Outspoken iconoclast Hugh Hendry takes a massive $2B bet that Asia will hit the skids. "At these...

Outspoken iconoclast Hugh Hendry takes a massive $2B bet that Asia will hit the skids. "At these immense levels of yen strength, Japan is bankrupt," he says. "And because it's deemed to be impossible, the trade is actually asymmetric. By golly if I am right, I can make a lot of money."
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Comments (14)
  • stevepoddy
    , contributor
    Comments (53) | Send Message
    Cowboys are always amusing.
    28 Sep 2010, 07:07 PM Reply Like
  • DrBenway
    , contributor
    Comments (300) | Send Message
    Well, Japan is indeed bankrupt and they yen should be deprecating quickly. Over 200% deficit, no GDP growth, shrinking work force - makes US look like an economic miracle. I would pick Greece as more likely to succeed over Japan 20 years down the road.


    Yet the markets can stay irrational much longer than one can stay solvent.
    28 Sep 2010, 07:51 PM Reply Like
  • nightfly
    , contributor
    Comments (1015) | Send Message
    The problem is that the JPY is appreciating. The Japanese are the world's biggest lenders as they have been the biggest savers.


    This is what has kept Japan somewhat afloat, as they sell most of their govt bonds to their own people. Big contrast to the US.


    But those savers are pulling their Yen back home, (carry trades gone amock); corporations need to re-patriate their profits etc.


    The game is up for Japan, and all too soon, the US as well.
    28 Sep 2010, 09:33 PM Reply Like
    , contributor
    Comments (370) | Send Message
    Right bet, wrong position size.
    28 Sep 2010, 10:29 PM Reply Like
  • The Mighty Wart
    , contributor
    Comments (128) | Send Message
    Japan only needs to open up to immigration and foreign investment to turn their fortunes for better. Now this is a big ONLY but I believe they will do this before going bankrupt. The problem of Japan is a political one, not a structural one. They might start paying countries like France, Spain, Taiwan to receive their elderly: it might be cheaper that maintaining them at home. Mind you the Japanese live a hell of a long life and this has become a massive burden for the society particularly because they don’t want to open up for immigration. They still have world-class companies, super educated workforce and perhaps the most advanced infrastructure in the world, things that Greece lack of. I don’t believe this BS quite frankly. Plus what does that mean being bankrupt? The Nikkei has been in a secular bear market for years now.
    28 Sep 2010, 09:50 PM Reply Like
  • Paul H. M.
    , contributor
    Comments (1035) | Send Message
    Great post.


    Also, let's remember that compared to its population, Japan has the largest GDP in the world.


    Considering they are a small island with few resources, their system, as flawed as it might be, is still producing better results (in relation to the resources available) than any system in the world.


    Sure, China has a larger GDP, but Japan is close, with much less to work with.


    People point to Japan as a failed system, but who else has done so much (3rd largest economy in the world) with so little?


    How can one poster put them in the same sentence as Greece. Have you been to Greece? Have you been to Japan? It's like night and day.


    Japan is like being in the future, everything is high tech. Most places around the country are clean and well-kept. Overall, Japan's "secular bear market" has produced better results, in relation to what the have to work with, than any nation's "bull market".


    You think India or China is better off than Japan? Go to India...then go to Japan...you will see with your own eyes that Japan is in far better shape.
    28 Sep 2010, 10:48 PM Reply Like
  • DrBenway
    , contributor
    Comments (300) | Send Message
    You can't just open up to immigration on demand. Japan is a very closed society, unlike US or even Europe. How many people do you know that learned Japanese?


    Japan used to have an educated workforce, not it's turning into a retired workforce, which accustomed to high standard of living but can't afford it. The great Japanese companies, Toyota, Sony, Toshiba, etc. are leaving Japan for countries with younger and cheaper workforce.


    Japan is bankrupt in a very simple sense: the interest payments on its debt will soon exceed its revenue. Both are simple functions of long-term-debt/GDP ratio that is growing rapidly . There are only two options: monetize the debt or outright default. Either way the Yen will collapse and the interest rates will spike. Whether you want to short long-term bonds or short Japanese currency, is more a matter of preference, but it's essentially the same bet.


    Japan is an absolute basket case that probably hit a point of no return. It will be a third world country in 20-30 years. Chinese will be building fences to keep Japanese migrant elderly out.
    29 Sep 2010, 01:19 PM Reply Like
  • User 281898
    , contributor
    Comments (46) | Send Message
    What happened to his investment in German bonds he put on in 2008? I loved that guy when the crash was going on but haven't followed him since. I was under the impression he was on the wrong side of the trade all of last year and I'm assuming this year as well?
    28 Sep 2010, 11:06 PM Reply Like
  • nobby73
    , contributor
    Comments (1176) | Send Message
    I'm a big fan of Hendry and his Macro Fund has done pretty well this year. I suspect this trade is for his new fund, and where they are looking at shorts on high rated credits. If you think about the logic, there is a lot of sense in it. There are many huge Japanese manufacturers, which will have very tight CDS spreads, that are getting murdered by the exchange rate, which needs to be a lot lower. Therefore, you can short their CDS and hedge with OTM JPY/ USD puts, in a appropriate size to cover the cost of the premium for the CDS. The CDS will pay off if there is a deterioration in credit spreads, or the big one, a worsening of JPY govt bonds (in which scenario, your fx hedge will probably pay off as well.)


    The logic is simple, and as he said, he knows his maximum downside (it is the cost of the CDS protection.)


    The thing to remember with high rated CDS names is the trade is more like an option that a swap (this is what Paulson/ Pelligrini understood about the MBS market) so your risk reward profile really gives you a cheap option.
    29 Sep 2010, 02:47 AM Reply Like
  • sosdkny
    , contributor
    Comments (10) | Send Message
    Difficult to say that if Japan goes all of Asia will follow? We are in a new Era with China pulling all the strings and calling all the shots.


    What bet is he making? SHorting the Nikkei, long the Yen, which is it?


    29 Sep 2010, 04:38 AM Reply Like
  • Ranni
    , contributor
    Comments (154) | Send Message
    " sosdkny: We are in a new Era with China pulling all the strings and calling all the shots."


    That's what they said about Japan too... Two decades ago.
    30 Sep 2010, 10:24 PM Reply Like
  • jonhousley
    , contributor
    Comments (3) | Send Message
    The Japanese know exactly what they are doing. Strong Yen for now (84 to 93) allows them to invest in other up and coming countries (Cambodia, Malaysia, Korea, etc). After the purchases have been made the yen goes back to normal levels (115 to 120).


    When you speak of Japan it includes all of Asia. There are very many trade agreements and backroom infrastructure deals going on. When the time is right the yen will weaken and come back to the homeland.


    Use the YCS at the 16.50 level. It seems the 83Y is the magic number for now for Gov. intervention.
    30 Sep 2010, 02:48 PM Reply Like
  • sosdkny
    , contributor
    Comments (10) | Send Message


    True, but I dont see China falling in to a stagflation environment with a 0% interest rate environment. China's creditor nation status, its huge labor force and its worldwide investments dont seem to correlate to Japan 1990? Just my thought.
    1 Oct 2010, 06:07 AM Reply Like
  • jonhousley
    , contributor
    Comments (3) | Send Message
    You are right, China is a seperate issue. They are growing their middle class and have plenty of population in China. However China is making more deals with Africa and Australia than their Asian neighbors. Korea and Japan are pouring mass amounts of money to neighboring underdeveloped countries. Basically taking their workforce in the end to supplement the older workforce in JP.
    1 Oct 2010, 10:22 AM Reply Like
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