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Is It Time to Follow David Einhorn and Short Japanese Bonds?

March 30, 2011 | About:
matsandalex

matsandalex

9 followers
At the 2009 Value Investing Congress, David Einhorn expressed an ultra pessimistic view on Japanese government bonds. After the earthquake and tsunami it is expected that the reconstruction efforts will cost over $300 billion. Could the reconstruction costs push Japanese government bonds off a cliff?

Greenlight Capital (GLRE) previously bought long-dated options on much higher interest rates in Japan and other developed regions. The options are tied to interest rates four to five years out, Einhorn noted.



During his 2009 presentation at the Value Investing Congress in New York, Einhorn stated, "Japan may already be past the point of no return."

Before the massive earthquake, Japanese public debt was over 200% of GDP. That number is sure to rise as the government will most likely need to nationalize the operator of the stricken Fukushima Daiichi nuclear plant, Tokyo Electric Power Co. (TEPCO).

In 2009, Einhorn noted that at some point Japan could experience a funding crisis where it no longer could borrow at less than 2%.

"When the market refuses to refinance at cheap rates, problems emerge," he said, adding that this could trigger a "currency death spiral."

If one wants to follow David Einhorn's bearish bet against Japanese bonds, how would one go about doing this?

Most retail investors will not have adequate capital to short Japanese government bond futures that have a notional value of $1.7 million.

However, there is another way that retail investors can short Japanese bonds. The SPDR Barclays Capital International Treasury Bonds (BWX) 22.6% of the holdings are in Japanese government bonds. “The investment seeks to replicate as closely as possible, before fees and expenses, the price yield performance of its benchmark index, the Barclays Capital Global Treasury Ex-US Capped index.” The index also has large holdings of Italian bonds and other beleaguered European countries.

Rating: 2.4/5 (9 votes)

Comments

bmichaud758
Bmichaud758 - 3 years ago
100% of Japan's debt is issued in its own currency - it's next to impossible for them to default without the Japanese economy literally ceasing to exist.

Please refer to pragcap.com for in-depth analysis regarding this topic.
superguru
Superguru - 3 years ago
deleted my question about how Greece is diff because found some interesting theories on pragcap.com. Not sure how credible the site is but definitely very interesting view points.
bmichaud758
Bmichaud758 - 3 years ago
Because Greece cannot print Euros, it first must "raise" Euros in the form of taxes prior to servicing its Euro-denominated debt. This is the exact same as how an individual manages his/her personal balance sheet - in order to pay off a credit card, an individual must "raise" monies first.

The US and Japan on the other hand, b/c they are a monopoly supplier of their own currency, are not required to "raise" funds in order to service their debts. In theory, the US could operate for the next fiscal year at a $1.6 billion deficit without issuing a single UST bond b/c it is NOT revenue constrained. This is highly counterintuitive and unlike anything that is ever taught - I highly recommend reading the following:

http://pragcap.com/resources/understanding-modern-monetary-system
matsandalex
Matsandalex - 3 years ago
Einhorn's position is not necessarily that Japan will default on it's debt but rather that rates will rise. If rates rise, you make money by shorting their bonds.

Part of the thesis is that the Japanese savers will start cashing in their bonds to pay for retirement.
superguru
Superguru - 3 years ago


Based on my few days of reading macro economic viewpoints, I think Economics is like philosophy. You can intelligently argue for ever without ever reaching any actionable conclusion.

It is s good to be aware of these things so that you can protect yourself if needed.

Printing money and large deficits cause inflation and declining currency, yeah, but not in Japan for last 15 years.

Same is true with large scale demographic trends, I have been hearing for 10+ years now, that America is getting older and pharma will benefit, most recently from Mr. Berkowitz. Yeah sure wait another 20 years and after 30 years of lost opportunity costs you will know if thesis is right or wrong.

tbonetmoney
Tbonetmoney - 3 years ago
I am trying to find out if the new ETNs JGBL and JGBT are shortable or optionable. If short selling were allowed this would be the best way for the individual to short Japanese government bonds.

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