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Guest Post: Cashing In On Japan's Debt Conundrum?

Tyler Durden's picture


Submitted by Robert Ross of Casey Research

Cashing In On Japan's Debt Conundrum?

On the heels of Fitch's sovereign credit downgrade to A plus (the fifth-highest investment grade), Japan's government debt continues to swell. With its debt at over 200% of its GDP, the Land of the Rising Sun appears to be embarking on a trek into the debt-laden unknown.

(Click on image to enlarge)

A ballooning government debt is often associated with sovereign debt crises, as market shocks can send the interest rate paid on the debt to unsustainable levels. Coupled with Japan's shrinking population (and thus tax base), the country is setting itself up for a hairy situation (data for both charts are from the IMF's World Economic Outlook Database).

(Click on image to enlarge)

As with any well-known macro-trend, there are speculators eager to capitalize on it.

Enter Kyle Bass, one of the few hedge fund managers who made a killing when he bet against housing during the subprime mortgage bust. He and his fund have now set their sights on Japan, specifically shorting Japanese yen and Japanese government debt.

His thesis is simple: with a debt-to-GDP ratio over 200% and a contracting population, it's only a matter of time before a sovereign debt crisis sets in, thus triggering a rise in Japanese interest rates – which the government would be unable to service with a shrinking and aging tax base.

So far this strategy hasn't worked as Bass intended: according to ValueWalk, Bass' fund lost 29% of its value in April alone.

That's not to say Bass' assumptions are incorrect. But there are alternative ways of looking at Japan's situation.

Many blame the 2011 earthquake and subsequent reconstruction efforts for the ballooning debt, while some, like Business Insider columnist Joe Weisenthal, think Japan will never implode.

Weisenthal's main point is that Bass' analysis is simplistic and incorrect. He says that the debt-to-GDP ratio is a lousy measure of anything because "it's measuring a stock (total debt) to a flow (a country's national income for the year)." And "beyond that, debt-to-GDP just doesn't tell you anything about interest rate risk or credit risk."

Weisenthal is entitled to his opinion, but we think Bass will eventually be proven right – although his fund could go broke in the meantime.

The Japanese problem is real, and a sovereign default – outright or inflationary – along with the rising rates that lead up to it are inevitable. But as we have said many times before, just because something is inevitable doesn't make it imminent.


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Fri, 06/01/2012 - 19:00 | 2486272 tom a taxpayer
tom a taxpayer's picture

Uncle "Hollah for the Dollah!" Sam says, "Come to Papa. All is forgiven. I understand your fling with those Oriental guys, Yen and Yuan. But it didn't satisfy you, and now you're hungry for the Real Thing. And I know you are hurting over the break-up you going through with that Euro guy. I got what you want. And you know what me and Jerry Lee want…



Fri, 06/01/2012 - 19:22 | 2486339 NotApplicable
NotApplicable's picture

Mr. Rockefeller, is that you?

Sat, 06/02/2012 - 04:25 | 2486950 jeff montanye
jeff montanye's picture

and his drug laws were very bad ideas as well.  another great example of the corruption and incompetence of the u.s. elite.

Sat, 06/02/2012 - 08:17 | 2487037 rwe2late
rwe2late's picture

Rockefeller drug laws example of corruption, yes indeed.

but incompetence, not really.

Prohibition II -"the drug rackets" has served the interests of Rockefeller and his ilk very well. And not just financially, for it has also provided excuse to support the development of police states, both at home and abroad (Colombia, Mexico, Afghanistan, Vietnam).

Based on 2003 figures, drug trafficking constitutes "the third biggest global commodity in cash terms after oil and the arms trade." (The Independent, 29 February 2004).

The IMF estimated global money laundering to be between 590 billion and 1.5 trillion dollars a year, representing 2-5 percent of global GDP. (Asian Banker, 15 August 2003).

Prohibition II expenditures for the huge prison and arms industries should be added to give a fuller picture of the economic impact.

Fri, 06/01/2012 - 18:59 | 2486277 CPL
CPL's picture

Zombie attack again.

Fri, 06/01/2012 - 19:32 | 2486362 John Wilmot
John Wilmot's picture

Are these the slow comical "brains!" kinda zombies ala Night of the Living Dead, or the fast scary zombies ala 28 [insert unit of time] Later?

Fri, 06/01/2012 - 19:49 | 2486401 Matt
Matt's picture

Fast, immune to pain, super strong, non-contagious. Probably just junkies on 'bath salts', some kind of new drug concoction.

Fri, 06/01/2012 - 20:07 | 2486434 John Wilmot
John Wilmot's picture

Yea, heard about the "bath salts." Apparently it's similar to acid (don't know if that means chemically, or in terms of effect?). Though eating faces and ripping out one's own intestines doesn't sound like acid to me, lol - more like PCP.

Some folks have been speculating that this rash of "zombie attacks" is fallout from an MK-ULTRA-esque experiment. The DoD has in fact been developing various drugs that basically make soldiers go apeshit with rage - that's an old concept actually, NAZIs were doing the same thing with amphetamine concoctions. Dunno, interesting speculation. There's a long history of the US government conducting experiments on soldiers and civilians, without their knowledge or consent, and not only MK-ULTRA.

...wonder if any of these recent "zombies" have long unexplained gaps in their personal history, maybe after they mysteriously dropped out of basic training...

Fri, 06/01/2012 - 20:25 | 2486460 Errol
Errol's picture

The most common "bath salt" is dimethoxypyrovalerone, a eurphoriant stimulant.  Nothing at all like LSD, more like methamphetamine.

Fri, 06/01/2012 - 20:36 | 2486481 John Wilmot
John Wilmot's picture

That makes sense.

Is dimethoxypyrovalerone the kind of thing a hill-billy can cook up in a bathtub, or a lab creation? ...if you happen to know.

Fri, 06/01/2012 - 23:25 | 2486698 AssFire
AssFire's picture

So why is it mainly black men love it??

Sat, 06/02/2012 - 07:37 | 2487018 TheFuture_MrGittes
TheFuture_MrGittes's picture

I think you're confusing race and socioeconomic status. These highs are comparatively cheap dose-for-dose compared to more established highs, unfortunately they're so strong that controlling the dosage is difficult.

Sat, 06/02/2012 - 07:27 | 2487014 TheFuture_MrGittes
TheFuture_MrGittes's picture

It's probably cooked up in a lab in China or Brazil, that's where 'a friend' used to ship synthetic cannabinoids from, although I don't think you'd need dedicated equipment for these particular syntheses.

Fri, 06/01/2012 - 20:00 | 2486428 ACP
ACP's picture

Just remember cadio and the double-tap!!!

Fri, 06/01/2012 - 20:40 | 2486490 John Wilmot
John Wilmot's picture

...better start stacking twinkies too, they DO have an expiration date.

Fri, 06/01/2012 - 20:27 | 2486467 Caviar Emptor
Caviar Emptor's picture

If we do have a zombie apocalypse, should we try to beat 'em or join 'em? Will there be girl zombies? Will there be zombie camaraderie and parties? Does it pay to move to Zambia to become legit? 

Sat, 06/02/2012 - 00:48 | 2486792 ChrisFromMorningside
ChrisFromMorningside's picture

Just saw George Romero's 2005 "Land of the Dead" (with John Leguizamo and Dennis Hopper). Looked cheesy at first but was actually quite entertaining. Lots of themes that are relevant today. Plot takes place in a post-zombie apocalypse world where the majority of homo sapiens on Earth are undead zombies aimlessly wandering around, except for a minority of living humans who live in a walled fortified city where they primarily serve as consumers enriching the tycoons at the top, who are deep into corruption and tyranny. The privatized security force that defends the city ends up "going rogue" and the zombies breach the city walls ... Fun shit. Just wish it wasn't coming true before my eyes.

Fri, 06/01/2012 - 19:07 | 2486296 xtop23
xtop23's picture

Kyle's timing may be off but his research is solid. I haven't read anyone who has a better grasp of Japan.

Seriously. Did anyone really think TPTB could keep this thing going as long as they have?

Fri, 06/01/2012 - 19:37 | 2486381 Rich Bagg
Rich Bagg's picture

Pretty funny to see that arrogant Texan humbled though he will ever admit he's wrong or early or whatever.  


Early = Wrong.


Markets can stay irrational longer than.......Kyle Bass can stay liquid.





Fri, 06/01/2012 - 19:52 | 2486412 Spitzer
Spitzer's picture

Early don't mean wrong. He will be wrong when/if he goes bankrupt.

