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Kyle Bass on Hardtalk about Europe, Japan and Hedge Funds

BBC’s Hardtalk recently featured Kyle Bass, Founder of Hayman Capital, a hedge fund based in Dallas, Texas to talk about global markets, asymmetric market bets and the sovereign debt crisis. Bass likes to make asymmetric bets to hedge his long portfolio of financial assets against black swan events and has made a considerable amount betting on the subprime mortgage and sovereign debt crises. His next bet is on Japan, based on demographics, interest rates, and its ability to service debt. People have been waiting for this bet to come due for over a decade, but Bass believes the time is now.

Video below (hat tip Paul Kedrosky)

Also see Bass in previous videos from February

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

19 Comments

  1. Edward – thanks.

    If MMT acknowledges Tax Revulsion as a possible cause of Inflation, might not changes in Tax Revenue due to demographics be a trigger for higher rates (for Private Credit at least).

  2. Edward – thanks.

    If MMT acknowledges Tax Revulsion as a possible cause of Inflation, might not changes in Tax Revenue due to demographics be a trigger for higher rates (for Private Credit at least).

  3. Jay H. Mani says:

    Kyle Bass is wrong on Japan. He compares Greece & Italy to Japan. This is wrong! Greece/Italy don’t control the currency their debts are printed in while Japan does. The case is closed right here and now. He came on CNBC last year with the same position and Japan JGB’s yields have plummeted since then. Any guy who chooses to bet against an economy that has monopoly control of its own currency will lose in the end. Why do we continue to bring on guys who got sub prime right and now think they have all of the answers to the world figured out? He was also wrong on Muni’s as he came on earlier in the year and shot off his mouth then. The only risk Japan has is hyperinflation, but to get to hyperinflation first we need normal inflation. This is what they have hoped for 2 decades. I am sure as soon as the economy slowly improves, the JGB will increase short rates to keep asset prices in check. 

    • I agree that the only real risk in Japan is hyperinflation as you will see from the post I linked to from February. As I also say here, people have been making the anti-Japan currency trade for over a decade. Maybe one day it will be right. I like an anti-Japan economy/currency trade only as a black swan asymmetric hedge. As a primary vehicle inside a portfolio, it would have lost a lot of money these past years.

      • Jay H. Mani says:

        There is a graveyard of traders who shorted JGB’s. Kyle Bass should just order his gravestone while its still cheap. In my prior post I meant to say BOJ not JGB. My bad. The thing here is again, Meredith Whitney called Citigroup, but she hasn’t called anything really correctly since then. Kyle Bass got Sub Prime trade correct but he was wrong on Muni’s and is wrong on JGB’s. When will people call him out on it? As we have seen John Paulson is doing very badly this year after gathering assets like a demon the last few. It seems to me that BBG, CNBC, Fox and other MSM are outlets for these people’s vanity and its just another way for them to gather assets for 2 and 20.

    • Rpetheram says:

      You are missing the point. For a conventional bond investor default and hyperinflation are the same thing. I don’t think Bass would necessarily disagree with you, Japan ultimately has two options, default or hyperinflation and a short on Japanese government bond futures will make you a lot of money in both cases.

      • Jay H. Mani says:

        What point am I missing? This guy came on in February with his negative Muni and short JGB Trade and got his clock cleaned. CNBC was drooling all over this guy back then. He is back again now with the same trade? He seems to believe that everyone should give him the benefit of the doubt just because he got Sub Prime correct? We have got to get over people who got Sub Prime correct. All the props to you but…. That is so 2007-2008. This is 2011. As I posted earlier, there is a graveyard of traders who thought like Bass and shorted JGB’s. They all lost and got buried in the process. You can’t fight Central Bankers who have monopoly access to their own currencies. Default is never going to be a problem with JGB’s, Gilts, and or UST. If you are waiting for a default you will be waiting for a long time. Hyperinflation is the only way this trade works and it’s simply not going to happen just by expansionary monetary policy as we all know that Weimer Hyperinflation was much than a monetary phenomenon.

        • Phoenixsuen88 says:

          2 things you are missing that I can see:
          1) As he states, this is a hedge position, it is not an outright trade.  If he has had it on since February then he has probably lost around 0.8% of the proportion of portfolio position taken….ie he hasn’t taken a bath on it as you imply but instead is costing him what you might expect for a hedge cost.  Note that as it is a hedge against an extreme tail risk, the outcome for Japan doesn’t even have to be his base case to justify the position given the cheapness of the trade.
          2) as the other writer suggested, and you yourself have stated, hyperinflation could be the outcome for Japan – the trade will work perfectly if hyperinflation comes about. 

