“The good news is the wolf is at the door”
Posted by ampontan on Friday, April 23, 2010
IN JAPAN, that is. That’s why it’s good news for one American, Kyle Bass:
“The good news is the wolf’s at the door in Japan and that we in the U.S. have front row seats to see what’s going to happen,” he says. “I hope we learn something from it.”
He’s a jolly good fellow, isn’t he? He isn’t just munching popcorn in his front row seat to see “what’s going to happen”, either. He’s rooting for the country to collapse. In fact, he’s put his money where his mouth is and bet on it.
Kyle Bass has bet the house against Japan–his own house, that is. The Dallas hedge fund manager (no relation to the famous Bass family of Fort Worth) is so convinced the Japanese government’s profligate spending will drive the nation to the brink of default that he financed his home with a five-year loan denominated in yen, which he hopes will be cheaper to pay back than dollars. Through his hedge fund, Hayman Advisors, Bass has also bought $6 million worth of securities that will jump in value if interest rates on ten-year Japanese government bonds, currently a minuscule 1.3%, rise to something more like ten-year Treasuries in the U.S. (a recent 3.4%). A former Bear Stearns trader, Bass turned $110 million into $700 million by betting against subprime debt in 2006. “Japan is the most asymmetric opportunity I have ever seen,” he says, “way better than subprime.”
It’s not clear why a man who generated almost $US 600 million four years ago needs to finance a house, but let’s run with what the article says.
Of course, a poor showing by the ruling party in the upcoming election could set in motion a series of events that removes the current gang of economic illiterates from office, which would pull the rug out from under Mr. Bass’s feet in that yen-leveraged home. And considering the behavior and philosophy of the ruling party in Washington, finances there could get much worse before they get better, too.
The article from which these quotes are taken, in Forbes Magazine, doesn’t single out Japan for criticism–it uses the country’s financial condition mostly as a lead-in and a closer. There is more discussion of the United States, though that discussion also has ramifications for this country:
Carmen Reinhart, a University of Maryland economist…has found that a 90% ratio of government debt to GDP is a tipping point in economic growth. Beyond that, developed economies have growth rates two percentage points lower, on average, than economies that have not yet crossed the line….It’s not a linear process,” she says. “You increase it over and beyond a high threshold, and boom!”
The OECD estimates that ratio in Japan will hit 200% next year.
The author of the article is quick to admit, however, that betting against Japan is never a sure thing:
Bass could be wrong on Japan. The island nation (and the world’s second-largest economy) has defied skeptics for so long that experienced traders call betting against it “the widowmaker.”
That might turn out to be the case once again after the adults are put in charge.
The sooner the better.