, exploring, talking to people who run real businesses.
I know some of the things that stock analysts like to do is talk to the officers of the companies and that kinda thing. I don't' like to do that that much 'cause everyone's positive and optimistic about their businesses. So I like to go and talk to the regular folk, the man on the street and see are they using the products. Are the products working? And that's kind how I dig up my information that leads to kinda my ground-up analysis and investment ideas.
Aaron Brabham: Yeah, that's great. And I always like the refreshing approach that you have when you talk to the storeowners and the local guys and that type of thing, 'cause you can really get a gauge on what's going from a micro economic and then you work your way back up. And I'm with you. You will get lied to by CFOs and the big people because they want you to recommend their stocks; they want you to push their stocks, and it's refreshing to have it the other way around.
So, today Doc, we have – our guest is Tres Knippa. Tres is a CME trader, and he also has a website that is http://www.shortjapandebt.com, and he –
Doc Eifrig: Love it. Love it.
Aaron Brabham: – he's gonna come on today and talk to us about why he is shorting Japan's bonds. And he's also a big options guy, so I look forward to the conversation that you guys will have.
Doc Eifrig: Yeah, that should be fun. I'm excited to hear him and talk with you, so that'd be great.
Aaron Brabham: Great. Well, before we get to that, Doc, let's talk about – I know your most recent issue of Retirement Millionaire, you kind of educate the readers on the four ways to kind of evaluate stocks and why you should buy that position, and I think it's fantastic. Prior to that, you've written about how to legally hide assets from the government and how to get off the grid. Of course, it's all above board.
But I know that there's a promotion out there right now and it's doing quite well. You've got lots of subscribers interested. These are topics that we talk about on Stansberry Radio, of course, which too much government intervention into our lives, especially because they're so broke and they're looking to squeeze every dollar they can out of everybody. So what I want to do is throw a couple of newsworthy topics at you and get your take, if you don't mind.
Doc Eifrig: Sure, go ahead.
Aaron Brabham: All right. We call this the "You Just Can't Make this Stuff up" segment. So the Department of Homeland Security just released their annual report. The DHS processed a total of 205,000, and some change, Freedom of Information Act requests during 2012. The agency only fully granted just over 10 percent of the requests. It employs 400 people just to deal with the requests. And the costs associated for procession the FOI requests was roughly $2 million including litigation. The only took in $435,000.00 in fees to offset the costs. Actually, no, I'm sorry. It was $2 million per incident that they looked at, and it was over $38 million to their deficit.
Doc Eifrig: Yeah, I was gonna say I think the way you said the numbers, it was $2 million, I thought the litigation. I was like, $38 millions sounds like – isn't that crazy. And it's $38 million they spend and they take in $435,000.00. That's government for you, yeah.
Aaron Brabham: Yeah, typical government, right, and they only – what this disturbs me about this is – so the Freedom of Information Act is, really, that whole transparency idea that Obama was going after. It's a little disturbing to see that just over 10 percent of these were granted, which means that there's not a lot of freedom of information that they're providing to people.
Doc Eifrig: Right, right.
Aaron Brabham: All right, I've got another one here. A confidential Justice Department memo concludes that the U.S. Government can order the killing of American citizens if they are believed to be "senior operational leaders of El Qaeda" or "an associated force, even if there is intelligence indicated that they are in engaged in an active plot to attack the U.S.
To me, this kinda screams maybe that's the reason why the Department of Homeland Security has purchased nearly 2 billion of ammunition over the past two years. Maybe they know something or maybe they're preparing for a civil uprising. I'm not really sure, but this kind of ties into the legally hiding assets. If they're building this massive force, which I believe that they are, the next thing would be the assets in my opinion. What are your thoughts?
Doc Eifrig: Yeah. I mean I think it scares me, repeatedly, when you have people who spent a lifetime in the military and/or most of their working career from the time that say they were teenagers, and that's kinda their only knowledge base and set. They don't really understand freedom; they don't understand the history of the United States. And, now, it's kind of worked its way into this country where the debate – along these same lines, they're talking about using drones over U.S. soil.
You're talking about things, like you said ammunition for the Department of Homeland Security. I mean, last I knew, we already had police departments which were kind of at the local level. And if there was a problem, a larger problem, you had that National Guard, which are run – my understanding is – by the governors of each state. So here we are, again, laying another third layer of bureaucracy over it. And it would be one thing if they were just to be at the borders. And, okay, I get that.
But, again, you start giving power and power tends to corrupt. So that makes me nervous. And as to your first point, you're talking about this targeting U.S. citizens overseas, even when there's no intelligence that they're actively in it, that strikes me as killing and attacking somebody based on their professed beliefs and their expressions, and that is completely counter to our country's philosophy about freedom of speech, so I – yeah, I have a problem with that.
