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Kyle Bass Warns "The 'AIG' Of The World Is Back"
Kyle Bass, addressing Chicago Booth's Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. "The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time... and it is happening in size." As he explains, the regulatory capital hit for the bank is zero (hence as great a return on capital as one can imagine) and "if the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year." Critically, the bank that he bought the 'cheap options' from recently called to ask if he would close the position - "that happened to me before," he warns, "in 2007 right before mortgages cracked." His single best investment idea for the next ten years is, "Sell JPY, Buy Gold, and go to sleep," as he warns of the current situation in markets, "we are right back there! The brevity of financial memory is about two years."
Click the image below for the full presentation (unembeddable):
The main thrust of the discussion is Bass' thesis on Japan's pending collapse - which we wrote in detail on here, here, and here - and while the details of this thesis should prepare most for the worst, it is the Q&A that provides some very clear insights into just what is going on in the world.
Starting at around 50:00...
Bass On Immigration Reform in Japan - hailed as a solution to the demographic problem - Bass says "Ain't gonna happen. They need wage inflation and this will not encourage that. It's an untenable situation." Summing up his whole view on Japan - "I just don't think it can be fixed."
Question: When you look today in the capital markets at the tactical asymmetry that exists among the various financial instruments to take advantage of cheap optionality - what is that instrument?
I'll give you guys a bit of an idea... we don't talk about exactly what
we do - we tell you how much we love coke but we're not gonna give you
the formula.
The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time.
You know why? Because it's outside of a 95% VaR, its less than one-year to maturity, so guess what the regulatory capital hit is for the bank... I'll give you a clue - it rhymes with HERO...
If the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year.
We are right back there! The brevity of financial memory is about two years.
I wouldn't sell nuclear holocaust risk in Dallas for 1bp - you should be fired for thinking about selling something for less than 50bps.. and yet - this is happening again...
And it's happening in huge size - huge - we bought half a trillion dollars worth of these 'options'... and interestingly enough, one of the biggest banks in the world called me the other day and asked me if I would close my position - that was an interesting day for us - that happened to me in 2007 right before the mortgages cracked.
They said "we ran some new risk tests," and I said "really?"
"Yeah, the new stress scenario is a little more punitive than the last one."
"What is it?"
"Well, we don't wanna share our proprietary secrets"
"Ok, then I am not closing it",
and they said "woe woe woe.. in our old model rates stressed 50bps, in the new one they stress 400bps"
"Yeah, that would really hurt wouldn't it".
"Yeah, we'd like to close that one"
"I'd like to but I am not going to do that for you"...The point is - Why would they run a stress test like that? They are starting to realize! Who would have them run that stress test. It's happening again.
Question: Do you buy guns, gold, neither, or both?
I don't get paid to be an optimist, I don't get paid to be pessimist, I get paid to be a realist - and a prudent fiduciary of the capital, and then if i have time I care about the social issues of the world.
If I am right, the social issues are going to be very difficult. I don't think we devolve into anarchy and I do think the payment systems will continue to work but what they will pay with will be wumpum...
We will go thru a period where its a little tougher...
We went through a period where it was briefly tough and now there are 1400 new billionaires in the world - maybe some capital was misallocated...
Question: Which one investment would make for the next ten years
I would buy Gold in JPY and go to sleep... Sell JPY, Buy Gold, Go to sleep, and wake up ten years later and you'll be fine. Don't put all yourr money in it but that is the single best investment you can make today.
(h/t @EquityAnalystNY)
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" where are the opportunities for investors Mr Kyle plizz" they cry? like Maria Bartiromo.
Some folks just don't get it.
Investment isn't finding some way to steal money off someone else (or printing your own), it is about creating real growth, and designing, selling new things better than the competition. Until these muppets realise that, they are part of the problem, not part of the solution.
you dont get it, there are no "investments" when there is this much system variation. he didn't make the game or the rules that he has to play by. Great you can make something and profit today? What about tomorrow when your taxes increase by 50% or your health insurance premiums go through the roof, or you are forced to pay employees a certain amount, or you no longer have the right to fire an employee, or you are deemed to be colluding or you are deemed to be under cutting, or your prices are too high by government decree.
again you don't get it.
