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akimon


Total Posts: 566
Joined: Dec 2004
 
Posted: 2009-10-28 14:05
Recently there seems to be some rage again about betting on the collapse of JGB's. I remember every now and then, a bunch of punters will try to go short Japanese fixed income but ultimately lose and return home licking their wounds... but this time around seems to be causing more noise lately as non-traditional celebrity investors coming into the game.

Einhorn’s Next Call Won’t Be as Easy as Lehman

Oct. 27 (Bloomberg) -- David Einhorn was right about Lehman Brothers being a house of cards. What about Japan?

The New York-based hedge-fund manager who bet against Lehman Brothers Holdings Inc. says, “It is hard to see how Japan could avoid a government default or hyperinflationary currency death spiral” once borrowing costs increase. Lehman was one thing; Japan crashing is too frightening to contemplate.

Einhorn’s firm, Greenlight Capital Inc., has bought options that anticipate much higher interest rates. He is betting on a phenomenon many tried to time for a decade: a meltdown in a bond market with irrationally low yields.

...

The mix of a falling birthrate and swelling debt is a key reason investors steer clear of Japan, or bet against it returning to prosperity.

“Japan may already be past the point of no return,” as its debt burden worsens and the population ages, Einhorn said on Oct. 20 at the Value Investing Congress in New York.

-

What do you make of all this? Have you had any good/bad experience of going short JGB's?

Japanese Flag Head against Wall

Martinghoul


Total Posts: 866
Joined: Oct 2008
 
Posted: 2009-10-28 14:41
Another article on the subject:
Tough Times for Govt Bonds

I was on a conf call with a yen economist and the situation does sound pretty horrible, I have to admit. I, personally, don't see how they can climb out of this hole, given all the negative developments.

However, as you mention, it's a view that appears sensible to an outsider. The trade only makes sense if you're prepared to buy some cheap 'Japan blowup' options and write the premium off. Otherwise, as I have found to my detriment not once but twice (not short JGBs, though), the yen mkt will have you for breakfast.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

CFloon


Total Posts: 78
Joined: Jul 2007
 
Posted: 2009-10-28 16:02

Great topic. I think it is, in essence, the same or equivalent situation that the US is in. I think there will be "both" a major default and big inflation. There's really no way out of it.

There was a great little model that some guys developed, something like a 1-factor short rate model with a binomial or poisson "bing" that lifts rate off zero. You calibrate the model and it's supposed to indicate a most likely end date for the end of the zero rate policy. I will try to remember where I found it.

Anyways I used to trade euroyen (short rates) and JGB's. Euroyen of course was always short futures and it was only a minor loser (year after year, ha ha.) JGB trdaing was much better, but I wasn't always short. This was a few years ago. Since then I have been hiding under a rock.


"There probably isn't any meaning in life. Perhaps you can find something interesting to do while you are alive. Like how you found that flower. Like how I found you."

meteor


Total Posts: 165
Joined: Feb 2007
 
Posted: 2009-10-28 18:09
This debasment / japan defaulting talk is IMO way too premature.

People should get their macro-economic right: a country run a current account deficit if the gov deficit is higher than the sum of the household and corporate savings.

Yes the household savings have been going down over the last 10 yrs but on the other hand the corporate savings have been going up.

Furthermore the corporate capex expectation remain depressed which should increase the corp saving rate in the short term. On the other hand the households have eroded their savings during the downturn (saving are smoothing out the consumption) and so we might expect that in the short run the saving rate will go up (either because the economy picks up and consumers get more income or because the downturn is permanent and consumers reduce their consumption).

When you look at the japanese net saving (Gov - Private sector saving) we have reached the current level during the 80s and 90s. Furthermore the current level is not low compared to previous recession.

On the political side, I wouldnt be surprised if the DPJ is trying to scare Japanese people: ie blaming the bad current state of the economy to LDP-era (and so help DJP election for the upper house next summer) or trying facilitate a cons tax increase.