Aaron Brabham: Yeah, I do too. And you mentioned the drone thing, so nine states want to restrict the use of drones over concerns about spying in Montana, a Libertarian-minded state that doesn't even allow their police to use remote cameras to issue traffic tickets. They have a bipartisan movement, banding together to back multiple proposals restricting drone use. And, on that note, I laughed today because I looked on Drudge, and the FAA came out and said, "Listen, citizens. Yes, drones are out there and they're flying around, but for now we're not gonna arm them." Well, I don't think that makes me feel much better.
Doc Eifrig: Right.
Aaron Brabham: I don't want armed drones ever in the United States.
Doc Eifrig: It's just a matter of time before they arm them. And the thing is the math is wrong for these people. The probabilities are wrong. It's like this L.A. police officer, or ex-police officer that went rogue and killed people. This Homeland Security group would argue that that's why we need an armed drone. This drone could have tracked him down and found him and shot him down from the sky. And you're like, "No, I don't really want these idiots, who have high school educations, flying around drones shooting down people because someone – the police department of L.A. says that this guy's a bad guy.
And, presumably, what happened is true. But the guy burned up in the cabin. He didn't get a trial. I don't know if it's true or not. Look what's going on in Texas. There are – I forget the number, but it's in the high double digits of people that have been exonerated based on DNA evidence from crimes they were put in jail for a long, long time. And not all these guys or these gals were straight-up players, but still there's a lot of miscarriage of justice and that's – in this country, that's kinda we lean on the side of error so we don't put away innocent people. I have a problem. These guys are driving these drones in the sky with weaponry on it. Oh, man, that's –
Aaron Brabham: That's scary stuff, man. It's scary stuff.
Doc Eifrig: It's not what I want to be. In fact, I'm glad to hear that Montana, where I am now, there aren't drones here, currently. So that's good.
Aaron Brabham: Yeah, I love it. I didn't know that about Montana. I've actually never visited Montana, but knowing that they're more Libertarian minded and having a bipartisan group get together on this, it makes me feel a little more positive. And then on a – oh, man, I can't remember what state it was. I saw it on the Drudge too. IT was Missouri – they have – I don't know what their state legislature, the mix is of democrats or Republicans.
But I saw today, also, that they just introduced a bill that, if it passes within 90 days, they want their citizens of the state to either turn in their assault weapons, dismantle them so they can't use them, or turn them over to law enforcement to get them out of state. And high-capacity magazines, they want the same thing, out of the state, turned in or destroyed. The State of the Union speech the other day, it was a little too much, for me, talking about gun control and not economics. What were your thoughts on that?
Doc Eifrig: Yeah, same thing. I was talking with a barber here in downtown Montana yesterday – and I'm in Bozeman. He's been cutting hair for 26 years, and he said it pretty simply and I agree with him. A lot of these rogue killings are really from people who have severe break from reality, mental disorders. And until Jimmy Carter came along, a lot of these people were institutionalized. And sure, we've got medicine that help people live a functional life with schizophrenia and other really hard diseases that have really super strong biological bases.
But one has to wonder if these people were institutionalized and under better care, better treatment, the quality of their life might be much, much better and the world would be a safer place. And, again, I'm not saying that you take everyone that has schizophrenia, but if you look at the killings, these are not caused by normal people, and it's much more random and chaotic than the government and people would believe or lead you to believe. So do you take away the right to have arms? You take away the constitutional right because there are a few crazy people.
I just [break in audio] understand. Okay, I'm not an expert on this, so I'm not a guy that's on the weekend out shooting and gun-toting cowboy. But it definitely seems like we're looking at the wrong place. It's not good citizens with guns; it's the criminals and it's these killers, the mass killers tend to be – they have breaks from reality and probably shouldn't even be out in the free world. That's –
Aaron Brabham: I couldn't agree more. And when you said you're not out on the weekend shooting, I had the flash of Porter with his picture in the digest. And boy, did he get some heat for that picture of him shooting the hogs. Oh, man, that guy got some heat from that. But that's why I love Porter 'cause he'll lay it out there.
Doc Eifrig: Yeah, yeah.
Aaron Brabham: Now, Doc, being that you are an M.D., I would love to get your take on this because it ties into what you're saying. Why isn't the government opening up more talks about the over-prescribed medicines and how these doctors just prescribe all kinds of uppers and downers and anything like that, other than seeking psychiatric help. In my opinion, I think it has a lot to do with the big lobbyists being the drug companies, but maybe I'm totally wrong. But the mental issue should be tackled here, and it is being avoided like the plague. What's your take on that?
