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"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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Sat, 01/19/2013 - 10:27 | 3168670 retiringteach
retiringteach's picture

correct! -- only the zh sheeple (fools) keep waiting for the day the sun wont rise

Sat, 01/19/2013 - 12:52 | 3168866 Calmyourself
Calmyourself's picture

Keep us in the loop, let us know how that pension is treating you in 3-5 years.  Even a slow grind will put you in between millstones teach..  The sun will rise but you may not.

Sat, 01/19/2013 - 02:42 | 3168487 sitenine
sitenine's picture

I don't get it. If bond rates are low just because central banks force them there (and everyone knows it), then why do these pundits continually claim victory by citing the low bond rates? Why do they want to believe in the delusion that the rate still has an inverse relationship on investors faith in said product? Laughable. Kyle Bass is right on - he's woken me up to a lot of truth.

Sat, 01/19/2013 - 02:58 | 3168497 newengland
newengland's picture

The Ministry of Truth and Central Banks wishes the proles to be herded into the killing fields, for the profit and power of Big Brother.

Sat, 01/19/2013 - 03:20 | 3168516 newengland
newengland's picture

Here we stand, for better or worse. The Republic.

Kyle Bass is correct. Math vs magic.

Math wins every time. History says so.

Sat, 01/19/2013 - 10:50 | 3168689 Calmyourself
Calmyourself's picture

History never dealt with or described an incredible effective MSM dumbing down the population.  History records herds running over monetary cliffs as 2+2=4, every time.  What if 51% of folks think 2+2 = 5, what happens then? DSM-V is a better indicator this time then history we are in uncharted psychological territory.

Sat, 01/19/2013 - 04:07 | 3168533 LMLP
LMLP's picture

in that Rickard's videos per last chapter of his book Part 3 and 4 of 5   -apart from his gold value scenarios $3000-44,000/Oz estimating $7000/Oz Germans must have seen the 4th scenario...Chaos (his most likely scenario) regarding US presidential executive orders section.......dictatorial powers in economic emergencies possibility to seize European gold assets held on US shores...(nuff said) seems clear the US is explicitly doing everything possible to devalue USD....and that the trigger for gapping higher GOLD n SILVER will be reserved for any time we see deflation occur as the last financial weapon to maintain an inflationary environment In the mean time China will suck in as much physical as they can and think they have been accelerating that process....only way to defend against US monetary actions....Truley the ONLY universal money FUCK FIAT!

Sat, 01/19/2013 - 04:38 | 3168539 slackrabbit
slackrabbit's picture

Is it just me, or did those CNBC presenters almost seem 'real'.

I guess their ratings must be making them desperate, but I'm sure it'll pass...

Sat, 01/19/2013 - 09:21 | 3168626 HeatMiser
HeatMiser's picture

That's because Kyle grabs them by the short hairs if they miss quote him.

Sun, 01/20/2013 - 19:08 | 3171316 edifice
edifice's picture

Which he did, at least twice, during this interview.

Sat, 01/19/2013 - 04:42 | 3168540 nothing can go wrogn
nothing can go wrogn's picture

""When the central banks are buying all the bonds there is no consequence for fiscal profligacy."


Sat, 01/19/2013 - 05:43 | 3168556 silverdragon
silverdragon's picture

Kyle is the man>

China fucking Japan by boycotting Japanese goods will tip the scales.

Payback is a bitch.

Sat, 01/19/2013 - 06:14 | 3168564 silverdragon
silverdragon's picture

Good luck to those betting agaist Kyle, they're gunna need it.

Sat, 01/19/2013 - 07:21 | 3168575 Diesel Seven
Diesel Seven's picture

Bass is the man--he gets it. This will one day, all end with tears and gnashing of teeth. However, many "experts" are saying that Abe's inflation targeting and super-duper monetary and fiscal actions, if in fact implemented, is a paradigm shift. Japanese stocks might be a good bet IF you have to invest in equity AND you are able to hedge the yen effectively. (In a contrarian view, I think the Chinese and Koreans will revel in buying Japanese goods as they enjoy the shift is purchasing power parity). Down side is for the Japanese citizens that don't have a majority of their wealth in equities. Just the petro inflation resulting from a rapidly depreciating yen will be very effective at taking away the "under-funded" standard of living of the average Japanese citizen, while maintaining the status-quo for the elite. Europe is on the same path, just in a somewhat different way.

The U.S. feels a little different. All ZH readers should understand what the term "petro dollar" means. Does anyone else find it somewhat peculiar that in this current tree-hugging, Al "I invented the Internet and global warming" Gore environment, frack drilling is booming and domestic oil/gas exploration is expanding rapidly, despite a relatively liberal executive branch and senate. It seems like the U.S. is setting itself up for the upcoming currency (and actual?) wars.