As for the cheap option: the 5y10y 3-6% payer spread offers you a 5:1 pay out ratio; not such a great deal for an end of the world scenario if you ask me.

On a broader level, I think this story is related to the fact that people want to see black swans these days (as opposed to their white swan view prior to last year crash). So people are happy to buy "cheap" option as they cant afford to miss the next crash.

Btw if foreigners wants to get real about the possibility of a japanese default they should short the cash bonds instead of swaps.

malsain de corps et d'esprit

CFloon


Total Posts: 78
Joined: Jul 2007
 
Posted: 2009-10-29 02:03
Here we are:

Nice Little Model

I thought it was cool / useful / understandable.

The idea is to get a handle on market expectation of the end of ZIRP.

As for an actual trade set-up, I'm sure meteor is right, but I've never shorted cash bonds. Japanese cash bond trading has not always been so nice and friendly for us westerners. In fact it used to be possible to get into something, but fairly difficult to get out of it. In other words, local firms would be happy to sell you a bond, but when you wanted to liquidate they wouldn't touch it. I don't know if it is still like that or if shorting a cash bond is even worse??

"There probably isn't any meaning in life. Perhaps you can find something interesting to do while you are alive. Like how you found that flower. Like how I found you."

Dynamic Turtle


Total Posts: 165
Joined: Sep 2006
 
Posted: 2009-10-29 12:27

People have short memories. Turtles don't.

Beyond the economics of the situation (which are so dire as to effectively guarantee default), I don't understand why everyone is so bloody sympathetic towards the Japanese.

They're simply paying the price for failed colonial aspirations and for their horrific attempts to conquer Asia last century. Frankly, the marauding bastards deserve everything they get. Let them face the economic and social consequences of their warmongering. It's the least they deserve.

Problem is, we will also suffer greatly from their economic collapse. I hope we don't bail them out (that money has arguably already been spent on ourselves). There's plenty they could've done to limit the damage to their economy, but obstinate, arrogant and xenophobic attitudes have undone them. We should not underwrite these principles and learn to live without Japan as a major economic powerhouse. I don't think they'd mind too much. The hate us Gaijin anyway.

I hope this serves as a good lesson to other overcrowded nations. If you're going to make a land grab, make bloody sure that you win the fight.

DT


MadMax


Total Posts: 424
Joined: Feb 2006
 
Posted: 2009-10-29 12:36
DT,

If you have nothing to contribute to the topic, may be you should just shut up!

jungle
Chief Rhythm Officer
CSD LLC
Total Posts: 3164
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Posted: 2009-10-29 13:15

On a broader level, I think this story is related to the fact that people want to see black swans these days (as opposed to their white swan view prior to last year crash). So people are happy to buy "cheap" option as they cant afford to miss the next crash.

Perhaps.  But the unsustainability of fiscal policy is a reasonable focus, and Japan is further down the road than most.  I'm not sure there's much more to it than that.

 


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KangaXX


Total Posts: 293
Joined: Mar 2005
 
Posted: 2009-10-29 14:38
is japanese debt to gdp that bad if you net off foreign reserves/net assets held at the central bank?

Bright, energetic people—usually quite young—have promised to perform miracles with “other people’s money” since time immemorial.

macrotrader


Total Posts: 353
Joined: May 2009
 
Posted: 2009-10-29 15:40
John Mauldins newsletter has a piece by Einhorn this week, where expands on the ideas:

"Along these same lines, we have bought long-dated options on much higher U.S. and Japanese interest rates. The options in Japan are particularly cheap because the historical volatility is so low."

In the speech he also said he is not a macro-guy, but is forced to be one nowadays. I think he misses or rather omits several questions, as interesting as his views are. If rates should spiral why now (as opposed to the last X years)? How do US and Japanes rates correlate? They didn't in the past to my knowledge. etc.