          “Default is never going to be a problem with JGB’s, Gilts and or UST”……I don’t want to mount a personal attack on yourself but I think there is a serious problem with our investment community whereby people still think this way 4 years into the crisis.  In fact we did have a Gilt default less than 100 years ago (1932) when the coupon was reduced on the war loan from 5% to 3.5% (which by the way was sold with this slogan “if you cannot fight, invest all you can in 5% bonds.  Unlike the soldier the investor runs no risk”……perhaps you could get yourself a job at the Debt Management Office.

          • Jay H. Mani says:

            First of all for such a small trade and or hedge position he certainly talks like it’s not a small position? He was on Fox, BBG, as well as CNBC talking about both the Muni and JGB Trade. So if it’s such a small trade why is he making such a big deal about it? Just put it in and shut up! This trade only works if hyperinflation is the case and he has continually stated that money printing alone will bring hyperinflation. This theory has been debunked mercilessly. I state again. If anyone believes a Sovereign Country with monopoly power in a floating exchange rate mechanism can default on their debts, you are as stupid as the day is long. This at the end of the day is the fatal flaw in the EURO. The economic crisis of 2008 wasn’t caused by Sovereign Debt. The crisis we are experiencing at the moment is a single currency union crisis, it has nothing to do with UST, Gilts, and or JGB’s, so your last point is stupid, thoughtless, and right out of the GOP/Paul Ryan/Eric Cantor playbook.

            I will keep a copy of this chain and we will revisit again in 1 year, 5 years and 10 years and guess what I will be right.

          • Jay H. Mani says:

            BTW….England defaulted in 1340, and 1471, and 1596. Did they actually default in 1932? I don’t see this anywhere. They came off the Gold Standard in the 1920′s. Simply reducing the coupon is not a Sov Default. If you just want to frivolously roll off misleading stats go ahead so far that is all you are doing.

          • Phoenixsuen88 says:

            There is nothing simple about reducing the coupon on your debt.  Reducing your coupon on current debt is a default.  End of story.  That was done in the UK in 1932, and you can go into the market and buy that bond today (it is the UKT3.5% perp).  It is a default on credit rating definition, on ISDA definition and most importantly of all to the individuals that invest in the bond.

            Secondly, the UK didn’t only reduce its coupon on this bond, it defaulted on its loans to the US (along with France). You might like to have a read of this….. http://history.state.gov/milestones/1921-1936/Dawes  If you call me frivolous then you have to extend that to the Office of the Historian as well.

            Very happy to revisit this in the future.  But you know what, this all comes back to the fact that you are missing the point – this is a hedge position, it doesn’t matter for Bass that it doesn’t eventuate because the rest of the portfolio would benefit.

      • delarge says:

        Sometimes I wonder those hyperinflationists have ever actually studied the real hyperinflation cases in the past.  This notion that monetary expansion can single-handedly cause hyperinflation is as daft an idea as tooth fairy.

        No one can actually map out precisely how it can happen in Japan or the US etc. for the simple reason that they share hardly any conditions with the likes of Weimar and Hungary and Zimbabwe.  The likes of Japanese central bankers may almost WISH that wasn’t the case.  That’s the irony.

    • Drfunkenstef says:

      …Interesting that bond yields in Japan made a big move up last week. Bloomberg is quoted saying that investors are driving up government bond yields at the fastest pace in almost 11 months.

      • Jay H. Mani says:

        His original thesis for this trade came out when JGB Yields were at 1.30% I am sure he was talking his book waiting for a decent bid to appear so he can say sold to you sucker. The yields then plummeted back down to 90 BP. Now they have rallied back up to 1.08%. This is no different then a guy who toats a stock at 1.30 and watch it go all the way down to 90 cents. Who cares if it goes to 1.08? Bass is just playing on the fears of people. The Words Default and Hyperinflation get peoples attention. I am surprised that he didnt mention Nazi’s in his rant.

  4. Jay H. Mani says:

    Kyle Bass is wrong on Japan. He compares Greece & Italy to Japan. This is wrong! Greece/Italy don’t control the currency their debts are printed in while Japan does. The case is closed right here and now. He came on CNBC last year with the same position and Japan JGB’s yields have plummeted since then. Any guy who chooses to bet against an economy that has monopoly control of its own currency will lose in the end. Why do we continue to bring on guys who got sub prime right and now think they have all of the answers to the world figured out? He was also wrong on Muni’s as he came on earlier in the year and shot off his mouth then. The only risk Japan has is hyperinflation, but to get to hyperinflation first we need normal inflation. This is what they have hoped for 2 decades. I am sure as soon as the economy slowly improves, the JGB will increase short rates to keep asset prices in check. 