After a lifetime if listening to Fed Chairs babbling about their all-important "MANdate" (defined as either a congressional mandate for the Fed to seek price stability and full employment, OR when Ben and Tim hook-up for a little male bonding time), it's clear now that the politically-connected can and will control the central bank's actions, just as Abe is attempting in Japan. Put in simple terms, if Congress changed its mandate to "increase the unicorn population", Bernanke would be telling the banks to be buying ponies, strap horns on their heads, and label them unicorns with a Sharpie, so the Fed could buy them in exchange for freshly printed money.

In short, the print-and-spend policies will continue until either the positive balance of payments countries rebel or scarcity of resources causes conflict (i.e. we run out of imitation unicorns).

Sat, 01/19/2013 - 09:06 | 3168598 Tom Green Swedish
Tom Green Swedish's picture

Ok, so he is basically saying that Japan is going to trigger a huge global problem in about 2 years.  Nice article.  How do I make money off it like he did with the subprime bond thing?  Short the entire world or buy Japanese Stocks? 


We'll use 1991 as a reference figure for Nikkei 225 versus S&P 500.


Stock Market Perfomance 1991 - 2012

Nikkei225 -  -64.64 Percent

S&P500 - 350 Percent


Now 1984 - 1991 (The Japanese Eighties Buying Spree)


Nikkei225 - 200 percent

S&P500 - 100 percent




1984  - 2012


Nikkei225 - 9.95 Percent

S&P500 - 800 Percent


Tough Decision here.


As for the China and Korea thing, their are underdevelped nations in the Pacific rim with much more potential, being the Japanese I would say they could care less about China (being they will lose their advantage relatively quick), and decide to keep Korea as a partner.

Sat, 01/19/2013 - 09:46 | 3168644 machinegear
machinegear's picture

Is Kyle a priest?

Sat, 01/19/2013 - 10:05 | 3168657 Zer0head
Zer0head's picture

No, Bernanke is a priest, Kyle is a soothsayer

Sat, 01/19/2013 - 12:30 | 3168813 i.pagnottella
i.pagnottella's picture

he is from Texas

Sat, 01/19/2013 - 16:52 | 3169417 Cathartes Aura
Cathartes Aura's picture

lol answer to the question. . .

Sat, 01/19/2013 - 10:14 | 3168660 andrewp111
andrewp111's picture

Ok. When the interest costs become unbearable, Abe starts minting trillion yen coins and makes the debt go away. The yen goes down and everything stabilizes at a different exchange rate.

Sat, 01/19/2013 - 10:18 | 3168664 lindaamick
lindaamick's picture

The current global game of endless money printing by Central Bankers will continue until confidence by the masses in this situation is lost.  I do not know what percentage of the populace globally it will take to tip the scales.

One of the successes of the global oligarchs is the indoctrination of peoples globally in the current system.  It now takes a larger number of citizens to lose confidence and tip the scales.  Plus due to there now being only one game/system, the buyin among corporate and government oligarchs in countries is greater than in history.

The fact is that given the current global relative fiat system money printing/increase in currency is required to pay back the debts WITH INTEREST.  It's the interest in the Debt scheme that is driving this money expansion and it is intrinsic to the scheme. 

At some point the losers will have to rise up or else starve.  Starvation is a big motivator.  Since the system is global this could take a long time.

Sat, 01/19/2013 - 10:49 | 3168688 Atomizer
Atomizer's picture

The Governments are competing with each other. After each Grifter skims off more profits, panic ensues to find makeup monies to replace fraudulent transactions. Generally, new taxes & higher fees aid in the recovery process. Until it doesn’t work any longer.


Wash, rinse and repeat

Sat, 01/19/2013 - 10:39 | 3168672 CTG_Sweden
CTG_Sweden's picture

It is true that Japan has a larger public debt than the US and Western European countries. On the other hand it seems as if the Japanese government has smaller pension obligations than other countries. It seems as if Japanese senior citizens rather than pension rights hold government bonds, directly or indirectly.


Furthermore, the net indebtedness of Japanese households seems to be lower than for Western European and American households.


Therefore, very large portion of the total debt in the Japanese society is concentrated to the government. So therefore the Japanese debt problem is not as serious as it looks like.


My impression is also that the Japanese government intends to reduce the public debt by creating some inflation. If the Japanese general public still continues to buy government debt the result will be a smaller public debt adjusted for inflation. Instead of reducing pensions, like they did in Sweden in the 1990s, they make pensioners poorer by causing more inflation.


However, I agree that the Japanese governments so far don´t seem to have taken the debt problem seriously enough. They can´t continue like this. It´s unsustainable. They got to raise taxes and cut spending.


The most clever way to raise taxes is probably to raise taxes on imported goods, such as gasoline and diesel. If demand for imported goods like gasoline and diesel slumps, the result on aggregate demand in the economy is very limited. You get more unemployment and a larger impact on aggregate demand if you raise taxes on things that are produced domestically.


The most clever way to cut spending is to cut spending by doing things more efficiently. For instance, you only need a fraction of the existing number of teachers if all lessons are broadcasted over the Internet. If you do that teachers will primarily be needed for grading papers and tests.