Doc Eifrig: Yeah, I mean we've written about it a couple of times in Retirement Millionaire, and as the studies come out, there are many large-scale drug companies – I won't name names, but this has come out in the last ten years – where the positive results were reported and negative results were hidden from both the FDA, as well as the general science community. You know we're finding out that many of the drugs, for simple things, don't really work as well as people thought they'd do.
There's a huge placebo effect you can get for just about anything. Even sham surgeries, there's a placebo effect knee surgery. Some famous studies done there. And so just telling somebody, "Here, here's a pill. I'm gonna do this procedure on you," cures a good 30 to 40 percent of people. So, yeah, we were talking – again, the barber and I were talking about this. You've got a lot of this kids running around, ADHD. It turns out there's sort of a paradoxical thing with giving them amphetamines that helps them concentrate.
But, gosh, if I take amphetamines, yes, it allows me to concentrate till 3:00 or 4:00 in the morning if that's what I'm doing and want to be concentrating. On the other hand, you have to wonder sort of self-control and about thinking about other people and having a society that's civil and focused on that, as opposed to a society that thinks the fix is a pill. And so, yeah, I'm really – I'm not a guy that – I don't like pills in general. I'm against it, but I understand there are needs for people.
But I think there are ways you can – even as diabetics – you can get off of insulin, get off pills, just by following some certain things like working out and exercising, walking, not eating – we've written about this in Retirement Millionaire – not eating – we call them white killers you know – sugar and white flour and rice and French fries. Yeah, so anyway, that's kinda – I'm kinda getting off track of, I think, our talk today. But, yeah, I have lots of thoughts about that.
Aaron Brabham: Yeah, I imagine you do. And, actually, Porter and I talk about the killer whites a lot, and we source you for that. Because when I lost a lot of weight, recently, and got real healthy, that was the number one thing that I cut out. And Porter, also, is cutting back on that and he's seeing instant results. And, yeah, I'm amazed at how much better I sleep at night, how much better I feel, the energy and all that type of stuff.
And you give this pieces of advice in every Retirement Millionaire issue. You always – that's one thing I love about it. I scan it. You talk about the Vitamin D for natural sunlight; you talk about the light; you talk about a lot of things that make sense that are very easy to do. So I'll encourage all of our listeners out there to give your Retirement Millionaire a shot, and we'll send something out for that to all of our people on our list. And if you're not on our list, sign up at http://www.stansberryradio.com.
Give us your e‑mail, we'll send out a promotion for Doc with a good price on it too. And it's risk free. Now, Doc, what do you think about – going back to the off-the-grid subject – what do you think about second passports? Is this something you're concerned about or you're not concerned about it at all?
Doc Eifrig: No, no. I like the idea. I think, for the average person, it's a little harder reach just because of the – many smaller countries will offer second passports easily enough with – when you have to spend $200,000.00 on a business or deposit money in a bank on their property. And that's fine. I think it would be good to have one. And I know people of certain European dissent – I think Irish and Italian – if you show direct bloodlines there, you can get a second passport from those countries. And getting that allows you, instantly, into the EU, as long as your – if you think the EU's gonna last for a while, that's useful.
Yeah, I think it makes sense to do it. I'm certainly looking at it and considering it. And the purpose of it is, really, so that you have freedom. And if it's not too much of a financial or time hassle, having a second passport is a nice thing. And I know a good friend of mine has got three passports, a British, a Canadian and a U.S. passport. And that gives her and her family an incredible amount of flexibility to come and go in the world as they please.
And I think [break in audio] of the big things as well is that having that freedom to come and go. So, yeah, we're looking at it. It's one of the things on the list this year to focus on. We're getting a couple of partners who probably will help us design some things and come up with a report or two, or at least direct them to places where they can get the stuff that's already been created. So, yeah, I'm all about it, love it.
Aaron Brabham: I will definitely be looking for that. And for our listeners out there, I ran across an article the other day that – 'cause they're getting tougher to get, right. They're getting more expensive. The requirements are getting tougher because people are seeing them out. It's supply and demand. So just for our listeners though – and you can google this. So the two easier ones – but you do need cash – are in the Eastern Caribbean nations of Dominica and St. Kitts.
So I know with St. Kitts, they have a Dubai company that's building some 4-square mile community in there, so for $400,000.00 you get a piece of property, a house – I'm not really sure what it is, but it also comes with a passport. The good thing about St. Kitts is it gives you visa-free travel to 139 countries, including all the EU. That's a lot of freedom. The Dominica one, you can get as little as $100,000.00; however you're only going to travel without a visa to 50 countries.