He gets it..... you both do.... just describing the same thing in a different way.
"A credibility trap is a condition wherein the financial, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform, or even honestly address, the problems of that system without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves...
And so a failed policy and its support system become self-sustaining, long after it is seen by objective observers to have failed. In its failure it is counterproductive, and an impediment to recovery in the real economy. Admitting failure is not an option for the thought leaders who receive their power from that system."
Jesse
Ooh,
That had so much truthiness in it that my brain got a chubby.
Admitting failure is not an option for the thought leaders...
It's the world of post modernism. There is no absolute truth and pragmatism is the highest valued commodity.
Of course, nothing could be further from the truth, as "the house on the sand went splash".
Funny what he says because sell yen and buy gold is exactly what I've been doing the last two months. :D
i cant get the link to load all the way
Dick's Sporting Goods to honor Bloomberg's Big Gulp ban ! Monedas 1929 Comedy Jihad Social Conscience World Tour
Pure irony, or a contrarian "tell"? Bass is speaking at a "Myron Scholes" conference.
Kyle relished the irony. He said it's "beautiful" how the Black-Scholes pricing is so fucked up at secular turning points. Like now.
Hmmmm.Advise from Kyle Bass is "I would buy Gold in JPY and go to sleep... Sell JPY, Buy Gold, Go to sleep, and wake up ten years later and you'll be fine. Don't put all yourr money in it but that is the single best investment you can make today"
Beam Me UP Scottty .....
everyone has been calling shorts on Japan for years. maybe he is right, maybe he isnt. I think the trajectory of japan has more to do with China and nuclear toxicity than demographics/debt. these japs are smart enough to deal with demographic/debt issue. china/nuclear issue is another story. i dont think the usa will dump japan in the shit unless they are going down the toilet as japan is a pivotal role in their asia expansion. maybe if usa gives big enough concessions, japan/usa can have a decent joint venture in asia.
everyone has been calling shorts on Japan for years. maybe he is right, maybe he isnt. I think the trajectory of japan has more to do with China and nuclear toxicity than demographics/debt. these japs are smart enough to deal with demographic/debt issue. china/nuclear issue is another story. i dont think the usa will dump japan in the shit unless they are going down the toilet as japan is a pivotal role in their asia expansion. maybe if usa gives big enough concessions, japan/usa can have a decent joint venture in asia.
And then Ben steps up for the rest of us to cover their loss.
What he probably meant to say was, Goldman took the same position and size that you did, and now they are squeezing our ass in the Yen markets.
And don’t you wonder how many people have bought the same insurance for an asset that none of them actually own? Moral hazzard? Naaaa, we’re a self-regulating industry.
All efforts of the economic systems and financial markets in place today are designed to make a majority of the population borrowers, speculators or crooks.
Any attempt by a person to make an honest living either by saving or working are met by punishment in the form of zero interest rates or a buffet of taxes by the government.
Welcome to the new age democracy.
http://www.marketoracle.co.uk/Article35345.html
www.letstalkmoney2012.in
Is the Keynesian endpoint a means to an Alinsky-like goal? To collapse the system at the highest possible level and then, not letting a good crisis go to waste, to use that event to seize control of what to replace it with? Ah, fiinally the perfect opportunity to build the Secular Utopia, hell on earth. The Beast of Revelation will yet live.
KB is da bomb, but paying $50 million for $ 500B 1 year Jap jump risk seems unlikely to pay off. If Japan somehow does blow up within a year, the counterparty or counterparties will have blown up way before that time.
$50 million for $ 500B 1 year Jap jump risk...
That's a pretty hefty bet on the rule of law. Fall of '08 pulled that card and in reality crushed it rather than upholding it as claimed. The US can never be the same until those individuals that short circuited it are brought to justice.
Who knows if Japan would honor an offshore entity to be paid out. Nations have become nothing more than casinoes by persons allowed to have free access to their chips. Things would be different if the chips had intrinsic value, imo.
I thought he said he paid less than a basis point
Bass had better have a big rock to crawl under when the SHTF.. He has made a very public figure of himself and has advertised the profits he has made off the system crashing/disfunction... He will not be treated kindly.
