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.

Kyle Bass and his macro views from the Alpha Hedge West Conference

On FED

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%.

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.

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.