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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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Fri, 01/18/2013 - 23:30 | 3168331 Aurora Ex Machina
Aurora Ex Machina's picture

Well, I've three things to say:

#1 Spanish Revolution did actually work - let no-one lie to you about that [as for the Communists; we no longer have a great Stalin-in-the-sky to direct being a bastard]

#2 Although many are weak and feeble, the underlying empathy and connectivity of the 1.5's and all of the 2.0s is not to be under-estimated. The race survived through a larger bottle-neck over 12,000 years ago, you'd be surprised about how co-operative people will be when there's nothing else but them.

#3 I would prefer, to be honest, the Ascension way; however, if it comes to the fragmented futureTM please don't worry. Provisions have been made.

 

 

It's still beautiful out there, despite the damage. Moon will always mirror the sun, eh?

Sat, 01/19/2013 - 01:19 | 3168429 CrashisOptimistic
CrashisOptimistic's picture

You just don't understand.

Argentina in the early 2000s Had Its Own Oil.

Brazil ditto.

Russia is the largest oil producer in the world.  None of them had to buy oil.

Zimbabwe eats local food.

 

Japan and the US don't.  Our Food Is Shipped.  Thousands of miles.  It won't be if oil can't be bought.

Frankly, monetary this and that is not the mechanism of Armageddon because money (and gold) has value only in your head.  The value is a human invention.

Oil's joules predate all that silliness by millions of years.   Oil scarcity is what will take it all down, but regardless of that, you need to sit down and figure out where food comes from.  It's not coming to NYC grocery store shelves from farms.

It's coming from trucks, and they run on oil.  If Japan can't buy any, people will starve.

Sat, 01/19/2013 - 10:35 | 3168676 Calmyourself
Calmyourself's picture

CIO is right here.  Japan is a very different country in terms of density and its farming /food procurement strategies.  Japan will in large measure starve without oil, however Japan has gold, technology, and nukes it will get oil it will be very messy however.

Sat, 01/19/2013 - 20:53 | 3169781 Aurora Ex Machina
Aurora Ex Machina's picture

Late response, but yes: You're spot on, and yes, I do understand.

 

Look over the #6 points, and tell me again how Japan survives?

Sat, 01/19/2013 - 18:27 | 3169587 Seer
Seer's picture

While there may not be an instant mass starvation (but then again no one can say for certain that there couldn't be) all points lead to a less bright future.

All of these countries that you noted obtained outside assistance.  I don't believe that this can be counted on in the future, not if/when the US dives hard: or even if it doesn't- it doesn't have any money with which to assist!

Japan stay afloat because it still has exports going on.  At some point, as energy costs increase, those exports are going to experience ever-increasing downward pressures on margins.  It's a vicious circle.  One has to fully get the point I've been making for quite some time about "economies of scale in reverse" to understand how things can unravel quite quickly.

Fri, 01/18/2013 - 23:04 | 3168285 Aurora Ex Machina
Aurora Ex Machina's picture

#2 specifically mentions "energy independence".

At what point does that "fails to start and end at the correct point, which is oil"?

 

No, really, I'm interested how you dived in there with that dismissal, if you'd not read the entire #6 point plan.

Sat, 01/19/2013 - 01:27 | 3168436 CrashisOptimistic
CrashisOptimistic's picture

Nod.  Did, but not focused in that "all of the analysis" wasn't pointed only at you.  You just happened to have an attention getting reply button.  I was pointing mostly at all above your comment.

But with that as preface, there is merit in noting that there is entirely too much intellectual translation of "oil" into "energy".

There is no energy problem.  There is an oil problem.  Energy doesn't translate to oil.  Only oil fuels bulk transport, and only bulk transport feeds the world.  Only oil fuels commercial tractors and combines to get 50,000 acres planted before planting season expires.  Not energy.  Oil.

It's very dangerous to lump them together.  The nuclear plants shut down and electricity shuts off.  That doesn't starve people.  Stopping the trucks does.

Sat, 01/19/2013 - 01:58 | 3168462 r3phl0x
r3phl0x's picture

We could build electric trucks and electric farming equipment and electric trains and run em off the nooks, or natural gas, or whatever.

But I doubt it'll happen in time.

Sat, 01/19/2013 - 03:16 | 3168514 CrashisOptimistic
CrashisOptimistic's picture

 

Since you concluded the right result, we needn't go into this in too much detail, but in general NO, we can't build electric trucks or electric farming equipment, and nat gas stuff you see on the roads have very short ranges.