Listen to his interviews. He is not arrogant. He just stands there and answers questions because people are asking them.

Tepper is an arrogant cock

Fri, 06/01/2012 - 19:58 | 2486427 xtop23
xtop23's picture

Thanks for saying that. Kyle's one of my investment heroes.

Very few people get the trade AND the timing perfectly and usually it's a bit of luck.

Fri, 06/01/2012 - 20:29 | 2486469 Caviar Emptor
Caviar Emptor's picture

If zombies attack Japan first before other places, does Kyle win or lose? 

Fri, 06/01/2012 - 20:38 | 2486486 John Wilmot
John Wilmot's picture

Godzilla doesn't like competition.

Fri, 06/01/2012 - 20:45 | 2486502 Caviar Emptor
Caviar Emptor's picture

Gamera was always my favorite Kaiju      <---Gamera vs Godzilla

Fri, 06/01/2012 - 20:00 | 2486429 Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

Like good comedy, in trading, timing is everything.


(Well, not necessarily everything)

Fri, 06/01/2012 - 20:01 | 2486432 ACP
ACP's picture

Japanese own most of the debt, not others. It wouldn't have gone this far if foreigners had owned the debt.

It can go on for a while.

Fri, 06/01/2012 - 20:22 | 2486458 ironsky
ironsky's picture

There may be very old men wandering the jungles of the South Pacific carrying a Nambu in one hand and a tin holding Imperial bonds in the other.

Fri, 06/01/2012 - 20:57 | 2486480 Caviar Emptor
Caviar Emptor's picture

I believe that. 


March 5, 1974 - Lubang Island - 2nd Lt. Hiroo Onoda
Probably the most 'famous' of the Japanese holdouts, Onoda was the only survivor of a group of four.  He surrendered 29 years after Japan's formal surrender, and 15 years after being declared legally dead in Japan. When he accepted that the war was over, he wept openly.

April 1980 - Captain Fumio Nakahira on Mindoro
Captain Fumio Nakahira of the Japanese Imperial Army, held out before being discovered at Mt. Halcon in Mindoro.

Don't tell Kyle, but these dudes don't throw in the towel early

Sat, 06/02/2012 - 20:37 | 2488039 MisterMousePotato
MisterMousePotato's picture

Is bushido still the prevailing philosophy in Japan?

Sat, 06/02/2012 - 01:06 | 2486805 ChrisFromMorningside
ChrisFromMorningside's picture

This has been addressed before. Japanese households are tapped out, savings-wise. Japanese corporations are facing major problems with profitability. That kind of contraction is going to make it very hard for the banking sector to keep buying bonds with a negative real yield for infinity, as currently seems to be the plan.

From this ZH article:

If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen.

Fri, 06/01/2012 - 21:39 | 2486584 eclectic syncretist
eclectic syncretist's picture

Betting on a sovereign default is very risky.  Time will tell, but perhaps Mr. Bass is not expecting the unexpected, and will have to pay for that.

War or debt forgiveness, choose your poison!

Sat, 06/02/2012 - 05:24 | 2486978 Popo
Popo's picture

Bass is a very good macro analyst. On occasion he's even brilliant. But he's a god-awful trader and betting on sovereign debt like he's doing is quite frankly, crazy, his assesment of Japan's macro dilemma is astute, but his prediction of 'how the chips will fall' is just one possible outcome -- and to bet the farm on that outcome, and then throw in timing risks -- is frankly a dumb trade. He might get lucky, but if he does it will be just that: luck.

Furthermore, any bet on the Yen has to take into account the relative health of other leading currencies. So Bass is not only betting on the Yen, he's betting on the RMB, the USD, the Euro and Sterling.

That's a batshit crazy trade. No way would I take that at this particular moment in monetary history, Bass just got his face fipped off with a 30% loss, and he could very easily get wiped out long before his macro thesis pans out.

Sat, 06/02/2012 - 17:10 | 2487770 fightthepower
fightthepower's picture

What the fuck is batshit crazy as opposed to just crazy and why do say it?

Sat, 06/02/2012 - 00:06 | 2486762 FeralSerf
FeralSerf's picture

The BoJ, like the Fed, cannot afford to allow interest rates to rise - no way, no how.  This is the reason that they will just continue to buy their government's debt with newly created money.  The Japanese taxpayer, like his American counterpart, cannot now be taxed enough to pay the interest on their countries' respective debts.  This problem gets more obvious every day as the total debt accumulates.

They're like the credit card holder that pays their cc payments with cash advances from other credit cards because they don't have enough income to make the minimum payments that are due.  As long as the credit card holder can  get more credit cards and higher limits, he can continue his Ponzi scheme.    Unfortunately there comes a time when his creditors stop giving him more credit.

Sovereigns have the advantage of being the ones that create money.  As long as this money is accepted for goods and services, their Ponzi scheme can continue.  When the money is no longer accepted, then it's over. It's so over, the system fails completely.  This is why shorting JGBs and USTs may not be profitable.

Sun, 06/03/2012 - 07:55 | 2488806 rbg81
rbg81's picture

You are 100% correct.  The BoJ and the FED are pursing a ZIRP policy because 1) they can and 2) they have no choice.  Of course, this is a huge tax on savers and starves the private sector of funds.  If all big investors take their $$ to safe havens that pay zero (or even negative), that does not bode will for the Economy as a whole.  The sad thing is that we're probably stuck in the conondrum for the foreseeable future.

Sat, 06/02/2012 - 00:36 | 2486786 laosuwan
laosuwan's picture

when you are short being right is irrelevant; all that matters is timing. That is because you lose money as prices go up and there is no upward bound to how far up a price can go. You only make money as prices go down but downward declines in price is boudned by the value zero.

Sun, 06/03/2012 - 07:51 | 2488787 rbg81
rbg81's picture

Bass's problem is that he is treating Japan like Greece and (except for their debt to GDP ratio) they couldn't be more different.  Greece makes nothing and has a population that basically wants to do nothing.  Japan is still one of the most industrious nations on earth and has a very disciplined population.  It is very instructive to look where people flee in a "flight to safety".  They mostly go to the US and Japan.  These tells us that these countries have a lot of running room despite their debt problems.  The US is a country where Government assets alone may be $300T+ and may have oil reserves greater than the entire world combined (not even counting natural gas or coal).  In short, the $15T debt pales in relation to these assets.  Also, the fact that Treasury yields are so low for both the US and Japan actually helps those countries.  Right now yields are  about negative when inflation is factored in.  That means they are technically MAKING $$ off their debt.  So, they can continue to pile on the debt because the cost of that debt keeps falling.  Eventually, it will be a problem but when is anyone's guess, but I don't think it will happen in the short term.  Its also possible that the CIA engineered all this shit to keep the American Empire/Welfare State healthy for a few more decades.

Fri, 06/01/2012 - 19:08 | 2486306 John Wilmot
John Wilmot's picture

Unsustainable debts will not be sustained, what did I miss?

Fri, 06/01/2012 - 19:22 | 2486340 NotApplicable
NotApplicable's picture

ZIRP and the infinite debt-rolling machine?

Fri, 06/01/2012 - 19:29 | 2486357 John Wilmot
John Wilmot's picture

Of course, I didn't mean that Japan would actually default. I'm just saying Japan's cruisin' for a bruisin', some day they won't be able to export their inflation anymore, and then the true cost of all that debt will become apparent.

....sounds like another decaying superpower I've heard about.

Sat, 06/02/2012 - 03:17 | 2486878 AnAnonymous
AnAnonymous's picture

That what is consumed is consumed?

Fri, 06/01/2012 - 19:10 | 2486308 otto skorzeny
otto skorzeny's picture

you're using Weaselenthal for info?? I have been keeping an eye on JGBS but I'm afraid it will be over in a matter of days. Bass is great but he may be bled dry before he collects-he must have ice water in his veins

Fri, 06/01/2012 - 19:10 | 2486309 Shibumi2
Shibumi2's picture

Am I the only one on ZH who does not understand this shit?


Post after post with arcane financial concepts, diametrically opposed positions (utilizing said arcane words and concepts)...punctuated with stupid newsletters by blowhards who, in a just world, CAN'T be right about anything.


I need to get back to basics. It seems that the financial skills I learned in business school are as relevant as my FORTRAN programming experience.


Is there a ZH 101 somewhere that would bring me up to speed on the big picture?



Fri, 06/01/2012 - 19:13 | 2486312 veyron
veyron's picture

Your education in FORTRAN has better equipped you than years of Econ and Business education.

