Domo arigato Tyrannosaurus Debt

While the world’s attention has been focused on the eurozone debt crisis, Japan’s borrowing has hit a record high of 235% of the country’s GDP. The prospect of going down credit rating ladders as its debt costs increase is hanging over the country.

*According to the OECD, 2012 will see the highest level of debt repayments among the developed nations. Japan will have to extinguish $3 trillion of debt, with over 40% of the sum to be paid in Q1 2012.

The 2012 budget stands at $1.16 trillion, while 49% of the planned revenues are comprised of new loans and 25% of expenditures will be spent on debt servicing.

The cost of borrowing is not high for Japan (the yield of 0.95% for 10-year bonds), as the nation’s debt is mainly domestically held. Insurers, pension funds and banks are holding 95% of the country’s debt. However, high concentration of debt among domestic lenders makes it difficult for the government to make further borrowings. The Public Pension Fund of Japan and Post Bank are holding 35% of the country’s debt.

Experts believe that in 2012, Japan will have to increase borrowing from abroad, which will inevitably lead to an increase in debt costs.
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http://rt.com/business/news/tsunami-debt-credit-japan-031/

This needs to be translated into Japanese:


Kyle Bass' vindication is coming...

I'm long Japanese CDS and short the JPY in NOK.

I wouldn't short Japanese gov bonds, because I think the BOJ will keep yields low, just like the FED does.

I have to ask a question here.

All of these countries with enormous debts can never pay this money back. It is logistically impossible, therefore it must be rolled over in perpetuity. At some point, you reach a plateau that will not allow assumption of any more debts, because even if taxes were 75% across the board, the interest on those bonds cannot be paid, and a default must be declared. If interest rose to where it should actually be, somewhere between 4.5 and 6%, wouldn't our debt bomb explode? Same for Japan and every European country. Has anyone done a chart to illustrate when this happens, because it is inevitable.

ancona said:

I have to ask a question here.

All of these countries with enormous debts can never pay this money back. It is logistically impossible, therefore it must be rolled over in perpetuity. At some point, you reach a plateau that will not allow assumption of any more debts, because even if taxes were 75% across the board, the interest on those bonds cannot be paid, and a default must be declared. If interest rose to where it should actually be, somewhere between 4.5 and 6%, wouldn't our debt bomb explode? Same for Japan and every European country. Has anyone done a chart to illustrate when this happens, because it is inevitable.

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Theoretically (!), central banks of these countries can buy up their gov debt indefinitely and keep interest rates low. Alan Greenspan knows this:


This will cause a hyperinflation however. Then yields can rise as long as they stay negative in real terms. In a hyperinflation, tax revenues never keep up with government expenses, because the taxes are collected for a past period of time when prices were significantly lower. Inevitably, the leads to total chaos followed by a currency reform and a debt writedown.
If you want a deep analysis of this topic, read this book: http://www.pmbug.com/forum/f4/book-...ciani-turroni-austrian-case-study-weimar-479/

There is no free lunch. Your (and your children's) lunch was committed as collateral to feed tyrannosuarus debt.

ancona said:

(..)If interest rose to where it should actually be, somewhere between 4.5 and 6%, wouldn't our debt bomb explode? is inevitable.

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That is the sole reason, why they will not be able to control the inflation, when it (inevitably) comes due to all this money printing around, using their traditional textbook measure - "rise the interest rates". That would make interest payments on already monstrous debt prohibitively expensive, so even increasing taxes, implementing austerity measures and what nots, will not make up for the rise of the mighty percentages!

Good point about keeping REAL interest rates negative - by printing just enough, to deflate money, and balance it with corresponding interest rates, so they will eventually stay in the negative REAL gains, for savers. The problem is, the days are long gone, when the savers were the dynamo behind investments... Today it is a printing press, and the money supply expands so fast, there's no way that savings could keep up with it. So even transferring all the wealth from the remaining savers, will not provide enough money, to keep the monetary bubble inflated, IMHO. Don't have the exact figures, but it is quite obvious. So, we are "investing" more&more PRINTED, not earned/dug out of the ground/manufactured/serviced wealth. If it could ever work, Zimbabwe would be the richest country on Earth today, I suppose.

There is a reason, why there are no savers, only spenders/borrowers in America/Europe (and all other developed nations), statistically, and some Game Theory is to support it (1. statistically, people behave as they were rationally calculating their decisions, 2. oftentimes, when every player plays for his best individual gain, the whole system tips to the point, where each and every player looses). IMHO, it is not exactly, that people became so reckless. It is first, their real costs of living have increased to the point where it is very difficult for them to make any significant savings (oh the joys of dollar printing and government subsidies & regulations), and secondly (and for me - more importantly), when you do some math, you will inevitably come to a conclusion, that saving money makes no financial sense, but borrowing and/or investing immediately, does. Even consuming immediately, makes more sense, than saving to consume tomorrow - because your savings are loosing purchasing power all the time, even when you sleep!

