This has been a most dramatic week in Europe. The Greek crisis unfolded over a year, so by its (short term) conclusion we were all a bit inured to it.
Cyprus has been an entirely different matter. We’ve all been aware that Cyprus had problems, but the sudden deterioration of the situation has taken everyone by surprise. The tax on savings has caught most attention, but what is perhaps more telling has been the hard line stance taken by the ECB.
After moving heaven and earth to keep Greece in the Euro, the Cypriots are being given the hard shoulder. And then some!
No doubt there is much confusion in Nicosia at the perceived double standard, but my hope is that the ECB has learned from its mistakes with Greece and is sending the strongest possible message to Spain and Italy to get their houses in order. The pending German election will also have been influential.
Apart from the widespread shock and loathing at the prospect of a tax savings, there is also a feeling that Europe is playing a dangerous game. I’m not so sure. Continue reading
Kyle Bass was the hedge fund manager who made his name and fortune correctly predicting and trading against subprime mortgages. He now believes Japan is 18 months away from a major sovereign default.
This video presentation is a must watch.
In summary Mr Bass delivers a damning indictment of the state of Japanese public finances. This isn’t a personal attack. It is based on the numbers and as he says the numbers don’t lie.
How this will all play out is of course anyone’s guess. Consider the extraordinary responses of policy makers across the overly indebted OECD-nations in the last five years. By rights the financial system should have collapsed, the Euro probably should have failed and the world would be a very different place. This is not to say this won’t still happen. I believe much of it will (though the Euro will probably survive).
Among the many excellent points of this presentation one has really struck me. Discussing the widely held view that Japanese nationalism and predilection for expressing patriotic pride through the holding of bonds is the saving grace of Japan’s vastly unsustainable debt to GDP ratio, Mr Bass cuts right through this. He believes that when the crisis point is reached human instinct will trump cultural norms. In other words expect to see a stampede for the exit as Japanese money managers desperately rush to move from Yen-denominated assets to whatever they can get their hands on abroad.
If this happens it will be violent, savage and quick.
Mr Bass is asked how retail investors can position themselves to profit from this. He is very cagey in his response and basically says they can’t. I can’t believe this is true and will be looking for opportunities as I agree with the assessment. In the meantime I will pay heed to his overarching advice; buy gold, sell the yen and go to sleep!
I am very happy to be long gold at the moment.
I came across this article which is a rebuttal of the idea that Japan will default. Make of it what you will, but it is an interesting counter argument.