- “Detonating The Japanese Debt Time Bomb” With Kyle Bass (ZeroHedge, Jan 18, 2013):
The hyper-correlation of Japanese stocks and the JPY have led many to believe that Abe’s miracle promise will be just the ticket to bring the nation’s two-decade slump to an end – a 2% inflation target is all you need. However, in a brief CNBC interview, Kyle Bass explains that not only are 99.9% of people wrong about the crisis (explaining the critical aspect of the abrupt turn of twenty years of the ‘procylicality of thought’ – that deflation is the norm), but Abe’s actions have actually brought forward the date of the “detonation of Japan’s Debt Time Bomb.
It is the Japanese institutions that own JGBs and they own them at meager rates of interest simply because of the ingrained belief in deflation; when the government begins to target 2% inflation, the swing in forward expectations (he notes to monitor inflation swap breakevens) will be the trigger for Japan’s implosion. Bass warns that “Japanese debt is around 24x central government tax revenue and when you sail into the zone of insolvency, nothing you can do will help,” though he realizes that calling the end of the 70-year debt super-cyle to a specific date is naive, he does expect the ‘bomb’ to explode within 18 month to two years.
All of the components for this [bomb] to go off ‘all of a sudden’ are in place. The clock has started on the qualitative shift in participants’ minds that the situation is untenable as the realization that Japan spends 25% of revenue on interest now – and with higher rates (via this supposed inflation) the entire situation becomes farcical as every 1% rise in their cost of capital (or rates) costs them another 25% of revenue!.
On JPY devaluation - The signs are already there that elites are exiting the JPY – with recent M&A transactions – he warns. 20% of exports go to China; this could be halved given the tensions, and a JPY devaluation is not going to restore the competitiveness of that secular decline.
On Japanese stocks – The people buying Japanese stocks, are picking up dimes in front of a bulldozer.
Bass goes on to discuss the US Housing stabilization, European stress, and China’s economic opacity.