He'll need plenty of clean underwear; see to it. Ulysses and the Cyclops and all that. All hell breaks loose and his poor boat ends up in Circe's bedroom.
How much is your skin worth?
Cover me in gold and I'm sold to any man bold enuff to hold me as I unfold.
I told you no underwear!
To prevent getting your shorts burnt you must wear asbestos underwear.
"We bought half a trillion dollars worth of these 'options'."
Jeez Louise, he's gonna put someone out of business.
Will he still get paid if whatever bank that was goes down?
"When fraud is the status quo, possession is the law. Get physical, sleep well."
But what happens if the government confiscates it? The government creates the law and can dispossess you of your gold.
"Investment isn't finding some way to steal money off someone else (or printing your own), it is about creating real growth, and designing, selling new things better than the competition. Until these muppets realise that, they are part of the problem, not part of the solution."
Muppets never realize anything. That is why they are called muppets.
"Bass had better have a big rock to crawl under when the SHTF.. He has made a very public figure of himself and has advertised the profits he has made off the system crashing/disfunction... He will not be treated kindly."
The ones who should not be treated kindly are the ones who keep crashing the system by creating bubbles that burst, as all bubbles do.
Fuck that, lets go after the ones who told us everything is ok and still made money. Atleast kyle gives a 4 year warning
Myron Scholes Global Markets Forum! Too funny!
I get the feeling the rest of us may want to see KB lose this one.
Fuku II may start WWIII.
A broken glass massage without a happy ending.
As far as I know, Kyle Bass hasn't been wrong yet--housing bubble, Iceland, Greece, etc. I wouldn't bet against him.
Is there a link to Bass' speach that works?
Guinny:
http://media.chicagobooth.edu/mediasite/Viewer/?peid=f15d95d054e8442ab0c...
Appreciate it but it's not working for me. Tried it both in Firefox and IE in case it was a browser thing.
"Yeah, we'd like to close that one"
"I'd like to but I am not going to do that for you"...
Kyle why are you letting them off the hook? If they want out they should do so at the market and fast.
This would be my response :
Me : Really oh my god is that true?!?!!??
Spineless Bank Trader : OMG!! Yes !!!
Me : I can't thank you enough for this information !!! What is the current offer on these 'Securities' ?
Spineless Bank Trader: Offer ? you mean Bid sir.
Me : I know what I SAID what is the current OFFER?
Spineless Bank Trader: You cant Buy more because we need to get out before they go much much higher and if we dont WE MIGHT LOSE MONEY !!!!
Me : Well you know the old market saw " He who sell what isnt his'n, buys it back or goes to prison."
Spineless Bank Trader: Hold on we have to call Uncle Ben first.
Is there any way to watch this without the gay ass fucking silverlight shit?
Guinney- that link was working earlier, but not now...too many views/ers????
The only firm dumb enough to do these deals would be Nomura.
Yea, it's tough to save face by getting your face ripped off in the markets.
Well there is a safer way to short JGBs, short JGBs and buy Japan Tobacco, you might make money even if you are wrong.
Could Gold be the next Libor?
He called somebody anal..! LOL
Kyle Bass has held these views on Japn for quite a while. I'd like to hear his views on what the international market response will be when it happens. How will it effect other markets? Bonds...stocks...in Europe, United States, etc.
What is the contagion risk?
Buy gold in jpy - wait ten years... what if jpy turns worthless in the meantime? What if a meteor of pure gold hits the JPM building? What if I die?
KYLE BASS WORKS FOR THE CIA
Japan are screwed. This is funny as shit...though actually makes more sense than Krugmans waiting for Aliens.
http://capitalistexploits.at/2012/01/japan-official-media-announcement/
Bitcoin? Yay like. Nay dislike. Appreciate it..
Are the Russians going to join the Japanese in printing a massive amount of money? Putin just nominated his economic advisor for the position of central bank governor. She could bring turmoil to the Russian markets. Check out the article. http://www.globaleconomicmonitor.com/2013/03/will-bank-of-russia-fire-up...
This is the feature story twice? It's official, Kyle Bass is Tyler Durden.
