"Detonating The Japanese Debt Time Bomb" With Kyle Bass

Tyler Durden's picture

The hyper-correlation of Japanese stocks and the JPY have led many to believe that Abe's miracle promise will be just the ticket to bring the nation's two-decade slump to an end - a 2% inflation target is all you need. However, in a brief CNBC interview, Kyle Bass explains that not only are 99.9% of people wrong about the crisis (explaining the critical aspect of the abrupt turn of twenty years of the 'procylicality of thought' - that deflation is the norm), but Abe's actions have actually brought forward the date of the "detonation of Japan's Debt Time Bomb.

It is the Japanese institutions that own JGBs and they own them at meager rates of interest simply because of the ingrained belief in deflation; when the government begins to target 2% inflation, the swing in forward expectations (he notes to monitor inflation swap breakevens) will be the trigger for Japan's implosion. Bass warns that "Japanese debt is around 24x central government tax revenue and when you sail into the zone of insolvency, nothing you can do will help," though he realizes that calling the end of the 70-year debt super-cyle to a specific date is naive, he does expect the 'bomb' to explode within 18 month to two years.

All of the components for this [bomb] to go off 'all of a sudden' are in place. The clock has started on the qualitative shift in participants' minds that the situation is untenable as the realization that Japan spends 25% of revenue on interest now - and with higher rates (via this supposed inflation) the entire situation becomes farcical as every 1% rise in their cost of capital (or rates) costs them another 25% of revenue!.


On JPY devaluation - The signs are already there that elites are exiting the JPY - with recent M&A transactions - he warns. 20% of exports go to China; this could be halved given the tensions, and a JPY devaluation is not going to restore the competitiveness of that secular decline.

On Japanese stocks - The people buying Japanese stocks, are picking up dimes in front of a bulldozer.

Bass goes on to discuss the US Housing stabilization, European stress, and China's economic opacity.


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Seer's picture

Greece ^ 2 is probably closer.

EscapeKey's picture

Ooh, I like a good fairytale. Like the government sponsored inflation stats so evident in this graph.

I guess - as long as we don't eat, go anywhere, dare to get educated, or insure our health - inflation is contained.

in4mayshun's picture

Hey Kyle, I know your a smart guy and all, but I got a little nugget for you...
In order to buy houses, people have to procure jobs, and not just minimum wage jobs, good paying ones! The only houses selling where I live are the repo's that are listed for less than the intrinsic value of the house. New houses and non-repo houses are still dead and the kids graduating college are working for $10/hour.

So how the hell is the housing market supposed to improve fundamentally?

Seer's picture

Obviously this starts to encroach upon the notion of questioning the very premise that everything centers on- perpetual growth on a finite planet.  Neither Kyle or any other talking-head is going to go here as it'll verge on questioning their own relevance/importance (I mean, really?, do I need someone to tell me that Food, Shelter and Water are the most important things? [though these "advisors" don't come out directly and say so, in the end that's what they're "buying" for their clients]).

Those who don't understand reality look to the talking-heads to make a cover story for them.

Seer's picture

Yeah, and what does it mean?  Over-done?  Under-done?

When insiders miss the inside joke one has to wonder if there's some sort of failure to communicate...

Cash2Riches's picture

Debts worldwide are inevitably going to explode. Once that happens currencies will collapse globally. At that point you better hope you hold enough gold and silver to take you into the new financial system.

Keep Stacking Gold and Silver. Protect your wealth.

Seer's picture

"new financial system"

Meet the new boss...

I'll skip this one, thank you.  Instead I'll just look to go directly to something that's not predicated on perpetual growth, as That will be the ONLY surviving model/"system."

Snakeeyes's picture

Yup. The Japanese debt will explode like ours and Europe. Poverty here we come!


ZeroAvatar's picture

I gotta tell ya, silver bug:  You seriously disrespect the Tylers when you jump in, 1st comment, say a few words as if you really cared about the post, and then



Newager23's picture

I really like Kyle Bass, always have. He is brilliant and an awesome analyst. However, his choice to invest in this housing recovery might not payoff. This year is shaping up to be very volatile, and the only reason the housing market is currently expanding (slightly) is because of the Fed's stimulation. Our economy is manipulated and at risk - because of that manipulation. I find it ironic that he is betting against Japan because of the persistent manipulation by their central bank, but is betting on our housing market recovering WITH central bank manipulation.

He has bought gold in the past, but did not bring it up in the conversation. Clearly he is not panicking or fearful of an economic collapse. But what happens when this "debt bomb" does explode. Does he really think our "debt bomb" will be immune and not be closely correlated to Japan. I say, watch out. I say, once one debt bomb explodes they all explode. So, a bet on the housing market seems pretty risky to me. Let's see what happens in 2013. I don't think it will be as smooth as 2012, where the DOW and SP decided to have a nice double-digit rise.

