Kyle Bass on the End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; The Belief Bubble
It is a fantastic interview that echoes many of the things I have been saying about Japan for quite some time.
Link if video does not play: Conversation with Kyle Bass
Ken Eades kicks off the interview welcoming Kyle Bass mentioning that over the past few years his investment thesis has been the same. Eades then asks Bass to recap and review. What follows below is Bass' reply.
TOKYO--Japan's current account surplus fell in October from a year earlier, as the nation's trade deficit continued to expand, while separate revised gross domestic product figures showed that the economy may have already entered a recession.
The finance ministry said on Monday that the current account surplus narrowed to Y376.9 billion in October before seasonal adjustment. That was slightly larger than the Y218 billion surplus expected by economists surveyed by Dow Jones Newswires and the Nikkei.
"Speaking generally, exports have been the weakest link in recent data, and the direction exports take will be key for economic recovery," said Jun Kawakami, market analyst at Mizuho Securities.
Please consider the trend in Japan's Balance of Trade
Japan recorded a trade deficit of 548.90 Billion JPY in October of 2012. Historically, from 1979 until 2012, Japan Balance of Trade averaged 635.3 Billion JPY reaching an all-time high of 1608.7 Billion JPY in September of 2007 and a record low of -1476.9 Billion JPY in January of 2012.Balance of Trade Since 2009
click on chart for sharper image
Starting in 2011, Japan's balance of trade has been consistently negative.
Please consider the trend in Japan's current account.
Japan recorded a Current Account surplus of 376.90 Billion JPY in October of 2012. Current Account in Japan is reported by the Ministry of Finance Japan. Historically, from 1985 until 2012, Japan Current Account averaged 1106.53 Billion JPY reaching an all time high of 3287.90 Billion JPY in March of 2007 and a record low of -437.30 Billion JPY in January of 2012. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).Current Account Since 2009
The trend in Japan's current account has been in serious decline starting 2011.
Japan will be in serious trouble as soon as its current account stays negative. That has not happened yet, but it will. As soon as it does, Japan's debt-bomb goes off.
For more on the Yen please consider Spotlight on Japan: Return of 'Abenomics', More Militarism, Tougher China Line; Outlook for Yen and Nikkei
For more on the conflict with China regarding disputed islands, please see China Skips IMF Meeting In Japan; Taiwan Claims Islands Too; What's the Dispute Really About?
Most Difficult Time to Invest
I wish to conclude with the statement by Kyle Bass "As Dick Mayo [Chairman, Mayo Capital and Founding Partner of GMO] said today, it's actually the most difficult time in the world to invest in his lifetime."
I endorse that statement 100%. Moreover, I would like to add that many now find investment decisions relatively easy. They look at monetary easing by the Fed, by the ECB, by China, etc., as a perpetual green light.
Clearly Kyle Bass does not see it that way, nor do I, nor does John Hussman. Indeed, I believe the only ones who find investment decisions easy are those who do not understand the risks.
As I have pointed out on many occasions, if the Fed could have prevented a collapse in 2008, it would have.
If Japan's central bank had an easy cure for deflation, it would have found it long ago. Instead Japan has a massive amount of debt, with nowhere to hide.
If the ECB had an easy solution to the crisis in Greece, Spain, and Italy, there would not be endless meetings followed by endless bickering.
Yet, for whatever reason, there is a bubble in the belief that central banks are in control.
Problem is Debt, With No Easy Cure
The problem is debt. As Bass pointed out "the total credit market debt-to-GDP globally is 350 percent. It's 200 trillion dollars' worth of debt against global GDP of roughly 62 trillion."
The 70-year debt super-cycle is coming to an end. It could have happened last year, or the year before, but it didn't. It may or may not happen in 2013.
Those fully loaded in equities are either ignorant of these facts or they do not care. Those of us who are aware, but also aware the end cannot be precisely timed are the ones who look overly cautious. We are the ones who think "this is a difficult time to invest".
Prudent to be Patient
I am comfortable in my position that better times are ahead for those willing to be patient, even if I cannot precisely say when that will be. In the meantime, I am willing to sit with a position in gold, cash, and various hedges until better opportunities present themselves.