Global Macro Trading Journal
- Thread starter Daal
- Start date
Obtaining the property isn't the point, the point is to get something (the property) for nothing (a fixed liability in paper money which you expect to become worthless, or worth less).
The other point, about a strengthening yen, is why you wouldn't do this unless it was in Japan and you could rent the property (and thus have some yen income to cover the yen liabilities). But apparently they don't give loans to gaijin so it's all moot...
I just took a look at 5yr CDS of Italy and Hungary:
http://www.bloomberg.com/quote/CITLY1U5:IND
http://www.bloomberg.com/quote/CHUN1U5:IND
Honestly, have financial market players lost their mind placing Italy´s default chances at par with Hungary´s????
:eek:
http://www.bloomberg.com/quote/CITLY1U5:IND
http://www.bloomberg.com/quote/CHUN1U5:IND
Honestly, have financial market players lost their mind placing Italy´s default chances at par with Hungary´s????
:eek:Quote from ASusilovic:
I just took a look at 5yr CDS of Italy and Hungary:
http://www.bloomberg.com/quote/CITLY1U5:IND
http://www.bloomberg.com/quote/CHUN1U5:IND
Honestly, have financial market players lost their mind placing Italy´s default chances at par with Hungary´s????
Should be higher, far higher. Hungary can be bailed out and in fact is working with the IMF on just that. Italy can't.
But surely you'd agree that in the world of finance you can construct arguments that appear sound that support diametrically opposing views? As to facilitating trades that perform well, it's unfortunately impossible to know a priori whether the argument will do that or not.
Absolutely agree... For the short JGB trade, I'd argue, the timing element has a larger weight than usual. My point is that, taking survivorship bias into account (something you're alluding to), how can I be certain today that Bass is a decent trader who's got the timing of the short JGB trade right, rather than one of the many other famous money managers (among them Julian Robertson, Paulson, Einhorn and, if I am not mistaken, Peter Thiel)?
Sov CDS is not worth owning even at 1bp per annum. Japan, with most of its bonds held domestically, is easily capable of engineering a "voluntary restructuring" w/o triggering sov CDS. In that case, the real cost of owning this contract is the PV of all the litigation expenses, rather than 1bp per annum (judging by how long the Argentina sov CDS lawsuit spent in NY courts, those fees are going to be hefty). However, if I understand what you mean, i.e. would you buy these types of blowup options if they were cheap as chips and well-defined? Hell, yeah. Problem is that there are no "cheap" or "free" Japan blowup options out there, unless, of course, you assume a blowup occurs very very soon.
IIRC, isn't there a story that this is pretty much what Kyle Bass has done? Not for properties in Japan, but that's the idea...
Right, so I have listened to the interview and, while there are some things that Bass said that I certainly agree with, there's not much detail and it's, obviously, him presenting his side of the story. So, in order to find more detail, I have gone and re-read one of his famous investor letters from a while back (Q3 2009) where he talks about Japan a bit more.
The analysis that he offers to support his "short Japan" thesis is superficial, IMHO. It doesn't address several important issues.
1) Japan's running a current account surplus, even with yen pretty much the strongest it's been.
2) Japan's headline govt debt-to-GDP number is overstated, due to the intra-govt cross-holdings of JGBs and FILP bonds.
3) The rise in the corporate savings rate that has offset the often mentioned fall in the household savings rate.
4) There seems to be specific confusion about what the yen exchange rate actually does to the Japanese economy. On the one hand, his expectation is for weaker yen and yet, mysteriously, he cites that a strong yen is going to be a problem for exporters and thus will negatively impact GDP. I am not really sure I understand how you can have yen both weak, so that you profit on it, and strong, so that it actually causes a problem.
5) Finally, in the investor letter, Bass explicitly gives his timeline for when he expects the Japan trade will start performing. He says and I quote "We believe global OECD rates will begin their ascent over the next 18-24 months and that the best convexity for rates is in Japan". The letter is dated Oct 2, 2009 and 10y JGB yield on that day was arnd 1.30%. 10y JGB yield today, more than 24 months later, is 0.94%. During the 24 month period the high was 1.5%, the low 0.85%. I have already mentioned the negative carry. So, clearly, Kyle Bass doesn't quite have the timing of this JGB trade right, which is exactly the problem with so many of his famous predecessors.
At any rate, I have no way of knowing how exactly the trade is structured. Given that he mentions convexity of rates, I presume it's through options. It's entirely possible that Bass has found a fantastically cheap way to put these trades on, but there doesn't seem to be any evidence of that.
The analysis that he offers to support his "short Japan" thesis is superficial, IMHO. It doesn't address several important issues.
1) Japan's running a current account surplus, even with yen pretty much the strongest it's been.
2) Japan's headline govt debt-to-GDP number is overstated, due to the intra-govt cross-holdings of JGBs and FILP bonds.
3) The rise in the corporate savings rate that has offset the often mentioned fall in the household savings rate.
4) There seems to be specific confusion about what the yen exchange rate actually does to the Japanese economy. On the one hand, his expectation is for weaker yen and yet, mysteriously, he cites that a strong yen is going to be a problem for exporters and thus will negatively impact GDP. I am not really sure I understand how you can have yen both weak, so that you profit on it, and strong, so that it actually causes a problem.
5) Finally, in the investor letter, Bass explicitly gives his timeline for when he expects the Japan trade will start performing. He says and I quote "We believe global OECD rates will begin their ascent over the next 18-24 months and that the best convexity for rates is in Japan". The letter is dated Oct 2, 2009 and 10y JGB yield on that day was arnd 1.30%. 10y JGB yield today, more than 24 months later, is 0.94%. During the 24 month period the high was 1.5%, the low 0.85%. I have already mentioned the negative carry. So, clearly, Kyle Bass doesn't quite have the timing of this JGB trade right, which is exactly the problem with so many of his famous predecessors.
At any rate, I have no way of knowing how exactly the trade is structured. Given that he mentions convexity of rates, I presume it's through options. It's entirely possible that Bass has found a fantastically cheap way to put these trades on, but there doesn't seem to be any evidence of that.
Indeed, but I, personally, am happy to stay out of this particular game and leave sov CDS to other people...