If Japan had made all the “easy” tax increases and spending cuts, like those I have described above, 10 years ago they would probably have been better off right now. Now they probably also have to make more painful tax increases and spending cuts. But they seem quite reluctant to do that. But I´m not sure that they are more extreme in this respect than most other governments. Furthermore, they haven´t even made the “easy” tax hikes and spending cuts yet.

Sat, 01/19/2013 - 10:35 | 3168674 Zer0head
Zer0head's picture

something to think about from the father of financial blogs

Sat, 01/19/2013 - 10:42 | 3168682 ebworthen
ebworthen's picture

Bass on Japan:

"Government debt is 24 times revenue...."

How does that work?

I mean, in a world that makes sense.

Sat, 01/19/2013 - 13:37 | 3168982 css1971
css1971's picture

It works just fine if you just do as you're told and don't think about it too much.


Apparently that's exactly what an entire country of 128 million people have been doing.

Sat, 01/19/2013 - 10:58 | 3168691 Atomizer
Atomizer's picture

Based on Mr. Bass warning’s. Which Japanese financial officials are on suicide watch?


Sat, 01/19/2013 - 16:52 | 3169414 Accounting101
Accounting101's picture

The Japanese Ponzi scheme will implode any minute now. Any minute I tell you. When will we hold failure accountable? 

Sat, 01/19/2013 - 19:16 | 3169667 Atomizer
Atomizer's picture

Ok sparky, how will you continue to ratchet false claims? Your gig is up. From a dormant site. You must think honey boo boo is your genetic bloodline because you read it on . /LOL

Sat, 01/19/2013 - 11:41 | 3168737 virgilcaine
virgilcaine's picture

If he were properly dressed I might take would he has to say seriously, a sweatshirt under a sport coat?  No way.

Sat, 01/19/2013 - 12:59 | 3168881 Calmyourself
Calmyourself's picture

Absolutely, did you see the rags Jesus wore to the cross and really who dressed Ghandi or MLK, belt should match the shoes boys..   I for one welcome our fashion overlords to the party.  This vapid shallowness should be relegated to the ash heap where it belongs or you forgot your sarc tag.  It is what is inside the book, not the cover.

Sat, 01/19/2013 - 15:15 | 3169209 Atomizer
Atomizer's picture



If he wore a hoody, spoke like a nervous CEO.. would that make you comfortable to see the forest through the trees?

Sat, 01/19/2013 - 16:55 | 3169419 Cathartes Aura
Cathartes Aura's picture

pasties & a thong?

Sat, 01/19/2013 - 12:57 | 3168876 FLHRS
FLHRS's picture

With Bass betting on the super cycle I am surprised he believes in a housing recovery.  The demographics side with the super cycle and against housing. 

Sat, 01/19/2013 - 14:09 | 3169065 AynRandFan
AynRandFan's picture

He is apparently betting on rampant inflation.  I saw one interview in which he suggested non-agency MBS's.

Tue, 01/22/2013 - 16:33 | 3176687 NaN
NaN's picture

He mentioned the average recovery (turnaround) time stats, 5-7.5 years for house+banking crisis; that is the strongest and simplest model to trust. It may take more time for a clear recovery, but if you want to catch the bottom before interest rates rise, now appears to be the time. 

Treasury was selling MBS in an attempt to unwind from being buyer of last resort, but then it stopped, and started buying again about 6 months ago.  As far as I know, Treasury selling MBS should suppress prices, so that unwind process could take a decade which means the upside will be very slow. Unless interest + inflation rates rise. 


Sat, 01/19/2013 - 13:09 | 3168904 linrom
linrom's picture

Bass has so much money behind this trade--all his nickles worth astounding sum of money, which is probably less than GS spends on lunch money for its key employees.

Sat, 01/19/2013 - 13:18 | 3168920 resurger
resurger's picture

"every 1% rise in their cost of capital (or rates) costs them another 25% of revenue!."


Sat, 01/19/2013 - 13:50 | 3169018 gnomon
gnomon's picture

Nothing an extended worldwide banking holiday won't solve.  Then they will try little reboots every once in a while and shut down immediately for another holiday, if the fix won't work.

And in the meantime, (if world war does not erupt), it will be pretty much martial law lockdown for the whole "civilized" world.

Sun, 01/20/2013 - 00:49 | 3170149 TumblingDice
TumblingDice's picture

How are those Japanese zero coupons doing now by the way?

Sun, 01/20/2013 - 21:04 | 3171565 f0shijapan
f0shijapan's picture

whats so bad about picking up dimes in front of a bulldozer, its moving so slow that u will never get caught. and also its more like picking up $100 bills in front of a bulldozer. bass is right in the end  but like he said this is a bulldozer not a bullet train 

Mon, 01/21/2013 - 13:37 | 3173114 dadichris
dadichris's picture

pretty easy to like that guy Bass. why isn't he the Treasury secretary?

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