The Case for a Sovereign Debt Default in Japan - Kyle Bass

Hedge fund manager Kyle Bass, managing partner at Hayman Investments, earned his claim to fame by predicting the crash in housing prices and the financial crisis that would follow. Now, he has focused his cold stare on the bubbles in sovereign debt in developed economies. The folks at CNBC’s Strategy session interviewed Bass last week to give him a chance to restate his case for his biggest target: Japan.

Now that the U.S. dollar is hovering at 15-year lows against the Japanese yen, it is understandably difficult for anyone to believe that Japan’s sovereign debt bubble will blow anytime soon. Yet, Bass has the composed, patient, and deliberate demeanor of someone who is well-accustomed to explaining himself to a skeptical and doubtful audience.

Bass’s current investment position places 90% of his capital betting long the U.S. on special situations. Because he believes global GDP growth might soon drop to -4 or -5%, he is not long stocks. I believe the rest of his capital (“the tail”) is betting on sovereign defaults in Japan and Europe.

Bass describes the case against Japan in the video clip posted below. Here are some highlights:

Japan’s weakening fiscal situation

40 trillion yen in tax receipts is the same level from 1985 in nominal terms.Expenses have increased 200% since 1985 to 97 trillion yen.1 quadrillion yen in total credit market debt

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