December 05, 2013
Kyle Bass, founder of Hayman Capital Management speaks with Bloomberg’s Stephanie Rule about Herbalife, activist investors and his own investing ethos
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
November 24, 2013
Kyle Bass On The Fracking Revolution
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
October 31, 2013
Kyle Bass: Fed Won't Raise Interest Rates for Another 3-5 Years; Stocks "The Only Game In Town"
Jim: Do you feel the debt ceiling debate and the political theater in Washington are hurting U.S. credibility and our capital markets in the long-run?
Kyle: No...the entire world is in the same position we are in one way or another. That’s painting the world with a broader brush, but when you look at the developed western economies (and, of course, we’ll exclude countries with no net debt like Australia and Canada that are natural resource heavy), but the developed western economies with the largest debt loads are all in the same boat. Whether or not they have debt ceilings in the U.S. or bank note agreements like they had in Japan until they recently abolished them, there are all of these potential glass ceilings that are put on the marketplace that always tend to move. I think since 1960 we’ve raised our debt something like 82 times.
Jim: Economists have often said—I’m thinking of “This Time Is Different” by Reinhart and Rogoff—when countries have debt-to-GDP ratios over 100%, they get into trouble; Japan’s is 230%. Why have they not had trouble up until now?
Kyle: When you think about what Reinhart and Rogoff’s book says, it kind of gets to an answer but it’s not the right way to look at things; there are many more variables to analyze the situation with. One is, of course, debt to central government tax revenues—that ratio. Another one is what percentage of your central government tax revenues do you spend on interest alone? Those barometers are much more impactful than just using a debt-to-GDP barometer. And then when you think about Reinhart and Rogoff’s work, if you’ve read all the white papers that they’ve written prior to writing the book, one of the other conclusions that they draw is when debt gets to be about 100% GDP it becomes problematic. Well, what that means is, typically—and, again, painting the world with a broad brush—central government tax revenues are roughly 20% of GDP. So what they’re telling you is when debt gets to be 5 times your revenue, that’s when you start to have a problem. Historically, the analysis that’s been done empirically by academics has focused on the countries that have fallen into a restructuring or a default as a result of this ratio that you and I are discussing. Historically, those have been emerging market economies that have higher borrowing costs. So, it actually makes complete sense that that number is too low when you’re talking about a developed market economy versus an emerging economy because, in theory, a developed economy can borrow at lower rates than an emerging economy can. That being said, in Japan, when the debts are 24 times their central government tax revenue, they are already completely insolvent—it’s just a question of when does it blow up.
Jim: I want to turn our attention to the stock market right now and your view of where you see the markets right now. They don’t seem overvalued when you compare them to 2000 or 2007, but they’re not cheap; and, where do you go in a market when the rate of return on cash or bonds is hardly anything?
Kyle: I think that as long as the Fed—for instance, the Fed is still buying $85 billion a month; almost a trillion a year—you could argue that the Fed is being more stimulative today than they were a year or year and a half ago. When we were running a trillion to a trillion and a half deficits, the Fed, at a trillion dollars in a deficit, was buying every bond that was issued. Today, you have a scenario where the fiscal deficit in the U.S., we think, is somewhere around 650 to 700 billion dollars. So, in theory, the Fed is actually adding more money to the economy today than it was a year ago because the deficit is lower and they’re still buying the same number of bonds. So what I’m saying is the monetary base continues to expand. What the economists are saying is velocity continues to drop at a faster rate than the base is expanding. Well, velocity, I believe, is a coincident indicator at best—possibly a lagging indicator. So, when the v [velocity] turns around that’s when inflation shows up, but for now--you’re asking about stocks…I think, given the lack of nominal yield in the bond market, all of the new money is going to continue into stocks. The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off.
Jim: What is your outlook on when the Fed will taper or, eventually, raise interest rates?
Kyle: I personally think that what enables the Fed to taper, again, is a contraction in the fiscal deficit. Now, part of that equation will be remedied by higher tax collections; unfortunately, the other side of that equation is, of course, lesser spending, which isn’t going to happen. So, I believe they can taper to the extent that the fiscal deficit has contracted. I don’t think that they’ll be able to raise the Fed funds rate any time in the foreseeable future—3 to 5 years.
Jim: So, that would argue that stocks would be a better play.
Kyle: Unfortunately…because it feels like they’re making it the only game in town. It’s not your choice, but it’s the only answer though. [End transcript]
In the rest of this must-listen interview, legendary hedge fund manager Kyle Bass gives investors his most recent views on Japan, the impact and outlook for shale gas in the U.S., and a wide range of other topics.
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Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
October 09, 2013
Kyle Bass: No good way to hedge from US default
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
September 24, 2013
Kyle Bass and his macro views from the Alpha Hedge West Conference
Kyle Bass thinks that the first taper will be easy one. The real problem will be the fiscal drag of moving Fed Funds rate from 0% to 3%.
About China, Kyle says he is Not investing in China now. He thinks the country is "Univestible" due to banks and shadow banking systems. Same as Jim Rogers, he is also Staying away from India too. Branded luxury and quality did well post crisis. China has not adjusted from command and control yet. Kyle sees a restructuring.
