Email of the day (2)
Comment of the Day

December 31 2012

Commentary by David Fuller

Email of the day (2)

On Kyle Bass's presentation:
"This presentation by Kyle Bass is an hour long, but is well worth watching, especially for anyone with an interest in investing in or shorting Japan. He starts talking about Japan in detail from about 25 minutes into the presentation. At the risk of oversimplifying what he says, he argues that Japan can't simply inflate away its massive debt (240% of GDP) because even with interest of less than one percent of the total debt, 25% of government revenues are presently needed to pay that interest. If JGB yields follow inflation higher, Japan will be simply not be able to service its debt and there will be some sort of crisis. Kyle Bass articulates his views far more eloquently than I can and his hedge fund has obviously done a lot of homework so I would highly recommend this video and would be very interested to know your thoughts. Unfortunately, you can't see the slides that he refers to, but I have a attached a couple of charts (sourced from ZeroHedge I think) that help illustrate some of his points

"For what it's worth, my own opinion has long been that it is obvious that there are no other options left for Japan other than to aggressively print and this will eventually lead to high inflation. Whether this results in higher bond yields and some form of financial crisis or whether through QE and other means (somehow preventing domestic financial institutions from selling JGBs and getting them to buy new issuance), yields can be kept low, I don't know. Under both scenarios, shorting the Yen would likely be profitable, I expect. The first scenario would probably be bad news for the stock market, but the latter (less likely in my opinion) might be quite good. Whatever happens, things could get very interesting in Japan over the next few years.

"All the best for 2013,"

David Fuller's view Thank you for this very informative email.

I have viewed a good portion of the Kyle Bass presentation and he is extremely worried about ballooning government debt, not least in Japan. So are most of us although we do not have as much data to hand. Meanwhile, I remain concerned about what happens when all the QE ends. I have assumed that it will be inflationary if GDP growth picks up, as it almost certainly will in the US and some other countries.

Japan's debt total is alarming but at least it is held by the BoJ. I have more questions than answers as to how all this plays out, since there is little relevant historic information on the subject, in my opinion. My preferred strategy is to monitor price trends and try to run with them, rather than trying to convince myself that they are wrong. The latter can be very expensive, as we all know. My biggest concern is what happens when QE ends? That may not happen for several years, as Bass says. Meanwhile, I am in general agreement with paragraph 2 in the email above. Fullermoney called for Japan's current policies and I think they will remain bullish for at least the medium term.

My main concern about Kyle Bass's presentation, and I credit him for sincerity rather than gratuitous alarmism which we sometimes hear from other sources, is that it may frighten people to the detriment of their own analysis and trend following abilities.

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