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A Trader's Take on Playing Japan

Freaking Heck's picture




 

By: Chris Tell at http://capitalistexploits.at/

We can all pretend that debt doesn't matter. We can pretend that demographics don't matter. We can pretend that raising taxes aids rather than frustrates an economy, and we can pretend that citizens will continue to bend over and be sodomized by central bankers.

But we'll only ever be pretending, because in the real world all of these things matter, and in the real world human beings will always look out for #1. Darwin was right.

This is universal, but today I'm talking about the land of the rising sun, the land of Toyota, Mitsubishi, Saki, Yakuza and glowing fish. Fukushima dealt a huge blow to Japan's economy, not least because Japan is no longer energy independent, but what will really kill Japan's economy is its state of finances.

We edge ever closer to a day when things in Japan go from manageable to, "Oh my God we're all going to die..." unmanageable. Betting on such an event is not only intellectually sound. It is financially appealing, since the amount of risk required to bet this way is heavily skewed in our favour.

Asymmetric trades which allow for substantial payoffs is exactly what my friend and partner Brad's strategy has been for decades. Decades which have earned him tens of millions of dollars from applying methodical strategies based on his core thesis of finding global deep-value asymmetric trades.

Why do we think the day of reckoning is close? Well, financing debt requires capital inflows. Japan has managed to finance truly absurd debt levels due in no small part to its previous trade surplus and domestic savings pool. Both of these elements are being systematically eroded in rapid fashion, leaving Japan looking a lot like Wile E Coyote as he runs of the edge of a cliff, just prior to plummeting towards the earth.

Will E Coyote

Firstly, let's deal with the domestic savings pool. This pool of capital is, as we're all by now well aware, mostly held in JGBs. It isn't growing while the debt burden grows, and it cannot grow, as the demographic headwinds facing Japan are the most severe in the developed world. But don't let such a dire situation get in the way of a solution. The government are funding so called "match making" parties in a desperate attempt to boost the birth rate. As if that was not absurd enough, they've turned to creating a robot baby. I kid you not. What, I hear you asking, is, "What is this meant to do?"

Well, it appears that the Japanese population is so devoid of emotion that they require these "bots" to "trigger the maternal/paternal instinct, causing people to "want" to have a baby. Trust me, I've had young babies and a crying baby, let alone a robot does nothing to stimulate anything in me, other than a headache. It is the last thing on earth likely to drive any rational human being to want to get horizontal!

Hopeless!

Now let's move on to a trade. I found this in the Wall Street Journal. It shows Japan's waning trade. Put simply, the fundamentals for Japan are terrible.

Japan vs China

According to this recent Bloomberg article, Japan have just reported a widening trade deficit with exports by volume falling the most since June last year.

The deficit quadrupled from a year earlier to $1.45 Trillion yen ($14.1 Billion), larger than a 1.08 Trillion yen projection by economists. On a seasonally adjusted basis, the deficit grew to 1.71 Trillion yen.

All the while JGBs hold steady, the yen remains supported in large part right now from the uncertainty in Europe, with Ukrainian headlines causing capital to run to "safety". Volatility in the Yen is low and the pricing of it is nothing short of unbelievable. Once again ideal hunting grounds for Brad.

In an email exchange with Brad he provided me his thoughts on the topic:

Continue to read more here.

- Chris

 

"Japan is a bug searching for a windshield." - John Mauldin

 

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Sat, 05/17/2014 - 13:07 | 4769452 AdvancingTime
AdvancingTime's picture

 Japan continues to slide towards an economic abyss with each passing day. The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency. This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world. 

 The moment the Japaneses stock market fails to rise enough to offset inflation this will turn into a tsunami of  money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.

 http://brucewilds.blogspot.com/2014/05/japan-sliding-towards-abyss.html

Sat, 05/17/2014 - 13:01 | 4769440 AdvancingTime
AdvancingTime's picture

I recently found myself thinking about the decline or collapse of great empires and realized that it is often hard to predict when or how their demise will occur. Many analogies can be taken from this idea, the empire need not be great and timing is always hard to correctly gauge.

