I'm sitting, I guess, exposing myself to the usual dose of afternoon comedy, as a watch an interview with hedge fund manager Kyle Bass on CNBC where he's warning of the big bust in Japan and explaining how he's shorting Japanese bonds right now so that he can take advantage of the coming crisis.
Bass just got introduced by CNBC Capital Markets Editor, Gary Kaminsky, who I thought was a pretty smart guy (now I'm having doubts), but I am floored when I hear Kaminsky accord him such reverence, saying that he's "honored" to be sitting in the midst of such "brain power." If that's brainpower I'd hate to see what Kaminsky considers to be stupidity.
Bass begins by saying there's going to be a huge bust in Japan because there's no way the country can avoid a bond market crisis, insolvency, default and/or, severe hyper-inflation.
Never mind that people have been making this same, misinformed, prediction for the better part of the past 20 years now and despite the fact that Japan's debt is three times that of the U.S. yields on 10yr JGB's are a paltry 0.88%. In addition, Japan's inflation rate is, like, ZERO, and the yen has been so strong that it's caused Japan's monetary authorities to have to intervene (something they are loathe to do) to try to get the damn thing down and that hasn't worked very well.
Is Bass blind? Are all these debt guys blind??? It is my humble prediction that it will only be a matter of time before he is relieved of all the money he is managing. And that would be a good thing. I mean, seriously, this is such a rookie, misinformed, ignorant, unscientific prediction that I can't believe Maria Bartiromo herself doesn't call him out on it. Even SHE knows better!
What really amazes me, though, is how guys like Bass have the ability to con investors into giving them these enormous sums of money to manage. I want some!! How do these guys do it?? Japan...a curreency issuer...defaulting?...becoming insolvent? It's mind-numbingly stupid.
By the way, Bass had one other forecast: he predicted an even worse scenario for the United States, where the debt was "approaching five times revenues" (which, is a pretty normal, comfortable, ratio for the average homeowner with a mortgage) he said. Insolvency, bankruptcy, hyperinflation...the end!
Do yourself a favor, go buy some JGB's and Treasuries. It's almost your duty. We have to make sure these guys never manage money ever again and we all deserve at least a piece of what they're about to lose. A fool and his money...
41 comments:
I think if the Fed were to just finally get out of the UST market, UST yields would start to head right to Japan-like levels....
Resp,
HAHA! Love this post! Glad to hear you call out Bass. He's one of the most obnoxious mainstream financial commentators. He's another one-hit-wonder, still riding the coattails of the sub-prime disaster. Let's not forget that a year or two ago he took out a special mortgage on his house priced in YEN!
Here's the Treasury real yield curve and the nominal yield curve for May.
Man, those bond vigilantes are really on it, aren't they?
What does he not get about yields falling and negative real yields short term?
He apparently thinks he knows something that none of the global bond traders putting billions on the line do.
Why are JGBs and treasuries referred to as debt when they more closely resemble savings accounts? These instruments are simply not similar to actual debt obligations and do not serve the purpose that actual debt issuance does. Perhaps this confusion would have been clarified if the terminology was different?
I view holding treasuries as a way of purposefully avoiding money management decisions. When the real rate is negative, one is in effect "paying" to store purchasing power across time.
If this is off base please be critical as this will aid in my learning.
I am a client of Kyle. I am very happy with my portfolio. I think you are all wet and once again he will again hedge his accounts appropriately and skillfully and once again my EOY return will be delightful.
Time will tell.
@ Raphael
Right, securities of a currency sovereign under a non-convertible floating rate system are not actually borrowing that finances govt spending, since it funds itself through issuance. The reserve accounts that banks hold at the Fed are like deposit accounts, and tsys function as savings accounts.
Tsys are generally used for management rather than savings vehicles, other than by countries that have persistently large foreign balances, e.g,., China in USD, and institutions that are required to keep a % of funds in AAA rated securities. Generally they are used in money management as a parking place that pays some interest while awaiting another destination, as well as by traders that only hold a position for a relatively short time. Banks and other large corps and institutions use them for management as well.
Looks like add JPM to the Dumb List:
http://finance.yahoo.com/news/jpmorgan-takes-hit-trading-book-211823911.html
Ouch!
They lost more than Corzine... between them and Corzine they lost over $3B.
Small children running lemonade stands make more money than they do.