>>is japanese debt to gdp that bad if you net off foreign reserves/net assets held at the central bank?

Right. Here are the datapoints:

The current debt/GDP ratio is 200% (IMF data). The foreign reserves are roughly 1 trillion$ (IMF data). GDP for Q2 09 was 1.4 trillion$.

"[Fama] then said that he believed that God knew that the stock market was efficient. He added that the closer one came to behavioral finance, the hotter one could feel the fires of Hell on one’s feet.”

jungle
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Posted: 2009-10-29 16:13

is japanese debt to gdp that bad if you net off foreign reserves/net assets held at the central bank?

YukaRedux highlighted the net vs. gross debt issue in an old thread.

EDIT: post edited for clarity.

Akimon -- check your email, sent you something that may be of interest.


"I believe there is something out there watching us. Unfortunately, it’s the Government." Woody Allen, via HLCYG

tabris


Total Posts: 1255
Joined: Feb 2005
 
Posted: 2009-10-29 19:50
I think the "why now?" question is probably the best point in this thread. All the things that has been mentioned in this thread have had previously happened to Japan in similar scale. I think people who are interested in shorting the crap out of the JGBs need to at least find a "catalyst" that would explain why this time it is different. I am not sure there are any at the moment. I agree with meteor that this is a bit too pre-mature. It reminds me of PIMCO in 2005 talking about the bursting of the housing market bubble.

To me, this just sounds like some sales guy not generating enough sales credit and decided to rehash the old idea to foreigners. Same shit, different day.

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Martinghoul


Total Posts: 866
Joined: Oct 2008
 
Posted: 2009-10-29 20:06
I am very interested in this net vs gross debt issue and what the net debt figure might be like now, after the crisis and the resumption of rinban.

I'll try to ask arnd myself, but if anyone has this info handy, it would be most glorious.

EDIT: First result... Apparently, the BoJ's holdings of govt securities (FILP and JGB bonds and trsy bills) are currently at arnd 20% of nominal GDP.

EDIT: @Meteor, where do you see the price of the 3% - 6% payer spread? Did you price it before or after Einhorn-inspired flow hit the mkt? Just curious...

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

sharpend


Total Posts: 279
Joined: Aug 2007
 
Posted: 2009-10-29 22:46
So many "macro" guys pushing the same types of trades. They all see early to me: gold, short bond etc.

Amazing to see how much 'buy with' noise there is out there.

This is a great thread.

jungle
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Posted: 2009-10-30 00:53

So many "macro" guys pushing the same types of trades. They all see early to me: gold, short bond etc.

How many big, thematic macro (or "macro", if you prefer) trades are there to do at any one time? 

Incidentally, there was a story out today about Tudor pushing gold.  Link.


"I believe there is something out there watching us. Unfortunately, it’s the Government." Woody Allen, via HLCYG

sharpend


Total Posts: 279
Joined: Aug 2007
 
Posted: 2009-10-30 01:20
I don't think we totally disagree. "macro" in quotes, meaning too many people who are not really macro guys (Loeb Einhorn and everyone who followed Einhorn last week) trading macro because that has been where the major edge had been the last couple of years. And now they are reaching to find trades. So I think you have fewer macro trades now and too many people chasing them.

There will always be macro trades. I also think there is a lot of room for disagreement on these trades. I think everyone is way to early on inflation and is misinterpreting the effects of monetary expansion--ignoring velocity and the money multiplier.

Gold may work but not because of inflation. But thematic macro: Here's one. The US will be in a horrible slow growth decade and the money will be made selling the rallies and not buying the dips. The consumer will wither and branding will struggle.

All I read about everyday is one more guy shorting bonds and buying gold. I don't disagree 100% but it seems crowded to me.
And in general, even though maybe not this year, I think there can be many thematic trades at one time--or more than two

jungle
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Posted: 2009-10-30 02:05

Re: being early: IIRC, in Robertson's interview with Charlie Rose in 1998, he said that Tiger had been short Japanese banks for something like seven or eight years.  Being early is perhaps not something that macro funds worry about. 


