Monday, December 24, 2012

KYLE BASS - Japan is about to "detonate" a "debt bomb" Japan is about to "detonate" a "debt bomb" and will be forced to massively devalue its currency, Kyle Bass says. Bass, of course, is massively bearish on Japan, having bet (incorrectly so far) on a fiscal crisis. In an interview with University of Virginia business school professor Ken Eades posted on, Bass argues Japan is already in a crisis, and that the likely election of Shinzo Abe next month (an election we already admonished readers to pay close attention to) will set off a chain of events that will result in a devaluation of the Yen and treasury yields skyrocketing. "In the next 12 to 18 months, I think you're going to see a move in their rates. Basically Japan is entering its final 'checkmate' phase of the chess game." Japan is already running a -$100 billion trade balance, Bass says, and the country's GDP has been hit by Chinese boycott stemming from the Diayou/Senkuku islands dispute. "You have a secular decline in the population happening, you have a balance of trade that's literally being rewritten and falling off a cliff and their GDP is now tracking -3.5, -4 percent. Bass sees December's election as a foregone conclusion that will dangerously exacerbate the situation. "We think Abe's a shoo-in. And he said he's going to do everything possible to get to 3 percent inflation. He doesn't even know what he wishes for, because if he gets there, he detonates his debt bomb. " But Bass argues the Bank of Japan's independence has been "usurped." "When there's a press release put on the BOJ's website from the MOF [ministry of finance], the BOJ and the government — that's analogous to Bernanke, Geithner and Hillary Clinton issuing a joint press release saying 'we're going to end deflation'. This is how it begins to happen" He concludes "Their backs are against the wall. They have a full crisis. They absolutely have to change the manner in which they deal with their currency." Here's the full interview: Kyle Bass seemed surprised that events in Japan were happening as fast as they are. I think Europe will implode before Japan though. I think the market has to see that the Euro was in fact a failed experiment and has fragmented before it will accept that Japan will default. I think the first domino is going to be Greece and/or Portugal. I think that one of them will decide to leave the Euro because of social unrest/political change due to austerity. Once that happens, perhaps they exit together as some sort of strategy. I don't know anything about their international relations though. Ireland could also default around this time. Then I think there will be a bit of market panic, with flight to the dollar, but followed by some 'stable period'. Whether this is weeks or months, or even years I don't know. But then due to the relationship between Portugeuse debt and Spain, it could be possible that Spain is the real domino, the real triger because of the size of its economy and its bank exposure. I think Italy will then default in timing close to that of Spain. I have difficulty determining what the trigger would be in Itally though because they don't seem to be owed much by PIGS if I'm interpreting this previous post. In any case, Spains default would probably affect the UK, specifically if Santander were to go under as Santander has a lot of UK 'assets'. Then if the UK is in trouble, France is going to be impacted due to debt exposure and the Euro will have essentially imploded. It is around the time that the UK has trouble that I think the market will notice Japan and restructuring will eventually take place. While all this is occuring I think there will be flight to the dollar (and commodities of course), however temporary, before the Keynesian endgame occurs in the US. Perhaps that is an overly simplistic view, but thats kind of the order I see things happening.

1 comment:

  1. "When you let the politicians run monetary policy, well, that is how it [ends]"