So it still gives you a little bit of travel, but having access to the EU is good. I look forward to seeing what you write up, Doc. I'm extremely interested myself. And when I read these disturbing stories about our liberties being taken away and no due process and things like that, it makes me a little bit concerned. And I like the idea of freedom, so I will certainly be looking for that.
Doc Eifrig: Great.
Aaron Brabham: Now, Doc, you've written – I can't remember. I want to say you've written about the potential student loan problem. Have you touched on that?
Doc Eifrig: I have really not. I think that's been more Porter, and I think it's come around in The Digest several times. I'm aware of it, but not completely up to speed. I know it's a bad, bad thing happening. But go ahead. Tell me more. Teach me.
Aaron Brabham: Well, Fair Isaac just posted a report that says, "Overdue student loans reach unsustainable 15 percent. The delinquency rates on students loans in the past two years is now at 15 percent as recent graduates struggle to find jobs. Average student loan debt rose to $27,253.00 from $17,233.00 in 2005. Student loans are the largest source of unsecured consumer debt. And with the current bankruptcy laws, they can't be discharged." This is a very disturbing trend. Now that you have a struggling stagnant economy, it's hard to get a job. The median incomes are going down basically, and people are burdened with this massive amount of student debt that they can't discharge. This is a bubble probably as big, if not more pressing, potentially, than the underfunded pension problem.
Doc Eifrig: I think I'm right with you. One of the things people don't realize, certainly students, is that these debts are not dischargeable. I think I've run into a few younger folk in their late 20s, early 30s, who've gotten into medical school debt and, for whatever reason, sort of believed that worst case, if they struggled, could declare bankruptcy and their debts would go away. And I've pointed out to a couple of people that is not the case. These student loans from the government, that's as good as an IRS lien against your future. So it's like anything.
If you're gonna borrow, the borrowing should be a matter of convenience. And the interest rate, if you can make more than the interest rate you're paying on whatever assets you have, you're creating negative net worth. And so I just don't understand people who have done this. I've got a relative, who I discovered recently has taken out large loans to go to school in mid-life. And I'm just shocked. I'm asking why didn't they save before spending this. Why take loans and pay in interest rates that they – there's no way, though, in the next years be able to pay this off.
And I can't even see how the payoff for school would equal that. They could spend a year reading books and becoming an expert on almost any topic in the world and get a job in that time that would more than increase their net worth, relative to what they're doing. So the finance is just not worth on debt for school much of the time. This is an abomination. And it's marketed and pitched by many of these places that it will. And it's just not the case.
Aaron Brabham: And, to me, it's no surprise that when they changed the bankruptcy laws in 2003, I believe last time, that's when the government got into the game of pretty much giving everybody unlimited funds for student debt. It's hard to go to a bank anymore and get a loan. You pretty much go through the government, and I think they're pretty happy with knowing that the next generation or generations to come are pretty much stuck here paying off their debt. But maybe I'm getting a little bit out there.
Doc Eifrig: Yeah. I'm not sure it that's intentional, like the government is saying, "Oh, we're gonna make our people beholden to us." But it's very clear that the mindset is the same mindset that drives Obama to give a talk where they think you can create something out of nothing by just spending money, that debt, somehow, creates wealth, and borrowed money creates wealth. It doesn't. It creates an obligation and – that, for your wealth, the moment you create debt, you get that – the money you borrowed, if it's from your asset side, your net worth doesn't change.
But, again, like I said, unless you can meet the obligation of that interest rate on your asset side of the balance sheet, you are going negative. This is negative net worth production, and it's embarrassing that these government people don't understand the math. And it's beyond me how they can get in power and don't understand the math.
Aaron Brabham: Yeah, I couldn't agree more. All right, Doc, well, it's time to get our guest, Tres Knippa, on. So let's go to the interview.
On the hot line, we have Tres Knippa on the show. You can check out his website for more information at http://www.shortjapandebt.com. I recently heard an interview with trace on Joel Nagel's Global Legal Advisor radio show that's broadcast on the Overseas Network. And thank you to the Overseas Network, as well, for rebroadcasting S&A Investor Radio, as well as Stansberry Radio on Fridays. Tres, welcome to Stansberry Radio.
Tres Knippa: Thank you very much for having me. First thing, I do want to say. I want to apologize a little bit. You may hear some background noise in this interview. I'm actually on the floor of the Chicago Mercantile Exchange. So you've still got some markets that are open and the equity bits are still going. So sorry for the bit of background noise there.
Aaron Brabham: Hey, no problem at all. So, obviously, your website says it all. Give us a little bit of background and how long you've been shorting Japan's debt and the reasons why. And then we'll kind of dig a little deeper.