Fri, 06/01/2012 - 19:21 | 2486337 NotApplicable
NotApplicable's picture

Market perspectives are of limited value in a political world, as its incoherence reduces planning to the shortest time-span required to complete an action before Benron et al. rips your face off.

In other words, if you ain't an algobot, you've absolutely no chance. And if you are? Well, good luck with that.

Fri, 06/01/2012 - 19:26 | 2486344 Raymond_K_Hessel
Raymond_K_Hessel's picture

I'll admit that ZH does have a lot of articles with confusing terms, but this one doesn't seem so bad. What specifically would you like amplification of?

Fri, 06/01/2012 - 19:27 | 2486348 Elooie
Elooie's picture

here are the basics...

Japan pays around 1% interest on its current level of debt. Because its so cheap they just keep getting farther and farther in debt. The problem (I dont have the exact numbers in front of me) is that nearly 60% of their tax collections already go to interest payments.  They have no wiggle room for changes in interest rates.  If rates double to just 2% that will wipe out all their tax collections.(120% of tax collections would be needed just to cover the interest). Thats the basic set up.. 

The problem they have is most of their population has invested in their own debt.. thus being able to keep the interest rate low.  Most of that population is leaving the work force(aging) and going from collectors of debt to sellers of debt. They are also a shrinking population so there is not enough new younger people to pick up the slack.  thats a problem for 2 reasons. 1) the tax base is shrinking.. thus less able to cover the interest on the debt.. and the interest rates will rise because not enough people buying the debt to make up for the sellers.  As they add more and more debt the lower the interest rate ceiling will get before the interest payments > tax collections.. thus insolvent.

Fri, 06/01/2012 - 19:29 | 2486356 Raymond_K_Hessel
Raymond_K_Hessel's picture

^ what he/she said

Fri, 06/01/2012 - 19:39 | 2486386 xtop23
xtop23's picture

The birth-death model in Japan is horrendous.

They are exceptionally xenophobic.

They are swimming in radiation and Cesium 137.

Europe is the only thing keeping them together (like the US).

When that blows up they're done.


Fri, 06/01/2012 - 19:52 | 2486410 Elooie
Elooie's picture

yes, this..

My post was to get across how the different parts are working for Japan.  They will basically have 2 options.. Print a ton of money or let it default. Thats why Bass is short the yen and bought insurance on the debt. 1 of those 2 things will happen.   If every japanese person wasnt dumping every nickle into government debt they would have blown up a long time ago.  Basically the EURO currency failing in the reason Japan isnt front and center. Japans situation cant continue though.

Fri, 06/01/2012 - 21:54 | 2486607 hedgehog9999
hedgehog9999's picture

"When it blows they are done",

This comment has a binary connotation and it read as an event, when in fact it is a process,

The process of aging and therefore . less contributors to the debt and more sellers of debt will set in motion the process (here is that word once again) of raising interest rates. This will take many years and that process's net result is the impoverization of the population, once again it will not be a week end but once again a process that will take many years. They will fight it back but like gravity the forces at play will still be there.

At some point this process reaches a tipping point where you can't sell any more debt and you then print ad nauseum which further impoverishes the population even more or along the way, at some point where the impoverization reaches a high point you will reach a steady state of poverty, few government services, subsistance living for the old and unemployed , kind of like a developing country Today like Mexico, where families have to take care of their old folks as the government dough is just not enough.....

The US and Spain impoverization has already started with close to 20% unemployemnt but they still have social security and welfare, foodstamps, unemployment checks, etc. At some point, later than Japan, that will stop too and impoverization of society will grow even more..... the Roman empire took a couple of hundred years to vanish. Our current western civilization, if  continuing on this path may only take 20 t0 40 years as things are accelerating......

There will be winners here, those societies that keep their house in order financially, politically, technologically and otherwise may thrive through this.....only IF they make the right adjustments.......these adjustment will result in short term impoversihment, it is unfortunately a requirement, those that do it by choice will do better than those that don't......

those blessed with resources like water, oil, agricultural land , technology, property rights , a good legal system,  etc obviously will fare better but as the world is so interconnected, even they would be dragged down significantly, I am thinking Canada, Australia, Norway, Russia, Brazil and a few others...... even the US could be on that list if they don't get into a civil war.


Fri, 06/01/2012 - 20:11 | 2486442 John Wilmot
John Wilmot's picture

...the demographics and level of JGB's held internally also means that inflation --> total F-in disaster.

My guess is that somewhere in this mess someone is trying to pressure the Japanese into opening their borders, which they will be forced to do eventually, unless they opt for a national hari kari instead.

Fri, 06/01/2012 - 20:48 | 2486507 e1618978
e1618978's picture

Here is the part I don't understand:

- If they start selling their foreign currency reserves (1.3 trillion) and buying the yen, it would put upward pressure on the yen exchange rate.

- They could print money and pay off a big hunk of the national debt, putting downward pressure on the yen

Why don't they do both?  If they start printing yen and buying back foreign reserves and debt, they will cause inflation (which they want) and a net lower yen (which they also want).

Sat, 06/02/2012 - 00:34 | 2486784 laosuwan
laosuwan's picture

because "printing money" mean issuing debt.

Sat, 06/02/2012 - 07:28 | 2487015 Marco
Marco's picture

Not really ... but outright printing money for use by government is anathema to the powers that be.

What e1618978 suggested is perfectly possible, and if they weren't running a trade deficit it wouldn't even be inflationary ... the reason it works is the reason it can't be allowed, nothing is allowed to work (for now) which doesn't create more debt. Until they are ready to let debt collapse (and mop up the collateral).

Fri, 06/01/2012 - 21:43 | 2486593 Shibumi2
Shibumi2's picture

Pretty good answers...thanks.

The idea of buying ones own DEBT seems absurd on its face.


It appears the takeaway from the responses is:

1) A lot of this shit is made up

2) The system is PONZI/IRRATIONAL

3) The system is imploding

4) If you can get a little ahead of the freight train, you might be able to snap up some fiat...or might also be crushed by the very same train

5) No one is going to hold your hand. Sink or swim. Stop whining and figure out yourself.


I can live with this. I'm looking forward to it actually.


Sat, 06/02/2012 - 11:38 | 2487206 DeadFred
DeadFred's picture

It takes time and when you think you've mostly figured it out you'll see you were wrong. It can be fun to try to puzzle this stuff out but remember to enjoy life while you're at it.

Sat, 06/02/2012 - 00:26 | 2486777 piliage
piliage's picture

But the big problem betting against Japan debt is that it is still seen as a very safe harbour. Hidden in the numbers today is that Deutsche Bank at one point was down 8%. Lots of big money heading for the exit and looking for a home.

The fact is, anyone holding big funds needs to park that money somewhere, and Japan, for better or worse, is a safe parking place. I'll bet when the poop hits the fan in Europe for real this month, Japanese yield will go negative like Germany and Switzerland.

You can fund a lot of debt with people willing to pay you to hold it.

If we go to full blown Defcon 1 here in the next month with Spain and Italy blowing up and a 66% deleveraging of EU banks, Japan will be able to sell more -0% debt than it can print.

Long term, yea, Kyle Bass is probably right. But a lot of people were right in 1996 about the internet bubble too. How many were able to lay short for 5 years and take a 90% hit against that position? Heck, I've been right since November about today happening for the EU, and I just saw green numbers in that position for the first time this afternoon. At one point, I was down 38% waiting for Europe to catch up with reality. That was only 6 months.

The question isn't only being right, it is being right at the right time and being able to fund it.



Sat, 06/02/2012 - 07:53 | 2487021 Augustus
Augustus's picture


Good observation on how it does take some timing of when to actually take the position to make it profitable.  Your calc of how Bass could be down 90% (or more) before the scenario plays out is interesting.  At that point he will have to have a 9X gain on the remaining capital to get back to even.  I had a short Euro position for months and got tired of losing on it when it just would not crack below 1.30.  I closed it out and quit, not because I lost a belief in the thesis that euroland had to get worse.  My thought became one of whether all of the currencies are worthless and, being in US, euro obviously looks worse, but all are junk.  In that case it becomes a question of which junk becomes worthless faster.  When Euro would not really crack, I closed it out based upon the "everything is equally worthless" anallysis.  Good for you to have held to the original conviction with patience. 

Sat, 06/02/2012 - 09:58 | 2487096 piliage
piliage's picture

Sometimes you get lucky. At least with the situation in Europe the numbers are so overwhelmingly hideous that one thought the probability of a reckoning was high. The fact is, I was too early and leveraged short when the DAX was at 6300 and thought it would never go higher. I was wrong. It was tough to stay in when the DAX topped out at 7100 in March, but I threw more money at the short. It was a bit of a gut check to be sure.

