Mad Hedge Technology Letter
November 22, 2023
Fiat Lux
Featured Trade:
(YEN COULD DRAG DOWN TECH STOCKS)
(FXY), ($COMPQ), (WEWKQ), (SOFTBANK)
Mad Hedge Technology Letter
November 22, 2023
Fiat Lux
Featured Trade:
(YEN COULD DRAG DOWN TECH STOCKS)
(FXY), ($COMPQ), (WEWKQ), (SOFTBANK)
The Japanese yen has helped boost tech stocks ($COMPQ).
Institutional money is borrowing Japanese yen (FXY) by the bucketful because Japanese interest rates have been anchored at 0% and betting big on tech stocks.
The strategy has worked like clockwork and Japanese stocks have also felt the wind at its sails.
What now?
Lurking in the shadows is a potentially catastrophic problem called Japanese tech company Softbank.
Softbank reported a "shocking" Q2-2 loss, revealing, in particular, how dangerously exposed they are to a Japanese yen devaluation.
Selling in Softbank stock would trigger panic selling in Japanese Banks. The contagion risk here is crystal clear.
JGB yields will spike following the US Treasury yields overnight trend. This will put even further pressure on banks' liquidity with a risk of exacerbating the sell-off.
What's important to understand here is the risk of Softbank triggering a $226 billion (the total amount of Softbank balance sheet liabilities) credit event right now.
To begin with, with a BB rating from S&P, Softbank has a pitiful credit rating tying its hands.
Now Softbank has liabilities mostly in US dollars while on the hook to repay $48 billion in the next 12 months.
Days before WeWork (WEWKQ) filed for bankruptcy, Softbank paid $1.5 billion to WeWork bank lenders.
In total, Softbank had to write off more than $14 billion in US dollars on that terrible WeWork investment while the Japanese yen crashed.
Now here the big problem is that Softbank doesn't disclose the amount of "off-balance-sheet" guarantees they issued either directly or through the Vision Fund.
Lastly, things might turn quite bad for Masayoshi Son personally, because 35% of his personal shares in Softbank are already pledged to financial institutions.
It doesn't take much to figure out what financial institutions will do if Softbank stock starts crashing, right?
The Japanese government will need to bail out not only Softbank but also the Japanese banks.
This tinderbox could explode anytime and the Yen would then become the focus.
If the Japanese government finally does embark on an interest hiking cycle then under this scenario, the Bank of Japan would be forced to raise the cost of capital on investors and households.
The global and Japanese financial system isn’t ready to take away the low-interest carry trade and it’s hard to quantify the unintended consequences.
Large parts of the Japanese system could go under water and the Japanese yen would greatly strengthen.
I specifically am worried about all the adjustable loans taken out by the Japanese consumer.
Loan defaults would surge.
If the Japanese government is forced to save Softbank and the Japanese financial system then expect another tidal wave of inflation as the purchasing power of the Japanese yen is even more devalued.
The string of abysmal tech investments by Softbank is threatening to accelerate the financial death spiral in Japan.
In my view, this would ice the tech rally momentarily, but not derail it long-term.
In all honesty, Softbank did deliver ample liquidity to many poorly run Silicon Valley tech companies and this fortified tech stocks during the bull run.
Now Softbank cannot throw around the cash they used to and tech stocks have concentrated into a group of 7 outperformers.
In the short term, the tech bull run continues in just a few narrow names but 2024 could trigger a broader run in secondary tech names as well.
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