Tres Knippa: Absolutely. For me, it was pretty simple. Down on the floor of the Exchange, we've got these big TVs, almost like a diamond vision at a baseball game. And one day, I glanced up and I saw an interview with Kyle Bass. I went to my screens and I pulled up on the CNBC website, and I watched that interview. And he laid out the case. He talked about their population dynamic. He talked about the percentage of their tax revenue that was going to interest expense and all those things.
And, at the end, he talked about – the most important part for me, as a trader, was is he talking about the enormous amount of leverage, relative inexpensive options that you could buy to place this position against the Japanese Government bond market. So, quite frankly, at that moment I was hooked. Once I started doing some research of my own, pulling up – going to the Ministry of Finance website there in Japan and kind of diving into the why I wanted to do this. And, quite honestly, I got into the trade, virtually, through my own failures. First things first is I called his fund and said, "Hey, I'm in. I want to invest." However, the fund was more tailored to institutional investors and had a minimum of $10 million and some odd dollars. So I said, "Okay, well that's not realistic for me."
So then I called some friends of mine at Goldman Sachs at their structured products desk in New York. I said, "Guys, I need credit default swaps on Japan right now." They said, "Well, Tres, deposit $10 million in your Goldman account," and you could see where this conversation's going. So the next thing I did was, I said, "Okay, Tres, you're a floor trader. You trade options every day. Surely there's a way to try to execute this." Well, there is a futures contract that trades on the Tokyo Stock Exchange on the five and the ten-year futures, the five and ten-year Japanese Government bond. There's a futures contract.
Hey, that's speaking my language. I'm a futures trader. First thing I did, I got my systems hooked up. I shorted their bond market, and I think I lost $30,000.00 in three or four days. And the reason is, is that the contract that's traded in Tokyo is enormous. The underlying value is somewhere in the neighborhood of $1.6 million. So a small move in interest rates really punished my equity very, very quickly. So then I backed up, and I said, "Okay, Tres, you're not using your brain here." First of all, there's no way that we can time this. There's no way – you're talking about the largest accumulation of peacetime debt in the history of the world.
So how am I supposed to be able to time this with any accuracy at all? So, clearly, the options are gonna be the way to go. So I bought a round of options; they expired worthless. I bought more options the next time; they expired worthless. And then it hit me. I said, "Okay, Tres, let's just try to get our arms around this." Why not allocate X amount of dollars out of my own portfolio, and then take that money and try to stretch it out as long as I can so I've got consistent exposure as long as I could possibly have it?
So once I got comfortable with the idea that I'm not gonna be able to time this, and I got comfortable with, "All right, I'm gonna allocate X amount of dollars. Then I'll go into the options market and continue to update my options' position and roll them from one month to the next." Because I will admit the weakness of what I'm doing is that the options that are traded in Tokyo have a relatively short lifespan. That's the bad news. The good news is my puts are stuck right up underneath this market. My puts that I own right now get triggered – I call myself a fund manager. That's not entirely accurate. I'm registered as a CTA.
So the options that I own there are only 50 basis points out of the money. So I don't need a massive – a lot of people argue with me. They say, "Well, Tres, the Japanese can print their own currency, ergo they're never gonna have a default." Fine, they don't have to default. I don't care. I just think that interest rates there can go up. And if they do, these options are positioned for considerable gains if you get rates that tick up 2, 3, 4, 5, and 6 percent. So that's what I'm doing. That's kinda the function of how I'm doing it. And I divide my strategy into two phases. Phase one, I buy options that I'm willing to accept a certain amount of option decay every single month.
Phase two will be when I convert these puts into a synthetic put position. And a synthetic put is just short futures and long calls. I want to be in the synthetics and I want to be short futures. The reason is is that, clearly, there's a yen play stuck in my idea here, and I just think that once the bond market tips down, the Bank of Japan will go into hyper drive trying to support that bond market. And that's when you could see the yen just get really punished, somewhere in the neighborhood of $200.00 or even $300.00 to the dollar if you start upticking interest rates there.
Aaron Brabham: Doc, you want to jump in? He's a little out of my league here with some of this.
Doc Eifrig: No, no. I like the trade. It's a great trade. I can't imagine that feeling of going through a large contract like that in a couple of weeks or days, losing that amount of money. Do you think this'll be a precipitous event, Tres? Do you think that's gonna happen slowly over a couple of years? What's your kinda debt call on that?