Got mine back today. We'll see if they come up with some smoke and mirrors bullshit this weekend to smooth over the markets, or if they finally do the right thing and let Greece and ultimately Spain devalue.

Everyone over here is really worried and concerned about Lehman II in 3-D.

While the US and UK wrote off a lot of debt, the fact is NOBODY knows what the heck lives in the EU bank balance sheets and they haven't really owned up. The only thing everyone does know is that EU banks are at least twice as leveraged as the US.

Bankia showed a profit last month of $31mil and then come back with a $19Bil hole. In Belgium, they are quietly saying that Dexia will need another $55bil! Both passed the 'stress tests'.

Liquidity is drying up in Europe, nobody is loaning to anyone and interbank transfers are completely dead. It is strikingly similar to what happened in the days before Lehman. So much for all of the lecturing from the Europeans back in 2008. Karma is a bitch.




Sat, 06/02/2012 - 08:43 | 2487049 Kiwi Pete
Kiwi Pete's picture

I'm getting a bad feeling that things are coming to a head in Europe. Think I'll go plant out the rest of our vegie garden tomorrow. Also I really must get around to reading this site and make some notes:

And of course buy more wort and popcorn!


Fri, 06/01/2012 - 19:35 | 2486374 John Wilmot
John Wilmot's picture

This one's pretty simple. If you know what debt is, and have a basic grasp of how the bond market works, and know what GDP is...where's the confusion?

Too much debt, not enough production to service debt, hence inflation to service the debt, hence FUBAR for Japan (eventually, that poor Bass)

Fri, 06/01/2012 - 19:35 | 2486376 CommunityStandard
CommunityStandard's picture

This article was pretty straightforward, actually.  There are way worse articles, like the ones trying to explain the Iksil trade.  But I'm slowly understanding.  It helps to look up things you don't know.

You'll also find Tyler likes to make up his own terms, and it's easier to read the articles once you learn to recognize them.  I see it as a way to keep the group exclusive - the online cool kid's table, no sheeple allowed.  There isn't even an effort to reach out to the main stream or try to wake up people, and it's meant to stay that way.  It's fight club.

The creaters of the modern financial industry did the same thing to protect their complex industry... except they rob people.  Tyler fights the power.

Sat, 06/02/2012 - 08:57 | 2487060 Flying Tiger Comics
Flying Tiger Comics's picture

In death we have a name. Japan's name is Robert Paulson.

Fri, 06/01/2012 - 19:52 | 2486411 BigJim
BigJim's picture

 Am I the only one on ZH who does not understand this shit?

Funny you should complain about that here, of all places - this one's pretty straightforward!

Keep reading ZH, and with the occasional bit of off-site research, eventually it will sink in... though I have to say I understood maybe 1/20 of the Iksil trade explanation... so much yet to learn!

Sat, 06/02/2012 - 12:11 | 2487237 WmMcK
WmMcK's picture

OK, if the 7th column on the card ... oops, wrong big picture.

Sat, 06/02/2012 - 20:44 | 2488050 MisterMousePotato
MisterMousePotato's picture

Nigh on three years ago, I starting reading every word here at ZeroHedge, and it took me six months before I could get even every other sentence to parse. I still don't understand 10% or more of everything that goes on here. And I mean not a clue. I don't even understand what people are talking about, much less the implications or accuracy of it.

Fri, 06/01/2012 - 19:12 | 2486314 Bunga Bunga
Bunga Bunga's picture

Fukushima will take care of that problem.

Fri, 06/01/2012 - 19:15 | 2486323 divide_by_zero
divide_by_zero's picture

+1 Bass has a nuclear weapon on his side.

Fri, 06/01/2012 - 19:14 | 2486324 divide_by_zero
divide_by_zero's picture

+1 Bass has a nuclear weapon on his side.

Fri, 06/01/2012 - 19:28 | 2486350 BankruptBanker
BankruptBanker's picture

When handset makers start bundling radiation meters in smartphones, you know the country is totally Fuku-ed.

Fri, 06/01/2012 - 19:21 | 2486338 q99x2
q99x2's picture

Once Weisenthal took over Business Insider I had to stop viewing. The site appeared worse than James Altucher looks. Not there is anything with Altucher's looks except when I see him I see the word "Fraud" flashing in the back of my mind. And that is how the Business Insider now appears to me as a site of fraud. And further, I wouldn't doubt that they are taking money from the banks to keep the site going.

Fri, 06/01/2012 - 19:25 | 2486346 otto skorzeny
otto skorzeny's picture

BI is good for a laugh-like CNBC. why do you think they have that pasty-faced hebe Weaselenthal on occassionally?

Fri, 06/01/2012 - 19:28 | 2486353 BankruptBanker
BankruptBanker's picture

Jew Weisenthal. 'nuff said.

Fri, 06/01/2012 - 21:40 | 2486583 essence
essence's picture

Yep,  I'd say your spot on with your assessment of Business Insider. Like Huff Post, it's status quo garbage.

Occassionaly though (like at the end of a hetic day) I'll drop by for some T & A. That's timeless & transcends politics. It's about all they have to offer.



Fri, 06/01/2012 - 19:27 | 2486347 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Meh.  Bernanke will buy it.....right?



Is anyone home?

Fri, 06/01/2012 - 19:32 | 2486365 gwar5
gwar5's picture

All eyes on Europe. Japan is the forgotten radioactive stepchild. Bass not wrong, just early.


"God Bless our military... especially our snipers"

Fri, 06/01/2012 - 19:34 | 2486369 goodrich4bk
goodrich4bk's picture

I'm going to hire Weisenthal to help me explain this "stock vs. flow" theory to my loan underwriter.  He keeps telling me that my debt-to-income ratio is too high and I keep telling him that he's comparing a stock to a flow.  I also threw in Weisenthal's idea that a high debt-to-income ration doesn't tell him anything about interest rate or credit risk.

When I told him this, he gave me one of those incredulous looks.

Stupid banker.

<sarc off>

Fri, 06/01/2012 - 19:34 | 2486370 tictawk
tictawk's picture

The rise in the Yen is putting a squeeze on Japan's exporters and its economy given that it is an export based economy.  The only way Japan can force the Yen lower is to dump US bonds i.e. raise market rates in the US.  So in a credit crunch, selling US bonds provides Japan with liquidity, but it forces a widening of short rates vs long rates. The Fed only controls short rates and if Japan sell bonds, the Fed's portfolio of long dated securities will come under pressure.

Fri, 06/01/2012 - 19:38 | 2486384 John Wilmot
John Wilmot's picture

Japan starts selling bonds,

Fools become alarmed,

But Bernanke knows best,

He'll buy all the rest,

And muppets alone will get harmed.

Fri, 06/01/2012 - 19:57 | 2486425 Spitzer
Spitzer's picture

The G8 just colludes to keep the status quo.

Fri, 06/01/2012 - 19:49 | 2486399 BigJim
BigJim's picture

 The only way Japan can force the Yen lower is to dump US bonds...

No, they can QE, just like the rest of 'us'.

Fri, 06/01/2012 - 19:55 | 2486420 Matt
Matt's picture

Oh, has someone successfully devalued their currency relative to other currencies via QE?

The only devaluation I see is Euro, and that's more due to concern it may not exist in the near future.

Fri, 06/01/2012 - 21:18 | 2486545 John Wilmot
John Wilmot's picture just depends on how much they inflate. Japan certainly could devalue the yen relative other currencies, and by however much it pleases, and however quickly it pleases. They could monetize the entire national debt Monday morning if they chose to.

But anyway, you don't need devaluation relative other currencies to service a debt with inflation. The BoJ can just buy JGB's to infinity and beyond, simple.

Fri, 06/01/2012 - 19:46 | 2486396 GernB
GernB's picture

It's a valid idea, but it presuposes you now the exact best time to go short. Time it wrong and you risk running out of money before Japan runs out of time.

It also presupposes that events in other countries won't become so accute as to increase the value of the Yen while you're waiting for other to catch on to what a huge problem Japan faces.

Fri, 06/01/2012 - 19:57 | 2486424 Elooie
Elooie's picture

timing is important but the math will eventually catch up with Japan.

Even at there stupidly low interest rate they will eventually accumilate so much they will default or have to simply print money to pay it back.   Everything going on in Europe is basically the death of a currency. thats the only reason japn isnt the main focus.

