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Short Japan was Kyle Bass's Best Idea at Delivering Alpha. Did he get his timing right?
Japan has had nine finance ministers in the past six years, and five in the past three. To hedge fund manager Kyle Bass, this is a revealing statistic.
The founder of Dallas-based Hayman Capital, who may be best known for predicting the subprime mortgage housing crisis, told the Best Ideas panel at last September's Delivering Alpha conference that the Japanese government bond (JGB) was "the riskiest it has ever been in its history, and through the convention of Black-Scholes, the optionality on that bond is the cheapest it has ever been." So short Japan.
Bass cited the disparity between the central government's annual spending ( Yen 92 trillion or $1.2 trillion) and tax revenue (Yen 44 trillion) as an indicator of failing economics. Half of the spending was on debt service, he said, and half of that on interest. Noting that Italy went into full crisis with only a 100 basis point shift, Bass asserted that a small, 200 basis point shift in cost of capital could push Japan into what he calls the Keynesian endpoint, that is, the point at which debt service exceeds revenue. "A minute move can put them into checkmate," he said.
Critical to the fate of Japan, Bass explained, was the outcome of the European debt crisis. "As soon as Greece has a hard default and the dominos start falling," a loss in qualitative belief in Japan will occur.
Greece of course defaulted back in March. So how has Bass's prognostication of Japanese turmoil played out?
Well, the country is still functioning, but the question is whether it can keep functioning efficiently.
The...