Tres Knippa: I'm not inclined to think that this is a slow-moving trade. And the reason in is because bond markets, currencies and banking systems, they require one thing. And that one thing is confidence. The bond market is not gonna break until you get that fracture of confidence. Now, I have been told that I'm wrong on this trade by dozens of people because the Bank of Japan will continue to print and they will continue to support that bond market. That's fine. I do think that the first leg of this trade will probably happen in the currency as they try to support their bond market. But when that gets fractured, when that confidence gets fractured, at some point here, who do they sell this stuff to other than the Bank of Japan.
Doc Eifrig: Right.
Tres Knippa: I've been told countless times that I'm wrong because they're financing their debt from within in Japan. And the owners of Japanese Government bonds, 92 percent is all owned domestically.
Doc Eifrig: Right, that's –
Tres Knippa: I view that as a weakness, not a strength.
Doc Eifrig: Yeah, that's the scary part that it's basically all owned by households. I think that would be U.S. Government dream if our debt could be taken up. And I wouldn't put it past the U.S. Government to start to require this in [static] pension accounts insure –
Tres Knippa: Well, in Japan, they require the banks to hold them. So it's by law they have to own a certain percentage in JGBs. Well, I'm not really concerned about the households, necessarily. I'm more worried about the life insurance companies, the pension funds. How about the news recently. The largest pension fund in the world is the Japanese Government Pension Fund. And the manager of that fund has 57 percent of his assets in Japanese Government bonds.
And he had a press conference; he had an interview, and he flat out said, "If Shinzo Abe –" the new prime minister of Japan – "if he reaches his inflation target of 2 percent, why would you hold a ten-year bond yielding .75 percent if you've got 2 percent inflation." So he sees the situation where he changes his asset allocation and comes out of JGBs. That right there, who's he gonna sell it to.
Doc Eifrig: Right. Now, taking the devil's advocate for a moment, you could argue that this trade was a good trade five years ago, three years ago, two years ago, and it's kind of, I think, didn't yield to record lows in December. What's different now for you? Again, I like the trade. I just don't have the chutzpah to do it anymore. I'm older. But I love it. I love the idea. I've got an old buddy of mine from Goldman days; he's kinda doing the same thing. He does not like this JGB. But why now? Again, what's the catalyst? What's gonna make it happen?
Tres Knippa: Two words. Shinzo Abe, the new prime minister of Japan. He has set an inflation target. He has set it with the stated purposed of devaluing the currency. If I owned this instrument, I lent the government money and they give me a financial instrument. When they're paying me back for that loan that I gave them, they're now paying me back in a devalued currency. No thank you.
Shinzo Abe has lit the fuse on the Japanese Government bond market, and I don't even know if he knows it or not. Why would you target inflation when you have yields at .74 percent, and you've got a debt to GDP ratio of 230 percent? Do you know what the scariest piece of data out there is? It is the half of the tax revenue that Japan collects; half of the tax revenue goes to paying interest. And their interest is free, and it's still half.
Doc Eifrig: Right, interest at 0.7 percent. That is frightening.
Tres Knippa: So if you get a slight uptick in rates, it's all over. You moved rates to 2.5, 3 percent. Let's not forget something here. Italian rates on the ten-year rallied 250 basis points in five weeks. If you took the – what would that you to – that would take you somewhere in the neighborhood of 3.25 percent in Japan. That's it, checkmate, if you had that kinda move. So once the confidence is fractured, I think the owners of these JGBs, they turn and they start trying to sell, and there will be no buyers.
Doc Eifrig: Right. How about your take on the equity side? Do you think the Japanese stock market is in trouble as well, or do you think they're gonna be the next great trading earnings in –
Tres Knippa: I got into an argument with a guy from the Financial Times. And he laid it out so simple, as if it was just a very simple equation. He goes, "Tres, Shinzo Abe is a hero. It's simple. You devalue the currency, the exports pick up. Exports pick up, GDP growth happens, the stock market goes up. Bot those things generate tax revenue, and they use the tax revenue to pay down the debt. It's just that simple." Oh really. Show me an instance where devaluing the currency – show me an instance anywhere in history where that has worked.
It's never worked, especially when you've got a country that's got debt to GDP ratio of 230 percent. The debt is just simply not gonna get paid off. That is there will be a restructuring. Just like I said, I have no idea when. So I have to try to position myself – I have to manage – the risk of this trade is time. That's the risk here. So I have to try to manage that risk as a fiduciary as good as I possibly can, and make my window as wide as possible.
Doc Eifrig: Interesting. How about – do you have a second trade in the world that you think is behind this one? Anything else of interest to you that you think is in trouble.