    • I agree that the only real risk in Japan is hyperinflation as you will see from the post I linked to from February. As I also say here, people have been making the anti-Japan currency trade for over a decade. Maybe one day it will be right. I like an anti-Japan economy/currency trade only as a black swan asymmetric hedge. As a primary vehicle inside a portfolio, it would have lost a lot of money these past years.

      • Jay H. Mani says:

        There is a graveyard of traders who shorted JGB’s. Kyle Bass should just order his gravestone while its still cheap. In my prior post I meant to say BOJ not JGB. My bad. The thing here is again, Meredith Whitney called Citigroup, but she hasn’t called anything really correctly since then. Kyle Bass got Sub Prime trade correct but he was wrong on Muni’s and is wrong on JGB’s. When will people call him out on it? As we have seen John Paulson is doing very badly this year after gathering assets like a demon the last few. It seems to me that BBG, CNBC, Fox and other MSM are outlets for these people’s vanity and its just another way for them to gather assets for 2 and 20.

    • Rpetheram says:

      You are missing the point. For a conventional bond investor default and hyperinflation are the same thing. I don’t think Bass would necessarily disagree with you, Japan ultimately has two options, default or hyperinflation and a short on Japanese government bond futures will make you a lot of money in both cases.

      • Jay H. Mani says:

        What point am I missing? This guy came on in February with his negative Muni and short JGB Trade and got his clock cleaned. CNBC was drooling all over this guy back then. He is back again now with the same trade? He seems to believe that everyone should give him the benefit of the doubt just because he got Sub Prime correct? We have got to get over people who got Sub Prime correct. All the props to you but…. That is so 2007-2008. This is 2011. As I posted earlier, there is a graveyard of traders who thought like Bass and shorted JGB’s. They all lost and got buried in the process. You can’t fight Central Bankers who have monopoly access to their own currencies. Default is never going to be a problem with JGB’s, Gilts, and or UST. If you are waiting for a default you will be waiting for a long time. Hyperinflation is the only way this trade works and it’s simply not going to happen just by expansionary monetary policy as we all know that Weimer Hyperinflation was much than a monetary phenomenon.

        • Phoenixsuen88 says:

          2 things you are missing that I can see:
          1) As he states, this is a hedge position, it is not an outright trade.  If he has had it on since February then he has probably lost around 0.8% of the proportion of portfolio position taken….ie he hasn’t taken a bath on it as you imply but instead is costing him what you might expect for a hedge cost.  Note that as it is a hedge against an extreme tail risk, the outcome for Japan doesn’t even have to be his base case to justify the position given the cheapness of the trade.
          2) as the other writer suggested, and you yourself have stated, hyperinflation could be the outcome for Japan – the trade will work perfectly if hyperinflation comes about. 

          “Default is never going to be a problem with JGB’s, Gilts and or UST”……I don’t want to mount a personal attack on yourself but I think there is a serious problem with our investment community whereby people still think this way 4 years into the crisis.  In fact we did have a Gilt default less than 100 years ago (1932) when the coupon was reduced on the war loan from 5% to 3.5% (which by the way was sold with this slogan “if you cannot fight, invest all you can in 5% bonds.  Unlike the soldier the investor runs no risk”……perhaps you could get yourself a job at the Debt Management Office.

          • Jay H. Mani says:

            First of all for such a small trade and or hedge position he certainly talks like it’s not a small position? He was on Fox, BBG, as well as CNBC talking about both the Muni and JGB Trade. So if it’s such a small trade why is he making such a big deal about it? Just put it in and shut up! This trade only works if hyperinflation is the case and he has continually stated that money printing alone will bring hyperinflation. This theory has been debunked mercilessly. I state again. If anyone believes a Sovereign Country with monopoly power in a floating exchange rate mechanism can default on their debts, you are as stupid as the day is long. This at the end of the day is the fatal flaw in the EURO. The economic crisis of 2008 wasn’t caused by Sovereign Debt. The crisis we are experiencing at the moment is a single currency union crisis, it has nothing to do with UST, Gilts, and or JGB’s, so your last point is stupid, thoughtless, and right out of the GOP/Paul Ryan/Eric Cantor playbook.