Fri, 06/01/2012 - 19:50 | 2486403 lemonobrien
lemonobrien's picture

Japanese can do what they want; just pay interest to those holding bonds, fellow japanese. These people don't follow the same rules; they're basically inbred; clan/cult like.

Fri, 06/01/2012 - 20:35 | 2486482 MajorWoody
MajorWoody's picture

The average Japanese household has 150,000$ in savings.  $150,000.!

The average US household has a negative savings or maybe a few thousand worth of weapons.

  The Japnese government will take half of that through taxation, inflation , what have you,  if necessary to keep the wheels on the Hino. 

All is not well, but it's not as bad as you think.

Fri, 06/01/2012 - 20:40 | 2486493 johny2
johny2's picture

One day, yen, dollar, euro and other currencies will die suddenly, and Kyle will still have his nickels, if he lives that long.

Fri, 06/01/2012 - 21:12 | 2486532 bilbao
bilbao's picture

Japan can only default if Japan chooses to default.

First of all, unlike our own Fed (who must go through Primary Dealers), the government-owned Bank of Japan has the authority to buy government bonds directly from Japan's Treasury (known as the Ministry of Finance). And, of course, any interest payments on the bonds is refunded back to their Treasury. The BOJ holds Japanese government debt in excess of 100% of the nation’s GDP. And since the government owns the bank, the loan is always interest-free and can be rolled over indefinitely. An interest-free loan rolled over indefinitely is the equivalent of printing fiat money. In other words, Japan has already monetized over 100% of its GDP in debt.

The Japanese people own a lot of their national debt as well. But the reason they own so much of the debt has a lot to do with the Post Bank. The Post Bank started in Japan's post offices and offered a very easy way for Japanese citizens to save their money through highly popular savings accounts. The money was obviously invested in risk-free Japanese Government Bonds. Today the state-owned bank is currently the world's largest holder of private savings and the world's biggest deposit holder — holding over 1/5th of the entire Japanese national debt and becoming the nation's largest employer. The Post Bank actually became more popular than the post office and had to open up more branches than the post office!

In a debt-based fiat monetary system, the government's liability is the private sector's savings.

So, you can see where this is going... The Ministry of Finance (the Treasury) can spend and issue as much debt as it wants to, since the BOJ can purchase the interest-free debt directly. And the Ministry of Finance can sell trillions of government bonds to the Post Bank because that's where the Japanese are stashing all of the cash that was spent by the MOF before the bonds are even issued. So, Japan's debt will simply continue to grow and grow, and it won't make a difference. They will have no problem servicing their debt.

The fundamental difference between the Fed and the BOJ is that the Fed can't buy Treasuries directly from the Treasury itself — the Fed must go through the Primary Dealers. And the only way the Primary Dealers would have the cash reserves to purchase Treasuries in the first place is if the reserves existed in advance of the bond auctions (occasionally with the help of the Fed's repos, when necessary). And the only way the cash reserves can exist before the bond auctions (other than repos) is if the Treasury spends money — since you can't use bank loans to purchase Treasuries.

This entire song and dance is really just used as a way to move cash into risk free assets and control interest rates in the process. 

Japan is a currency issuer. There is no issue of solvency. Japan has many problems, but servicing its debt isn't one of them.

Fri, 06/01/2012 - 21:52 | 2486602 traderjoe
traderjoe's picture

Unfortunately I can't copy and paste links, but the BOJ is privately owned.

Fri, 06/01/2012 - 22:20 | 2486648 Jack D. Ripper
Jack D. Ripper's picture

Another condescending MMT'er who thinks that everyone who worries about excessive government debt is just an idiot who simply doesn't understand that governments can print money.

Perhaps there are people who worry that Japan will default on its debt but I personally don't know of any. For your information all non-MMT'ers that I know are keenly aware that governments can print money. What non-MMTers are aware of that MMTers are not is that money printing has many painful consequences and is not an magic, painless  solution to government debt. Money printing causes inflation which destroys the value of people's savings so that retirees who thought they had adequate savings find themselves forced into poverty because the purchasing power if their savings is gone. Also, it causes interest rates on all loans (government and commercial) to become very high and to remain high for years (even after the government has stopped printing). This makes it very expensive to expand a business or buy a house.

And it always amuses me that MMTers never take their stupid philosophy to its logical conclusion and suggest that taxation is unnecessary because governments can simply print all the money they need.

Sat, 06/02/2012 - 10:47 | 2487145 D-2
D-2's picture

I hate to ask it, but outside research turned up a blank; What is an "MMT'er"?

Fri, 06/01/2012 - 23:19 | 2486696 Orps
Orps's picture

While what you say might be true, the economic realities of servicing debt in such manners might prevent the debt service in the first place.  There are real people engaging in real economic activities and their economic interactions will be severely adversely affected by rampant inflation.  Sure Japan can stay solvent in this manner and eventually pay off their government debt to zero, but what will the effect be on the economy?  I predict it will have a bad effect.  There is always the chance of spontaneous innovations reviving world economies, like cold fusion or something.

Sat, 06/02/2012 - 04:51 | 2486962 css1971
css1971's picture

So, you can see where this is going... The Ministry of Finance (the Treasury) can spend and issue as much debt as it wants to

And Zimbabwe could issue just as much money as it wanted to as well. No problems there.

Fri, 06/01/2012 - 21:14 | 2486540 2tired 2share
2tired 2share's picture

Moodys Lowers Ceiling on Highest Rating That it Will Issue in Greece To 'Caa2'.


Fri, 06/01/2012 - 21:22 | 2486549 hairball48
hairball48's picture

I believe the article nailed it. It's all in the timing. The Japs are going down. It's not if, but when. If Kyle can hold on long enough, he'll make another fortune.

Fri, 06/01/2012 - 22:15 | 2486634 essence
essence's picture

"if Kyle can hold on".

If it was true in the main article where it stated his fund lost 29% in one month .... whew, then IF kyle bass wins at the end of the day, he certainly earned it. Doesn't matter if he wins 1000 fold, anyone who can withstand that sort of heat deserves their reward.

And let's keep in mind what's happening here. Kyle Bass isn't an evil speculator, he's effectively paying premiums to the Japanese status quo while he waits as a hungry wolf. There's no telling how this will turn out.The wolf might starve, or the wolf might survive by keeping the "herd" lean.

However it turns out will be interesting. Let's just hope governments don't step in when things don't go their way and say ... "effectively immediately, there's NEW rules and they're retroactive".

Got gold?



Fri, 06/01/2012 - 21:34 | 2486567 earleflorida
earleflorida's picture

Japan and China cut out the Middleman on Forex? The new paradigm is spreading like 'Asian Flu"! Australia, New Zealand, and Brazil to follow? Where's India geographically? These questions are just a prelude to the unfolding dilemma the USA has boxed itself into voluntarily. Having turned from manufacturing to a service orientated economy has literally crippled our countries ingenuity, innovation and entrepreneurship! Why? Why is America going to deleverage its labor-pool to that of 'Emerging Markets Standards' - only to maintain our Global Hegemony Muti-Corporations for the few [hoarding america's future?]?  We've expatriated all our good jobs because of foolish regulation and ridiculously high corporate taxes. Indeed, our leadership hasn't figured it out yet,... and why not - just play dumb as they have for thirty years? Of course it's easy to explain, it's so fucking simple it's pathetic - because of the endless flow of corporate K-Street whores selling our country piecemeal to the highest foreign bidder! D.C. is the brothel of POL-PIMPS, aka. fucking scumbag traitors, period!!! jmo

Ref:   note: link below for full article

thankyou tyler

Fri, 06/01/2012 - 21:35 | 2486575 orangegeek
orangegeek's picture

And the Yen keeps moving up on the US Dollar.


Not sure how long that will last.  USD on a bull run now.

Fri, 06/01/2012 - 22:21 | 2486650 theTribster
theTribster's picture

Every negative trend is in place for Japan, like never before. This is why Kyle will be right where others have been wrong, even he can't predict the timing. The only thing we know about the timing is that it hasn't started yet, but it will. The savings rates are down to less than America's in the most recent statistics, they have a shrinking population of workers/taspayers, their baby boom is just starting as well where net savers become net spenders, etc.

The reality is that if interest rates go up just 100 bps than Japan cannot service its debt level - current debt level that is. There revenues are shrinking and unfortunately the Yen is picking up strength as a safe haven investment - exactly what they don't need. Although, there is a positive in that they are now buying 100% of their energy needs in oil since all nukes were shut down and probably won't reopen.