Thanks for the link on JPM.
I can only hope people finally start paying attention to the amount of risk exposure these banks really have. None of this is going to end well, especially when everyone continues to be "surprised".
Jamie Dimon:
"This violated our principles. This trading violates the Dimon principle."
This is the supposedly risk-adverse guy, and he doesn't have control over his company or he is prevaricating. All of the TBTF's are SDI's as Bill Black says.
Well Bass did predict the sub-prime mortgage meltdown, whilst you were having fun shouting "What artificial lending standards?" at Peter Schiff on Fox.
Bass made a fortune out of the crash. How much did you lose?
"What really amazes me, though, is how guys like Bass have the ability to con investors into giving them these enormous sums of money to manage. I want some!! How do these guys do it??.."
HE MADE BILLIONS FIRST TO PROVE HS METTLE. THAT'S HOW.
Bass is not a one hit wonder as suggested. He not only hit a home run with the housing short, but just recently made a windfall on his Greek credit default swap position. While that doesn't guarantee he well be right on Japan, calling him clueless and dumb seems to be...well...clueless and dumb.
Bass will end up being just like John Paulson, who made a lot of money on subprime (with a rigged bet), but then lost most of it back shorting Treasuries and buying gold. These are both examples of guys who are more lucky than smart. It'll be fun to watch.
@Matt
"I think if the Fed were to just finally get out of the UST market, UST yields would start to head right to Japan-like levels...."
Exactly. What these idiots don't understand is, while they blame the Fed for keeping rates "artificially low," rates would be ZERO without the Fed because all the deficit spending would cause reserves to rise to the tens of trillions $$.
How's Bass's gold position working out? He was super bullish. LOL!!! Bass is a little boy, trying to trade like a man.
Kyle does acknowledge that shorting JGB has been dubbed ”the widow maker” by some of the world’s most talented macro investors.
But it is his opinion that these investors haven’t been looking at it from a flow perspective. As long as the sum the incremental personal savings of the Japanese population and the after-tax corporate profits of Japanese corporations exceed the running government fiscal deficit the Japanese government (in theory) has the ability to self-finance or sell additional government bonds into the domestic pool of capital.
Japan is now in a situation where the available pool of capital is smaller than the incremental financing needs of the government.
Japan can’t find money domestically much longer i.e. their borrowing costs will go up.
One more thing that he has mentioned as to why Japanese investors have been buying JGB with such low yield (besides the absence of attractive domestic investment alternatives) is because Japan has had persistent deflation between 1-3% for the past 10 years.
Institutional investor base in Japan has agreed to buy 10-year bonds and receive less than 1,5% in nominal yield but with deflation that is 2,5%-4,5% in “real yield”.
Maybe you should read some of his investor letters (where this is from) before judging him based on a short CNBC clip.
Mike,
I thought the credit default swaps were NOT triggered after the Greek bailouts. Please correct me if I'm wrong.
As for Japan, it is the same bond vigilante story. Government spending creates the money with which gets invested in the bonds. The central bank sets the interest rate. If no one buys the bonds, the money just sits it reserves at zero interest. Or is invested elsewhere.
Chew: That was my understanding as well.
Anon:
Japan is a currency issuing nation and therefore, does not "fund" itself from savings of the private sector. Indeed it's the reverse: private sector savings (in yen) can only come from government spending.
“Japan is a currency issuing nation and therefore, does not "fund" itself from savings of the private sector. Indeed it's the reverse: private sector savings (in yen) can only come from government spending”.
Alright… what about the demographics. According to Bass savings will be close to zero if not negative because of their aging population.
BTW I appreciate your input Mike.
I wonder if Japan's high savings (government deficit) is mostly or wholly due to demographics. They are getting old and want to save. However, is it possible that this will lead to inflation down the road? That is, eventually those old folks will be spending the money. If the productive capacity of the country can't meet their needs then prices will rise. Nothing about defaulting or any of that nonsense. But, Japan's issue future issues do exist in the 'real' world. A very rapidly aging population. Can modern technology support a population where half the people are retired? I guess we will find out.
Demographics makes no difference. The only way the private sector can "net save" yen is for the government to spend more than it taxes.
Government spending CREATES the funds used to buy JGBs.
It's teh same for every currency issuing nation. They don't "fund" themselves from private savings. They are the SOURCE of private savings in their currency.
Anon:
The reason someone schooled in MMT thinks Bass is “dumb” is because he is basing his bet and logic on what he “thinks” is true without any actual understanding of how the monetary system works.
If he took the time to understand treasury and central bank inter-operations he would realize that the treasury of a fully sovereign free floating currency can not spend or issue bonds without operationally forcing the central bank to adjust its balance sheet to accommodate. Unless the central bank voluntarily abandons its interest rate target it must insure there are sufficient excess reserves in the system to fund a bond sale prior to the bond sale ever taking place. This is why a bond auction NEVER fails for a fully sovereign free floating currency issuing government. There are always sufficient reserves to fund the sale by design – unless the central bank voluntarily abandons its interest rate target, but then it wouldn’t be doing its primary job of protecting the payment system of the nation. None of this has anything to do with how old the population is or how much it is savings. The central bank always accommodates – it has to! And it has an unlimited supply of reserves with which to accommodate with.
Anon:
“How can it possibly be sustainable?”
You need to ask yourself what does sustainability mean and how does it relate to Japan or any free floating fully sovereign currency issuer.
A currency USER who wishes to spend more currency than he has must borrow to do so. A currency user must also acquire future currency to extinguish this debt. If the currency user borrows more than he can acquire he has exceeded his sustainable ability to payback his debts.
A currency ISSUER can always acquire enough money to pay back any debts that it has issued (because he creates it) – it is operationally always sustainable from a monetary perspective. And the reality is that the issuance of the debt paper was an accommodation to the populace – it gave them an interest barring instrument to store their excess currency in.
Kyle Bass knows governments can print money to finance themself (I've heard from him in other interviews) but he sides with (wrongly) hyperinflationistas there and says that's "the end", so not worth going there. That's why he bets on default I guess (governments will politically decide to default). IMO governments will keep buying their own securities, just see BoJ last attempt at reflating prices, and nothing will happen, the sky won't fall, they will keep rolling over, and over the next decades at somepoint the truth will be known explicitly by everybody: governments can (and do) self finance by printing. Mild deflation is the new normal (and there demographics is important), only thing stopping it is higher cost-push inflation from global demanded commodities, period.
He does not realize Japan has one of the most productive economies in the world despite being in mild deflation since 20 years ago. With them now centring around the problem of energy dependency I would be very bullish on Japan if they manage to solve this (very difficult) problem.
If I'm bullish on Japan and Japanese people, this does not mean the stock market has to go necessarily higher, as the stock market functions on liquidity, systemic leverage and profits (which are a function of liquidity and debt too). Stock market indexes going up are an obsession for Americans and Bernanke types, specialy in inflation driven environments, but this is not aproblem in mild deflation/inflation where you can save in the currency without inflating asset prices. That doesn't matter that much elsewhere (only to the elites and financial types off course, but who cares about parasites anyway). Japan may be the first nation to break the vicious circle of 'growth and inflation for the sake of growth and inflation'.
If it success it will be an great example to follow in many aspects (not so much in others).
@Adam1
Will they be fine, should I move to Japan?
Will Japan be a prosperous country with growth and increasing living standards?
How much debt/gdp,
government debt/revenue and
government Interest expense/revenue can a country have?
I’m from Sweden a country with a free floating sovereign currency, should our government not worry about our debt at all since we’re not even close to Japan’s debt ratios?
I appreciate your input.
Does growth matter Anon? When GDP growths: do you feel it in your income? do you work less and can buy more with less money? do you enjoy life better? That's what matters, not if a stupid number prints higher or lower. Those who frame the debate are who win the debate, and here we are, talking econospeak, econospeak is not going to make your life better. GDP, public debt, gdp:debt ratios etc. are econospeak.
Your government controls the currency, it has a sane balance of trade, overall looks like pretty stable. As long as you don't live on other resources, and you can keep producing stuff other may want at some point so you can keep importing what is necessary, as long as you reduce bad unsustainable dependencies, then it's fine. With a free floating non-manipulated regime and a productive advanced economy where there is certain demand for your currency it shouldn't be much of a problem.
Japan hasn't been growing for ages, but it has one of the lowest unemployment rates of the world, they have some problems off course, most of them have nothing to do with aggregate levels of consumption and trade (export dependency is bad though, have to be solved, this may be problematic too as it's related to jobs). Most have to be solved other ways than with 'growth' and public debt does not matter, the BoJ has to intervene all the time to keep their currency from appreciating too much. Also a lot of cultural stuff going on, can't compare with western societies really.
“Econospeak” I don’t understand, what the hell are you talking about! Of course I feel GDP growth personally (maybe not gdp in nominal terms but always if it's in “real” terms). Unemployment goes down, people around me are happy and spending money my small business is going great I enjoy life better.
What do you want to talk about if we shouldn’t use gdp, public debt and rations. What should we compare?
Are there some qualitative aspects you want to discuss?
I have some happiness to sell you if you’re interested?
Warren Mosler chimes in…
http://moslereconomics.com/2012/05/11/japan-will-follow-europe-with-a-debt-crisis-kyle-bass/
Well, obviously you don't know what I'm talking about, better for you btw, but not for most people because what data shows is this:
- There hasn't been net creation of jobs since a decade ago despite "growth" (specially growth in household debt, that has been outstanding).
- GDP growth since 1987: exponential. Growth in incomes: much lower and with diminishing disposable income. Specially since lates 90's and 2000 it has got really bad. Financial costs and debt burdens for households: increasing.
- Growth in GDP vs. purchasing power: diminishing since decades ago. Increasing inflation vs. stagnant wages.
- Working conditions since decades ago: getting worse. Also this is truly outstanding: while in the 60's you needed one income for a 'middle class' family to have a comfortable life, nowadays you need 2 incomes to have decent quality of life and even then you are worse of (debt burdens are higher).
Econospeak is framing the debate in the terms preferred by some to 'keep things as usual'. I'm not saying GDP is not important or GDP to public debt ratio is not important, I'm saying they are useless and irrelevant by theirself. Why the hell should I care about GDP growth when it hasn't mean really nothing in decades except the wealthiest getting wealthier (this is fact, not opinion).
Also "public debt" is a fallacy for currency issuers, they should talk about "inflation limitations" instead. There is no such thing as public "debt", why do you look at public debt when what matters are household and corporate balance sheets, because they don't have printing machines.
Last, and not least, if you think it's sustainable to have 3% "growth" (dubious concept as we can see, who gets most the profit of growth) to have any impact on employment and quality of life (not really in that, but well)... we will see.
An issue with GDP that is "hot" at the moment due to increasing focus on inequality is the economic fact that living standard is often conflated with productivity as ratio of output to resource (labor) input in terms of units of input (worker hrs). But rising productivity (quantity) doesn't equate to living standard (quality) owing to distributional effects.
If GDP and productivity are rising, but so is poverty, with middle class incomes stagnant and indebtedness growing, and unemployment, underemployment high, coupled with participation rate falling, that is not an improved living standard (general increase in "happiness" where happiness is equated with "utility").
In financial terms when Japan's demographics kick in and private desired saving falls this will cause the deficit to shrink in kind both through automatic stabilizers and less need for the sort of fiscal packages we've seen the the last decade plus. In other words when the pvt sector stands up the govt sector will stand down
If the increased private sector spending worsens the trade balance then the govt deficit will increase in kind. The increased yen saving of the rest of the world will look like Japan seemlessly moved from domestic saving financing deficits to int'l financed deficits to those that don't understand currency sovereignty(much as they say for the US now).
Whether or not Japan's standard of living is sustained will depend on national productivity. But whatever the level of productivity Asa a currency issuer productive capacity that exists can always be fully utilized.
@Anon:
“Will they be fine, should I move to Japan?”
- I don’t know, do you like Japan? As for being fine, that really boils down to politics and policy choices. Just because they are fully sovereign in their currency doesn’t prevent them from making bad decisions – they have failed to execute the proper fiscal policy to revive growth in the past 20 years.
“Will Japan be a prosperous country with growth and increasing living standards?”
- See above comment
“How much debt/gdp, government debt/revenue and government Interest expense/revenue can a country have? I’m from Sweden a country with a free floating sovereign currency, should our government not worry about our debt at all since we’re not even close to Japan’s debt ratios?”
- By accounting identity we know that a government deficit (or surplus) is equal to any excess savings (or deficit) of the non-government sector.
For example, in 2010 the US government ran a fiscal deficit equal to about 10% of GDP. That exactly equaled the excess savings accumulation of the private domestic sector (7% of GDP) PLUS the 3% of GDP trade deficit the country ran (trade deficit is the flip of the capital account which represents the savings of foreigners in the domestic currency). Do I worry that the US government allowed the domestic private sector to accumulate an additional 7% of GDP? No (I do worry about WHO is doing the accumulating but that’s another topic).
That’s just from the accounting perspective. Operationally, as a free floating fully sovereign currency issuer the nation can always re-finance or expand its deficit/debt.
What are the REAL risks. Inflation. Inflation is the only worry; however inflation DOES NOT come from “money printing” (operationally government spending in a fiat currency is always money printing – again “borrowing” is just a savings accommodation for the non-government sector whether they realize it or not). It comes from too much spending (private, public or foreign) relative to the economies ability to meet those spending desires. Currently in the US resources are severely under utilized so inflation is about the last fee we should have. What should be our biggest fear is all the destruction or real capital going on as it sits by idly rusting away destroying future output and income potential.
As for Sweden… Don’t Join the EURO. That would make you a currency user and radically reduce your domestic policy options. Just look at the mess they all face.
Mike Norman said...
Demographics makes no difference. The only way the private sector can "net save" yen is for the government to spend more than it taxes.
Government spending CREATES the funds used to buy JGBs.
It's teh same for every currency issuing nation. They don't "fund" themselves from private savings. They are the SOURCE of private savings in their currency.
Let's turn it around though. If people want to save and don't spend their income, as they do for example in a 'balance sheet' recession, then MMT argues the government should run a deficit to support demand. Well, that same desire to save can come from an aging population. And, the government (of Japan) can spend to support demand (and allow for the savings). I'm not sure why this is necessarily wrong. And, eventually those savings will be spent as the people retire.
By the way you have some rude 'idiots' commenting here. I came here hoping to learn some things, not be abused by shrieking adolescents.
Ok, forget the argument about JGBs nominal yiel vs. “real” yield and that in recent years Japanese Net domestic savings/GDP is lower than their Deficit/GDP for the first time. (Kyle; “excess domestic savings provided significant room for private and public credit expansion at low interest rates” but since about 2009 Deficit/GDP is larger than the “Net savings/GDP Kyle; “The deficit/savings gap needs to be filled from external capital” hence they can’t borrow cheaply at home anymore.
Anyway!!!!!!!
,forget those arguments and let’s look at the figures that can’t be debated:
Today more than 20% of the Japanese population is over 65.
More people are leaving the work force than entering it.
They will have one of the largest population declines in a developed country.
In the last 20 years, Japanese stocks have dropped 75%.
Japanese real-estate has declined 70% (with high-end real estate dropping 50% in the last two years)
And nominal GDP is exactly where it was 20 years ago.
BTW I read the Harvard Business School paper on Kyle Bass and his views on Japan hoping that it would bring something new to the table and proving Kyle and Hayman wrong but it/they couldn’t.
The paper was pretty bad, the only real argument they had was that Japanese people are very resilient and could except higher taxes.
@Adam1: Telling me Sweden shouldn’t join the Euro? Why make that point? Every kindergartner knows we are better of sticking with the krona.
@Anon:
"Every kindergartner knows we are better of sticking with the krona."
Good news!
Summary of your bass-bashing: "He is dumb, this trade has never made anyone money and hence it will do so for eternity - even though I have no idea why and couldn't post a single argument"
My take: you are just another clueless blogger who is polluting the web with his worthless crap.
I'm constantly thinking about a clear way to explain MMT. However in the end, for many, it's a tricky one. But that eureka moment that you get when it becomes clear - when you realise it's how it works - is very satisfying!
Teaching MMT to the mainstream is a little like teaching evolution to people of faith - it doesn't sit well, but sorry that's just how it works!
Perhaps it needs to be in the high school curriculum, so subsequent generations can get there collective head around it?
Look Mike you have Kyle Bass totally wrong because you believe in the stupidity of Keyensian economics. History has shown that printing money never works. Take a look at the 10 yr JGB since Japan Fed started printing money. Let's talk in 2 years time and see who wins this argument: you or Kyle. I have my bet on Kyle.
So it is early 2014 and the Japanese Yen has done exactly what since you wrote this? Care to revise your thinking?
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