Betting
on a Japanese default By Katie Benner |
October 13, 2010 10:52 am
One hedge fund manager who accurately predicted the mortgage
crisis says the "Keynesian end point" for Japan
is inevitable.
Japan is lumbering toward default, veteran investor Kyle
Bass said Wednesday at the 6th Annual Value Investing Congress
in New York City.
As part of his presentation called "Does Debt Matter?"
Bass described in stark detail how one of the largest economies
in the world will eventually be stuck in a permanent structural
deficit, whereby its revenues cannot cover the interest
on its massive debt, much less the debt itself. According
to the International Monetary Fund, Japan's debt accounted
for 218.6% of its 2009 gross domestic product, making it
the largest public debt of all industrialized nations.
While Bass, a principal at hedge fund Hayman Advisors,
says he doesn't know when the situation will unravel for
Japan, he argued that even now the country is toying with
its "Keynesian end point." Its current social
security expenditures and interest payments on debt total
about 44 trillion yen a year, versus the 41 trillion yen
the country is bringing in.
Bass is best known for predicting in 2007 that subprime
mortgages were going to cripple credit markets, another
situation that moved swiftly from impossible to inevitable.
To bet on a Japanese default, Bass said that in general
he is able to cheaply buy out-of-the-money interest rate
call options on Japan, and if he is right he can make 50
to 100 times his invested capital. It echoes buying credit
default swaps on subprime mortgages, another strategy that
was out of reach for retail investors.
Bass said that the country's graying population is exacerbating
its deficit problem, given that Japan's working age population
peaked last year, and that the country is not open to immigration.
"Given their xenophobia, there will be more people
exiting than entering," he said.
Bass is not the only person to raise the specter of a Japanese
default. The country's own prime minister Naoto Kan warned
this June that the country could face a Greek-like debt
crisis if something weren't done soon. And late last month,
Hedgeye analyst Darius Dale raised similar questions in
his story, "Japan: The next global time bomb?"
But Bass believes that it's just too late for Japan, as
well as many other debt-burdened countries that have "suddenly
found religion" and tried to reduce their debt. Revenues
are shrinking and the load is too great.