Kyle Bass is famous for two things; betting on GM and betting against Japan.
The automotive shares have been struggling and part of the trade on Japan was (bad) bet against bonds but he’s been right on Japan and called the surprise QE at the Oct 31 BOJ meeting.
He has an insightful interview in the Swedish press today where he talks about Japan and some other interesting investment ideas (he still likes GM).
At the Texas Investor Summit in February you predicted the yen, then at around 102, would go above 115 against the dollar during 2014. It ended the year at 119. Where do you see the yen going during 2015?
– I think it will go north of 140. And you could see a disorderly move in the yen this year.
But yields in Japan have been falling to record lows. Why is that?
– The Japanese preliminary budget has Japan running a fiscal deficit of about 37 trillion yen which, if that holds, would be one of their smallest deficits in years. But their central bank is still going to print 80 trillion yen. That means that they’re going to buy every bond that they issue, monetizing all of that, and then they’re going to buy about 40 trillion yen more of bonds, stocks and Japanese REITs. Since they buy more than they issue, they are basically taking JGB supply out of the market. That’s why you have the 5 year rate at one basis point and the 10 year rate at around 30 points.
Could the weaker yen spill over to the bond market?
– It hasn’t yet. The Bank of Japan is buying every bond out there, as someone like Paul Krugman would suggest. But if you follow that hypothesis and you’re rational about it, then one would think you would never need to have a balanced budget. You could spend as much as you wanted to spend and your central bank could buy every bond that the treasury issues. Well, that’s a world of fantasy. Why would anyone ever worry about a fiscal deficit ever again if that were to be true? At some point in time the pressure cooker breaks. Right now the currency has been the valve that has moved, so I think the currency keeps moving. But if you get a disorderly movement in the currency you could see a move in rates, you could see a panic. But maybe they don’t get that. Maybe the currency just goes from 120 to 300 or 400. Who knows where it goes.