On Argentina
Kyle Bass said he likes Argentina. He believes that people don't understand what is happening there. Lots of things there are fixable. Leadership is in active control and can fix "issues" :). Energy has been an issue, but recently there have been major energy findings that will change that. Two years from now, he thinks there will be a new President in October 2015 and pro-business people will be running things to take advantage of vast prairies of nature resources. Argentina's problems can be fixed in 2 years. He feels now is the time to start investing. Sees 50% upside in the sovereign debt.
Kyle Bass on Japan
US Recapped their banking system, while EU is 3.5x more leveraged than the US. At some point, debt will matter. Has always eventually mattered the last 2000 years. When debts are 24 times revenues you are finished, it is just a matter of when. Hopes he is wrong. More he looks, the more he thinks it will happen. Sees it happening the next few years. Avoid Europe. US is 4.5x debts to revs. Japan is 24.
When asked how mutual should funds feel about Macro risks?
Kyle says that If he was long only, he would not be able to sleep at night. A Japan crisis could not be contained. It would have huge impacts. During the Tequilla crisis, Mexican equities went down 90%.
August 10, 2013
Kyle Bass is worried about China. Sees a full-scale recession in 2014
According to Hayman Capital’s letter, Kyle Bass is worried not only about Japan but also China. Kyle Bass expects a full-scale recession in China in 2014. He is taking risk down in the funds because he is worried about China according to investors’ letter sent in July. China problems probably mean bad news for asset prices worldwide. The credit expansion in China was huge in the last 5 years. The compounded annual growth of bank assets has been about 31%. If US banks did the same, it means 33 trillion USD in credit for 5 years. This rate is 3 times higher than what the US had the peak of the bubble in 2006. Kyle Bass is worried that easy liquidity from the PBOC will not be enough to keep growth because of diminishing marginal returns.The debt to equity rations of Chinese firms are exploding as they funnel more capital, not into yield returning investments but to fill black holes on their balances. In the industrial sector, there is deflation as overcapacity is obvious.
"The speed and depth of the Chinese policy response will help determine the severity and duration of this crisis. If the Chinese address the issue quickly and move decisively to rein in credit expansion and accept a period of much lower growth, they may be able to use the government and People's Bank of China's balance sheet to cushion the adjustment in the economy," Kyle Bass wrote.
"If, however, they continue on the current path and allow this deterioration to reach its natural and logical limit, we will likely see a full-scale recession as well as a collapse in asset and real estate prices sometime next year."
The firm's flagship Hayman Capital Master Fund is up 16.73% this year through May, according to investor documents. Last year, the fund returned 16.66%, beating the benchmark. Hayman passed $2 billion in assets this spring; besides the main hedge fund and a fund focused on Japanese debt and currency. It seems Kyle Bass is doing well not only with his views but also his execution of trades.
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
June 19, 2013
Kyle Bass: Japan Stimulus Still Not Enough
According to Kyle Bass of Hayman Capital, the Japanese stimulus and money printing should be even larger to achieve the wanted results at keeping low the interest rates while bringing down the value of the yen and up the stock market.
"If Bank of Japan investors believe in Abenomics and (BOJ Gov. Haruhiko) Kuroda's plan to double the monetary base in the next couple years and generate some inflation and growth, then a rational investor who holds their bonds is likely to sell a portion if not all of them," Bass said.
During a visit in Japana, Kyle Bass saw it with his eyes that many investors believe that BOJ will be able to temporary generate some growth and wealth. This means that rational investors will sell bonds as inflation expectations will go up. There is quadrillion yen in bonds. If 5% are sold, that’s 50 trillion yen.
That’s why according to Kyle, the plan of BOJ is not big enough. According to the BOJ plan announced April 4, the central bank will buy 60 trillion yen ($630 billion) in bonds both this year and next. The market reaction is clear according to him. The biggest banks started selling bonds and started buying Japanese equities and foreign bonds. What’s still unclear is when BOJ will increase its asset purchase program and by how much.
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
June 18, 2013
Kyle Bass Comment
“Effectively doubling the largest financial experiment the world has ever seen is not exactly risk-free, but it seems like an absolute necessity if the BoJ would like to maintain any optionality aside from checkmate.” —J. Kyle Bass on Abenomics, Hayman Capital, 5 June 2013Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
Kyle Bass talks on Why Japan is Doomed
This is a presentation during the Strategic Investment Conference 2013
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
April 09, 2013
Kyle Bass: Confused why Gold is so Low
Bass on Japan:
"I actually think it's the beginning of the end... When you have 20 years of pro-cyclicality of thought manifesting itself in the way that it has in Japan…I am not naive enough to think I can predict the end of a 70-year debt super cycle with any kind of precision, but looking at the changes in the qualitative perception of the participants is something that I think is key to the situation and we saw a big change on Friday."