Regardless, Japan will implode consistent with the rest of the world including the Europe, China, USA, Japan and Australia, etc. There isn't any chance of them avoiding this pending catastrophe, nobody will be able to as the whole system has been insolvent since 2008 and nothing has been fixed just more liquidity injections. I originally thought Japan would be the start of the meltdown but it seems pretty clear that Europe wants to win that race! Go Europe Go!

I'm happy to have the USA be the last to meltdown, that should give us a little more time to react and make the final preparations before the collapse. Its amazing how many people are just completely oblivious to where we are and where we are going, this ignorance coupled with the normalcy bias is going to leave an aweful lot of people is a vert bad way! A desperate way!

In Japan I expect to see lots of hary-kary craziness once they realize they've lost their life savings and their gubmint is completely insolvent - I guess similar to Greece. Who can save Japan? Who can save China? Who would save China? Wars are the only outcome, that based on history, is a certainty - let's hope not or that if it is we stand up against more war and death! Getting close to the time where we will have to take back our gubmint or lose everything we have and everything our children would have and so on...

The radioactive situtaion in Japan is still apparently on the brink of generating a much greater diseaster, a world wide diseaster. This would be devestating, much more so than the original damage that has already been done. It seems like Japan's luck has run out and they are destined for more massive pain and suffering, doesn't seem to be any way out of it either! Good luck to the Japanese, hopefully they can get this under control before the next black swan event like the one that caused it. 

They have to do something to deal with the Yen rising against their biggest trading partners otherwise their exports will decline which is something they definitely cannot afford.

Fri, 06/01/2012 - 22:45 | 2486669 Diogenes
Diogenes's picture

How to time a devaluation: When you see one coming, as in Japan, wait until the government officially denies it.

"We are not going to devalue the yen! Absolutely! That is completely out of the question! We will never never never even consider such a thing!

When you see that in the Wall Street Journal move fast, you have only a few weeks at most to put on your position before they devalue.

Fri, 06/01/2012 - 22:59 | 2486679 thx111
thx111's picture

It's time for Japanese to sell all the US treasuries they own.  There is no reason to finance US anymore.

Fri, 06/01/2012 - 23:32 | 2486707 Begbie
Begbie's picture

I admire Bass, but he's making a huge gamble assuming he knows a country where he's never lived.  The Japanese people are different than the American people in that they look out for each other and would be willing to suffer individually to help their country and fellow countrymen.  Remember the kamakazis in WWII?  Would American pilots do that?  His analysis is correct from a purely mathematical point of view, but there are other factors that affect their debt.  For example, most of their debt is owned by their own people.  Also, they have a high savings rate in Japan.  Compare that to the U.S.  He may be right in the long run, but the U.S. dollar may fall faster than the yen because we have just as many problems, if not more, than Japan even if their debt to GDP ratio is higher.  If Bass had lived in Japan for a few years, he probably wouldn't have made this bet.

Fri, 06/01/2012 - 23:52 | 2486725 Yen Cross
Yen Cross's picture

 I just opened small trades last night! eur/jpy, gbp/jpy, aud/jpy, and hedged them.  {usd/chf, cad/chf.}

Fri, 06/01/2012 - 23:52 | 2486726 jimmyjames
jimmyjames's picture

Why couldn't Japan have just as much export demand with a high Yen as with a weak Yen-

They could buy their imports/resources cheaper and pass the savings onto the finished product and keep prices down that way-

Fri, 06/01/2012 - 23:59 | 2486736 Yen Cross
Yen Cross's picture

What is the highest % of input costs? Labor...     It's killing the Aussies to. Well not so much after that 9-10 handle slide in one month!

Sat, 06/02/2012 - 00:29 | 2486779 jimmyjames
jimmyjames's picture

Labor...     It's killing the Aussies to. Well not so much after that 9-10 handle slide in one month!


High wages vs Asia are a big problem in every western country but here again a strong currency would allow for cheaper consumer consumption costs and that would compensate for lowering wages-

Sat, 06/02/2012 - 00:38 | 2486787 Yen Cross
Yen Cross's picture

Australia is a " Pan Pacific" country. A member of the G-20, and I see your point. Perhaps you should explore the " trading bands" of cyn/usd 1% and the new trading bands cyn/jpy 3%. Effective 6-01-2012. My comment is hypothetical though.

 Just like Asian trading bands.

Sat, 06/02/2012 - 02:57 | 2486872 BigInJapan
BigInJapan's picture

Yes, but here in Japan, that savings, aside from cheaper hotdogs and pizza at COSTCO, is never passed on to the consumer.

Oil down, Yen up vs USD and I've seen the price of gasoline go up over here more than once.

Heads in the sand.

Sat, 06/02/2012 - 00:09 | 2486764 bankruptcylawyer
bankruptcylawyer's picture

i love how when gorbachav talks about chernobyl as the end of russia because it was SO expensive to fix and a political quagmire---the japanese are making the same mistake as russia but even worse. 

at least gorbachev's russia had nukes and a modicum of military power. 


what is japan going to do when it collapses? beg america to use the okinawa force and tacitcal nukes pointed at japan? 


Japan has been subdued as part of the global order, but what about when american and china have to 'cut' a deal on japan. how's it going to work for the japanese then? they will trade one slave master for another, with the chinese masters not having forgotten world war ii. 


Sat, 06/02/2012 - 01:09 | 2486808 Knobbius
Knobbius's picture

I guess I'd like to see someone talk about the nature of Japan's creditors.  That's at least as important as the Debt-To-GDP level.


Japan's public Debt-to-GDP is ridiculous, I agree.  But the fraction of that debt owed to foreign entities is ridiculously low.  Unlike in the US, where our debt is a defacto global currency, Japan's debt is mostly held domestically.  Japanese bondholders have mostly acquiesced for 25 years in being forced into 0% returns on government-guaranteed accounts.  This has been true regardless of what the actual entities handling their money are.  

Back in the day, Japan Postal and Telecom held 1/4 of all of the household wealth in Japan.  Much of that was in non-interest bearing accounts, believe it or not.  80+ year-old Japanese pensioners are apparently not as concerned about returns as we are.

The rocket fuel for a real debt debacle comes from hot money fleeing your sovereign debt market, and forcing your central bank to either put up or shut up.  In Japan there isn't much hot money, and with the BOJ willing to intervene any hot money will be replaced instantly by BOJ monetization.


I agree with an earlier post here, as smart as Kyle Bass is he might have gotten this one really wrong.  He should have checked with a behavioral economist to see if what his calculator said made sense....




Sat, 06/02/2012 - 07:44 | 2486982 Marco
Marco's picture

Japan has momentum on it's side ... it's trade surplus has always made it's sovereign debt irrelevant, it was merely a stealth tax. If push came to shove and the market started to refuse to buy the bonds they could always go for a more transparent (and thus less popular) taxation scheme without making any real changes to the economy.

That was how it was ... how it is since the Tsunami is that they are running a trade deficit. Old wisdom has become irrelevant, they are now dependent on foreign bond buyers to sustain their trade deficit and economic structure.

Sat, 06/02/2012 - 01:37 | 2486832 pissing_excellence
pissing_excellence's picture

Physical owners.................

Sat, 06/02/2012 - 12:05 | 2487226 WmMcK
WmMcK's picture

First up vote? Check out it.

Sat, 06/02/2012 - 02:27 | 2486865 Peter Pan
Peter Pan's picture

At the end of the day, i believe that Japan's situation will depend on its cash flow and its population's expectations.

The expected cash flow is not good if exports start to fail, but demand for fuel and foodstuffs from overseas continues to remain high all within the parameters of an increasingly aging population that is consuming more tthan it produces.

Sat, 06/02/2012 - 03:16 | 2486877 AnAnonymous
AnAnonymous's picture

Foreign ownership of debt is not a function of the country going cap in hand all around the world, looking for investors to buy their bonds. It's a function of trade. When a country runs a trade deficit, it basically means it's spending more on goods from the rest of the world, than the rest of the world is spending on goods from said country.

So it stands to reason that if Japan is buying a lot from the rest of the world, then there are a lot of yen floating around the world: More yen wind up in places like China, the Mideast, the US, Europe, etc.

What happens to those yen? Well, some will get spent on other things, but in the end, they'll all wind up in bank accounts somewhere, and somehow they'll find their way into a Japanese Government Bond, so that the holder of said yen might get some yield. Now theoretically if someone had a bunch of yen, they might prefer to buy German bonds or US bonds, and that's fine, but then there's another private holder of yen who has to make a decision about where they're going to place their currency. Eventually, that currency will find its way home, and the cycle is complete.

Read more:


Enough said.