There are 745 watts per horsepower and the engines required to get that 50,000 acre field planted before planting season expires requires 400 horsepower.  298,000 watts.  

The N word.  Never.  That's never going to happen, and you may feel more comfortable concluding that because there is no time rather than physics precludes.

Sat, 01/19/2013 - 15:26 | 3169230 Lost Word
Lost Word's picture

If there is shortage of oil, supply and demand will allocate it to the most important place, and perhaps that will be to farms and food trucks. If the farm or local business has a natural gas supply pipe to their home or business, long range miles per gallon would not be a problem for local operations after conversion to natural gas engine systems. Nuke plants have combustion engine emerency electric generators that run on diesel, but they could be converted to natural gas. Many local buses and trucks now run on natural gas, or propane. There are nationwide natural gas networks, and local natural gas fueling stations could be built quickly for long distance travel. Many small vehicles are now flex-fuel, could run on 100 percent methanol or ethanol. Natural gas can be converted to methanol. Natural gas can be converted to fuel oil. Germany and South Africa survived on synthetic oil made from coal. USA could also in the long term. Just more time and money and work. Electric trucks only for short distance local travel, obviously.

Sat, 01/19/2013 - 18:35 | 3169595 Seer
Seer's picture

As someone with a tractor I'm just NOT seeing an electric tractor as being viable.  Maybe I'm just not imaginative enough...

All I can say is that up until the time I got a tractor I had no real understanding of just how important diesel engines were.

For sure, there are/can be "alternatives," just not "replacements."

Fri, 01/18/2013 - 21:42 | 3168138 palmereldritch
palmereldritch's picture

Picking up a dime in front of a bulldozer?...How about a nickel?... forget it....

More like, Gargling Fukushima containment water and thinking it's Dom Pérignon

Fri, 01/18/2013 - 22:13 | 3168200 WmMcK
WmMcK's picture

Bass is long nickels.
"A nickel isn't worth a dime today" - L. Berra

Fri, 01/18/2013 - 23:27 | 3168327 secret_sam
secret_sam's picture

    "A nickel isn't worth a dime today"

It should be soon, though.

Sat, 01/19/2013 - 09:14 | 3168622 BidnessMan
BidnessMan's picture

Nickel is about $8 a pound, so Kyle is still in the money on the 20 million nickels he took delivery on. A little more inflation and his nickels will be worth a dime.

Sat, 01/19/2013 - 18:37 | 3169599 Seer
Seer's picture

Just in time for when a dime is worth a nickel!  My head's starting to hurt!

I'll leave all this money-changer stuff to the pros and concentrate on land and farming...

Fri, 01/18/2013 - 21:44 | 3168140 PUD
PUD's picture

if (when) japan implodes, I find it hard to believe that us housing will be some safe haven. japan is the 3d largest economy on the planet...it isn't greece

Fri, 01/18/2013 - 22:50 | 3168147 Aurora Ex Machina
Aurora Ex Machina's picture

Based on what, exactly?

Break the areas down, please. (And then look at Korean and Chinese competition in each area, and where the factories are).

 

"It isn't Greece":

Exports Stagnant since 2008

Imports Up since 2008

That's a 1k billion deficit, baka.

I don't think I need to reference JPY rates, do I?

 

Sony committed sepukku a long time ago.

 

What you're really bothered about is the $0.9 trillion in bonds and what it could do to the USA.

 

 

Muppet.

Fri, 01/18/2013 - 22:00 | 3168176 unrulian
unrulian's picture

+1

Sat, 01/19/2013 - 18:38 | 3169604 Seer
Seer's picture

-1

Just wanting to provide some balance...

Fri, 01/18/2013 - 21:45 | 3168146 NoDebt
NoDebt's picture

Forgot to add in that Japan's trade deficit is also worsening due to the increased importation of oil.  Since that whole Fukushima thing didn't turn out so well.

Last I checked WTI crossed $95/bbl today.  And they ain't getting our cheap WTI- they're buying more expensive stuff.

I think Japan is in for a world of hurt.  Which will serve as a preview of what's coming here later.

Me?  I'm starting a Payday Lending business.

