Kyle Bass goes to Japan and finds all as expected...
After traveling through Japan for the past couple of weeks and with their economic experiment at the forefront of the financial press, it is an appropriate time to give an update on Hayman’s current thoughts regarding the island nation. My travels took me from Kyoto, the cultural heart of Japan to Tokyo, Japan’s financial epicenter. I met with all kinds of thoughtful and wonderful people throughout my trip – from tea service with Zen priests in Kyoto to the metaphorical Zen priests of finance in Tokyo. The Japanese people are some of the most inviting, respectful, and thoughtful people with whom I have ever had the opportunity to spend time. There is no doubt that culturally and historically, Japan is one of the richest countries in the world.
Unfortunately, I had this overriding feeling of sorrow and empathy for most of the people with whom I met because my conclusions regarding their potential financial fate were reinforced on this trip. Most large and complex problems do not have a single cause, and there are countless decisions and circumstances that have led Japan to its current situation. While there is no formulaic determination for the solvency of a sovereign balance sheet (despite many attempts to develop one), the inescapability of economic gravity remains constant. Japan and its leadership face an unsolvable equation in my opinion. The structural problems in Japan have existed for years and were evident during our original analysis of the situation in late 2009, but it is fascinating to observe the progression of the decline over time and the recent broad acknowledgement of their plight.
And also learns something new, if not unexpected...
Despite the abundant quantitative data indicating the fragility of the financial system and the risks posed by further indebtedness, very few individuals in Tokyo have expressed a willingness to embrace the difficult choices required to resolve this looming crisis. During my trip to Kyoto, I was introduced to a Japanese phrase that encapsulated the strangely fatalistic viewpoint that many local Japanese market participants have toward the twin threats of debt and deflation. This concept explains a resignation to the unfolding of events and a willingness to submit to this unfortunate reality rather than to fight a seemingly inevitable or impossible challenge. It seems apposite to reprint it here as we watch the beginning of this endgame in the Japanese debt markets unfold:
“Shikata ga nai”
It cannot be helped.
But perhaps most interesting are Bass' thoughts on China:
The speed and depth of the Chinese policy response will help determine the severity and duration of this crisis. If the Chinese address the issue quickly and move decisively to rein in credit expansion and accept a period of much lower growth, they may be able to use the government and People’s Bank of China’s balance sheet to cushion the adjustment in the economy. If, however, they continue on the current path and allow this deterioration to reach its natural and logical limit, we will likely see a full?scale recession as well as a collapse in asset and real estate prices sometime next year.
China’s direct contribution to global growth is enormous, but perhaps equally as important is its role in generating growth in developed and emerging economies. A slowdown, whether significant or extreme, in the Chinese economy heralds very bad news for asset prices around the world. A growth crisis centered in Asia will further exacerbate the instability and volatility in Japan and have a devastating impact on second derivative marketplaces such as Australia, Brazil and developing markets in South East Asia. The combination of rich valuations and further threats to growth has led us to dramatically reduce risk in the portfolio and actively position ourselves to withstand the uncertainty and instability ahead.
In short, Bass is once again hunkering down.
Full Hayman Capital investor letter below, courtesy of Valuewalk [13]: