Remember back in December when hedge fund manager, Kyle Bass, was predicting a catastrophic financial collapse in Japan because of all its debt? He equated Japan to a "bug in search of a windshield?"
I immediately pounced all over that here and here, explaining why Bass's arguments were completely ignorant. They showed a total lack of understanding of fiat currency systems.
Bass purportedly bet big against Japanese government bonds (maybe he just put his clients' money in that trade) however, since then, JGBs have surged, causing the yield to collapse all the way down close to 0.5%, and that's despite Japan's debt being nearly 300% of GDP!
These guys will never get it, so don't expect them to, however, the real problem is that the stupid media and much of the financial community and our own leaders believe their crap even though everything they have ever predicted never comes true.
P.S. The yen did go down for a while, but now it's going back up.
37 comments:
The one thing critics never have a response to, not that their responses in other areas are particularly good, is MMT's unparalleled predictive power (no charge for the bonus alliteration). Usually when defending their pet ideology and finding themselves slapped in the face with this reality, they will go silent and pretend you didn't say anything at all.
"MMT's unparalleled predictive power"
What are you talking about? Bass got this bet dead right. He's been short Yen in his fund, not bonds or sovereign CDS as Norman implies. Bass got the direction of the Yen trade exactly right and Norman was beating his cheat late last year saying he was taking the other side of the trade. Norman got killed in that trade. Bass took his money. MMT led Norman astray.
Bass's entire thesis was about a debt collapse. And, yeah, I got the yen wrong, but it wasn't MMT that told me to go long yen.
"With Japanese debt 24 times central government tax revenues, "when you sail into that zone of insolvency nothing you can do can help in my opinion," the Hayman Capital Management founder said."
"Bass got this bet dead right."
Yeah right.
Who knows how Japan will play out. Bass said it could take "years" for a crisis to unfold. I am sure Warren Mosler didn't think Russia would default in 1998 when one of the funds his company ran lost $800 million in part on that bet.
Magic Money Tree analysis doesn't make your market analysis bullet proof. In fact, it might not help at all as seen by the fact that Norman got his clock cleaned taking the other side of Bass's bet. And Norman, we all know you don't think QE causes a currency to decline so please don't try to claim you weren't using MMT analysis as the basis for your trade. Lying won't make you look any better.
With 2 percent inflation these expectations will change quickly and the yen will collapse and they'll lose control of interest rates.
This didn't happen. Bass said it would. MMT said it wouldn't.
Simple lesson: MMT always wins.
"Simple lesson: MMT always wins."
Except when you repeatedly tell people how stupid Jeff Gundlach and Kyle Bass are for shorting the Yen and then declaring to your readers:
"I gotta confess, I'm long the yen. I know I'm crazy, but I'm long the yen."
And then you proceed to lose 20% on that trade in a matter of months. If by "win" you mean "lose" then you're exactly right.
comments on Bass and Koll
Posted by WARREN MOSLER on March 5th, 2013
"Who knows how Japan will play out. Bass said it could take "years" for a crisis to unfold."
Ah yeah, the get out of jail card for financial types. Make a prediction (no matter how stupid is) or give some advice and then say "it will happen, but no one knows when".
As useless as it can possible get.
Yes, I got the yen wrong, but again, it was not an MMT trade. It was me just wanting to bet against those guys in one market, so don't go trying to misconstrue it or blame it on MMT. In fact, Warren Mosler was bearish all along on yen. Bass and Grundlach talked about a debt crisis. They got smoked on JGB's.
I'm pretty sure Kyle Bass isn't shorting the bonds Mike, the whole reason he likes Japan is the low vol means he can buy options and CDS cheaply. He supposedly bought 1 year jump risk for a basis point so I doubt very much he's been smoked on the JGB's.
I would like to know if you think high inflation say 5%+ and/or 10y yield rise above 2% are impossible?
I'm pretty sure Kyle Bass isn't shorting the bonds Mike, the whole reason he likes Japan is the low vol means he can buy options and CDS cheaply. He supposedly bought 1 year jump risk for a basis point so I doubt very much he's been smoked on the JGB's.
From what I understand also, that is correct.
I would like to know if you think high inflation say 5%+ and/or 10y yield rise above 2% are impossible?
Anything is possible. What is relevant is what is likely within a specified time frame. I would say it is highly unlikely that Japan will experience inflation or fall in bond prices in the next two years.
The global trend among the major economies is deflationary and the likelihood is that other countries will get trapped in deflation in a similar way that Japan did. The financial crisis is not resolved.
About the only thing that could result in inflation these days is another oil crisis, certainly not cb "money printing" that has no fiscal impact.
If Kyle Bass isn't shorting JGBs than he's a hypocrite and a coward and he's misleading investors. His entire thesis is centered around a debt collapse. That means a collapse in Japanese government bonds.
No Mike, it's ok to take a Macro view but there are lots of people who are great economists, the skill of a great trader is execution. He uses options because in his opinion the black-scholes model mis-prices risk so as there has been low volatility in the bonds, he can buy deep out of the money puts cheaply. He doesn't guarantee he's right so he puts on the Japanese collapse trade as cheaply as he can.
I don't know how you can say Bass' thesis is impossible?
Kyle's one sentence investment advice, “short the yen, buy gold and go to sleep for 10 years”… I don’t see anything about shorting JGB today… If you follow Kyle more than anecdotally then you would understand that he isn’t saying the JGB will collapse tomorrow. JGB’s are still mostly supported internally by pension funds and savers, but once those groups need to start selling bonds, or even reduce their buying of bonds to support day to day living, then the government will forced to seek funding externally, and that is when the external buyers will demand higher interest rates and the JGB’s will collapse… unless the BOJ monetizes all JGB’s, in which case you have Zimbabwe and anything you lost on shorting bonds should be more than made up by a USD buying you 1 trillion yen… but while there is still decent internal demand and the BOJ is doing QE then rates will likely drip lower, but due to Japan’s demographics they can’t support that situation for very long.
only around 5 points of update left on 10 year JGB's and lots of downside. Lets see how it works out
Sean,
If the Japan pensioners start to exchange the bonds for Yen demand account balances to spend on provision in retirement, then those Yen balances will just transfer over to the Japanese non-govt cohort working to provision the Japanese seniors...
Which this working Japanese cohort will just put right back in the bonds as the bonds will yield more than Yen demand accounts as long as the BOJ does not raise the policy rate...
No other way the math can work out, it is a closed system...
Think of the Yen system as a type of "closed system"...
http://en.wikipedia.org/wiki/Closed_system
rsp,
Hey Matt,
I'm not following the closed system logic, don't we have to account for international trade? So even if the money pensioners spend goes to current workers isn't there a net outflow of yen from the country as Japan runs a trade deficit? And wouldn't that leave the BOJ with 2 choices, either print to refill the bucket or sell bonds externally?
Sean,
Entities that export to Japan in exchange for Yen are intending to save in YenNFA or "in the Yen system"... so there cannot be a "net outflow of yen from the country".. ie where can it go? Yen only exists in the Yen system (hence the "closed")...
iow you cant take a wallet full of yen on a plane flight over the Pacific Ocean from Tokyo to LA and when you land, you look in your wallet and now it is USDs... the same is true if your balances are in the Yen computer system...
So if they save in YenNFA, again, as long as the BOJ does not raise the policy rate, these external entities will have their Japanese bankers put the Yen balances in the Japan bonds to earn more interest than that available in Yen demand accounts...
This is the MMT concept of Gov. Bond issuance as "from the checking to the savings account..."
Here is the record of pretty much all USD savings by entities external to the US right now:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
These USD $NFA balances cannot just "get up and leave the country"...
so it would be the same for Japan if there were a development where Japan started to run long term trade deficits... folks outside Japan would show up on the Japanese equivalent of this spreadsheet... happily saving in YenNFA...
rsp,
Sean,
" sell bonds externally"
They cant issue their own bonds outside of their own system... ie the JGBs settle in Yen which are "used in Japan"...
rsp,
Matt,
Surely the demand for currency has to eventually have an effect on the bonds. If people decide to sell the Yen and it goes to 200 (like Kyle Bass predicts) surely that has to have some effect on inflation and consequently demand for the bonds as well?
Thanks Matt,
I get now what you mean about yen not being able to leave the system, but it can’t be a closed system because the BOJ can add more to the system any time it wants, and that’s what causes inflation, right?… so while I my wallet of yen does not automatically convert, I would go directly to the nearest cash changer and get USD for my yen before it gets cheaper… anyone not required to hold yen would (should) exchange them for a different currency rather than invest in a JGB, so it turns into a supply/demand problem as both JGB’s and yen increase into falling demand…
Aside from the technicals, I guess the issue I’m having the most trouble understanding with is why Japan’s situation any different than every other instance of sovereign default and/or hyper-inflation since the invention of fiat currency? What makes their situation so special that they are the ones that finally make it different this time?
normally I hate to comment but this article came up on google reader and I could not resist...
I love when these guys start throwing around emotional words and striking out against guys like bass who are the only ones who know anything. MMT is a joke, and somehow you are thinking that by missing the mark by a couple months in a 70 year cycle he is wrong. Bass doesn't have a crystal ball but he has put on trades that cost less 100 basis points that have a wildy asymmetric payoff. If you think they go in and actually short they pair then I am not sure how to respond to that.
He is saying "look there is a very good chance this will happen." Even if its a 10% chance but the payoff is 50:1 or higher, Ill take that trade all day long (and I have).
The best trades are when guys like this start saying things like "never" and "i told you so" without understanding the derivatives that are offered. only a fool would trade the actual pair in a situation like this, and it looks like this is the case
"can add more to the system"
Sean that is "quantity theory of money" which is not applicable under FFNC (Free Floating Non-Convertible) systems...
Both Yen balances and JGBs are Yen "Net Financial Assets" one pays more interest than the other...
"anyone not required to hold yen would (should) exchange them for a different currency"
If japan is running a CAD, this simply cannot be done with the quantity of Yen that comprises the CAD. ie "somebody outside of Japan has to own the Yen" (if Japan is running a CAD)...
I dont think that once net Yen balances are owned by external entities, that they can ever NOT be owned by external entities unless those entities use them to purchase REAL goods or services in the domestic jurisdiction for 'export', in this case Japan....
iow the people in this spreadsheet:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
Can only exchange these balances with each other net. If they want to reduce this amount outstanding, they have to buy something from a US entity for export... ie they "cant get out of this financially"....
rsp,
Sean,
Under FFNC systems, Hyper inflations are characterized by a huge collapse in real output in the nation followed by fiscal policy where the govt ignores this real collapse but instead thinks it can just keep raising it's bid for things and somehow the real problem in collapsed real output will go away magically by itself...
the govt keeps setting the prices higher and higher hoping somehow output will return...
so in Japan, and Mike has talked about this point often, just like in the US... what should be examined is if there is any reasonable chance of a collapse in real output in the economy where we could not provide necessary goods/services no matter how high a price the govt would offer for said goods and services....
that would be a true potential for "inflation" or "price instability" under a FFNC perhaps, but the threat is not from "money printing" or "debasing" .... that is "gold standard" thinking which we are no longer under....
rsp,
Japan's vulnerability is energy. A spike in energy cost could provoke supply side inflation due to shortages and higher import costs.
Hi Matt,
In reality financial assets are not really assets in and of themselves (in the productive sense), they are derivatives that get their value based on the collective belief in the value of the real underlying assets and the issuers ability to make good on the promises… so in the case of a currency, the underlying asset used to be gold and it is now the national economy. So couldn't you still “debase” the currency relative to the underlying asset? Also, since it is largely belief based couldn't the value of the financial instrument change more violently than actual changes to the underlying assets? So why can’t a sovereign create hyper-inflation without a collapse in output though simple mismanagement?
Sean, you might want to have a look at Cullen Roche, Hyperinflation - It's More than Just a Monetary Phenomenon, where he examines the historical data from most previous hyperinflations.
In addition, the way that inflation develops according to Post Keynesian analysis is through effective demand exceeding the capacity of the economy to expand to meet it or supply issues with vial resources. Ja[an could have a supply issue arise wrt to energy, but without actual fiscal injection through increased govt deficit or a fiscal helicopter drop of spendable funds in to the economy increasing the amount of bank reserves will not be inflationary wrt to increasing effective demand relative to available supply. The transmission mechanism is expectations, and so far monetary rather than fiscal ops have not been sufficient to inflame expectations, so I would not bet on a new round doing so. Moreover, the cb controls the interest rate, not the market.
Thanks Tom,
I’m a big fan of Cullen’s… I’ll have to take a look at that.
Regarding interest rates, don’t you think there is a limit to how much the CB can control interest rates? At some point they would have to buy 100% of the bonds to maintain a targeted interest rate if agents in the market protest the price, right? Then at that point wouldn’t they be 100% internally “funded” and that is where you get hyper-inflation for anything they need to import since no one would want to own then yen?
Also, what do you think is the counter to Mr. Bass’ thesis? Where is Japan in 10 years? I agree that given Japan’s demographics they are more likely to have a continued problem with deflation rather than an imminent problem with hyper-inflation, but I cannot but give governments the credit they deserve in that they are able to break systems in ways never thought possible… so what do you get when you combine deflation for domestic products, inflation for imports and a CB monetizing everything it can? And if I recall correctly Japan is really blazing the trail for this type of long term policy, so there are a lot of theories about where the trail ends, but no one has actually been there… my money is on it not ending well, but how long it takes to not end well is a different matter.
"So why can’t a sovereign create hyper-inflation without a collapse in output though simple mismanagement?"
Youre right imo they can..
They can easily "overpay" for things or try to buy things that are not really available for sale by increasing their bid... allow their banks to use ever higher collateral values in making loans...
But perhaps to Tom's point under FFNC "inflation is everywhere a FISCAL phenomenon" imo... really (to me) the whole concept of "inflation" is based on "physics envy" and not applicable in economics...
Yes we could easily have govt pursue bad policy with morons there and in control...
But Bass is not helping people and policymakers to be better informed by running around saying things like "Japan will never be able to pay off it's debts" or the like...
This type of a statement has no applicability in this situation... and should be embarrassing to him...
rsp,
"Timing is everything"
Let's get the record straight.. Bass is talking 24 months (now 21)
From Mike's link: "Japan is sitting on a debt time bomb and recent moves to push the central bank to target inflation have made it more likely the bomb will explode in the next 24 months, hedge fund manager Kyle Bass told CNBC's "Street Signs" on Friday.
rsp,
Sean, see Mosler's comments that I linked to above in my comment of April 2, 2013 at 6:56 PM
Japan's govt has been trying to break the deflationary cycle for decades without success even though the way out has been explained by Nomura's Richard Koo.
Simple answer is that there is too much demand leakage to savings. There are several reasons for this. First, Japan's banks were hobbled by the 80's debacle and haven't recovered, so they are unable or unwilling to increase credit, which means that bank money is constricted. Deleveraging is still going on, too. Japan's export economy has been helping by adding to income but not enough, and recently Japan is running a trade deficit, which increases demand leakage to saving.
Unless the consolidated private sector spends more or net exports offset, then the govt has to step and increase its deficit to offset the demand leakage to saving. This allows the consolidated private sector to increase net financial asset to meet its saving desire.
Japan's problem is over-saving, which includes deleveraging. Nothing the BOJ is doing or can do short of an actual helicopter drop into the economy, which is fiscal rather than monetary, can reverse the situation by making money more plentiful than the desire to save-delever in order to stoke effective demand. If Japan hasn't built up inflationary expectation with the existing debt to GDP ratio, I don't see it happening through "money printing" that just sits in banks' reserve accounts. Hasn't worked in the US either in spite of all the predictions of a bond collapse and runaway inflation just around the corner. Lots of supposedly smart people got caught short in that trade as bonds continued to rally.
Could the Japanese govt act so stupidly as to blow things up? Of course, but how probable is that? They may be clueless about addressing deflation and they are unable to get any inflation going. Suddenly runaway inflation is supposed to happen due to expectations?
"it can’t be a closed system because the BOJ can add more to the system any time it wants, and that’s what causes inflation, right?" - Sean
It's a closed system (of Yen) because the level of Yen in the domestic economy can't change unless there is an add or subtract from an external source...the government (ie BOJ). Yen are added "from thin air"..."thin air" is external to the system.
Taxes send Yen balances back to thin air.
The BOJ can also choose not to add more (or not enough) to the system and that's what causes deflation. See the past twenty years or so.
The Quantity Theory of Money equation has so many degrees of freedom it is useless as any kind of metric. Tea leaves would be just as meaningful.
at least the yen is going up again...
Well, here it is September of 2014 and the Yen is collapsing as Kyle Bass predicted. 2 years ago you got 76 Yen for One Dollar - now get 105 yen
Bass says we are going to 250 to 300 yen per dollar whereas Jeff Gundlach, the world's best bond manager, said a few weeks ago he thought it would only go to 200 to the dollar.
OK - here is what is coming. Large hedge funds and investment banks want to help holders of JGB's, so they sell calls on JGB interest rates. They goose the 50 to 80 basis points that JGB 10 year notes yield by a few basis points. So far it has been a good strategy. Bass only uses 1% of his fund each year taking the opposite side of the trade. Why? because the call sellers are adamant that Japan will be just fine. Well, Greece was fine until rates went to 20% from 3%. The pay off on that trade was 60 fold. Bass only has to be right once while buying this dirt cheap optionality on Japan's financial suicide.
He will be right but I worry about his trade for an entirely different reason. The sellers of these calls are the too big to fail banks in the US and perhaps for all I know in Europe. What if the regulators say to Goldman Sachs, "you took $10 million from Kyle Bass and you owe Hayman Advisors, Bass' fund, $1 billion dollars. We forbid you pay him.
That to me is the risk Bass is taking not his analysis of Japan's inevitable collapse.
Looks to me like dollar strength instead of yen weakness. The yen is pretty stable against other major currencies, which are also falling relative to the dollar.
Looks like a flight to the safety of the USD may be happening owing to the worsening global situation politically and economically.
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