"I believe there is something out there watching us. Unfortunately, it’s the Government." Woody Allen, via HLCYG

sharpend


Total Posts: 279
Joined: Aug 2007
 
Posted: 2009-10-30 02:13
No they don't like Clarium and you have to endure a lot of pain. And I have, and I got sick of being "right." As a musician friend used to say "the right note at the wrong time is the wrong note." Got to have rhythm.

As for gold working with no inflation

Bandwagon

Back to Japan and JGBs. If the USD becomes the carry currency of choice. Well what is the size of yen borrowing, is it significant or a rounding error? Similarly how much of Japan's savings are in other countries/currencies that would be repatriated if yields increased?

jungle
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Posted: 2009-10-30 03:02

As a musician friend used to say "the right note at the wrong time is the wrong note." Got to have rhythm.

Smiley  Nice analogy. 

EDIT: I would be surprised to see pensions funds jump in to gold.  They don't strike me as sufficiently nimble to be momentum traders, and as gold has no yield, I don't know why they would want to own it.  But I'd like to here from others (any real money guys reading?) why I'm wrong here.   

 

 


"I believe there is something out there watching us. Unfortunately, it’s the Government." Woody Allen, via HLCYG

meteor


Total Posts: 165
Joined: Feb 2007
 
Posted: 2009-10-30 05:21
@ sharpend: you are spot on about the carry trade: Japanese have been buying Treasuries with short term FX hedges. The return of such strategy is quite high compared to the last decades because rolling the hedges is costless as the USD Libor = JPY Libor. You can also see the purchase of UST by Japanese from the TIC data.

This has several interesting consequences:
-This is my mind why the JPY lifers are not really fighting the sell-off (ie they get their duration in via US Treasuries).
- So when the Fed exit you can expect a nice blow up in the USDJPY (and some repatriation of duration back in Japan)
- Given that scenario it is understandable why UST can rally while USD is selling off.

@ Martingoul: The quote I got was 2 days ago. Now the pay-off looks more like 7-8:1

malsain de corps et d'esprit

akimon


Total Posts: 566
Joined: Dec 2004
 
Posted: 2009-11-01 03:10
Personally I find the story fairly convincing because what they have at the moment is clearly not sustainable. The question is to get the timing right because "the right note at the wrong time is the wrong note" (I really like this quote Smiley). That's probably why the use of long-dated options is the preferred trade over outright shorting the market to avoid getting squeezed out.

Jungle, I don't think I have received what you sent - can you pls send again to hardmaru at gmail dot com?

meteor: the payoff has changed, probably because _someone_ changed the strikes to increase the pay out ratio Wink

akimon


Total Posts: 566
Joined: Dec 2004
 
Posted: 2009-11-01 03:10
deleted double post.

Martinghoul


Total Posts: 866
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Posted: 2009-11-02 14:49
The UK press seems to be on the case now:
It is Japan we should...

EDIT: Another bit of blurbage:
The Japanese Bond Mkt...

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

akimon


Total Posts: 566
Joined: Dec 2004
 
Posted: 2009-11-04 14:39
Interesting articles Martinghoul

I don't think anyone outside of Japan is bullish at the moment with sentiments like these strongly expressed in the investor community.

It makes yen swaption volatility seem like a hot commodity these days Cool Japanese Flag

Martinghoul


Total Posts: 866
Joined: Oct 2008
 
Posted: 2009-11-04 15:31
Yep, indeed... However, from what I can see (just looking at 5y5y ATM) we're almost back to pre-Einhorn levels. It's a bit strange, to put it mildly.

I was also attempting to look at 10y 10% caps in yen (given my happy experience with this trade in EUR). I can't see it in ICAP, sadly, but, again, the 10y ATM cap vol has also been coming off and is now back to where we were before all the headlines.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...
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