"When I started sharing our views more globally it was the middle of 2010 and I said I believe the stress would begin to show itself in the next three years. Pretty much three years in, we're close, and the stress is beginning to show. Maybe that was luck at the time, but now when you ask the timing--look everyone wants the crystal ball and it's really difficult to predict this, but what you can do is follow where I think the stresses are going to show in the marketplace, but more importantly, you have to get into the heads of the participants because they all have a collective sense of fatalism. When you do the quantitative analysis here, you know they are insolvent. Everyone who owns the bonds knows they are insolvent. It's a question of how long they can hang on. What changes their views are a multitude of variables, but it's really important to follow any change in those views. When you see things like Argentina, Greece, Cyprus, Ireland, Italy--you see how fast things go from perfectly stable to completely unstable. In this case I think it will happen more quickly because of the 20 year buildup."
On Hayman Capital having strong performance overall when it has a trade that, even if it's right, takes a while:
“When we think about the globe, I think about positioning. When you invest in a fiduciary like myself or someone else, you want someone that has the courage of their convictions. You want someone that is not particularly dogmatic. And if they are, you want to think about risk management. It is really important to size things properly. So far, knock on wood, I think you have to be as thoughtful as you can possibly be on the construct of the position and not set yourself up for many years of losses until something like this happens.”
"It's really important to think about the capital at risk in your strategy and the construct of how you put these kinds of hedges into place. We have 90+% of our money is long--long U.S. structured credit, U.S. mortgages, U.S. stocks--the majority of our capital is long."
On structured credit and the importance of being very liquid in the long side:
“Believe it or not it's really liquid right now. With Bernanke pinning rates at zero and the entire world continues to chase yield. Our indices are being led by utilities and things that don't particularly lead us into new highs, it's because of their dividend yield. So the whole world continues to chase yield. Structured credit and even mortgage credit are one of the most liquid areas in the marketplace today. People can't get enough of them. Even in subprime credit, 97% of the 20,000 line items are still rated below investment grade. They're still junk. The ratings-based buyers aren't even there yet. The money is being misallocated by the printing press."
On gold:
“We have always had a position in gold. When you think about the largest central banks in the world, they have all moved to unlimited printing ideology. Monetary policy happens to be the only game in town. I am perplexed as to why gold is as low as it is. I don't have a great answer for you other then you should maintain a position.”
On George Soros' recent statements that he’s losing interest in gold:
“George has been a much better investor than I over the years. When you think about the global monetary base, it is north of $70 trillion. All the gold in existence is around $7-8 trillion. There might be $1.2-1.3 trillion of investable gold. At some point in time, I would much rather would own gold than paper. I just don't know when that time is.”
On whether he'd rather own gold than U.S. treasuries:
“I do. If something happens in Japan like we think it is going to happen, I think U.S. Treasury nominal yields will go negative in a flight to quality. maybe gold moves up and Treasuries actually get much stronger for all the wrong reasons, not as an endorsement of U.S. fiscal policy because it is the only place money has to go... If monetary policy is the only game in town, we are all in for a world of trouble. That is the way we see it.”
On residential mortgage-backed securities:
“That investment is working... The various concentric circles surrounding housing not getting worse, which is how we think about it. We are not expecting it to get materially better, just not to get worse. The services sectors, the new mortgage insurance companies, the things that are actually asymmetric investments you can make around the housing market not worsening are where the majority of our long side of our portfolio is.”
On the future of Fannie and Freddie:
“I have no clue... We decided to just exit, thinking about them when you meet with both sides of the aisle, they both want a bullet in their head. Typically when that happens you get a bullet in your head. The second thing we were thinking about, if you remember there was a proposal to start raising the g-fees. There is a way for the U.S. Treasury to get paid back all of the money they've pumped into Fannie and Freddie if they start raising g-fees."
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
"I actually think it's the beginning of the end... When you have 20 years of pro-cyclicality of thought manifesting itself in the way that it has in Japan…I am not naive enough to think I can predict the end of a 70-year debt super cycle with any kind of precision, but looking at the changes in the qualitative perception of the participants is something that I think is key to the situation and we saw a big change on Friday."
"When I started sharing our views more globally it was the middle of 2010 and I said I believe the stress would begin to show itself in the next three years. Pretty much three years in, we're close, and the stress is beginning to show. Maybe that was luck at the time, but now when you ask the timing--look everyone wants the crystal ball and it's really difficult to predict this, but what you can do is follow where I think the stresses are going to show in the marketplace, but more importantly, you have to get into the heads of the participants because they all have a collective sense of fatalism. When you do the quantitative analysis here, you know they are insolvent. Everyone who owns the bonds knows they are insolvent. It's a question of how long they can hang on. What changes their views are a multitude of variables, but it's really important to follow any change in those views. When you see things like Argentina, Greece, Cyprus, Ireland, Italy--you see how fast things go from perfectly stable to completely unstable. In this case I think it will happen more quickly because of the 20 year buildup."
On Hayman Capital having strong performance overall when it has a trade that, even if it's right, takes a while:
“When we think about the globe, I think about positioning. When you invest in a fiduciary like myself or someone else, you want someone that has the courage of their convictions. You want someone that is not particularly dogmatic. And if they are, you want to think about risk management. It is really important to size things properly. So far, knock on wood, I think you have to be as thoughtful as you can possibly be on the construct of the position and not set yourself up for many years of losses until something like this happens.”
"It's really important to think about the capital at risk in your strategy and the construct of how you put these kinds of hedges into place. We have 90+% of our money is long--long U.S. structured credit, U.S. mortgages, U.S. stocks--the majority of our capital is long."