            I will keep a copy of this chain and we will revisit again in 1 year, 5 years and 10 years and guess what I will be right.

          • Jay H. Mani says:

            BTW….England defaulted in 1340, and 1471, and 1596. Did they actually default in 1932? I don’t see this anywhere. They came off the Gold Standard in the 1920′s. Simply reducing the coupon is not a Sov Default. If you just want to frivolously roll off misleading stats go ahead so far that is all you are doing.

          • Phoenixsuen88 says:

            There is nothing simple about reducing the coupon on your debt.  Reducing your coupon on current debt is a default.  End of story.  That was done in the UK in 1932, and you can go into the market and buy that bond today (it is the UKT3.5% perp).  It is a default on credit rating definition, on ISDA definition and most importantly of all to the individuals that invest in the bond.

            Secondly, the UK didn’t only reduce its coupon on this bond, it defaulted on its loans to the US (along with France). You might like to have a read of this….. http://history.state.gov/milestones/1921-1936/Dawes  If you call me frivolous then you have to extend that to the Office of the Historian as well.

            Very happy to revisit this in the future.  But you know what, this all comes back to the fact that you are missing the point – this is a hedge position, it doesn’t matter for Bass that it doesn’t eventuate because the rest of the portfolio would benefit.

      • delarge says:

        Sometimes I wonder those hyperinflationists have ever actually studied the real hyperinflation cases in the past.  This notion that monetary expansion can single-handedly cause hyperinflation is as daft an idea as tooth fairy.

        No one can actually map out precisely how it can happen in Japan or the US etc. for the simple reason that they share hardly any conditions with the likes of Weimar and Hungary and Zimbabwe.  The likes of Japanese central bankers may almost WISH that wasn’t the case.  That’s the irony.

    • Drfunkenstef says:

      …Interesting that bond yields in Japan made a big move up last week. Bloomberg is quoted saying that investors are driving up government bond yields at the fastest pace in almost 11 months.

      • Jay H. Mani says:

        His original thesis for this trade came out when JGB Yields were at 1.30% I am sure he was talking his book waiting for a decent bid to appear so he can say sold to you sucker. The yields then plummeted back down to 90 BP. Now they have rallied back up to 1.08%. This is no different then a guy who toats a stock at 1.30 and watch it go all the way down to 90 cents. Who cares if it goes to 1.08? Bass is just playing on the fears of people. The Words Default and Hyperinflation get peoples attention. I am surprised that he didnt mention Nazi’s in his rant.

  5. Anonymous says:

    His last point about governments spending misses the point in much of Europe that it was the collapse in tax revenues that caused the increase in deficits. In fact Ireland had a surplus before the crisis, and a combination of the fall in revenue and guaranteeing of the debt was the cause of Irelands problems. The UK had a deficit which expanded because of the banks. He is right about the need to write debts off but that is unpalatable to our corrupt politicians.

    • Jay H. Mani says:

      You are totally right that when a Gov loses the ability to tax its constituents, its the first sign of serious trouble. This was one of the drivers of Weimar hyperinflation. When a country has so much economic mismanagement this is also a driver of currency revulsion. 

      • Anonymous says:

        The similarities to the Weimar republic or even Zimbabwe are just not there. The problems of Weimar were down to the onerous debts of reparation at the end of WW1. If they had not been imposed on them, pretty much like the debts of Ireland right now, then things would be very different. Zimbabwe was down to over printing of money by an incompetent and corrupt government. I do not suggest that Ireland will start invading its neighbours on a path to warfare, to resort national pride. 

        The UK still has the ability to tax, but the problem of taxation is not political but ideological. Sweden has far higher tax rates than the UK, but they tolerate them because of confidence that they get good public services for all. The US has basically and deliberately mismanaged its role to destroy the government for ideological reasons, because services are aimed at the poor and the reasoning to cut them is to motivate them back to work. They are on the road to Somalia. No government and no taxation. The UK is on the long path to social collapse it is cutting public services using the justification of low tax revenues and balancing the books. The option of raising taxes has deliberately been placed on regressive taxes, particularly by the UK coalition. So inability to raise funds does not apply to the US and UK yet. The willingness to pay for them will erode as the services they get falls will create problems. 

        In Greece they have no safety net so they cannot cut that. It also makes people unwilling to pay taxes if the rich get away without paying and they get very little for their money. So inability to tax is dependant on politicians. 

