April 05, 2013

Kyle Bass: Japan About to 'Implode' Under Debt

Transcript: Thanks a lot, rick. rick and mohammed. welcome back david. i didn't know he was a mets fan. oh, yes. we've been talking about this historic move by the bank of japan targeting the monetarymove, anyw certainly it's been one of the more vocal voices. can you be a vocal voice? i guess you can. japan is eventually going toreach this point. the interest costs will exceed the tax revenues, and i would just love to simply get your take on the latest move and what your thoughts are about what they're trying to do, which isessentially engineer at least 2% inflation. i think it's really importantto understand the magnitude of what they're embarking on. it's essentially doubling the monetary base. and to listen to mohammed just a second ago talk about it is a giant experiment.doubling the monetary base in two years is extremelyexperimental. but when you're backed into a corner, and your debts are more than 20 times your central government tax revenue, you're already insolvent. it's to the point that mohammed made.they have to do something. they have to do something big. because they are about to implode under the weight of their debt. what is interesting to me is they also abandoned the bank note rule. they had a handshake with them. they would not moetize the debt. they got to a goal post, and they removed it. when you think about themagnitude of what they're doing on ha nominal basis, the goe will be buying assets at 70% of the rate of the u.s. fed on an economy that's that's one-third the size of the u.s. just to put things inperspective. well, to the extent that you have said for some time that japan is already in the zone of unsolvency. is this goi to change the dynamic or the trajectory? yeah, i think what they havedone is formalize the announcement that a new sheriff is in town.it's important to follow the bond markets. there are economic zelouts running the central bank. they only know one thing. in this case the trajectory is set. what they're trying to do is materially devalue the currency in order to become slightly more trade competitive while attempting to hold their rates marketplace flat.the econolis besteve they can live in that nirvana, and that is not the case. you also play that in part by belief that the value of thecurrency would go down. it's going down more than it has since october of 2011. do you continue to approach this in the same way and tell the viewers how you go about trying to benefit from the series of events that are trying to occur? if you're japanese, you need to spend the yen that you have. you're not going to suffer amassive depreciation in your purchasing power. if you're non japanese, go borrow yen and buy assets in other countries not as fiscally stretched as yours is. there is really no great prescription here. i think it's really important to not be long yennd long japanese assets. there are people that earn equities in this response toweaker yen by equities. you have to remember the japanese industry has been hallowed out over the last 20 years. so i think it's going to be very disappointing for the equities. i think they're macro tourists. even with what will be increased -- conceivably increased exports? maybe we'll get the start of a trade war, but i would imagine it would be good for the toyotas and hondas of the world.expecting that today. people are focused on dollar yen. they lost the trade deficit to korea. the next thing you'll start to see japan talk about is buying foreign bonds. and i think they need to set thearchitecture up to enable them to do so. when they do that you'll see a trade war. that's the next step that you see out of the doj.but you have to think about where their trade is loss lost? you generate inflation. you get real velocity of money. you get an economy starting to grow and generating higher tax revenues.when you have the declining population and the death rate across the birthrate and a hollow out of industry, you may get a bump in nominal gdp and with the looming tax inkroes in april2014, they'll pull forward some consumption this year. but it's important to focus on the fact that this is not the panacea that everybody hopes it will be. i hope i'mut this. i can't imagine when we look at -- let's say they're trying to get to 2% nominal inflation, 16% of gdp is imports.they have to get the yen to the dollar by the end of next year. so that's our target. but if they lose control it's going to be much weaker than that. we are in unchartered territory, are we not? we are. the central banks around the world are kreaing tents andvillages that are very difficult to invest around. very much appreciate you offering insight on a historic day. right before i let you go you have benefits this year from this strategy that you had in place for quite some time, correct? he made a good amount of return on this japanese investment, or your point of view, your thesis this year. so far. all right. so far. kyle bass, thank you.

Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.