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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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…



NotApplicable's picture

Mr. Rockefeller, is that you?

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.

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.

CPL's picture

Zombie attack again.

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?

Matt's picture

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

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...

Errol's picture

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

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.

AssFire's picture

So why is it mainly black men love it??

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.

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.

ACP's picture

Just remember cadio and the double-tap!!!

John Wilmot's picture

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

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? 

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.

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?

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.





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

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.

Caviar Emptor's picture

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

John Wilmot's picture

Godzilla doesn't like competition.

Caviar Emptor's picture

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

Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

Like good comedy, in trading, timing is everything.


(Well, not necessarily everything)

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.

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.

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

MisterMousePotato's picture

Is bushido still the prevailing philosophy in Japan?

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.

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!

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.

fightthepower's picture

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

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.

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.

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.

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.

John Wilmot's picture

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

NotApplicable's picture

ZIRP and the infinite debt-rolling machine?

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.

AnAnonymous's picture

That what is consumed is consumed?

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

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?



veyron's picture

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

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.

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?

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.

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.


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.