Japan from the inside out

“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.

3 Responses to ““The good news is the wolf is at the door””

  1. If anything were to happen, it might help others cry “wolf” and so avoid the worst of it happening to others. Japan has been said to be in decline for twenty years. They had the bubble and it burst long ago. Since then, they have avoided “lancing the boil” liquidating and restarting. There is not even a debate? So goes the common understanding. You are well placed to agree or not with that.

    I hope he wins his bet but cannot collect because the other party has failed …… But I believe that the Japanese are a wonderful family who can survive by co-operating. There is no escape valve of mass migration in or out. He may have chosen unwisely!
    Hi, PD: They came close to unwinding all that debt during the Koizumi years and started to see a clear path toward a balanced budget during 2007, but that changed fast.

    – A.

  2. Rod said

    You’re forgetting China. The Chinese are buying quite a lot of Japanese property and goods, they’re actually helping the Japanese economy, more than we can see in plain sight. There is also the debate about this Chinese spending, that if the Chinese millionaires all got together all at once and decided to BUY THE ENTIRE COUNTRY OF JAPAN, that they could do so, without even thinking. China’s got huge areas of opportunities to grow and grow, and that is helping drive their economy. People think China could collapse like Japan with its own economic growth of more than 400% in 3 years, but the fact is, China is HUGE. It’s got land to expand and the people to fill it. It doesn’t compare to the bubble that Japan experienced.

  3. […] Is Japan going to go bankrupt quicker than the US? […]

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