If the economy decides to roll over in 2013, the housing market in the U.S. is going to begin another crash in my opinion. I expect housing prices to fall back to 1995 levels. I'm a bit of pessimist in this regard. But my bet is that people will lose their jobs and be forced to move in with friends and family. I'm expecting a plethora of empty houses across the nation. And a checkerboard effect in many neighborhoods at night, where you have many houses with no lights on.

If we are going to get a housing recovery, that basically implies that the Bernank is going to pull off this print and grow strategy. And Obama is going to enjoy a stable economy during his last term. Somehow I think that is a long shot.

My bet is on hard assets and precious metals, including gold and silver mining stocks.

www.goldsilverdata.com (for mining stocks).





fonzannoon's picture

Am I way off for envisioning Bass/Gross etc. owning the mortgages, the banks owning the homes, the sheeple renting the homes and the fed covering the banks if the sheeple can't pay the rent?

Basically the banks are the angry guy, and Bass and Bernak are standing behind him, and we are "Stu".


847328_3527's picture

I don't agree with Kyle abut housing. True, there are a handful of locations where prices seem to be temp stabilizing Ex: The Aliens want Cali (Irvine, etc for example) and some investment companies grabbing a few neighborhoods (that then get run down since renters don't give a hoot abuot caring for a house they don't own).

But overall, unemployment and the massive shadow inventory (now 9 years of supply according to the NYT) will continue to press prices downward. As oil prices rise, people will be further pressured. My guess is housing will not "recover" for a generation (30 years).

Look at Japan now 20 years down the road and much worse off.

secret_sam's picture

I also disagree with what I think is Kyle's *tone* on housing, but could he possibly just mean it'll stay flat indefinitely?  That's obviously a lot better than the long bond...

Seer's picture

These folks ARE the oligarchs!

Those that have big megaphones and REALLY tell the TRUTH end up being nailed to a cross (or some such).  Bass, Gross, Rogers et al tell partial truths, enough to make them appear as less red meat come the time when the masses erupt.

As you note/question, the flaws are apparent when you dare raising more than superficial questions (advance more than a layer or two under the surface).  Many people are willing to stop short because they're not wanting this big game to end, they're wanting to be just like (or get as close to) folks like Bass as possible.

Deception is a big part of nature.  Humans are OF nature.

billsykes's picture

 I am long physical multifamily this yr and for the next 3, after that.... no idea. Kyle on the other hand is going whole hog and doing subprime, which is a bit more ekk to me. 

I think the fed can print and grow, I just would book profits and structure offshore for possible downside protection, if the thing doesn't play out, fuck it and walk away with your accumulated profits, if you cannot restructure. That's the new capitalism to me. Trust nothing, pull everything out as fast as you can and as much as you can, recession/depressions happen every 5 yrs so expect it and live and structure it accordingly.


bilbert's picture

Yep - I listen pretty closely to Kyle, and found myself wondering, WTF??

After a couple quick scenarios, I came up with this:

Nobody asked Kyle about his thoughts on hyperinflation happening in the U.S. in the next 12 - 24 months.


r3phl0x's picture

True hyperinflation (50% or more per month) is unlikely in a fiat currency as large as the USD or EUR. The Fed would literally have to create ~$5 trillion per month.

Sooner or later we'll see very high inflation, but not a true hyperinflation, at least not in 2013.

Calmyourself's picture

Unlikely as a shortage of fiat paper currently on hand?  Disagree, the printing begins where the confidence wanes, printing is a result rarely the trigger.

BlueCheeseBandit's picture

There's a lot of USD in the world. If confidence in USD fails, it will be coming back home.

Seer's picture

I love it when I see people who actually understand reality!

I think it irrelevant, however, to label it anything other than "currency collapse."  Currency collapse is what the real issue is; and, as you note, this can very easily/rapidly happen should the bulk of humanity, which is OUTSIDE of the US, decides to quit playing the "money for nothing" game...

Currency collapse wouldn't be a good thing for Bass, not with the sub-prime cards that he's holding.  He needs to talk around it while he suckers others into the lair (for the off-loading of his shares).  This is how it all works, does it not?  If you're buying you're quiet; if you're selling you make all sorts of noises/appearances.

Seer's picture

And to (attempt to) provide a visual...

Think this as the release of a stretched rubber-band.

OR, perhaps more appropriately:

The back-end of a slinky catapulting over its head as it bounds down the staircase.