Tres Knippa: The yen. I think the yen, more than likely, moves before the bonds, because they will defend that bond market to their dying day. So do I think it's possible that you will continue to see yen weakness? You bet I do. And especially as the Prime Minister, Shinzo Abe, is being lauded as some sort of a hero because the Nikkei is going up. "Oh my gosh, he's turned things around. He's our savior," et cetera, et cetera. So do you think for one instant that he's gonna take his foot off the gas. No, I don't think that he will. Secondly, he has said, "I will print an unlimited amount of money." Well, guess what. Unlimited sounds like a lot to me.
Doc Eifrig: 39:10.
Tres Knippa: Unlimited sounds like a rather nebulous number that I can't really get my head around. And will he get pressure from the international community, the G7 and the G20? Of course he will. Will he ignore it? Of course he will because he doesn't have to answer to them. Now, do you notice who's conspicuously absent from the criticism of Japan in their devaluating efforts? The United States.
Doc Eifrig: Exactly.
Tres Knippa: We have not been criticizing him for this move. Why is that? We're doing this because they are our first line of defense against the Chinese. And I think that we have – are kind of turning a blind eye. Because as the Chinese build up a military power and things like that, we need a strong ally in Japan. So if they're making strong moves in their currency, I think that the U.S. is kind of looking the other way.
Never mind it's hypocritical that any of these other policy makers anywhere in the world are, "You can't devalue your currency." Oh, really. You know what. Because the guy who's saying that is trying to devalue. And if Japan devalues, then it's sort of neutralizes some of that effect. So I find that whole notion's a complete joke anyway.
Aaron Brabham: Is there a way that the average investor could play this 'cause you're talking about sophisticated instruments.
Tres Knippa: Well, obviously, in my CTA, there's a whole big, long discussion here about suitability, about where my CTA is appropriate for. Believe it or not, I got into – I originally set up my CTA because I wanted this exposure too. So the minimum investment in my CTA is reasonably low, $30,000.00 U.S.
So that is not just an insurmountable – I'm not exactly an institutional money manager. Now, there are weaknesses. It is not appropriate for all investors. And so that would have to be – a conversation would have to happen between me an the individual investor to make sure that what I was doing was appropriate.
But if that conversation happens and we determine that, yes, that is appropriate for their portfolio, then you move forward. But, like I said, I've got a reasonably low minimum account size. But I'm also kind of hamstrung with the instruments that I'm able to use. Would I like to buy an over-the-counter swaption or some sort of an option that has a five or ten-year life? Of course I would. But no institutional sales desk or Goldman or UBS or wherever, nobody's gonna touch me because I'm dealing – I'm having to deal with individual accounts. So that's the drawback of being in the retail space.
Doc Eifrig: Yup. And for our listeners, a CTA is a commodity-trading advisor and, basically, the National Futures Association regulates this assignment, and this allows trade to give you advice just like a financial advisor would. And there's a little bit – and you'd have to go – Akisha has one-on-one and ______ Gem. And until this radio broadcast and a little bit of reading about trade unknown, so I can't attest to you one way or the other. But just so our readers understand what that is, and I'm sure, Aaron, I'm hoping at the end will direct people to his website and so they can learn more as well.
Aaron Brabham: I certainly will.
Doc Eifrig: But just so people know what CTA is.
Tres Knippa: Even for people who goof may not be in the position to invest or try to take a position in what I'm talking about. They should still go to this website anyway and register. I put out – once a week I'll put out a newsletter. If there's a big piece of news that comes out on Japan or on their debt, like when the pension fund manager talked about his asset allocation, things like that, I e‑mail that out to the people who've gone to the website and registered. So http://www.shortjapandebt.com and then just click on the button that says register here for the free newsletter. And then you'll start getting communications from me.
Aaron Brabham: That sounds great. Well, we really appreciate your time.
Doc Eifrig: Now, I want to ask you something about your background. Tell me about your history with Ranch Management. I see this in your background. My sister happens to have gone to a competing school in Texas at FMU, and you went to TCU. But tell me about Ranch Management. Did you do anything with that? What was your interest there?
Tres Knippa: Well, considering, right now, I'm standing 15 feet from the live cattle pit on the floor of the Merc in Chicago, I'd say that I did something with my Ranch Management background.
Doc Eifrig: There you go. Is it in your family at all? Are you involved in ranching in Texas or what's your –
Tres Knippa: Nope. I am originally from Texas. I went to Baylor University, studied finance. I went to MIT in Boston, and I also studied that Ranch Management Program there at TCU. And then, after that, when you get a background in finance and agriculture, then most people they go into Ag finance. Yawn, no thanks. So I started – how I met Kyle Bash was that I worked at Prudential Securities in the Dallas office, and I met him because he was in the Fort Worth office. So the day that I saw him being interviewed on TV here, I said, "Oh, I remember him from my days at Prudential."
