Steve Romick of FPA comments on his current investments. Below is a brief excerpt on Japan, it looks like FPA is now joining the Kyle Bass Japan widow-maker trade. I know the people at FPA are much smarter than I and far better investors, but I think this Japan interest rate bet is a losing one. Japan can control interest rates, unlike Greece or other PIIG members. This is a point which most investors who have taken short positions on Japanese Government bonds have not recognized or have not been cognisant of. Kyle Bass was down 30% in one month alone, as we broke earlier this year. We cannot confirm, but have heard Bass will only make money if his prediction comes true within three years. However, Romick does note that the options have a 10 year life span. Japan will likely raise rates sometime in the next ten years, even though the analogy with Greece is incorrect. Without further to do, Steve Romick:
As bad as the United States is or seems, Japan, it can be argued, is worse. When we’re asked when America’s problems will catch up with it, we plead the 5th. It’s inevitable, but impossible to time. Japan, however, is far enough along that we believe its fiscal problems will start making headlines sooner rather than later (Please don’t ask us to define “soon”).
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With this in mind, we have recently begun purchasing over-the-counter derivative instruments that are intended to be profitable if the Japanese Yen weakens or Japanese interest rates rise. Since we have purchased options, our losses are limited to the purchase price of these contracts and are sized accordingly. The potential payoff could be substantial and quite asymmetric if either the exchange rate or interest rates revert to historical levels or something akin to five years ago, when the Yen traded at 115 to the U.S. Dollar and the 10-year Japanese Government Bond (JGB) was 1.7%.
Considering that we have, at best, only a vague notion of when Japan will take over the headline baton from the PIIGS, each of the instruments we purchased has a multi-year life (including one as long as ten years). That allows us to structure the trade by placing greater emphasis on the “if” part of the thesis, rather than the “when.”
Crescent 2012 q3 Final