MyBrothersKeeper's picture

Great post in general. However I think you are missing point on Bass post.  He likes non-agency RMBS NOW because he feels housing prices have bottomed out.  Non agency doesn't have, in his mind, the same risk it did before.  Non-agency yields are 6-8% and will compress driving prices up.  But why are you under the impression that he thinks this is a long term play?  I have heard him allude to the next year or two in this thesis.  He said when Japan does bust it will be bad for all of us but also says it's impossible to predict the bust.  If it looks more and more probable in that 18-24 mth window i'm sure he'll go back to what he did in 2007 which is finding the best things to short....probably Euro banks or specific industries. No good hedge fund manager has a real long term play. When he says the Japan result looks way more obvious than even the sub-prime crisis in US did in 2007 than that is saying something.

Seer's picture

"he feels housing prices have bottomed out"

That's the point of argument right there.  And as others have noted, the litmus test would center around wages and employment.  For his position to hold it would necessitate that wages and unemployment stabilizes (and for growth to occur would require increasing wages and increasing employment AND increasing interest rates- and, in a grow-or-die environment we'd then be requiring a pretty big reversal here).

I'm thinking that his position is status quo, it has all the look and feel of someone who didn't get the memo that growth is dead (note from Mother Nature).  If this is not the case then he's doing a GS (telling clients to buy when you're selling).

BidnessMan's picture

My bet is the foreclosure system will get overwhelmed and people will just stay in their house. Certainly what is happening in Florida. More and more "zombie" foreclosures where the lender does not actually foreclose. Because then they would owe taxes and maintenance on the property. So they don't actually foreclose, and dont have to notify the Borrower either. Borrower moves out, but still on the hook for the property!

So once people wise up, they will stay in the house and never have to leave. The lender does not want the property to add to their existing REO inventory, and the cost and liability that goes along. Moving out just because you can't pay the mortgage is foolish.

Seer's picture

Great summation.  A Catch-22 if ever there was one.  I wonder where Bass accounts for this (reality)?

Instead of Scarlett Letters being scribed on folks' foreheads we'll be able to measure based on how run-down properties become.  Those who cannot make mortgage payments are not very likely to perform home maintenance; and should they become unemployed the very necessary maintenance like plumbing and roofing repairs are going to be neglected -> fast-track to a condemned building status (though there's likely not going to be folks plastering notices/tape on the buildings).

BlueCheeseBandit's picture

I agree. As much as I like Bass, I can't agree with his housing thesis. Where are the new jobs and income to support housing prices? Who is buying? Certainly not the young, with no jobs and student loans.

I also think his thesis of Europe, then a few years later Japan, then a few years later the US is odd. IMO, Europe can't collapse with the rest of us looking on saying sucks to be you. I think it all go together. His relative timing may be right, but I don't think it's separated by years.

cranky-old-geezer's picture



The Japenese debt bomb will explode on its own. As will all western debt bombs. It is only a matter of time.

Actually you and Bass are completely wrong, it won't ever "explode", just like the US debt bomb won't ever "explode".

These nations have central banks that can print their own currency and set interest rates.  Long as they can do that, no "debt bomb explosion".

Betting the printing press will stop printing is idiocy, as the last 4 yrs has shown.  Central banks are linking QE termination to fantasies that will never happen.  BOJ says 2% inflation would stop their QE.  But there won't ever be 2% inflation the way they measure it.   Just like here in America, Fed says QE stops at 6.5% unemployment, but we won't ever see 6.5% unemployment again.

Why?  Because BOJ and Fed have drained so much wealth out of their respective economies, there's not enough left for any sort of economic recovery.

We're stuck in -3% to +1% GDP growth from now on, and it would be worse if you leave out govt spending, which comes mostly from borrowing these days, which means printing more currency, aka more QE.

This pattern isn't gonna end.  We're stuck in this borrowing and printing paradigm from now on. No, it isn't a cycle we'll come out of.  It's structural now. 

Same thing will happen here that happened to ever other financial empire in history.  Steady debasement of the money till it's worthless.

Whether Roman coins or Japanese Yen or American dollars, same thing happens, steady debasement till they're worthless.

BeerBrewer09's picture

go back to the pink panties please!

Tao 4 the Show's picture

Cranky - I wonder about the situation in Japan along similar lines. However, these days, massive amounts of money (i.e. expectations on ability to spend in the future) are wrapped up in the JPY bonds. Certainly, the upcoming and current retirees could get spooked about that.

So, what happens then? One answer is dumping of these bonds. The JPYgovt has a couple of options: 1. Disallow selling of the bonds, 2. buying them directly with newly printed money, or 3. allowing yields to rise and crash the govt in short order. They are not as insulated as the U.S. in its reserve currency role. Thus, it would appear Japan is in for rough times sooner than later.

