In my favorite episode of The Simpsons, the family goes on vacation in Japan. Homer, being the usual simpleton, does not want to eat at a traditional Japanese restaurant, instead preferring to eat at America Town–a place serving American food and staffed by waiters who pretend to be American.
Lisa: [Looking at the menu.] Don’t you serve anything even remotely Japanese?
Waiter: Don’t ask me! I don’t know anything… I am a product of American education system. I also build poor quality cars and INFERIOR style electronics!
Homer: [Laughing hysterically] HAHAHAHAHA! You’ve got our number!
This episode was from 1999… not too long ago. It is amazing to think that since then, an American company has created the best consumer electronics devices ever. The South Koreans have caught up, too. It is the Japanese who now make “inferior style” electronics.
So I was not surprised at all to hear that Olympus conducted a scheme to hide losses. I suspect that Panasonic and other Japanese OEMs are misreporting their financial condition. Why am I singling out Panasonic? It’s the only Japanese company I really understand other than Sony. I started looking at their financial statements because I had no idea how this company could possibly be making money. I found that the company is taking measures that look desperate–like doing sale leasebacks of their facilities to raise cash.
If Japan has lost its competitive edge in electronics, what else do they have to rely on? You think about this and take what Kyle Bass has said about their fiscal situation and it is clear that the entire country is beyond the point of no return. The Japanese bondholders getting paid 1% are going to suffer huge losses.
Who owns Japanese government bonds? Specifically, who can I short that owns JGBs? Japanese life insurance companies. Look at the combined balanced sheet of 47 of Japanese largest life insurers:
3. Asset Distribution (month-end August 2011) in billions of yen
Cash, Deposits 2,738
Call-Loans 2,028
Monetary Claims Bought 2,980
Money in Trust 1,996
Securities 249,087
(Government Bonds) 136,419
(Local Government Bonds) 12,486
(Corporate Bonds) 25,066
(Stocks) 13,834
(Foreign Securities) 45,256
Loans 43,459
(Financial Loans) 40,064
Tangible Fixed Assets 6,696
Invested Assets 310,528
Total Assets 319,129
These 47 insurers combined own 136,419,000,000,000 yen worth of JGBs. That’s equal to $1.76 trillion! If Kyle Bass is right and the bonds will be marked down 80%, that creates a hole of more than $1 trillion! The stocks of Japanese life insurers would be worthless. Their bonds would be worthless.
lots of companies do sale leasebacks. kmart got out of bankruptcy by doing it, airplane companies do it all the time. not the best business models, but doesn’t mean there is fraud.
you can never really prove a fraud from a far. only that it sticks.
Agreed on sale leasebacks.
But I think you really can prove fraud. You have to be suspicious enough about a company to do some really good analysis. And if you’re lucky and clever enough it always helps to interview a whistleblower. I’m trying hard on some cases, but haven’t been successful yet. Who knows?
Do you believe that shorting the equity of life insurers is the best way to play Japan’s situation? Or do you also own yen puts, payer swaptions, CDS, etc.
I think your probability of making money increases as the size of your probable gain decreases…. just like everything else. Shorting the equity of Japanese banks and insurance companies is the safest way but it also has the lowest payoff.
The derivatives have much larger payoffs but also much larger potential losses. Last time I checked, interest rates on JGBs would have to hit 4% in five years for you to make money buying a swaption. This is an apocalyptic scenario. I don’t know how probable the apocalypse is.
Other than these well known electronics, the Japanese also have a lot of proprietary technology on many key components. eg. Derailleur gears on bicycles. The japanese will certainly lose their edge in these electronics, but 80% of value evaporated seems a little farfetched.
I looked at the report this was from and then looked through the Japanese LIA to list out the companies- they seem to pretty much all be private. What can you short?
Sony comes to mind. The life insurance business is still connected to the electronics business.
but the insurers will hide the losses.
Impossible. The market knows how much in JGBs each insurer owns. If bond prices drop it will be obvious to the market. The insurers’ stocks will all collapse.