On structured credit and the importance of being very liquid in the long side:
“Believe it or not it's really liquid right now. With Bernanke pinning rates at zero and the entire world continues to chase yield. Our indices are being led by utilities and things that don't particularly lead us into new highs, it's because of their dividend yield. So the whole world continues to chase yield. Structured credit and even mortgage credit are one of the most liquid areas in the marketplace today. People can't get enough of them. Even in subprime credit, 97% of the 20,000 line items are still rated below investment grade. They're still junk. The ratings-based buyers aren't even there yet. The money is being misallocated by the printing press."
On gold:
“We have always had a position in gold. When you think about the largest central banks in the world, they have all moved to unlimited printing ideology. Monetary policy happens to be the only game in town. I am perplexed as to why gold is as low as it is. I don't have a great answer for you other then you should maintain a position.”
On George Soros' recent statements that he’s losing interest in gold:
“George has been a much better investor than I over the years. When you think about the global monetary base, it is north of $70 trillion. All the gold in existence is around $7-8 trillion. There might be $1.2-1.3 trillion of investable gold. At some point in time, I would much rather would own gold than paper. I just don't know when that time is.”
On whether he'd rather own gold than U.S. treasuries:
“I do. If something happens in Japan like we think it is going to happen, I think U.S. Treasury nominal yields will go negative in a flight to quality. maybe gold moves up and Treasuries actually get much stronger for all the wrong reasons, not as an endorsement of U.S. fiscal policy because it is the only place money has to go... If monetary policy is the only game in town, we are all in for a world of trouble. That is the way we see it.”
On residential mortgage-backed securities:
“That investment is working... The various concentric circles surrounding housing not getting worse, which is how we think about it. We are not expecting it to get materially better, just not to get worse. The services sectors, the new mortgage insurance companies, the things that are actually asymmetric investments you can make around the housing market not worsening are where the majority of our long side of our portfolio is.”
On the future of Fannie and Freddie:
“I have no clue... We decided to just exit, thinking about them when you meet with both sides of the aisle, they both want a bullet in their head. Typically when that happens you get a bullet in your head. The second thing we were thinking about, if you remember there was a proposal to start raising the g-fees. There is a way for the U.S. Treasury to get paid back all of the money they've pumped into Fannie and Freddie if they start raising g-fees."
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
April 05, 2013
Kyle Bass: Japan About to 'Implode' Under Debt
Transcript: Thanks a lot, rick. rick and mohammed. welcome back david. i didn't know he was a mets fan. oh, yes. we've been talking about this historic move by the bank of japan targeting the monetarymove, anyw certainly it's been one of the more vocal voices. can you be a vocal voice? i guess you can. japan is eventually going toreach this point. the interest costs will exceed the tax revenues, and i would just love to simply get your take on the latest move and what your thoughts are about what they're trying to do, which isessentially engineer at least 2% inflation. i think it's really importantto understand the magnitude of what they're embarking on. it's essentially doubling the monetary base. and to listen to mohammed just a second ago talk about it is a giant experiment.doubling the monetary base in two years is extremelyexperimental. but when you're backed into a corner, and your debts are more than 20 times your central government tax revenue, you're already insolvent. it's to the point that mohammed made.they have to do something. they have to do something big. because they are about to implode under the weight of their debt. what is interesting to me is they also abandoned the bank note rule. they had a handshake with them. they would not moetize the debt. they got to a goal post, and they removed it. when you think about themagnitude of what they're doing on ha nominal basis, the goe will be buying assets at 70% of the rate of the u.s. fed on an economy that's that's one-third the size of the u.s. just to put things inperspective. well, to the extent that you have said for some time that japan is already in the zone of unsolvency. is this goi to change the dynamic or the trajectory? yeah, i think what they havedone is formalize the announcement that a new sheriff is in town.it's important to follow the bond markets. there are economic zelouts running the central bank. they only know one thing. in this case the trajectory is set. what they're trying to do is materially devalue the currency in order to become slightly more trade competitive while attempting to hold their rates marketplace flat.the econolis besteve they can live in that nirvana, and that is not the case. you also play that in part by belief that the value of thecurrency would go down. it's going down more than it has since october of 2011. do you continue to approach this in the same way and tell the viewers how you go about trying to benefit from the series of events that are trying to occur? if you're japanese, you need to spend the yen that you have. you're not going to suffer amassive depreciation in your purchasing power. if you're non japanese, go borrow yen and buy assets in other countries not as fiscally stretched as yours is. there is really no great prescription here. i think it's really important to not be long yennd long japanese assets. there are people that earn equities in this response toweaker yen by equities. you have to remember the japanese industry has been hallowed out over the last 20 years. so i think it's going to be very disappointing for the equities. i think they're macro tourists. even with what will be increased -- conceivably increased exports? maybe we'll get the start of a trade war, but i would imagine it would be good for the toyotas and hondas of the world.expecting that today. people are focused on dollar yen. they lost the trade deficit to korea. the next thing you'll start to see japan talk about is buying foreign bonds. and i think they need to set thearchitecture up to enable them to do so. when they do that you'll see a trade war. that's the next step that you see out of the doj.but you have to think about where their trade is loss lost? you generate inflation. you get real velocity of money. you get an economy starting to grow and generating higher tax revenues.when you have the declining population and the death rate across the birthrate and a hollow out of industry, you may get a bump in nominal gdp and with the looming tax inkroes in april2014, they'll pull forward some consumption this year. but it's important to focus on the fact that this is not the panacea that everybody hopes it will be. i hope i'mut this. i can't imagine when we look at -- let's say they're trying to get to 2% nominal inflation, 16% of gdp is imports.they have to get the yen to the dollar by the end of next year. so that's our target. but if they lose control it's going to be much weaker than that. we are in unchartered territory, are we not? we are. the central banks around the world are kreaing tents andvillages that are very difficult to invest around. very much appreciate you offering insight on a historic day. right before i let you go you have benefits this year from this strategy that you had in place for quite some time, correct? he made a good amount of return on this japanese investment, or your point of view, your thesis this year. so far. all right. so far. kyle bass, thank you.
