{"id":38035,"date":"2013-05-01T22:52:32","date_gmt":"2013-05-02T02:52:32","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=38035"},"modified":"2013-05-01T22:52:32","modified_gmt":"2013-05-02T02:52:32","slug":"the-real-reason-you-should-care-about-japan","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/05\/01\/the-real-reason-you-should-care-about-japan\/","title":{"rendered":"The Real Reason You Should Care About Japan"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

Kudos to those who bought Japanese stocks<\/strong>. The Tokyo Stock Price Index, or Topix, is up 37% for the year and a blistering 60% since November. It was in December that Shinzo Abe came to power in Japan. He promised easy money. And the Bank of Japan delivered by promising to double the money supply. It was like waving a red cape in front of a bull. Ol\u00e9!<\/p>\n

The idea behind this spectacular rally in the one of the world\u2019s largest stock markets is as simple as it is absurd. The impetus for the bullish charge is that printing lots of money is good for stocks<\/a>.<\/p>\n

Well, so far, it seems to be\u2026but I wouldn\u2019t bet on it lasting long\u2026<\/p>\n

I was at Grant\u2019s Spring Investment Conference in Manhattan a couple of weeks ago. Mark Yusko, the CEO of Morgan Creek Capital Management, was there. He said Japanese stocks are a buy. Emphatically so. The argument was that a weaker yen would bring profits for exporters. And that inflation<\/a> (or currency devaluation) is good for stocks.<\/p>\n

He particularly liked the financial companies in Japan. \u2018These stocks are going to go up,<\/i>\u2019 he said. \u2018It\u2019s not a question of whether they might go up, it\u2019s not a question of whether they might do well and make profits. They\u2019re going to go up\u2026<\/i>\u2019<\/p>\n

Kyle Bass<\/strong>, chief of Hayman Capital Management, was also there and presented right after Yusko. If Yusko was a guy waving a red cape in front of the bulls, Bass was a guy brandishing a sword.<\/p>\n

\u00a0Killing the Bull Argument on Japan<\/b><\/h2>\n

Bass, if you know anything about him, was one of those who made a fortune by predicting the subprime mortgage crisis. You may also know that he\u2019s been predicting disaster in Japan for a few years now. Nonetheless, on quality of the arguments, I give the nod to Bass. He dispatched the Japan bull with a few thrusts of his sword.<\/p>\n

The first thrust was to bring up Mexico in 1994 during the so-called Tequila Crisis. The Mexican government, much like Japan today, told the world what it was going to do. It was going to print a lot of money and devalue the peso.<\/p>\n

\u2018In theory,<\/i>\u2019 Bass said, \u2018Mexican equities should have taken off with that 60\u201370% currency devaluation. But what happened? In 40 days, they dropped 70%. You lost 60\u201370% on the currency, plus 70% on the equity\u2026 And look at how fast it happened. It happened very, very quickly. In a month\u2019s time, things literally fell apart. You couldn\u2019t act fast enough.<\/i>\u2019<\/p>\n

The Japan bull thesis, already dealt a mortal blow, staggered\u2026but Bass wasn\u2019t finished.<\/p>\n

Next, he took the sword to Japan\u2019s sorry fiscal condition. Japan is insolvent, he said. Everyone knows it. The only question is how long they can hold on. He walked through some back-of-the-envelope math on what this means for Japanese bonds<\/a>. On reasonable assumptions, he arrived at an 83% haircut. Ouch.<\/p>\n

The bull was bleeding now, breathing heavily. Bass kept at him\u2026<\/p>\n

Yusko, and others, say a weak yen<\/a> will be great for Japanese exporters. What they miss, Bass said, is that about 16% of the Japanese economy<\/a> is imports. So imported goods immediately become more expensive as the yen weakens. Exports take longer to adjust.<\/p>\n

\u00a0<\/i>\u2018Your terms of trade actually worsen at first,<\/i>\u2019 Bass said. \u2018I think that\u2019s going to be a shock to people who own equities.<\/i>\u2019 (He also used a great term I\u2019ve not heard before \u2014 \u2018macro tourists\u2019 \u2014 to derisively refer to those who buy stocks for flimsy macro reasons but have no expertise in global markets.)<\/p>\n