And so I went and I researched what he was talking about, and did my own research and said, "Wow, I think that's really exciting." So this whole genesis, this whole trade, came from me being a trader and wanting that exposure and buying into the story that Japan has got problems ahead of it. So like I said, how I came up with my strategy was from my own failures. I tried something; it didn't work. Tried something else; it didn't work. And then just slowly kinda tweaked it until I got something that I was comfortable with for myself.
Aaron Brabham: Well, we really appreciate your time. I know that you probably have better things to do. And we do want to point everybody to your website, http://www.shortjapandebt.com. I really appreciate it. And, Doc, thank you for assisting me with this high level talk.
Doc Eifrig: Sure. And before Tres leaves us, who are the golden guys these days down in the Merc? Any names from the '80s that I would [break in audio]? Any senior guys there running around?
Tres Knippa: Well, what you have to remember is, is that down on the floor, I don't know anybody's name because we know everybody by their acronym, by their trading symbol.
Doc Eifrig: Yeah.
Tres Knippa: So my trading symbol is WACO because I went to Baylor University in Waco, Texas. Now, in the time that I have been down here, has anyone in history every walked up to me and said, "Hey, Waco, did you go to Baylor"? No. Everyone, since I got my membership on the exchange, everybody calls me Whacko. [Laughter]. So I have been Whacko since 1996, thank you very much.
Doc Eifrig: I love it. I love it.
Aaron Brabham: Yeah, that's great. All right. Well, I appreciate it very much and we would love to hear back. And I'm gonna opt in and follow your path 'cause you got skin in the game and I love someone with skin in the game.
Tres Knippa: Well, thanks very much for having me. It was a delight to be here.
Aaron Brabham: You got it. Take care. All right, let me read a couple e‑mails. Special thanks to Tres for coming on our show and giving us a breakdown of Japan's debt. So Brian said, "I just wanted to give you feedback on the radio podcast. I'm a Premium subscriber, and I have to tell you it's cheap at $10.00 per month. I really enjoy it. Keep up the good work."
Nat wrote to us and said, "Thought you'd enjoy this story. I talked to a fellow at the gym this morning. He told me he's closing his Detroit auto shop and moving to Georgia. His shop is located in the city of Detroit. He says it's not worth running the shop anymore because of all the taxes the city of Detroit lays on him. In his own words, he says, 'Now, they are gonna fine me or lock me up if I don't pay for health insurance. Well, lock me the "F" up then. If I could afford to pay for health insurance, I would.'
He's giving the shop away to an employee, just walking away from it, and he's owned it for 20 years. He and his wife are moving to Georgia. He's getting an hourly job at an auto shop. He will probably earn more working it by the hour than he did owning a shop in Detroit. So, in essence, he's going Galt. How many more will do the same?" I imagine many, many more will do the same.
And then we also had an e‑mail from one of our female listeners, who was giving us a little bit of heat about the transcripts. And if anybody's seen our transcripts – we use a transcription service, sometimes mess some things up where they can't really understand it. Anyways, Lisa says, "Dear Aaron and Porter. I love your podcast, but I had to laugh reading this transcript with Doug Casey. Who's doing the transcript or is it a software program? 'So people should take advantage of that. Stop thinking like medieval serfs, but it's spelled S-U-R-F-S,' which most people do.
So, yes, we use a transcription service. These are errors in those sometimes. We love the feedback. Keep sending them in. We're a little backed up on our voice mails. We'll be back to the voice mails next week. Give us a call at 855-727-2346. We also still have our Black Label podcast show to record this month from the Miami Beach Marina. If you're not a Premium subscriber, I really encourage you guys to do that. It's only $10.00 a month. I can tell you it is way – it's a lot of bank for the back, plain and simple. All right, guys, we'll talk to you next week. We should have Porter back at the helm, and we'll see you then.
This Episode's Guest
Dr. David Eifrig
Dr. David Eifrig Jr. is the editor of two of Stansberry's best advisory services.
Tres Knippa is a professional trader and broker on the floor of the Chicago Mercantile Exchange. Mr. Knippa has been trading the futures markets for over 17 years and is a member of the Chicago Mercantile Exchange.
Mr. Knippa focuses his efforts on energy, stock index, and agricultural futures but holds positions in markets all over the world. In April 2001 Tres started trading proprietarily for himself and this became his primary source of income.
Tres believes Japan is the next sovereign debt crisis. Tres is a regular contributor on most of the major financial news networks including CNBC, Fox Business, and Bloomberg. To learn more about Tres and why he believes shorting Japan's debt could be financially lucrative visit his website www.shortjapandebt.com
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