Kyle Bass has been betting that Japan, which has the highest government debt-to-GDP ratio in the world, will eventually lose control of the bond market once investors wake up to this concept.
(Shorting Japanese bonds is known as the widowmaker trade, because it seems like an obvious conclusion to many traders, but it never bears itself out.)
Naturally, Bass is also bearish on the yen. If the Bank of Japan lost control of the bond market, it would presumably be bad news for the country's currency. So, he's been doing well in recent months as the yen has quickly declined against the dollar.
Betting against the yen has become one of the hottest trades in the world. A natural extension of that trade for many has been to buy Japanese stocks. After all, a weaker yen usually means higher stocks, as Citi strategist Steven Englander pointed out yesterday.
Bass doesn't think the "buy stocks" part of the trade is such a great idea.
Kyle Bass was on CNBC today to discuss the BoJ's decision last night to double the size of its asset purchases over the next two years, and he even went so far as to call those investing in Japanese stocks "macro tourists."
Below is what Bass had to say:
There's really no great prescription here to "profiteer" from what is going on in Japan. I think it's really important, if you run a global portfolio, or you have a global investment portfolio of your own, it's really important to just not be long yen, and not be long Japanese assets.
I know there are some people that own Japanese equities in this Pavlovian response to "weaker yen, buy equities," but you have to remember: the Japanese industry has been hollowed out over the last 20 years, very similar to how the U.S. industrial complex was hollowed out in the 1970s.
So, I think it's going to be very disappointing for those who own those equities, and I kind of think they are "macro tourists."
Note: The term "macro tourist" refers to someone who is not a traditional macro expert stepping out of one's comfort zone to make big bets based on one's own (often flawed) notion of economics.
CNBC anchor David Faber pressed Bass. Couldn't a weaker yen help revive Japanese industry?
I think what you really have to focus on – I think people are focused on the dollar/yen too myopically. You have to think about where Japan has lost its trade competitiveness. It's lost it to Korea. And, I think the next thing you are going to see Japan talk about is buying foreign bonds, and I think they need to set the architecture up at the MoF and the BoJ to allow themselves to do so.
If and when they do that, you're going to see an implicit trade war started by their purchasing of foreign bonds.
So, I think that is sort of the next step out of the BoJ. But don't be myopic about dollar/yen. You have to think about where their trade competitiveness really is lost.
Bass says he hopes he's wrong about all of it.
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