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
March 13, 2013
Kyle Bass Presentation
Kyle Bass, addressing Chicago Booth's Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. "The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time... and it is happening in size." As he explains, the regulatory capital hit for the bank is zero (hence as great a return on capital as one can imagine) 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, ugh, he got a paycheck all year." Critically, the bank that he bought the 'cheap options' from recently called to ask if he would close the position -"that happened to me before," he warns, "in 2007 right before mortgages cracked." His single best investment idea for the next ten years is, "Sell JPY, Buy Gold, and go to sleep," as he warns of the current situation in markets, "we are right back there! The brevity of financial memory is about two years."
Click the image below for the full presentation (unembeddable):
Click the image below for the full presentation (unembeddable):
Starting at around 50:00...
Bass On Immigration Reform in Japan - hailed as a solution to the demographic problem - Bass says "Ain't gonna happen. They need wage inflation and this will not encourage that. It's an untenable situation." Summing up his whole view on Japan - "I just don't think it can be fixed."
Question: When you look today in the capital markets at the tactical asymmetry that exists among the various financial instruments to take advantage of cheap optionality - what is that instrument?
I'll give you guys a bit of an idea... we don't talk about exactly what
we do - we tell you how much we love coke but we're not gonna give you
the formula.
The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time.
You know why? Because it's outside of a 95% VaR, its less than one-year to maturity, so guess what the regulatory capital hit is for the bank... I'll give you a clue - it rhymes with HERO...
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, ugh, he got a paycheck all year.
We are right back there! The brevity of financial memory is about two years.
I wouldn't sell nuclear holocaust risk in Dallas for 1bp - you should be fired for thinking about selling something for less than 50bps.. and yet - this is happening again...
And it's happening in huge size - huge - we bought half a trillion dollars worth of these 'options'...and interestingly enough, one of the biggest banks in the world called me the other day 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 "we ran some new risk tests," and I said "really?"
"Yeah, the new stress scenario is a little more punitive than the last one."
"What is it?"
"Well, we don't wanna share our proprietary secrets"
"Ok, then I am not closing it",
and they said "woe woe woe.. in our old model rates stressed 50bps, in the new one they stress 400bps"
"Yeah, that would really hurt wouldn't it".
"Yeah, we'd like to close that one"
"I'd like to but I am not going to do that for you"...
The point is - Why would they run a stress test like that? They are starting to realize! Who would have them run that stress test. It's happening again.
Question: Do you buy guns, gold, neither, or both?
I don't get paid to be an optimist, I don't get paid to be pessimist, I get paid to be a realist - and a prudent fiduciary of the capital, and then if i have time I care about the social issues of the world.
If I am right, the social issues are going to be very difficult. I don't think we devolve into anarchy and I do think the payment systems will continue to work but what they will pay with will be wumpum...
We will go thru a period where its a little tougher...
We went through a period where it was briefly tough and now there are 1400 new billionaires in the world - maybe some capital was misallocated...
Question: Which one investment would make for the next ten years
I would buy Gold in JPY and go to sleep... Sell JPY, Buy Gold, Go to sleep, and wake up ten years later and you'll be fine. Don't put all yourr money in it but that is the single best investment you can make today.
(h/t Steve M) Source: Zerohedge
Bass On Immigration Reform in Japan - hailed as a solution to the demographic problem - Bass says "Ain't gonna happen. They need wage inflation and this will not encourage that. It's an untenable situation." Summing up his whole view on Japan - "I just don't think it can be fixed."
Question: When you look today in the capital markets at the tactical asymmetry that exists among the various financial instruments to take advantage of cheap optionality - what is that instrument?
I'll give you guys a bit of an idea... we don't talk about exactly what
we do - we tell you how much we love coke but we're not gonna give you
the formula.
The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time.
You know why? Because it's outside of a 95% VaR, its less than one-year to maturity, so guess what the regulatory capital hit is for the bank... I'll give you a clue - it rhymes with HERO...
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, ugh, he got a paycheck all year.
We are right back there! The brevity of financial memory is about two years.
I wouldn't sell nuclear holocaust risk in Dallas for 1bp - you should be fired for thinking about selling something for less than 50bps.. and yet - this is happening again...
