Wednesday, December 19, 2012

Zay Restructuring

It has been a while since I have written about the great global grinding slowdown...
But, Kyle Bass' excellent speech got me thinking again - it's 1 hour long and is worth it. Here it is.

His primary concern is actually Japan. And that is odd because nobody seems to be talking about it.
Some of the things he said...


  • Population down to 125 Mn from a peak of 129 Mn
  • Aging population will want to dis-save and hence this shows in the retail ownership of JGBs which has dropped from 5% to 3.5% in the last 3 years or so
  • The pension funds and the post are also signalling that they want to get out of JGBs
  • If the administration says that we will see deflation for a long long time, a 0.80% yield on a 10 year with a 2% deflation is a real income of 2.5% + which is alright... but if the new administration says that we will inflate out of this lull, nobody will want to hold the massive amount of debt which runs above USD 14 Tn or more than 200% of GDP
  • The country's tax receipts are, I think he said 40 Bn Yen and the interest outgo is 10 Tn Yen, so a quarter of the government's receipts go out as interest outgo... 
  • What happens when the debt is called back... furthermore, the authorities are monetizing the debt but refuse to call it a monetization... "We will call it that when the market says so or when the yields move in the opposite direction."
  • People say that the current account surplus makes the Japanese debt sustainable, but the surplus needs to be seen against other spends (not sure if that's what he said) - point was that one cant see the current account surplus for such a massive amount of debt.
  • Japan has one of the smallest migrant populations in the developed world at 3 Mn and now they want them to leave... this in itself aggravates the demographic problem
  • Last year, he said that the problem should surface in the next 3 years and now he says that it should surface in the next 2... so he's consistent

In all, most of what he said is logical... this can't be sustained, but the fact that it has been sustained for so long makes people believe that it will continue to progress well...

He also mentioned that there is a lot of distress around the world with real riots happening and food shortages.

One thing he said, and which I believe in is that there will be a global debt restructuring - the last time this happened was after the second world war when 42% of all countries restructured their debts;
I go a step further and say that the entire international currency mechanism is in for an overhaul soon enough.

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Love what he said when asked about China. Almost verbose...

Chinese banking system has expanded by 50% of Chinese GDP 3 years in a row; so that's analogous let's say to the US lending USD 23 Tn into our (the US) economy in 3 years through the banks... so, I think that they have had this enormous capital infusion into their banking system and to put things into perspective - their banks are now 3 times their GDP, the banking system, and their non performing loans are running at about 1%.
Historically, their NPLs run up into the high 20s low 30s (%). On average for the last 20 years, their NPLs have been 18-19%. If you take 18% of 3x GDP and you go look at Chinese fx reserves, that illusory pile of money that we think China has, is kinda gone. If their NPLs spike up to 18-19%...
And that's why I found the most recent announcement of - we'll allow more foreigners to invest in our banks now... the spider to the fly... no thank you... we'll wait for your NPLs to spike up.

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In the end though, he also said that he is now optimistic about the US, saying that shale has converted the US to the Saudi Arabia of gas, it is already the Saudi Arabia of food, oil output has increased dramatically, housing has gone thrown its trough and he is seeing positive signs there.
The best thing to own is real assets.
And this got me thinking of equities...




Warren Buffett has said that the world will be a better place 5 years, 10 years down the line and there has always been no harm in buying a good business at a good price. Will that axiom change now?
I see that a Japanese crisis or a Chinese crisis or a European crisis might create a global trough-like condition like that of the 1970s - but that does not prevent good businesses from doing well.
The alternative, which is to hold money in interest bearing assets is sure to lose money in an inflationary scenario whereas a good business will go through a year or a 2 year cycle and readjust prices for the new regime.

Fun times ahead.
Need to stock up on maggi.

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