Fri, 01/18/2013 - 21:46 | 3168149 XtraBullish
XtraBullish's picture

Kyle, whether a fag or not, is definitely a really smart guy and if my Yen short continues to make me a fortune, I'll gladly blow him in front of my wife, kids, and parents. Read "Boomerang" by Michael Lewis and you will see why Kyle Bass rocks.

Fri, 01/18/2013 - 21:55 | 3168158 Aurora Ex Machina
Aurora Ex Machina's picture

Is being gay really that shocking to you? How do you mix Libertarian ethics of "nice atmosphere you've got here; don't fuck with me, I don't fuck with you" with that?

 

Welcome to the 21st Century.

 

[Edit - damn, there's either a ZH bot, or a damn fast trigger junker out there. Live for 10 seconds, refresh, junk. Aggressive algo there, I approve ;) ]

Fri, 01/18/2013 - 22:03 | 3168181 unrulian
unrulian's picture

i'll definately never read boomerang but i had to up you for the blow comment...i actually lol'd for possibly the first time ever

Fri, 01/18/2013 - 21:52 | 3168156 XtraBullish
XtraBullish's picture

Doug Short is full of really bad shit. Wrong on all fronts.

 

NEVER NEVER NEVER underestimate the replacement power of stocks within an inflationary spiral.

Fri, 01/18/2013 - 22:17 | 3168161 ZeroAvatar
ZeroAvatar's picture

I've seen that same trendline chart elsewhere.  Doug didn't invent it.  This is not the rally you are looking for.

http://home.earthlink.net/~intelligentbear/com-dj-infl.htm

  By the way, (is that you, KD?) (I didn't red arrow you)

 

Later:  I read somewhere today Japanese gas prices really starting to inflate.  Makes sense, lot's more oil needed there now, price goes up.

Fri, 01/18/2013 - 22:01 | 3168175 Bunga Bunga
Bunga Bunga's picture

at 103% debt the outcome of inflation is always a hidden government default. good luck.

Fri, 01/18/2013 - 21:58 | 3168170 stant
stant's picture

ah so we do get to burn washington this time

Fri, 01/18/2013 - 22:06 | 3168186 edb5s
edb5s's picture

What a fucking analogy:  "The Fed is the great enabler of congressional spending...and the Republicans and Democrats have 100-foot putts with 40 feet of break and 30 MPH wind and they keep looking at each other saying 'good, good,' we'll just move on to the next hole." 

 

 

Fri, 01/18/2013 - 22:22 | 3168211 Chuck Walla
Chuck Walla's picture

Hiroshima will look like a scout campout.

FORWARD SOVIET!

Fri, 01/18/2013 - 22:25 | 3168216 Yes_Questions
Yes_Questions's picture

 

 

Father Bass, please forgive me for all my sins.\

Said young Faber.

Fri, 01/18/2013 - 22:35 | 3168224 Atomizer
Atomizer's picture

If we just kick start anothel currency carry tlade ploglam, everything will be hookie dookie. Ha ha ha ha!

 

Measuring Carry Trade Activity -2010

While technology has made trading cheaper, investors fear the system is too complex to manage

 

Rage Against The Machine - Killing In The Name – 1993

Fri, 01/18/2013 - 22:56 | 3168244 earleflorida
earleflorida's picture

brief quoted [sic] excerpts from the 1970's, to the "Great Moderation [volcker shock]":

' "But the 'stagflationary' conditions of the 1970's did not prove any more permanent than the Depression conditions of the 1930's or the postwar prosperity of the 1950's and 1960's had been. Indeed, the very fact that during the 1970's the capitalists could not make profits in terms of gold meant that the stagflationary conditions of that decade could not possibly have continued for much longer than it did. In fact, these conditions were brought to an abrupt end by the Volcker Shock of 1979-80, giving way to a new and very different period, commonly referred to as the "Great Moderation." '

' "I believe that it can be safely stated that a 1970's-style stagflation lasting much longer than a decade is economically impossible." '

' "The level of Gold production during the 1970's" '...