And it's happening in huge size - huge - we bought half a trillion dollars worth of these 'options'...and interestingly enough, one of the biggest banks in the world called me the other day 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 "we ran some new risk tests," and I said "really?"
"Yeah, the new stress scenario is a little more punitive than the last one."
"What is it?"
"Well, we don't wanna share our proprietary secrets"
"Ok, then I am not closing it",
and they said "woe woe woe.. in our old model rates stressed 50bps, in the new one they stress 400bps"
"Yeah, that would really hurt wouldn't it".
"Yeah, we'd like to close that one"
"I'd like to but I am not going to do that for you"...
The point is - Why would they run a stress test like that? They are starting to realize! Who would have them run that stress test. It's happening again.
Question: Do you buy guns, gold, neither, or both?
I don't get paid to be an optimist, I don't get paid to be pessimist, I get paid to be a realist - and a prudent fiduciary of the capital, and then if i have time I care about the social issues of the world.
If I am right, the social issues are going to be very difficult. I don't think we devolve into anarchy and I do think the payment systems will continue to work but what they will pay with will be wumpum...
We will go thru a period where its a little tougher...
We went through a period where it was briefly tough and now there are 1400 new billionaires in the world - maybe some capital was misallocated...
Question: Which one investment would make for the next ten years
I would buy Gold in JPY and go to sleep... Sell JPY, Buy Gold, Go to sleep, and wake up ten years later and you'll be fine. Don't put all yourr money in it but that is the single best investment you can make today.
(h/t Steve M) Source: Zerohedge
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
March 02, 2013
Hayman Capital Says Japan on Edge
Richard Howard of Hayman capital believes that market re-pricing of Japan’s debt and a devaluation of the Yen could happen sooner rather than later.
“If you think of where the most interesting shift in dynamic has occurred for the last three month, it’s in Japan,” says Howard, managing director and global strategist for Hayman Capital.
“It’s important for people to understand how bad the economic environment has been in the last five years,” says Howard who points out that virtually all major developed economies have seen a rebound in economic activity from the troughs of the last financial crisis. Japan has not.
Previously, Japanese exports were relatively strong, which allowed the country to maintain a current account surplus and accumulate $1.1 trillion worth of U.S. treasuries as foreign exchange reserves. This has shifted since the financial crisis. “The Japanese absorbed an enormous amount of the world currency debasement and exported deflation over the last five years,” Howard says, and explains that the aggressive move by other central banks to ease monetary conditions after the crisis cheapened their currencies and made Japanese exports less competitive.
Korea, which devalued the won in response to the crisis is an example. “A lot of Japanese exporters and Korean exporters are now chasing the same customers,” he says, with Japanese firms being on the losing end of that competition. Indeed, according to the IMF, the Japanese current account balance shrank from 4.9 percent of GDP to a projected 1.6 percent of GDP in 2012.
The reversal of these supporting factors makes Howard believe that a final re-pricing of bad Japanese debts will finally happen in the near future. Despite a collapse in the value of equities and real estate over 20 years, debts accumulated during the credit bubble of the 1980s are still lurking on the balance sheets of banks and corporations. Despite the price drop in the value of collateral, they have not been written down.
“The value of the debt has already been crushed. The losses have already been incurred through the mal-investment of that capital. All that remains is to realize it. Either it gets realized through inflation or it gets realized through some sort of debt restructuring or write down,” says Howard.
RIchard also thinks that the government’s debt accumulated in a bid to prop up the banks and the economy is unsustainable and will lose in value. Major pension funds have announced that they will start selling Japanese Government Bonds (JGBs) in order to provide retirement income for an ageing Japanese population.
This leaves the Central Bank as a buyer of last resort.
“We’ve moved into a world that is more comfortable with the concept of truly aggressive monetary easing,” says Howard who thinks that the unlimited monetary easing that the Bank of Japan (BoJ) announced in January 2013 is a game changer.
“That is a sort of unorthodoxy and aggression that we haven’t seen previously. It’s a question of scale and scope,” he comments on the BoJ’s plans to buy $145 billion of government securities per months starting in January 2014 in order to reach a 2 percent inflation target.
While 2 percent inflation sounds relatively innocent, according to Howard, it will be enough to cause people to sell JGBs and the Japanese Yen in his opinion.
“You could see a big sell-off there as people migrate out of those assets because we don’t believe that there is a natural buyer out there in this new inflationary environment… with bonds at current yields were they are,” says Howard. Investors want to be compensated for inflation to earn a real return. In order to get that real return, nominal bond yields will have to rise.
“The problem with trying to create inflation is that debt is going to be harder to service. The hope is that the inflation creates enough nominal growth to enable the higher debt service costs. That makes sense for a portion of the economy that is not highly levered and can afford to service their debts,” explains Howard.
“The policy makers who are overseeing this process, they are convinced of the correctness of their views. Lots of experts out there will tell you that a government can never go bankrupt if you have a compliant central bank out there that can always buy your debt. As long as the BoJ cooperates there will never be a problem,” says Howard.
“We expect the Yen to devalue from here and we expect interest rate to rise in a sharp sudden fashion at some point over the next couple of years,” says Howard.