The bull was nearly spent. Bass moved in to deliver the final cut\u2026<\/p>\n

\u00a0<\/i>\u2018I think the average Japanese person will lose maybe a third or 40% of their purchasing power<\/i>,\u2019 he said, getting more apocalyptic as the minutes ticked away. He talked about the social risks in Japan.<\/i><\/p>\n

\u00a0<\/i>\u2018You don\u2019t want to be the only man standing in a place where everyone is losing 70% of their purchasing power,<\/i>\u2019 he said. The crisis in Japan would destabilize the whole region, he said, and lead to social unrest. I had visions of mobs, firebombs, tear gas, spilled miso soup\u2026<\/p>\n

\u00a0Breakdown in Japan<\/b><\/h2>\n

The beginning of the end is already here, Bass said. It started on April 5. Japanese bond prices began to move in odd ways not seen by any living traders. The Japanese \u2018swaption\u2019 market, used to manage interest rate risks, blew out 50\u2013100% overnight. \u2018The brokers were calling us asking, \u2018What\u2019s going on?\u2019<\/p>\n

\u2018The move that we saw that Friday was the holy crap moment,<\/i>\u2019 Bass said. \u2018The mindset of investors changed, ever so slightly.<\/i>\u2019<\/p>\n

He mocked those who rely on what governments say: \u2018I\u2019ve never been in a meeting with a finance minister or prime minister where a guy says to me, \u2018Yeah, you know, you\u2019re absolutely right, we\u2019re screwed.\u2019 I\u2019ve never been in one of those meetings. Period.<\/i>\u2019<\/p>\n

In the Q&A, attendees peppered him with questions about what the world would look like after a Japanese crackup. One Bass observation that stood out for me: <\/i>\u2018On that day, US yields go negative.<\/i>\u2019 If Japan implodes, it could bring a flight to the dollar \u2014 just as in 2008. US interest rates would fall.<\/p>\n

Continuing this line of thought, I would add that commodities, too, would get hit hard in dollar terms. It would probably mean gold would fall in US dollar terms, at least in the short term. Perhaps the sell-off in gold we see now is the market anticipating the day of a denouement for Japan.<\/p>\n

Anyway, when Bass was through, our host Jim Grant ambled up to the stage to drag off the carcass of the Japan bull.<\/p>\n

Intellectually, at least, the bullish argument on Japan was dead. It can take a while for markets to catch up to a real disaster in the making, though \u2014 which was the main subject of Bass\u2019 talk, titled \u2018The Difficulty With the Psychology of Negative Outcomes\u2019. But it gets there eventually.<\/p>\n

Until then\u2026 Ol\u00e9!<\/p>\n

Chris Mayer
\n<\/b>Contributing Writer, Money Morning<\/i><\/b><\/p>\n

Join Money Morning on Google+<\/u><\/a><\/strong><\/p>\n

\u00a0From the Archives\u2026<\/i><\/b><\/p>\n

The Market Rebounds, but We\u2019re Still Not Selling\u2026
\n26-04-2013 \u2013 Kris Sayce<\/span><\/a><\/p>\n

Is This the Last Hurrah for the Australian Dollar?
\n25-04-2013 \u2013 Murray Dawes<\/span><\/a><\/p>\n

Here\u2019s Proof the Silver Bullion Market is Alive and Well
\n24-04-2013 \u2013 Dr. Alex Cowie<\/span><\/a><\/p>\n

Stand By for the Recession Rally in Resource Stocks: Take Two
\n<\/a>23-04-2013 \u2013 Dr. Alex Cowie<\/span><\/a><\/p>\n

A New Take on Hard Asset Investing
\n22-04-2013 \u2013 Kris Sayce<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Kudos to those who bought Japanese stocks. The Tokyo Stock Price Index, or Topix, is up 37% for the year and a blistering 60% since November. It was in December that Shinzo Abe came to power in Japan. He promised easy money. And the Bank of Japan delivered by promising to double the … <\/p>\n

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