' "Therefore, already in the wake of the crisis 1974-75, prices in terms of gold were considerably lower than they had been in 1970. If you look at the trend line in world gold production, you notice that after declining for about five years in the first half of the 1970's gold production bottomed out, though it remained depressed compared to the peak of 1970." '

' "However, the decline in gold prices brought about by the 1974-75 was not enough to turn gold production decisively upward. This took a new crisies within the crisis, which erupted beginning in 1979. This too brought a surge of paper money prices and a sharp deflation in terms of gold prices.' "

' "The result was that the profitability of the world gold mining and refining industry, both relative to other industries and absolutely, soared. The gold industry was the great exception to the lack of profitability of capitalist production during the 1970's. Not surprisingly, beginning with the 1979-82 crisis gold production began a prolonged upward movement that was to continue until the turn of the 21st century." '   

' "For example, in March 1968, at the beginning of the protracted crisis that extended through the decade of the 1970's into the 1980's, the yield on 10-year government bonds was about 5.57 percent. In January 1983 at the end of the prolonged crisis, the rate of interest on 10-year bonds was hovering around 10.5 percent! It wasn't until August 1993 before the yield on the 10-year government bonds finally fell below the levels that had prevailed in March 1968, more than a quarter of a century before." '

end excerpted quotes from 'Kubrick ... a theme of 'Critique Theory' 

Ps. very interesting, but many a gap not fully exploited, imho

Ps2. In the end, we blossomed [saved by the fledgling EU?] and Japan faltered??? Perplexing...

thankyou Tyler

Sat, 01/19/2013 - 17:46 | 3169515 earleflorida
earleflorida's picture

supplement I: "The Rise and Fall of the Japanese Miracle"    ref__ http://www.mises.org/daily/298

supplement II: "The Japanese Stock Market"  [1950 - 2013] plug-in/ update

http://www.tradingeconomics.com/japan/stock-market 

Fri, 01/18/2013 - 22:46 | 3168250 joego1
joego1's picture

The Japanese are assembling their nukes. it is time for an honorable war.

Fri, 01/18/2013 - 22:58 | 3168273 palmereldritch
palmereldritch's picture

I believe those nukes were already inflicted seppuku-style on 3/11....

Fri, 01/18/2013 - 22:54 | 3168261 THE DORK OF CORK
THE DORK OF CORK's picture

I have to say I don't like this dickhead............

 

Every so often Zero hedge falls in man love with some guy.............thinking he is a tough guy or something.

 

These guys are a nothing.

They have tiny little balls , but like strutting their stuff.

 

In contrast you have the real dangerous men ...............

 

http://www.youtube.com/watch?v=74_pFXwRgCE

Fri, 01/18/2013 - 23:02 | 3168283 fonzannoon
fonzannoon's picture

Bass comes off as smug. So does Schiff. They have run the math and see the end point and don't let bullshit get in the way. They are also in the business of managing assets. So they will talk their book as close to what they really believe as possible, and have a better plan B than any of us has plan A if what they believe ever comes true.

Sat, 01/19/2013 - 12:29 | 3168353 blindman
blindman's picture

bingo, money system.
aka joker and sincere little eichmann,
good nazi true believer syndrome on
mood altering or enhancing medication,
never mind alcohol, entertainment or
drug induced insanity; we are talking
belief systems here. contradiction and
absurd hypocrisy be damned
but i wouldn't call him a dickhead.

Fri, 01/18/2013 - 22:58 | 3168274 americanspirit
americanspirit's picture

The only problem with KB's analysis is that it is premised on the housing market remaining essentially the same. He is betting that the basic model won't change. But if you look around the world there are alternative housing market models that are working and that don't support Kyle's model. Take a look at the Danish co-housing model - which is being implemented in the US BTW. If you want to argue that the vast majority of US people are sheeple who will never embrace an alternative model, which takes brains and initiative to understand and implement, I won't argue with you but at the same time I think that as brilliant as KB is he is vulnerable to the classic error - thinking that what has always been. always will be.

Sat, 01/19/2013 - 00:10 | 3168377 pain_and_soros
pain_and_soros's picture

Don't see that as his Japan case uses the Japanese "thinking that what has always been. always will be" as the reason most of the Japanese don't see the debt bomb/inflation problem lurking after 20 years of deflation...