And this time Howard might prove right as Mr Abe, nominated Haruhiko Kuroda as Next Bank of Japan Governor.
Japanese Prime Minister Shinzo Abe nominated Asian Development Bank President Haruhiko Kuroda to lead the nation’s central bank, raising the likelihood of further monetary stimulus this year.
Kikuo Iwata, a professor at Tokyo’s Gakushuin University who advocates greater government oversight of the Bank of Japan (8301), and BOJ Executive Director Hiroshi Nakaso were nominated for the two deputy governor positions, the nation’s parliament said in a statement today. Current Governor Masaaki Shirakawa and his deputies will step down on March 19.
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
February 01, 2013
Why Inflation Could Eat Into Stock Gains: Kyle Bass
As the Dow Jones Industrial Average has reached 14,000 for the first time since 2007, Bass said the inflationary environment created by the Federal Reserve and other central banks could eat up much of those gains.
"You lose sight of what is important if you're focused on nominal prices in equities," said Bass, founder of Dallas-based Hayman Capital Management.
"One of the best performing equity markets in the last decade has been Zimbabwe," he added. "But now your entire equity portfolio only buys you three eggs."
Bass concluded: "You have to really focus on the insidious nature of what inflation is, and how real returns might be negative in both equities and bonds," he said, "you're losing purchasing power."
Bass, who is famous for predicting the sub-prime lending crisis, was interviewed on "Squawk on the Street" at the TIGER 21 conference, an event for high net worth investment managers in Palm Beach, Florida.
He said the Fed's bond-buying program, which is aimed at stimulating stock prices and the U.S. economy, has skewed the relationship between stocks and bonds.
"If the monetary base is going to continue to grow at the rate it's growing and the Fed holds rates where they are today, we've lost the correlation between stocks and bonds," Bass said, "Stocks will continue going higher if we continue printing money."
Bass suggests that investors "own productive assets," such as apartment complexes, oil wells, or global businesses that sell products in different currency areas.
"If you really want to protect yourself, you put long-term fixed rate debt on these businesses," he said.
People continue to scramble for yield," he said, "the U.S. rate curve is still basically flat and low. The Fed is actually doing the best job it can do, but it's also enabling the fiscal profligacy of Congress."
"If there are no negative consequences for (Congress) to continue to spend the way they're spending, they're not going to change that if the bond market isn't calling them out," he said.
"Central bankers are trying to do their best to mitigate a bad situation," said Bass, "but they won't tell you when a situation is untenable or really bad," using Japan as an example, as situation he sees as unsustainable.
With the recent fireworks over embattled company Heralife between billionaires Carl Icahn and Bill Ackman, Bass said that he would "never bet against Dan Loeb," who has a long position in the company. "I think Ackman has a tough road here," he said.
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
January 30, 2013
Kyle Bass: Yen could hit 200 Vs. US Dollar [VIDEO]
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
January 23, 2013
Kyle Bass: USDJPY will hit 200
The Japanese yen will likely “weaken significantly” against the dollar according to him. He spoke to Reuters at the GAIM Hedge Fund Conference in Florida this week.
Kyle Bass stated that because Japan never allowed creative destruction which was necessary, it probably has no choice but to inflate and devalue. He said the Japanese government just smoothed over the volatility, and he believes that everyone in Japan is in denial about what is happening to their nation’s economy.
“I think what you have to realize is when your debts are 24 times your central government’s tax revenue and you have a secular decline in population, and all of the things are finally catching up to you, what happens when you have a debt crisis?” Bass asked. “Your currency collapses.”
He also said he believes that when the Japanese yen does collapse, it will have a major social impact on the nation, with many Japanese losing 30 to 50 percent of their savings. According to Bass, “there’s no way out for Japan.” He says it’s “when and not if” the nation’s currency collapses.
Bass also believes that the rest of the world will follow in Japan’s footsteps, although he said he feels the U.S. and possibly Europe are years away from going through what he expects Japan will very soon.
According to Bass, the central banks are enabling spending to go higher and higher, and eventually all of that debt will negatively impact the currency.
