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.

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.

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 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.