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Betting Against JGBs


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Anything similar for the retail investor?  Guess it's hard to get into CDS / interest rate cap as an individual?  I have looked around and only find FXY and JPY/USD futures as somewhat related.


On the other hand, I also notice the Greek Athex Composite Share (Bloomberg ASE:IND) index has dropped significantly in the past few years.  Can the same be expected in Japan when the JGB starts collapsing?

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Sanj has stated that Prem & others at FFH read this board, so perhaps this will be what gives them their next big "CDS" type idea. They could no doubt find a way to play this type of investment far eaisier than a retail investor could. I would be happy to see them make a move into this type of investment as it gives FFH holders an indirect exposure. But reading Bass also makes me want to revisit hedging my own portfoilio as well. But the question is how to get the most bang for the least buck......




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(Like txlaw I am no fan of ZH but it has interesting references).


It is slowly taking shape. I am investigating shorting JGBs or equivalent strategies. Hopefully we will keep this thread alive a little longer.


I am slowly building a portfolio with:

- undervalued very high quality and resilient to shocks: right now basket of pharma (ABT, JNJ, TEVA). Better than bonds.

- a-symetric bets as fat tail events are becoming "more probable" around the world. These act as hedges in addition to being potentially lucrative.

- very undervalued securities preferably small/mid caps in US or Canada.

- lots of cash and equivalent. I want high margin of safety these days.


I already took bearish positions on the euro as I believe that the european situation will lead to mixed results at best. Hamburg's state voted against Merkel in a big way confirming what I already knew: the germans won't go for a lot more bailouts. Ireland is electing a new gov in a few days and I cannot see irish people agreeing with bailing out foreign banks at their own expense. Portugal is rapidly taking the path of asking for bailouts as their rates exceed 7% consistently. Spain, Italy and Belgium are not looking much better mid term.


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  • 2 years later...



The AIG of the world is back. Here's what I mean by that.


I have 27-year-old kids selling me one-year jump risk in Japan for less than one basis point. $5 billion worth at a time.


You know why? Because it's outside of a 95 percent VaR. It's less than one year to maturity. So guess what the regulatory capital hit is for the bank? It rhymes with "hero." Right?


And, if the bell tolls at the end of the year, the 27-year-old kid gets a bonus. And if he blows the bank to smithereens, ah. He got a paycheck all year.


We're right back there. I mean, the brevity of financial memory is only about two years. I wouldn't sell nuclear holocaust risk in Dallas for less than a basis point. You should be fired for thinking about selling something for less than 50 basis points, you know? And yet, this is happening again.


And it's happening in huge size. You know, huge. We bought $0.5 trillion worth of these options.


Interestingly enough, recently, one of the biggest banks in the world called me and asked me if I would close my position. That was an interesting day for us. That happened to me in 2007, right before the mortgages cracked.


They said, "You know, we ran some new risk tests."


And I said, "Really?"


And they said, "Yeah, you know, our new stress scenario is a little bit more punitive than the last one."


And I said, "Well, what is it?"


And he says, "We don't want to share our proprietary secrets of our bank with you."


And I said, "OK, then I'm not closing it."


And they said, "Whoa, whoa, whoa, whoa. Well, how about: in our old one, we had rates being stressed 50 basis points, and the new one has rates being stressed 400."


And I said, "Ooh, yeah, 400. That would really hurt you on this trade, wouldn't it?"


And they said, "Yeah, we'd like to close that one."


And I said, "Well, I'd like to, but I'm not going to do that for you, so I'm sorry."


But anyway, they are starting to realize. Why would they run a stress test like that? Who would have them run that stress test? This is happening.


Compare the above quoted with page 58 and page 59 of Michael Lewis' "The Big Short".


Three days later he heard from Goldman Sachs. His saleswoman, Veronica Grinstein, called him on her cell phone instead of from the office phone. (Wall Street firms now recorded all calls made from their trading desks.) “I’d like a special favor,” she asked. She, too, wanted to buy some of his credit-default swaps. “Management is concerned,” she said. They thought the traders had sold all this insurance without having any place they could go to buy it back.


Could Mike Burry sell them $25 million of the stuff, at really generous prices, on the subprime-mortgage bonds of his choosing? Just to placate Goldman management, you understand. Hanging up, he pinged Bank of America, on a hunch, to see if they would sell him more. They wouldn’t.


They, too, were looking to buy. Next came Morgan Stanley—again out of the blue. He hadn’t done much business with Morgan Stanley, but evidently Morgan Stanley, too, wanted to buy whatever he had. He didn’t know exactly why all these banks were suddenly so keen to buy insurance on subprime-mortgage bonds, but there was one obvious reason: the loans suddenly were going bad at an alarming rate.


Back in May, Mike Burry was betting on his theory of human behavior: the loans were structured to go bad. Now, in November, they were actually going bad.


Yes CDS on subprime U.S. mortgage bonds and Japanese government 10 year bonds are not the same thing but...


Perhaps...finally...something may be happening.

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I love Hayman Capital's analysis and commentary.  On the other hand, I have disagreed with the analysis for the last six (6) years when I first heard it, I recall around '07.  I am still in the deflation camp, or at least non-inflation.  Maybe we are getting closer to the doom JGB story, but if we have a market setback, as many fear, then it may take another six years as investors will finally abandon stocks and flood bonds.




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