January 18, 2013

Kyle Bass: Japan is a debt time bomb

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.