I think that even Bass may be surprised at the criminality and violence we will see from government when this goes south. The question was posed in an oblique way. His "position" could easily be "corzined".
Ernest T. Bass was funnier
I think KB will drop his $500m to the aig guys
So the lady who was gonna buy my house lost her job today. We lost the sale. How's that for a "market barometer"? We are fucked. I am fucked. This country is fucked. How is that for ANALysis?
Awesome presentation. Even stuff I have no idea what he is talking about makes sense !
I doubt that a shrinking workforce is the big problem in Japan. If they need more labour they can increase their female labour participation rate which seems to be about 62-63 % in Japan compared to 77-78 % in Denmark and Norway, see:
http://www.imf.org/external/pubs/ft/wp/2012/wp12248.pdf
And where would all that new labour work? At ship yards and companies that produce consumer electronics and compete with South Korean and Chinese companies? Can you expect these companies to gain market share at the expense of South Korean and Chinese companies? Or should these people work with building bridges to nowhere in Japan or sell imported stuff to other people in Japan?!
Bass is still short Japan. I'd be cautious
Simmering tensions over the issue have risen in the past two years, with the Philippines and Vietnam accusing China of becoming increasingly aggressive.
China claims most of the sea, including waters close to the shores of its neighbours.
Relations between the Philippines and China have become particularly tense since patrol vessels from both countries engaged in a stand-off over the Scarborough Shoal in April.
Analysts said China's recent prickliness meant regional alliances made sense.
"Japan and ASEAN can regard security cooperation as a realistic option because China is their common adversary," said Hideshi Takesada, a Japanese defence expert and former professor at South Korea's Yonsei University.
"Practically, Japan can provide defence technologies or equipment to ASEAN so that Japan can win their trust," said Takesada, who is also former professor at Japan's National Institute for Defense Studies.
Japan reportedly plans to donate patrol boats worth more than $10 million each to the Philippines, ramping up regional efforts to monitor China's maritime activity in disputed waters.
http://economictimes.indiatimes.com/news/news-by-industry/et-cetera/japa...
http://mobile.reuters.com/article/idUSL1N0C5EA620130313?irpc=932
Everything is gonna just be fine!...and by fine I mean WE ARE FUCKED.
Get your junk bonds! High yield! WTF could go wrong?
Bass is talking shit when he says Japan is the most xenophobic nation on earth. I lived there for 2 years in the 90's and I found Japanese people to be very friendly and welcoming to foreigners.They do have a very strong sense of national pride and identity but that does not make them haters of foreigners.Britain is more xenophobic ,with it's endless Polack bashing and fearmongering drivel peddled by Farage and UKIP spouting shit about an invasion by Romanians and Bulgarians in to the UK when those countries become part of the EU.
This guy forgets only one thing...his counterparty may not be there to pay him when it comes due. Even if it is J.P. Morgan or Goldman.....
Good Luck, and good night
I thought all the banks are insolvent, hence the money printing no?
Why are we still talking about this, trade the paper in for real shit.
Tyler,
Sometimes you might need to translate, sometimes reiterate. Bass lives this stuff all day long, but from looking over the comments here, not all of the members do.
"Nobody is going to pay off his position"
It is unlikely Bass intends to hold anything (CDSs for which he paid one pip) until JGB default. He knows his counterparty will blow up if default comes, so he holds out for their uncle point and sells them back the position while they are still solvent enough to pay.
"Bass has been saying this about Japan for years"
So Bass should wait until everybody sees what he sees? At that point, he wouldn't be able to buy for a single pip. Also, look what has changed (just as he anticipated)....
---Japan's old plus 17% savings rate is going negative
---When current account is positive, and exceeds the budget deficit, no problem. When current account is positive but is less than the budget deficit, slight problem. When the CA is negative and the budget deficit is huge, big problem. When the CA is minus, the deficit huge, savings rate zero, and there's a drawdown on pensions/Yucho/Kampo owing to bad demographics, HUGE problem.
The last sentence is where Japan is today.
The only thing I disagree with that Bass said is, "human nature trumps cultural norms 100% of the time". Kamikaze pilots and cliff jumping in Saipan says the number is somewhere less than 100%.