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Expect the Unexpected – Similarities between Japan’s Economics and the US Presidential Race

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Kyle Bass – the Bet Against Japan
Kyle Bass founded hedge fund Hayman Capital in Dallas, Texas, in 2006. He made millions betting against the sub-prime mortgage bond market – and now he’s betting on the collapse of Japan. In simplistic terms, Mr Bass feels that the debt accumulated by Japan is so enormous, that sooner or later, Japan has to default on its debts. Yet Japan keeps borrowing and keeps increasing its debt load, and as a result, the hedge fund has suffered losses so far.

Mr Bass is using a reasoned calculation, that includes a shrinking workforce in Japan due to the aging population, a stagnant economy for many years now, and continued increases in borrowings to support social programs as well as to try and inject stimulus into the economy. To Mr Bass’s surprise, Japan has not yet defaulted.

Some Current Japanese Numbers
Japanese industrial production slumped 4.1% on month in September vs -1.6% in August and -3.1% consensus. It’s one of the largest declines in recent years and the third consecutive drop. Unemployment was unchanged at 4.2%, matching consensus, but household spending unexpectedly fell 0.9% vs a forecast for a rise of 0.9%. Does this foretell a collapse?

What is not clear, is whether Mr Bass’s bet against Japan will succeed or not. Conventional thought is that the world cannot afford to let Japan fail because of the sheer size of its economy, and that an economic powerhouse the size of Japan simply will never default.

The Fly in the Ointment
This is similar in some respects to the effects of hurricane Sandy. An unexpected event changes the course of history, and unexpected events change the course of things. A book was written a few years ago called “the Black Swan Event” which essentially categorized the obvious, as if it was something new. One can never foretell what will happen, never mind accurately predict the future. If one could predict the future, that person would make untold riches in the stock market.

As more and more time passes, the odds increase that some White Swan event or Black Swan event will occur and will change this calculation of whether Japan will default. We just don’t know what that event is until the event occurs. One thing is for sure: circumstances are sure to change – for the better or for the worse – because of some future event.

The point here is that Kyle Bass’s bet against Japan has a greater risk factor than the obvious calculations that he has made. That is the “time factor”. The longer his bet continues without a default by Japan, the greater the chance that a change in circumstances (an unexpected event) will change the course of history.

Hurricane Sandy & the US Presidential Race
It is said that the election of the President in the USA, depends on events occurring in the last 10 days of the campaign. This is sort of an expected truism. Both parties fear this unknown but expected event as it often changes the results of Electoral vote.

This year, the unexpected event is Hurricane Sandy. It is giving the sitting President the opportunity to look Presidential and to speak as if the election was not important when such a catastrophe was occurring.

Mitt Romney the Bystander
Mitt Romney is only a bystander, who has lost the front page of the news. His speeches are reported but with little interest. What is important to the voters is that the President is acting promptly, judiciously and for the immediate benefit of the people affected by Hurricane Sandy. The people need a concerned leader, a leader who cares for the people, a leader who puts aside political issues when a greater need arises. President Obama is now playing that role, to the chagrin of Mitt Romney.

So Hurricane Sandy may be responsible for the re-election of President Obama. Republicans are gnashing their teeth in frustration.

I don’t know why democracy works. I will never figure it out, but I know that democracy works. I know that whichever candidate gets elected, it will be good for the country. America is now rising from the downturn – slowly perhaps – but it is rising and again starting to lead the world in the recovery.

Oddities of the Republican Right Wing
Mitt Romney is an interesting fellow. If you follow some of the beliefs of right wing Republicans, they are about as nutsy as extremist Muslims who kill themselves for the greater glory. You regularly hear that if a woman is raped it is God’s will and the child is God’s will. You hear that slashing government spending by 50% instantly will be good for the country, whereas every economist in the world says that will plunge America into another great depression. You hear of Ministers who burn the Koran. You hear about extreme beliefs and you hear TV and radio announcers talk about Obama as if he were the Devil himself, sent to destroy America and God fearing people have to rise up and defeat this man who is worse than Hitler and Stalin.

The right wing is made up of fruitcakes. Yet Romney has gained their support by agreeing with them in the Primaries. Then when Romney later speaks to the general public, he amazingly becomes a moderate who agrees with most of Obama’s policies, and portrays himself as a man that can be trusted. American politics is so interesting and so weird.

Who Will Get Elected
What I take from this, is that Romney is tough enough and cynical enough and devious enough to do a good job in leading America. I also think Obama is a good President. Whichever gets elected, America will survive and thrive.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

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