The signs of decline may be everywhere but that does not guarantee the end is near. As the foundation crumbles away it is not uncommon for those in power to extend their rule by many tricks and changing the rules in order to gain a new lease on life. I would say Japan is running out of lives, More on the subject of how empires collapse in the article below.

http://brucewilds.blogspot.com/2014/05/how-empires-collapse.html

Sat, 05/17/2014 - 10:31 | 4769146 OC Sure
OC Sure's picture

 

 

 

"let's deal with the domestic savings pool...It isn't growing while the debt burden grows"

The best thing to happen to a nation governed by modern banking is deflation.

Deflation replenishes the citizens power to purchase.

Deflation reverses the the ability for the thief to steal from citizens by their primary method of theft; counterfeiting.

Counterfeiting, the expansion of the "monetary base" (that is to say the counterfeit and not money), causes citizen's purchasing power to decrease and thus what they would have done or purchased with the formerly higher power to purchase has been stolen from them by the thief; the thief, the initial recipient of the counterfeit exchanged "nothing," the counterfeit, for something in the process of passing along the devalued "money."

That Japan is exporting its counterfeit at record paces is symptom of the following cause:

The thieves could no longer tolerate the justice of deflation and are now returning to feast in a frenzy.

 

 

Sat, 05/17/2014 - 10:23 | 4769124 elwind45
elwind45's picture

Most of us where born when overnight rates were several degrees above the historical of 4-5%. 30 years ago overnight rates were 15%. Now they are. 25% meaning the dollar is running out of room to collapse? VOLKER SCREWED UP! The Fed is worried about the long end and not the short end! Has anyone considered a deflationary episode? The long end getting a bid is just the beginning of this process! Soon the Fed could end its exercise when long rates match short rate at. 25%? The past yield curve has no bearing to the present I.e. 5% is the new 15%? A parabolic long term bond price is a disaster? Or how many people in last 6 years told you rates should fall? Why ruin a moneymaking applecart?

Sat, 05/17/2014 - 09:59 | 4769098 elwind45
elwind45's picture

Articles such as these paints American as being on Its last leg ? Why because if you felt better about your production you would stop believing the American worker is SHIT and stop giving your fruits to a global banking cartel? You are a gifthorse who runs a lot better wearing blinders!

Sat, 05/17/2014 - 09:46 | 4769075 elwind45
elwind45's picture

Been there and done this same exercises when I wore a bigger wallet pocket? 10's of millions just like HILLARY ROFLOL

Sat, 05/17/2014 - 09:44 | 4769074 i_fly_me
i_fly_me's picture

So, um ... sell, or something?

Sat, 05/17/2014 - 09:52 | 4769085 elwind45
elwind45's picture

They are bigger takers of capital than the rest of world combined and if they go down than its a wonderful LEHMAN MOMENT or isn't Lehman moment a better use than saying black swan every God damn day? They are enemies of the American taxpayer same as EUROPE and soon CHINA your fucking ATLAS

Sat, 05/17/2014 - 09:42 | 4769071 elwind45
elwind45's picture

What would happen to the scam if one day everyone realized printing from thin air is actually not going on and capture of your present wealth impairs your capital formation and your ability to enjoy the remaining years of wage slavery or ever rise above anything but being the worlds drafthorse!

Sat, 05/17/2014 - 09:35 | 4769065 elwind45
elwind45's picture

Anyone who exclaims that the Fed is printing out of thin air is really saying "bend that fresh Asshole over good looking"?

Sat, 05/17/2014 - 09:32 | 4769064 elwind45
elwind45's picture

They get a bailout from the American taxpayer thru the Fed? Free your mind and the rest will follow? Its stealing your production to combat global deflation and as the global day of recognition fast approaches you must work harder to save the planet from (4) the central banking mechanism ?

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