David Einhorn Japan widow maker

David Einhorn is the manager of Greenlight Capital and is a speaker at the Ira Sohn investment conference in New York every year.  His trading insights are always a highlight of the conference as in recent years has called big moves in Lehman Brothers and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR).

This year was no different but the hedge fund manager did receive some criticism for not sharing any of big positions that he has at his fund.  In addition, after explaining his ‘concerns’ on Amazon.com, Inc.  and Martin Marietta Materials, Inc.  and his love for Apple Inc., the investor explained why he was bearish on Japan. He did not state if he had any short positions in the Yen, Japanese Government Bonds, or bought credit default swaps.

Einghorn highlights that the country no longer has a trade surplus and the Yen continues to strengthen which will eventually end.  In addition, the Bank of Japan is having a hard time controlling some of the issues in the marketplace and 9% of REITs in the US are owned by the Japanese.

Einhorn goes on with Japan saying that the country’s largest social networking sites are being watched by the government but have better valuations than Facebook.  It is suggested that Einhorn could be short some Japanese securities but he is not the first hedge fund manager to be bearish on Japan in recent months.

Take Kyle Bass, the founder of Hayman Capital.  Bass made his name from buying Greek Sovereign credit default swaps where he made 650% on each swap, allegedly.  Recently, the hedge fund manager has been extremely bearish on Japan saying that “Japan is in the crosshairs of the market…I’ve never seen more mispriced optionality in my entire life”.

Strong words but so far they worked against him.  According to our sources familiar with the matter, Bass has taken short positions in Japanese government bonds as well as credit default swaps.  However, so far the bearish Japan trade has not worked out. Bass’s Macro Opportunities Master Fund is down 32% since April and down 29% on the year.

The point I am trying to make is that Einhorn is the second hedge fund manager to go bearish on Japan.  Kyle Bass has not fared well from his bearish thesis on Japan and unless Einhorn wants a similar result, he should just stay away from Japan all together.  Japan is obviously a tough play to call right now and rather than risking capital, it would probably best suit these hedge fund managers to simply stay out of Japan.

Investors have been bearish on Japan for decades now but shorting the country has not worked.  Despite it seeming like a golden opportunity, the act of shorting Japanese government bonds has never truly worked.  In fact, nowadays, Japan is showing signs of deflation rather than inflation.  The simple fact is that the Bank of Japan can handle deflation by buying bonds and keeping the yields in check and in turn, deflation in check.  Japan may be a complex system to call but remember that history has shown us that Japan is not always a successful short.

Additionally if conditions are as bad as the bears make it out to be, deflation will just continue further. The Government can print money and buy Japanese Government bonds to keep yields down.

The Japanesse short trade the ‘japan widow maker.’ Bass and many others are very smart, but I think Einhorn is a shoulder above them and too smart for this trade.