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.

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.