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
January 18, 2013
Kyle Bass: Japan is a debt time bomb
Transkript:
The leading voice ahead of the housing crash has been critical of hyper governmentspending. he hate the japanese yen and is now going back to investing in sub prime bonds. he is with our own david favordowntown and he is kyle bass. thank you very much. of course, kyle bass a friend of yours and friend of mine. funny who you find hanging around town sometimes. kyle, nice to have you here at the new york stock exchange. nice to be here. let's start off with japan.if there is any trade you have been most associated with, it is that japanese trade. the basic idea their gdp is out of control and getting worse. they have a plan now to reflight the economy. they are printing a lot of money. 2% is the inflation rate they want. why is that not going to help the japanese economy. many people think it will. i think if you study the situation deeply, you see that japanese debt is about 24 times central government tax revenues. when you get into that, when you sail into that zone of insolvency, nothing you can do can help, in my opinion. they would have imploded undertheir own weight a few years down the road. now they talk about targeting 2% inflation. they don't realize it will force them to explode sooner. your criticism is well known, even to japanese ministers offinance, i would argue. first of all, when you think about a crisis, 99.9% of the people get it wrong. when you think about 20 years ofthe procycal cality, the owner ship of bonds of japan is theinstitutional community. they buy the bonds because they have 28 basis points of yield on the five-year and 70 on the ten. the only way invest on a bond like that is if they promise deflation. when they tell you they will target 2% deflation the swing will detonate the time bomb. you believe your time line has been moved up. correct.some say, kyle, you have been with david many times over the last three or four years. you guys have had theilar conversation. it hasn't happened. why should i think it is ever going to happen? so we've had the conversation over the last two just to correct you. is that all it is? second of all, i say, when you think about the end of this 70-year debt super cycle, it would be naive of anyone to saythey would predict it with any kind of precision. what i'm telling you is all of the component of the equation are in place for all of a sudden this to go off. all of a sudden. what does that mean? when it happens, when 20 years of the pro psychly cality of thought turns, it turns all at once. the end is strongest right before it breaks.interest rates are lowest right before they break. i think what you have to think about it is what causes the qualitative slip. the belief in the pir tis pants minds that this is an untenable situation. the clock started a few months ago. you perhaps would have said the same thing about italy when we watched italian bonds hit 7%.seems like that clock slowed down markedly. why wouldn't the japanese do the same? and i don't know if you agree with the argument that the clock slowed down. first of all, i didn't say that about italy. today japan spends 50 percent on debt service. their rates cost them another 25 percent of revenue. 2 percent move in their rates and they detonate. but 70 basis points on ten-year. 2 percent is 200 basis points. multiples of what they pay on ten-year paper right now. you don't have to look back very far to see that rate in japan very many years. very few people get this right. and if the japanese government is essentially been dismonest with the constituents in japan. i would advise everyone that lives in japan it spend their yen on something. look at transaction the soft bank did with sprint, 20 billion into sprint. there's $32 billion worth of m & a and all buying western assets. if i were them, i would take every yen i had and buy a western asset. when the elites, corp rates andhouseholds realize they are in an untenable situation they willexport the yen. the yen will collapse and then they lose control of rates. this is what is likely to happen going forward. when will we know the day is here? . what will be the tell? the tell is -- and this is not for the cnbc audience, but when the swaps curve startpricing inflation, i think that's it. any prediction? yeah, i think we started the clock. it'll take a couple years. 18 months to 24 monthes from now. something else, japanese and world investors have been focussing on investors from japan and china. south china seas. as someoneho studied japan carefully for a number of years, is that something you're focused on? yes. first of all, there is an informal boycott by chinese soes. the japanese and chineseperspective, ping's father fought in the second japan war. abe says he will put cabinet mesinkaku islands. these people won't wake up and love each other again. 20% goes to china, that's $340 billion.we think that number can be down 50% in the last quarter. and it is a secular change. they are going elsewhere to procure goodness china. japan's gdp is falling at an alarming rate. the change in a dollar/yen won't restore competitiveness? japan. the people buying japanese stongs are picking up a dime in front after bulldozer. think they need to be careful with what they are doing. brian, back to you at hq. i know you've been talking about japan, a huge trade for you.but you are also a proud american and proud texan. where are you investing in united states right now? so, anything that has to dowith u.s. housing, we're long. and that's a basic way of saying that we have, you know, a huge position in the mortgage bonds that we bet against years ago. we own mortgage servicing rights, companies. we own companies that are providing private mortgage insurance to the conforming marketplace. anything that has to do with housing flattening out and getting a little bit better,we're invested in. we are veryong u.s. cyclical recovering in housing and we are very afraid of what is going on in the village around the world. how much of the recovery is real? how much of the recovery is just fed injected hopium? look, there have been 24housing busts since 1980. pete detrough, has taken 6 1/2 years.those associated with banking crises is 7 1/2. all housing peaked in '06. we're about at the time at which things decide to flatten out and turn. when you think about what the fed is doing, it is enablingcongress, not necessarily turning the housing market around.however, i will jump in, absolutely. i think it is very bold what youare saying about japan. i would be very interested to know what you are saying about china. what is the your stance on the economy there? i don't know which numbers to believe. we don't have any positions in china. i don't know what you own. i don't know which numbers you are supposed to believe, the government's numbers or real numbers and power numbers or the government's official gdp number of 8. what we look at in china that worries me, they extended 50% almost three years in a row. that's the u.s. lending $8 trillion into our economy every year for the last three years.nonforming loans are about 1% when historically they are 19. i think china is setting itself up for a big problem down the road. not today, but maybe a few years down the road. of course bringing it back ithere in the states and wrapping it up, the u.s. is potentially setting itself up for a problem down the road not too far. we're not japan.we're not close to japan yet. but we may be in your opinion? yeah. i just think we are further down the road behind japan. we are spending 11% roughly, 10% on our central government fax revenue on interest. i was joking with you beforehand, around the office wemake this analogy to what the republicans aeb democrats aredoing. when the central bank is buying all the bonds, there is noconsequence for central. i say where is the ten-year? i don't see a bond crisis. can i jump back in? kyle, here is something i need to you do for me, all right. turn in the term bond eunuch.
Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.
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