  6. Anonymous says:

    His last point about governments spending misses the point in much of Europe that it was the collapse in tax revenues that caused the increase in deficits. In fact Ireland had a surplus before the crisis, and a combination of the fall in revenue and guaranteeing of the debt was the cause of Irelands problems. The UK had a deficit which expanded because of the banks. He is right about the need to write debts off but that is unpalatable to our corrupt politicians.

    • Jay H. Mani says:

      You are totally right that when a Gov loses the ability to tax its constituents, its the first sign of serious trouble. This was one of the drivers of Weimar hyperinflation. When a country has so much economic mismanagement this is also a driver of currency revulsion. 

      • Anonymous says:

        The similarities to the Weimar republic or even Zimbabwe are just not there. The problems of Weimar were down to the onerous debts of reparation at the end of WW1. If they had not been imposed on them, pretty much like the debts of Ireland right now, then things would be very different. Zimbabwe was down to over printing of money by an incompetent and corrupt government. I do not suggest that Ireland will start invading its neighbours on a path to warfare, to resort national pride. 

        The UK still has the ability to tax, but the problem of taxation is not political but ideological. Sweden has far higher tax rates than the UK, but they tolerate them because of confidence that they get good public services for all. The US has basically and deliberately mismanaged its role to destroy the government for ideological reasons, because services are aimed at the poor and the reasoning to cut them is to motivate them back to work. They are on the road to Somalia. No government and no taxation. The UK is on the long path to social collapse it is cutting public services using the justification of low tax revenues and balancing the books. The option of raising taxes has deliberately been placed on regressive taxes, particularly by the UK coalition. So inability to raise funds does not apply to the US and UK yet. The willingness to pay for them will erode as the services they get falls will create problems. 

        In Greece they have no safety net so they cannot cut that. It also makes people unwilling to pay taxes if the rich get away without paying and they get very little for their money. So inability to tax is dependant on politicians. 

  7. I understand the monetary-sovereignty arguments about no-default, but I believe that a lot of MMT-ers are too glib on inflation/hyper-inflation. 

    I can imagine a scenario in Japan where a drop in demographics causes a significant drop in Tax Revenues. If the economy gets to a point were private-sector-credit stops dropping (no net write-downs and defaults), then things could be interesting. Now add in an earthquake and then….well people will claim that it was the earthquake.That is the asymmetry to me – the relative sizes of the up-side and down sides.

    • Anonymous says:

      I do agree with you about when net lending stops falling. The issue is that for nearly all banks they have too much credit outstanding for their level of capital. They are all trying to rebuild their capital, and one way has been using their risk models to reduce the risk against the level of capital that they already have. That way they can become more solvent without raising much capital, if any. Though ultimately the total level of credit has to fall against the size of the economy, in many countries, otherwise it poses risks to all banks. This was what bank regulators and central banks have missed for the last decade. 

      As for an earthquake triggering some event, which happens regularly and really should be considered noise in the overall pattern of events. The recent floods in Thailand have not impacted the world economy massively but have had an impact on the supply of computer hard drives. This is a very small outcome but massive for some sectors, but overall it is simply noise. That is what the loss of a bank should be. We need to make that the objective, shrink big banks. 

  8. I understand the monetary-sovereignty arguments about no-default, but I believe that a lot of MMT-ers are too glib on inflation/hyper-inflation. 

    I can imagine a scenario in Japan where a drop in demographics causes a significant drop in Tax Revenues. If the economy gets to a point were private-sector-credit stops dropping (no net write-downs and defaults), then things could be interesting. Now add in an earthquake and then….well people will claim that it was the earthquake.That is the asymmetry to me – the relative sizes of the up-side and down sides.

    • Anonymous says:

      I do agree with you about when net lending stops falling. The issue is that for nearly all banks they have too much credit outstanding for their level of capital. They are all trying to rebuild their capital, and one way has been using their risk models to reduce the risk against the level of capital that they already have. That way they can become more solvent without raising much capital, if any. Though ultimately the total level of credit has to fall against the size of the economy, in many countries, otherwise it poses risks to all banks. This was what bank regulators and central banks have missed for the last decade. 

      As for an earthquake triggering some event, which happens regularly and really should be considered noise in the overall pattern of events. The recent floods in Thailand have not impacted the world economy massively but have had an impact on the supply of computer hard drives. This is a very small outcome but massive for some sectors, but overall it is simply noise. That is what the loss of a bank should be. We need to make that the objective, shrink big banks.