Questions, not answers are where all thoughts begin.
If you’ve come to this blog looking for answers we humbly suggest you leave now. There are countless sites out there offering you the answers. That many of them have been, and continue to be, dead wrong doesn’t matter, they satisfy the perverse need for people to have all of their questions answered.
My good friend and business partner Mark and I see eye-to-eye on most everything. One critical aspect, which I think is a foundation of our trading and investing personalities, is that we can strip out our ego in order to arrive at a conclusion.
For this to actually work we have to keep asking questions until a logical set of conclusions presents itself. Therefore, by the process of elimination we are (hopefully) left with the gold at the bottom of the pan.
Some questions we have asked ourselves recently…
How is it possible to sustain a country boasting the following:
- A debt to GDP running north of 200%;
- A Government that spends roughly twice what it brings in;
- A savings rate in precipitous decline (under 2% for fiscal year 2011);
- A trade surplus that has turned south;
- A country where out of a mere 128 million souls, over 1 million per year are falling of the statistical charts (dying, leaving, etc);
- This while interest rates are sub 1% on the ten year bond, and;
- Over 50% of central government revenues are now devoted entirely to debt servicing.
We’re talking about Japan of course.
After looking at these facts we ask ourselves whether this is sustainable, and if so for how long? After all, trading is all about timing.
“Not long” was, and is, our conclusion. The question has been not if, but when. Equally important to us is how do we, as speculators and traders participate???
With Japan’s population of 128 million set to drop by 1 million every single year moving forward, we have a setup over the next 50 years where 40% of their entire population will be over the age of 65. Over that same time the population will have shrunk by 32%, to only 87 million people!
I was told by a friend in Tokyo recently that 99.8% of Japanese are cremated upon their death. That’s a hell of a lot of burning, and it’s clearly going to be a growth business – long firewood maybe? There’s going to be good money to be made in coffins and crematoriums.
Think I’m kidding. Due to the AIDS epidemic in Africa, one of the best businesses to be involved in if you were in Zimbabwe over the last two decades, has been the coffin making business. I’m not trying to be disrespectful or flippant, this is just a reality. Maybe I can import Zimbabwean Teak coffins into Japan – they’ll look great rolling into the flames at least!
Pension programs, social security and labour policies are set for a massive shift. The ability for Japan’s government to scale back from this precipice has long since gone. We’re swiftly heading into kamikaze territory now.
Our conclusion led us to bet on this overlooked yet inevitable crisis late last year. As you can see from the chart below… so far so good.
The problem with going long the US dollar is the same problem that I see with going long the Yen, at least from a fundamental perspective. Why would you go long the largest debtor nation in the history of the world?
Well, the short answer is liquidity, among other things which we discussed when referring to the big three currencies as ugly, uglier and ugliest. This leaves us with that old, boring chunk of metal, a relic really, that has been used as money for… oh, say 6,000 years or so. Who am I to argue with that sort of track record?
We’ve also mentioned that we are Betting against life insurers and pension funds which we believe will provide some home runs as this great big ball of debt unravels.
For now though it’s the Yen that has been hardest hit, lying on the floor, sitting at an 11-month low to the dollar as I write.
We’ll know the game is really getting started when the political classes “reiterate firmly that Japan will not monetize their debt, and that Japan will not default on their debt.” When you see that happen we’re just months away from an Argentine-style default.
I’m watching the 10-year JGB bond yield carefully to see when the rest of the world finally wakes up and “gets it.” Until then, I’m banking on the Yen coming under increased pressure.
Right now I’m putting the finishing touches on a concise report on the various ways that the small, retail investor can play this particular trade. It’s not just for the big boys that can load up on CDS… Stay tuned!
“Japan is the most convex, spring-loaded scenario I’ve ever even read about in economic history.” – Kyle Bass