Frank Voisin writes about value investing topics at

Since posting the Kyle Bass and Hugh Hendry interviews earlier this week, I have received several emails asking me how I would “play” the unraveling situation in China and Japan. The timing is unclear and the catalyst event often identified only in retrospect. Given this, the costs of shorting and the expense ratios (and tracking error) of inverse ETFs can cause the dreaded situation of thesis right but execution wrong.

So what’s the best way to gain the right type of exposure? Here was one of my responses:

I think it is very difficult to determine the timing and a proper way to play this. I have not found a satisfactory vehicle for this (I’d love to have access to the CDS market), so my strategy has been to lighten up my portfolio and move more to cash, in hope of being able to opportunistically invest when China/Japan send markets at home crumbling.

Though I don’t want to be a macro investor, this past year has proven that the macro picture can dominate for extended periods so I have begun focusing more on the big picture. My view is that in this environment value investors should demand far larger margins of safety than they otherwise would, sticking to cash until true home runs can be found. I got caught far too long in the Spring with the Middle East unrest and the Japanese tsunami, which led into the debt ceiling crisis and renewed Euro debt problems. I’ve been atoning for this mistake ever since. When real macro issues exist to this extent, cash is the only place to be, and I should not have let the Euro problems out of sight in early 2011.

I suppose if you want to be more active than this, you could find American companies that are heavily reliant on sales to Japan (AFLAC?) and ideally highly leveraged as well, and then buy puts or go short. This avoids the risk that China or other sovereigns get together to bail out Japan’s government, thwarting a direct macro play.

I agree re. the inverse ETNs. I hate the idea of making the right call but getting killed on the friction fees. So far, I haven’t seen a way they can be used for anyone other than very short-term traders.

I am dissatisfied with my answer, but I have yet to come up with a better solution.

So let me throw it out to you, gentle reader, what’s the most elegant way you can conceive of gaining the desired exposure to a Chinese/Japanese deterioration without getting eaten alive by fees or exposing yourself to undesirable counterparty risk? Let’s assume this happens in the near term (2-3 years).


Author Disclosure: Stumped

Frank Voisin writes about value investing topics at