That was my conclusion, after I finished the college, and started asking myself this kind of questions - interest on my savings was always lower, than even the OFFICIAL inflation figures. Hell, I thought, something smelly there, but saving money definitely doesn't make too much sense, if you have even the very basic understanding of the simple math :redherring:

Hmmm, real interest rates. I see two sides of that for the average guy. The rate at which I lend (eg buy bonds) is negative, but it would seem that the rate I borrow at is still positive - so the banks can make money. That's some balancing act! Having just that fail is fatal to the system, let alone the more drastic hyperinflation scenario.

The system as it exists requires the perception that the money is devaluing faster than things, so you'll borrow now to buy things - make the economy go - but think you're smart to do so, as you'll be paying it back with money that's worth less.

The idea of pay as you go - words l live by, seems to be dead.

I think Kyle's going to be right for all the reasons he states - driven by Japans lousy demographics. But as always, the question is when.

Seems no government has actually done anything but roll debt since WWII or thereabouts.

I visualize all this as a train wreck. We have multiple intersecting tracks, and trains on them all heading for the center. One belief system says that there's a huge hole at the middle - where a train can fall into and not collide head on with the others.
Kind of wishful thinking.
The other says, well, we're all going to get to that intersection point sometime fairly soon, and just how soon is the question - but of a trader, what order is also a very important question. Pessimists say this means war - it always has. Optimists think they might be nimble enough to remain standing - jump out of the way of that steamroller at the last instant.

I'm watching all this with sort of sick fascination...but the trains are far enough out and slow enough moving that I can't yet judge by eyeball, and who knows with the idiots running things if someone will turn on afterburners unexpectedly - what skeleton is in what closet that will force what looks like irrational action to those who don't know about it (us). Till, then...I guess it's just "the ticker is the truth, go with the flow".

I'm pretty sure that any game will go to the nimble if it goes to anyone at all.

swissaustrian said:

I'm long Japanese CDS and short the JPY in NOK.

I wouldn't short Japanese gov bonds, because I think the BOJ will keep yields low, just like the FED does.

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The chances of the Japanese CDSs paying out are close to zero. I'd be careful.

I'd also like to note that over the last 3 years, Bass has come out AT THE LOWS with his calls at these conferences. Don't think for a second he isn't working his way out of a position.

I would also encourage people to actually investigate the returns of the funds that work with the guy. I would call the hype around those funds materially misrepresenting performance.

I'm long spam, bullets, carbines and silver. Oh yeah, I'm also long water filters.

;-)

dereksatkinson said:

The chances of the Japanese CDSs paying out are close to zero. I'd be careful.

I'd also like to note that over the last 3 years, Bass has come out AT THE LOWS with his calls at these conferences. Don't think for a second he isn't working his way out of a position.

I would also encourage people to actually investigate the returns of the funds that work with the guy. I would call the hype around those funds materially misrepresenting performance.

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I'm not investing based on Bass's advice (Hugh Hendry made the same call by the way)
I also don't expect the CDS's to actually pay out (ISDA will prevent that). I will get out earlier anyway.
The point is: The BOJ will keep bond yields low. Bond holders will resort to CDS's to price in the real risk involved way before the bond yields (finally) rise. So will currency markets.
Japanese CDS have been rising since 2008: http://www.bloomberg.com/quote/CJGB1U5:IND/chart

SA.. Do you run a fund? How were you able to get long CDS? I was under the impression those OTC derivatives were only available for funds over 20 million.

Hey, everybody talks their book, purposely, or subconsciously - you have to learn to filter for that from everyone.

Calling a buy at the lows is not bad advice - it's good advice if they are really the lows.

That said, while I listen to all, I take the advice of few if any - which might be why I don't do better.:flail:

dereksatkinson said:

SA.. Do you run a fund? How were you able to get long CDS? I was under the impression those OTC derivatives were only available for funds over 20 million.

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I was running a fund in Switzerland until late 2010.
Now I'm a "retiree".
OTC derivatives aren't restricted to high net worth individuals or institutionals over here in Switzerland.
I use one of the big banks to buy CDSs. They have a special division for private clients which offers otc solutions.
I invested about 1 percent of my net worth in CDS's, but reduced it now to about .5% (Japan, UK; earlier, I held Greece and Belgium). The minimum investment per CDS position is just 1200 CHF (EUR 1000).
I also use otc options for pm hedging and other options investments.