Sat, 06/02/2012 - 05:56 | 2486985 Marco
Marco's picture

What happens though when foreigners refuse to hold Yen any more because they lose faith the yield on the bonds will ever surpass inflation any more? Suddenly Japan gets forced into trade balance ... and this can happen very quickly, far too quickly for an economy to adapt without a lot of pain.

There are broadly three options for any trade deficit nation :

- The nation manages to get a trade surplus and pays back it's debt

- The nation gets forced into trade balance through default (hard or soft)

- War

There are of course hybrids possible, for instance Argentina could never truly default because it was stupid enough to denominate it's debt in foreign currency, making soft default impossible and letting foreign courts put up trade barriers when they tried to hard default ... so it got forced into the first option to an extent.

Then you have countries like Ireland and New Zealand which got forced into the first option through external debt imposed on them by traitors rather than trade deficits.

Sat, 06/02/2012 - 06:28 | 2486997 AnAnonymous
AnAnonymous's picture

What happens though when foreigners refuse to hold Yen any more because they lose faith the yield on the bonds will ever surpass inflation any more?


Uselessly too complex. The situation is simple: Japan buys in yens.

Trade deficit makes it even better.

So Japan buys in Yens. Which means sellers to Japan have yens to recycle.

Where to recycle? They can buy either stuff from other people with yens (kicking the can as the same question arises for the guy who sells the stuff against yen) or they can buy stuff from Japanese.

And what are Japanese going to sell? Maybe their debt. Mostly their debt.

Ponzi scheme at work, extorting the weak, farming the poor.

US citizen economics.

The way out: people selling vital stuff refusing to get paid in yens. Wake me up when it happens because Japan has nested its own debt into the USD and US citizens living in the US have worked hard making sure this refusal wont happen.

Sat, 06/02/2012 - 07:10 | 2487007 Marco
Marco's picture

There is no need to refuse to take Yen ... the Japanese export a lot of high quality products, they have an excellent manufacturing base and well educated population, most countries will be able to find something at which Japan has comparative advantage. You just have to spend the Yen quickly before it's substantially affected by inflation.

Japan is not the US, up till very recently (ie. the Tsunami) they ran a trade surplus ... almost all their debt is inside Japan and they still have a lot of foreign exchange reserves. It's only very recently that their inflation has surpassed their bond yields.

Sat, 06/02/2012 - 08:12 | 2487032 johnnyyuma
johnnyyuma's picture

I agree. I would not want to bet against the toughness of the Japanese people. I recall that when the radiation leaks were the highest, older retired workers came forth to volunteer for clean up and recovery. Sparing the younger workers the radiation risk. I also know that toward the end of WWII, the country and manucafturing base was devastated by bombing and blockade. Still, no militery leaders wanted to attack the country with a land invasion because the entire adult population trained to resist the invaders until death. Conservative estimates were that you risked a million casualties with invasion. Historicaly speaking, I would bet on this nation to survive and thrive. They would pay their debts.


Sat, 06/02/2012 - 13:14 | 2487347 AnAnonymous
AnAnonymous's picture

Giving the US the opportunity of making a statement with nuclear bombs.

Sugarcoating with predicted loss is US citizen stuff.

Sat, 06/02/2012 - 08:16 | 2487036 AnAnonymous
AnAnonymous's picture

Oh yes. There is much need to refuse to take yen to import high quality products whose production has revealed to push into an unsustainable consumption scheme.

The export of these high quality products serve one purpose first: providing work to Japanese. The products are themselves very less needed on the other sides.

The problem is quite simple: once you have to sell to Japan and accept their yen, what do you do with yen?

If the high quality products exported by Japan and more largely US citizen nations served to something else than boosting consumption, pushing up a race for consuming resources, aiming at depletion of resources, well, the global landscape would be very different.

Like claiming that the introduction of new oil mining technology that speeds up the extraction of oil will solve the oil extraction issue.

Nope, the only thing is that you will see the bottom faster. Only that.

Sat, 06/02/2012 - 09:23 | 2487078 Marco
Marco's picture

Natural resource depletion is a completely orthogonal issue from comparative advantage ... doesn't matter where you import from, natural resources are depleted.

What's the point in singling out Japan? Hell, you could do far worse than importing from Japan in fact ... almost every other industrial nation has worse energy efficiency and recycling. Better Japan than China in that respect ;)

Sat, 06/02/2012 - 13:12 | 2487339 AnAnonymous
AnAnonymous's picture

Orthogonal issue? Comparative advantage?

Because being able to buy in a money you have a monopoly of emission is not a comparative advantage in a depleting environment?

Ah, yes. US citizen gibberish. Cant make a step without hitting the wall they themselves erect.

Singling out Japan? The OP is about Japan. And the stuff was about Japan imploding or not.

Besides, the energy efficiency bit is mere diversion on the path on depletion of resources.

As long as Japan can not repay the physical debt, well...

Sat, 06/02/2012 - 14:27 | 2487464 Marco
Marco's picture

No being able to print your own currency is not a comparative advantage by definition ... the willingness of foreign partners to buy up your debt is a comparative advantage (of a sort). If foreign partners don't feel like accumulating your currency/debt then all you can give them is products or services of equal market value, even when your own currency is used to facilitate the trade.

Energy efficiency is not a diversion ... unless you advocate complete extinction of the human race to conserve resources making the most efficient use of them optimizes quality of life. This is regardless whether the energy comes from fossil fuels or renewables.

Sat, 06/02/2012 - 15:24 | 2487572 JeffB
JeffB's picture

But the amount in circulation can rise relative to the amount invested in very low to negative interest Japanese government bonds.

One other source, of course, are Japanese bonds held by other central banks trying to devalue their own currencies relative to Japan to help their own exports or otherwise improve their trade deficit/protect their trade surplus.


Sat, 06/02/2012 - 03:26 | 2486893 AnAnonymous
AnAnonymous's picture

US citizens are fond of using money calculations to conceal the core issue: physical debt.

Is physical debt repayable? US citizens have sold the idea that pondering on physical debt repayability is a waste of time because they, supremos of humanity, they, the special ones, will always find a way to overcome the environment and therefore it is a given, a physical debt can always be repaid.

Once that fantasy about US citizen supposed superiority is dismissed as it must, that the question of physical debt repayability is reintroduced, Japan will not implode.

Japan will go through harsh times as what US citizens have plunged the rest of the world is extremely unpleasant (a race toward depletion of resources) and that stuff is not expected to be a nice srping walk under a starry sky.

But Japan will not implode.

Sat, 06/02/2012 - 03:53 | 2486937 Cosimo de Medici
Cosimo de Medici's picture

Japan may or may not have a country-wide radiation problem with Fukushima.  Opinions on its dangers vary, and since most of us are not expert in radiation or nuclear facilities, we merely hang our hat on something that meets our psychic needs or biases.  All agree, however, that Fukushima is a long term financial problem, coming at a time when Japan can least afford it.  A related problem is the new aversion to nuclear power and Japan's need to pick up its oil imports.

Japan definitely has a birth-death problem, with a fertility rate approaching 1.1.  Many Japanese women do not even want to get married, never mind have kids.  The number of unmarried females aged 35 and below has never been higher.  One would suspect pornography has a bright future in Japan.  In point of fact, one of the constituents of the Nikkei 225 used to be (may still be) a firm whose business is "adult entertainment".  Maybe re-inserting it into the Nikkei could juice that price weighted index and lead to "confidence".

ZIRP hasn't thrown off a lot of disposable income, which is why the aging population has had to draw down savings.  Weisenthal tried to argue that the resulting spending merely gets recycled back into someone else's purchase of JGBs, which is why he believes Bass is wrong.  Obviously Weisenthal doesn't account for slippage or the financial joule effect resulting from such things as imports, interest costs on new debt, or promised yield on pensions.  Japan is not a totally closed system.  Its internal demands grow, and it also requires external imports---oil if nothing else. 

Bass argues that as of 2011, sovereign demand for capital exceeds total yearly savings plus total yearly corporate profit, meaning that Japan now needs foreign capital.  "Diversification" might allow Japan to sell JGBs to fireigners happy with 20 pips so long as it comes in another currency, but can that continue?  If that fails, it is printing or default, or Bass believes.  Who's to argue?

Sat, 06/02/2012 - 06:48 | 2487004 AnAnonymous
AnAnonymous's picture

All agree, however, that Fukushima is a long term financial problem, coming at a time when Japan can least afford it.

The questions should be whether the world can afford it and whether Japan can transfer the cost/debt on some parts of the world.

Both beg yes as answers.

