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Kyle Bass Speaking at the Darden School of Business

November 20, 2011
CanadianValue

CanadianValue

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CanadianValue
http://valueinvestorcanada.blogspot.com/

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Comments

mcwillia
Mcwillia - 3 years ago
The Widow-Maker Trade: Not Quite Yet.

Like Kyle, I worry about a JGB rollover crisis and Yen hyperinflation. The JGB/Yen short won't work, however, since the crisis won't happen soon enough for the shorts to profit. Here's what will delay it:

  • Japan is super-stockpiling forex reserves by its present interventions to suppress the yen. These will later be spent defending the yen, pushing off the crisis day. The present interventions can be done at ZIRP rates, so Japan piles up a forex warchest for free. The current account will add even more over time. Further yen suppression will, too. These forex reserves now equal over 20% of GDP. These will not eliminate a determined currency assault, but they will delay the effects far longer than people suppose. The longer Japan remains the risk-off haven, the bigger this will swell as the government capitalizes on this win-win forex situation. Extrapolation from the costs of their current interventions, Japan could now sustain a 20 yen/$ boost constantly, for over a year.
  • Household savings are still 16x the national budget. As they die in ever greater numbers, death/estate taxes channel a big amount of this directly into the national treasury. This alone could alleviate immediate marginal rollover problems instead of worsening them. Politically, the Diet could easily increase this tax and very quickly reap a windfall. It would be much easier than the sales or vat tax, and the Keidanren plus the banks and LDP would be able to force it through, especially by trading concessions to farmers, whose vote is hugely disproportional to the elderly, owing to perennial failure to redistrict.
  • The budget will certainly cut military spending (greater reliance on U.S. security as we worry about China more) and by increasing the Health co-pay for individuals under the national health insurance. The first is politically very popular, the second is easy via ministerial actions insulated from real democracy. Privatizations of Japan Tobacco, Japan Post, public utilities, etc. will also produce brief windfalls of approximately 2/3 of one year's annual bond dependence.
  • Most importantly, the rollover crisis will be partially self-correcting. The Government will not intervene until the 135-160 range. At that time, the forex stockpile will be twice as powerful as now, and the longer they wait, the easier intervention will be. Meanwhile, Japan GDP will be skyrocketing as the exporting engine explodes to life. Bank and Ins. Co. balance sheets will show net improvement as overseas carry-trade investments increase in value, easing credit and exerting negative rate pressure. In the 170's, tax revenues would be swelling, current account-driven upward pressure on the yen would be extreme, and the forex warchest spending would be decisive.
  • Next, the Japanese people have a ridiculous capacity for austerity, legendary obedience, literally suicidal willingness to support Japan, when asked. If the emperor were to ask the people to 'buy bonds' they would.
  • Also, odds of default are high in countries with external creditors, but politically much harder in countries where sovereign default injures mainly its own nationals. This creates much more political solidarity and appetite for true reform than can has been the case in Greece and Italy, where nationalism is at odds with austerity. In Japan, these forces are in mutual support.
  • The continual productivity gains combined with Japan's low industrial utilization mean that there is much less domestic demand for investment of national savings, so the savings glut burns off even slower and can more easily be lent to the government in the form of JGB's than would be the case in a healthy economy.


Now, none of these individually eliminates a rollover crisis, but collectively they do push it back, beyond what the costs of a current hedge justify. So, this may still be a widow-maker trade.
DfiinancialH
DfiinancialH - 3 years ago
Wait he said that current account surplus it's new money coming in,that's exactly the opposite cause the balance of payments work in the opposite direction to the CA.
DfiinancialH
DfiinancialH - 3 years ago
sorry I meant the capital account works opposite cause the balance of payments(CA+capital account is neutral)
DfiinancialH
DfiinancialH - 3 years ago
No now i see why he was referring to the effects on the banking system,that then buy bonds

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