I don't agree with his views on US housing - unless he thinks the Japanese will use their considerable US debt holdings to buy US real estate (maybe a hedge against radioactivity? lol) - I think the only "safe" asset for countries & individuals is physical gold bullion

Sat, 01/19/2013 - 16:41 | 3169387 Cathartes Aura
Cathartes Aura's picture

bingo.

there are alternatives to "americanism" and they're all around you/us - but if you don't open your eyes/mind, you'll never see them.

co-housing, particularly multi-generational, is a microcosm of a successful community/society, learning to work together - there are communities in all parts of amrka, with many different flavours, from "religious" to "anarchist" - and everything in between.  and of course, the same exists throughout the world, outside of imaginary lines drawn to serve taxations. . .

not every single mother is a "welfare queen" - so many share housing/bills/childminding, and some even do it with men around, also contributing to the caretaking of home/family - but in larger group'd situations, not the outdated nuke-y'lar model culturally enForced, that's sooo last century consumerism nonsense.  divide (into consumer-able portions), and rule.

and there are nomads, and folks who don't want extended families but can exist on periphery, still contributing and being a part of, just apart.

of course, you'll not be reading about that here, and that's cool - but just because you don't discuss these things amongst the simple banter, don't pretend they don't exist.

and thrive.

Fri, 01/18/2013 - 22:58 | 3168275 bugs_
bugs_'s picture

lets drop the big one and see what happens

Fri, 01/18/2013 - 23:13 | 3168298 steve from virginia
steve from virginia's picture

 

 

Peeps still don't get it! We are in the middle of an energy crisis not a monetary crisis. Nothing the central banks can do will effect the outcomes that are now set in concrete. In a year or two there will be permanent petroleum shortages b/c the customers -- those simple fools who buy petroleum -- cannot afford to extract the high-cost crudes. The fools are tapped out.

 

Bass assumes deflation can be overcome with more credit as if the Japanese haven't been trying to overcome deflation with more credit ... for the past 20 years.

 

The only difference between 2012-13 and previous years is Japan's trade deficit: Japan cannot arbitrage between the fuel it imports vs. the fuel in exports in the form of automobiles.

 

The worldwide death of the auto industry includes the Japanese version: $110 crude is about $90 too pricey for the world's auto owners. Guess what? The $20 was burned up for nothing a long time ago. It's $110 crude ... or $120 crude!

 

Chew on that motherfuckers!

 

Guess what 2.0? Bass' real estate call is a fool's game: US real estate is an auto industry dependency. $110 crude is about $90 too pricey for US suburban real estate, bankers, home builders, REITs, box-retailers, insurance companies, mortgage originators, service companies, etc. Increase consumption somehow and those fuel costs increase.

 

The BOJ attempts nominal GDP (NGDP) targeting which is unsecured lending in place of the private sector offering unsecured lending: the BOJ is just another big, insolvent Japanese bank! No wonder there is flight out of the yen, there is no effective lender of last resort in Japan!

 

Look for capital flight to accelerate until the BOJ reverses direction (quietly when no one is paying attention ...)

 

Next stupid monetary idea that will not effect our ongoing energy crisis: Modern Monetary Theory (or platinum coins).

 

Good grief!

 

 

Sat, 01/19/2013 - 00:27 | 3168392 ILikeBoats
ILikeBoats's picture

So extend the thought ... those places in USA that are urban but safe - are they the place to buy?  What about (going farther afield) European areas where you can live without needing a car?  Maybe even Russia or Ukraine, places where the metro systems and dealing with scarcity by people has already been raised to an art form?

Knowing what is going wrong is important - but knowing who is going to win is even more important?

Sat, 01/19/2013 - 10:23 | 3168669 andrewp111
andrewp111's picture

Japan can go totally to nuclear power, despite the risks. In the end, they have no choice.  Maybe they will make a big push into Thorium and have a big revival boom!

Sat, 01/19/2013 - 14:31 | 3169119 css1971
css1971's picture

Funny you should say that. Nuclear is at decade lows.

Fri, 01/18/2013 - 23:16 | 3168306 q99x2
q99x2's picture

He did not say how much farther down the road the US is but it sounded to me like I should be in no rush to go to work. US doesn't seem to need Japan or China. I guess the Japaneser economy goes poof and that means more for the rest of the world. No I think it means Ice-9 enters the system and the lights go out. He apparently doesn't think so. But he does think that relative to all other assets that a basis for preserving wealth in a worldwide collapse will be the US housing market. At least from the money manager point of things. I would not agree that it is the same for an individual. But he did not talk about that.

Fri, 01/18/2013 - 23:18 | 3168310 Kreditanstalt
Kreditanstalt's picture

CNBC - business news like an NFL telecast...sickening...

Sat, 01/19/2013 - 16:45 | 3169399 Cathartes Aura
Cathartes Aura's picture

familiar.

cosy.

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