Sat, 06/02/2012 - 15:32 | 2487587 JeffB
JeffB's picture

Whether "the world can afford", in addition to the enormous obvious financial costs, the potentially hundreds of thousands (millions?) of additional birth defects, cancers, premature deaths and disabilities is a subjective question.

Not all would agree with you that the question begs a "yes" answer.

Sat, 06/02/2012 - 03:55 | 2486938 Satan
Satan's picture

I like Bass. He has some very interesting ideas that generally hold water.
However, betting on rising Japanese interest rates is folly. Betting against the Yen during a global economic crisis is even more folly. Leveraging yourself up to the eyeballs and going all in is just plain suicide.
29% red in one month is nether smart or brave.

Sat, 06/02/2012 - 16:21 | 2487687 JeffB
JeffB's picture

That does sound quite excessive to me. Wasn't he down 40+% on his mortgage bet, though? That was probably spread over a significant amount of time, however.

I wonder how long a time frame he's locked into. If he's got a few years those types of drops couldn't continue, at least not relative to the original investment(s).

In any event it sounds like a bigger gamble than I'd ever want to take, despite the potential payoff. But I suppose that also depends upon what percentage of his capital he's placed on that particular bet.


Sat, 06/02/2012 - 04:40 | 2486957 AurorusBorealus
AurorusBorealus's picture

Europe, Japan, and the U.S. sink together, and it is the derivatives that will sink all 3: one pulling down the next.  Shorting the yen and long the dollar is just betting on who will pull down whom.

Sat, 06/02/2012 - 05:34 | 2486981 alonedriver
alonedriver's picture

The only reason that Japan hasn't explode yet out of its debt because of POSITIVE TRADE BALANCE


UNTIL 2011


From 2011 the trade balance become negative, so it is a matter of time (soon i think) that inflation forces the BOJ to increase interest rates OR otherwise JPY will collapse...


The reason all these years that shorting JPY was a disaster is because they have POSITIVE TRADE BALANCE... So they could print all the JPY they needed...

This era has come to an end... look back from 1979 to see the ONLY reason JPY survive the housing crisis...

Sat, 06/02/2012 - 06:46 | 2487003 AnAnonymous
AnAnonymous's picture

Nope. Japans will not implode as long as they can buy in yen.

Sat, 06/02/2012 - 10:06 | 2487100 mjk0259
mjk0259's picture

But they invest that money in concreting over the shoreline and rivers/streams/mountains.

Future #1 skateboarding holiday destination

Sat, 06/02/2012 - 13:58 | 2487422 rayban
rayban's picture

I concur. JGBs are the short of the century with Bunds and Treasuries: very limited price upside (few points to reach 0.5%), spectacular downside. Negative carry, at these yields, is pretty limited. The trick is sizing your position so that you don't get stopped out.

Since I am not an expert of cash Japanese Treasuries, I have a question on JGB futures (10 year, notional 6% coupon, on-the-run cash yield around 0.8%). Can anybody explain why they are trading at a discount (144 vs 146) to the Bund future (10-year notional, 6% coupon, on-the-run cash yield around 1.2%)? It doesn't look like a curve or a cheapest to deliver issue. What is it?

Sat, 06/02/2012 - 14:55 | 2487516 janus
janus's picture

i believe the technical term is "bathos"

Sat, 06/02/2012 - 18:04 | 2487852 rayban
rayban's picture

Actually I was wrong. It is a CTD issue. I've checked the contract specs and learnt that JGB futures can be settled with securities maturing in 7-11 years. No wonder shorter bonds have a better conversion factor than longer ones with rates so low with respect to the notional coupon. Hence the current JGB future actually is tracking a much shorter maturity bond. And it's upside is very, very limited if you assume rates on the 7-10 year part of the curve do not go lower than 0.3%-0.5%. On the contrary, the downside is potentially 10 to 20 times larger.

Sat, 06/02/2012 - 14:17 | 2487452 samwell
samwell's picture

maybe we need to worry about japanese nuclear reactors and not their debt/finances.  this is a transitory thing.  nuclear contamination of an entire country/ocean/hemisphere/ecosystem can effectively last forever and spell the end of a species such as homo sapiens.

Cracking Stuxnet


Stuxnet could harm nuclear safety: U.N. atom chief | Reuters New cybervirus found in Japan / Stuxnet designed to attack off-line servers via USB memory sticks Sutxnet malware was designed in Israel for the express purpose of causing a nuclear meltdown/catastrophe at an Iranian Nuclear POWER plant which would endanger people in the entire middle east/asia.  The problem is that these pyschopahtic, paranoid jews in Israel didn't stop to consider that their little virus could do damage to nuclear reactor Siemens controllers all over the world and could therefore cause a meltdown anywhere these controllers are used.  so effectively, we have a group of deranged psycopathic killer control freaks intent upon enforcing their dictates at any cost risking the future of humanity to try and stop iran from developing a nuclear bomb.  these crazy freaks need to be stopped and put in their place before they achieve their demented goal.  talmudic zionist jews are the known enemy of free humanity and all life on this planet.  israel and their psychotic rulers posess over 300 nuclear weapons with delivery systems. remember that the jews "holy" book, the Talmud, teaches that a jews life is worth a million goyim lives, and that it is alright to lie cheat and steal from the goyim.  it is even sanctioned that it is perfectly fine for a jew to murder a goyim.  take a look at what is happening right now and in the past on wall st.  You have a bunch of predominantly money changer talmudic jews robbing and committing fraud against the rest of us "goyim".  wall st. is the enemy of free and decent human beings.  wall st. could be wiped from the pages of history tomorrow and humanity would begin to thrive and prosper once again because they would no longer be preyed upon my the money junkie talmudic jews and their allies in the media/madison avenue propaganda racket.   ever wonder why muslim countries which forbid the charging of interest(a talmudic jew curse) never seem to experience these financial crises like we in the "developed" occidental countries do?  their financial systems aren't under the control of talmudic zionist pyschopaths.  and ever wonder why all these muslim countries which don't participate in the central bank fiat currency talmudic zionist scum interest banking system get attacked by our milatary industrial complex with millions of innocent goyim slaughtered?   it is because the milatary industrial complex of the US/britain/germany/france is owned and controlled by the talmudic zionist jew banking system, that's why.  They are part and parcel the same thing designed from the onset to terrorize/murder and control anyone who tries to assert control over their own destiny. shake your head people and wake up before it is too late.

Sat, 06/02/2012 - 14:24 | 2487460 earleflorida
earleflorida's picture

Japan and China can pull 50% out [liquidate] of "Their" [refer link above]  U.S. Treasuries Holdings, without affecting their cross-trade settlement positions in the "Grandest-of-Father'd U.S.A."? Were talking $600bl & $600bl respectfully for Japan and China, ~ total  $1.2Tr U.S.! That's a lot of yen and yuan!!! Guess who else is partnering up for the 'Great Wall Ceremoniously`Communal Wedding'? That's right,... the UK!  Surprise, surprise,...


Sat, 06/02/2012 - 14:46 | 2487503 janus
janus's picture

the only thing....THE ONLY THING that's keeping Bass's ballon beneath the surface is this goddam CHF to EUR peg.  once the peg is broken, all hell will break loose viz. the yen/BOJ rates.

BASS IS CORRECT and his analysis is peerless.  i'm long kyle bass.

oh, btw, the mightly swiss have fucked themselves savagely by doing the bidding of the ECB...think they may have some inkling of that?  think the discussions of a gold backed franc are just a function of the bullion bull market?  THINK AGAIN!

there'll be no yodeling in the alpian canyons come spring.

Hold on Kyle, your salvation draweth nigh...but, maybe a lil less leverage.

Sat, 06/02/2012 - 14:53 | 2487512 janus
janus's picture

one more lil hint:

did you know, ZHealots, that most large-cap japaneese firms have their FY 2012 slide-rules bottoming out at a USD/YEN of 85?  and we're at, what, 78...crank up the presses and fire up the choppers, BOJ!  after all, the repatriation has just, fun, fun in the land of the rising sun.


Sat, 06/02/2012 - 15:15 | 2487551 PulpCutter
PulpCutter's picture

Japan is rebuilding after the earthquake/tsunami.  This rebuilding is a classic Keynesian govt stimulus (similar to what the US did 1939-41), and will result in strong growth.  As their economy returns to growth, BOJ will return to higher interest rates in order to moderate the recovery. 

Sun, 06/03/2012 - 03:46 | 2488655 varmays
varmays's picture

Greece = The Bullet, Spain = The trigger and Japan = The Bomb...

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