A week ago I read Kyle Bass’s latest newsletter (for those of you who don’t know who he is: Kyle Bass was betting against the US mortgage market back when Ben Bernanke was testifying in front of the congress that the mortgage troubles are not going to have any significant impact on the US economy) and it resonated strongly with my personal ideas and expectations, especially on the state of affairs in Japan.
Japan is a champion even in the league of Spain, Greece and the other PIGS. Japan has been allowed to amass a completely unmanageable pile of debt (recently they were the first to reach the quadrillion level), the economy has been on a deflation spiral forever and the demographics has been worsening. So, Japan is a walking zombie, but then, what’s new?
A few things caught my attention. First, in the fore mentioned newsletter, Kyle Bass shows the demographics chart which seems to have peaked recently. In other words, from here on, it is more likely to see the consequences of their aging population.
The second is the upcoming elections – there seems to be a good chance that the next prime minister is going to be a proponent of unlimited easing! As if easing hasn’t been tried in Japan … Not only that, but he is even discussing the BoJ independence. A politician in charge of the printing presses sounds potently dangerous to me even in a world flooded with monopoly money.
Now the the million dollar question – how can one benefit from all these? Kyle Bass suggests short on the Yen, which seems reasonable. But in what currency? If the Yen starts weaken significantly, other central banks may decide to seize the opportunity to devalue their currencies en masse. In other words, I don’t feel compelled touching the USD/YEN, or the EUR/YEN pairs. The only plausible idea to me is to use a currency strongly based on physical stuff – the Canadian or Australian dollar. Any other ideas?
P.S.: I must say, I feel sorry about the Japanese people, they have suffered for a while now, and things are likely only to get worse from here on. On the other hand, if things developed as expected, then a major disaster in Japan could be the wake up call that the rest of the world desperately needs.