When I first arrived in Japan in 1974, international investors widely expected the country to collapse, a casualty of the overnight quadrupling of oil prices to $12 and the global recession that followed. Japanese borrowers were only able to tap foreign debt markets by paying a 200 basis point premium to the market, a condition that came to be known as “Japan Rates.”
Hedge fund manager, Kyle Bass, says that the despised Japan rates are about to return. There is nothing less than one quadrillion yen of public debt in Japan today. A perennial trade surplus powered high corporate and personal savings rates during the eighties and nineties, allowing these agencies to sell their debt entirely to domestic, mostly captive investors Those days are coming to a close. The problem is that the working age population peaked in Japan last year, and the country is entering a long demographic nightmare (see population pyramids below).
This year, the Ministry of Finance will see ¥40 trillion in receivables, the same figure seen in 1985, against ¥97 trillion in spending. Interest expense, debt service, and social security spending alone exceed receivables. The tipping point is close, and when it hits, Japan will have to borrow from abroad in size. Foreign investors all too aware of this distressed income statement will almost certainly demand big risk premiums, possibly several hundred basis points. That’s when the sushi hits the fan.
To top it all, no one in living memory in Japan has ever lost money in the JGB market, so expectations are unsustainably high. Need I mention that Japan’s Q2 GDP growth came in at an arthritic 0.1 %, not exactly a performance to run up the flagpole?
Both the JGB market and the yen can only collapse in the face of these developments. I know that the short JGB trade has killed off more hedge fund managers than all the irate former investors and divorce lawyers in the world combined. Read about my own recent, futile attempt to sell these markets by clicking here at http://www.madhedgefundtrader.com/august-6-2010.html .
But what Kyle says makes too much sense, and the day of reckoning for this long despised financial instrument may be upon us. How much downside risk can there be in shorting a ten year coupon of under 1%. I have included a breakdown of Kyle’s portfolio below, which you should note, has absolutely no equities anywhere in the world. Is Kyle trying to show us the writing on the wall?
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
(CNN)- With one day to go until the primary, an ugly GOP Senate nomination battle in Delaware is getting even uglier.
The Tea Party Express, the California based national Tea Party organization that's backing conservative candidate Christine O'Donnell, is demanding that Delaware Republican Party Chairman Tom Ross resign.
Ross is supporting former governor and nine-term state-wide Rep. Mike Castle in the contest. In May, at the state GOP convention, the moderate congressman and former two-term governor defeated O'Donnell, a conservative commentator and marketing consultant who ran unsuccessfully for the Senate in 2006 and 2008.
Tea Party Express endorsed O'Donnell earlier this summer and in the past two weeks went up with ads attacking Castle as too moderate. The group says they'll spend at least $250,000 on behalf of O'Donnell. A similar last minute blitz by the Tea Party Express last month was credited in helping conservative candidate Joe Miller top Sen. Lisa Murkowski in Alaska's Republican primary.
Ross has become very vocal in the past two weeks in criticizing O'Donnell and the Tea Party Express's involvement in the race.
Sunday night the Tea Party Express laid out an ultimatum.
"Tom Ross must resign within the next 24 hours or face immediate termination," declared Amy Kremer, Chairman of the Tea Party Express. "As Mike Castle's chief advocate, Mr. Ross has trashed Republican candidates, beliefs and principles, and shown a complete lack of character or integrity. He is a walking disaster who has brought irreparable harm to the Republican Party."
In an email release, the Tea Party Express said they were calling for the resignation in conjunction with a coalition of Delaware Republicans and conservative activists.
In a statement to CNN, the Delaware Republican Party fired back.
"As party chairman, Tom Ross is supporting the candidates that were elected by grassroots Delaware Republicans at the convention in May. A California political consultant who's never lived a day of her life in Delaware and is currently under investigation by the FEC for illegally coordinating with the O'Donnell campaign is the last person who should be calling for anyone's resignation," said Delaware GOP Communications Director Tom Doheny.
The investigation Doheney mentioned refers to a formal complaint the Republican Party of Delaware filed with the Federal Election Commission, accusing one of its own Senate candidates of illegally collaborating with the Tea Party Express. The Tea Party Express denies wrongdoing.
The series of TV and radio ads by the Tea Party Express attack Castle as a liberal candidate who "just keeps supporting the failed policies of Nancy Pelosi and Harry Reid."
The Castle campaign has also fought back.
"Out-of-state interest groups have threatened to spend half a million dollars to fund the disgusting tactics being used by the O'Donnell campaign to make accusations," said Castle campaign manager Mike Quaranta.
Meanwhile, the Castle campaign has launched therealchristine.com, a site devoted to aggregating negative news about O'Donnell. O'Donnell has faced criticism over her personal finance issues and leftover debt from previous, unsuccessful bids for a Delaware Senate seat. She has also been accused of misstating the results of her run against Joe Biden.
The winner of Tuesday's primary will face off in November against New Castle County Executive Chris Coons, the presumptive Democratic nominee, in the battle to fill the final four years of Vice President Joe Biden's final term. Biden stepped down from the Senate after his election in November 2008 as vice president. Former Biden aide Ted Kaufman was named as an interim replacement. Kaufman is not running for a full term.
Follow Paul Steinhauser on Twitter: @PsteinhauserCNN
CNN's Alison Harding contributed to this report
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