Option 1 is dramatic and rocks the world financial scene. Option 2 leads to disabling inflation. That makes your suggestion on target, but my guess is that Bass is also targeting this possible outcome.

BlueCheeseBandit's picture

Controlled interest rates mean a bond crisis morphs into a currency crisis. On this I agree with Bass wholeheartedly.

in4mayshun's picture

Sorry geezer, you're just wrong...

They can slowly debase a currency until the 50 million people on welfare can no longer buy basic essential items like food and electricity. After that point, society unravels because of the rampant looting and crime. Also, the millions of people making minimum wage stop going to work because, well, what's the point? Sure, you could raise wages and social security and welfare benefits, but the boat rises with the tide. If everything rises then interest rates must rise also and it's game over. That's what's so scary about the situation were in, either we let the banks implode or the banks let society implode, and I'm betting that the banks get their way.

Why else would they be trying to confiscate guns if they didn't know chaos is coming?

Calmyourself's picture

Chaos, yes.. The gestalt points to ultimately chaos and PTB are planning with a set of battlefield prepping moves that can only be gamed out manuvers.  This study out of West Point is interesting, setting the table.  I like to loo k at the table and see just how set it is for the end game.  Main course will come out of the ktichen in this 2nd term..


Seer's picture

Somewhere along the line REAL REALITY will surface, and it don't matter squat about what numbers we're playing with.  Mother Nature cannot dole out the volume of resources necessary to provide what we're currently trying to churn through let alone any that would push the growth needle.

Govts, virtual human constructs, cannot create anything.  So... I'm taking Mother Nature over govt for the win, Alex.

A crash WILL occur (either in the form of full-out realization OR war).  Just not thinking that people are going to take this overshoot thing lying down.

Rick Blaine's picture

ACTUALLY, YOU are wrong because Bass would agree with everything you said.

If central banks just continue to print money (as they probably will), at SOME POINT, interest rates will really start to go up and the central banks won't be able to do a damn thing about it.

...and that is when the debt bomb explodes.

That is, AT SOME POINT, those holding government debt are really going take it in the ass - either by simple not getting their money back or getting paid back in a seriously devalued currency.

Either way, governments are going to lose their ability to borrow more and more to pay back the bond holders.

...and that is when "we" (e.g., Europe, Japan, the U.S.) really start living within our means.


OldPhart's picture

Nice of the exchange to shut down all trades and sing 'Happy Birthday' in the background.

surf0766's picture

He's long housing  because of the time frame it has already been down? 

Half_A_Billion_Hollow_Points's picture

he doesn't put like this, but i think he's just frontrunning the fed like everyone else

surf0766's picture

Do housing prices fall or rise with the dollar crash?


knowless's picture

in real terms that depends on if you happen to be looking in a place with a functional economy left or not, i'de avoid vegas, and buy in places that make real shit.. however doing the opposite of what i think makes sense and is probably a better dollar play.

Seer's picture

"buy in places that make real shit"

Real shit as in really shit, as in most worthless products today?  or, as in stuff that really matters (for our future world)?  Do you know if you've got it picked right?

Further, one can make stuff but that don't mean people can buy it.  The import/export paradigm is going to become rather shaky...

gjp's picture

Hard to take all these 'thoughtful' guys speaking real truth about many of the world's problems yet actively contributing (parasitically) to the biggest problem of all.  Gross, Bass, Hendry are three that come to mind, and they all piss me off even though they are often talking from the same playbook as much of the ZH faithful, just not the whole story.

billsykes's picture

they are the symptom not the cause (cept bill, none of them mgt much money they are just internet famous), Hendry said it himself- if you want to make money since the 1960's finance is the way to go.

He is right.

secret_sam's picture

Plumbers don't tell folks to fix their own toilet, either.

Seer's picture

If they try an lay blame on anything other than our flawed paradigm of perpetual growth on a finite planet then I point my finger at them and call them a propagandist (for the grow-or-die system).

MyBrothersKeeper's picture

He's long housing because he believes the, from a pricing persepective, things have bottomed out.  He has most money in non-agency so he is not front running fed per se.  He is long non agency because they are paying 6-8% yields and feels the yeild will compress and drive up price.  That's my understanding.  If he shorted the same things in 2008 and made 591 million I wouldn't bet against him. Besides he isn't the only one...PIMCO Income has about 20% in on agency mortgage which helped it get 20+% last year.

urbanelf's picture

Happy Birthday!

WhiteNight123129's picture

Short Japanese bonds and Long Japan Tobacco, tobacco shares will increase dividend even in deflation, and if you have hyperinflation tobacco sharex will trounce bonds.

You have positive carry while waiting and now currency risk.