Kyle Bass: "The Next 18 Months Will Redefine Economic Orthodoxy For The West"

Tyler Durden's picture

Kyle Bass covers three critical topics in this excellent in-depth interview before turning to a very wide-ranging and interesting Q&A session. The topics he focuses on are Central bank expansion (with a mind-numbing array of awe-full numbers to explain just where the $10 trillion of freshly created money has gone), Japan's near-term outlook ("the next 18 months in Japan will redefine the economic orthodoxy of the West"), and most importantly since, as he notes, "we are investing in things that are propped up and somewhat made up," the psychology of negative outcomes. The latter, Bass explains, is one of the most frequently discussed topics at his firm, as he points out that "denial" is extremely popular in the financial markets.

Simply put, Bass explains, we do not want to admit that there is this serious (potentially perilous) outcome that disallows the world to continue on the way it has, and that is why so many people, whether self-preserving or self-dealing, miss all the warning signs and get this wrong - "it's really important to understand that people do not want to come to the [quantitatively correct but potentially catastrophic] conclusion; and that's why things are priced the way they are in the marketplace."

2:40 Bass begins

3:15 Central Bank Expansion

"We've essentially printed $10 trillion in the last few years"
"The first $5 trillion replaced the lost equity in the leveraged financial system and the second $5 trillion is making its way into deposits and expanding the monetary base"
"This is unprecedented... and it's not going to change."

The numbers that Bass reels off are incredible...

"What we've seen is a massive credit-led boom (+11% CAGR) and that can't last forever"

11:00 "The next 18 months in Japan will redefine the economic orthodoxy of the West"

"Japan is so far off the bell-curve that no one wants to talk about it"

"if you repeat things enough, everyone will believe them."

There are three key myths about Japan that Bass shows are simply false but remain repeated for the comfort of the cognitively biased investment community:

  1. The current account allows the country to self-finance its deficit
  2. The Bank of Japan is not monetizing debt
  3. Retail investors will always support the JGB marketplace

From the nation's own largest institutions forced to sell assets to the crushing demographics, Bass explains - in greater clarity than the soundbite-idiocy we get each night from Abe/Kuroda/Aso etc...

The smartest money is leaving Japan in a hurry already - Q4 2012 was the largest M&A quarter ever for Japanese firms buying foreign entities - Western productive assets - (just as was seen in Mexico before their crisis) as they try to get out of JPY

25:00 The Psychology of negative outcomes

"as an investor and a fiduciary, I get paid not to be an optimist or a pessimist; I get paid to be a realist"

"Denial" is extremely popular in the financial markets.

Simply put, Bass explains, we do not want to admit that there is this serious (potentially perilous) outcome that disallows the world to continue on the way it has. and that is whay so many people, whether self-preserving or self-dealing, miss all the warning signs and get this wrong.

"no one is ever going to tell you something is wrong"

"we have blind faith in the people running our institutions...that they can figure things out. They are a mental crutch to insure and placate depositors and investors that everything is going to be ok"

"we are running a huge economic experiment," and you can't control it all since there are too many variables

Once you understand the psychology of the participants, the key is to understand their actions based on that.

"It is the qualitative shift in the market participants' belief systems that literally flips a switch overnight"

Bass reminds us of Taleb's work on central planning: "if you suppress volatility long enough, then when the 'event' happens it is greater than the sum total of all the suppressed vol over time."

He warns - these shifts happen so fast that you will never get hedged or out of the way in time...

32:00 Q & A begins

First he discusses the naysayers on a Japanese bear thesis

"I would like to live in a world where it's all rainbows and unicorns and we can make Krugman the President - but intellectually it's simply dishonest"

"If you were advising Abe, what would you say?" - "Quit!"

41:00 General China discussion (in the context of the Japanese-China rhetoric)

43:30 Iceland - not as great as some would suggest

"China is building an embassy in Iceland that can fit 500 people in it. Iceland only has a population of 300,000!"

"You have a roach motel of a country; the New York Times and Krugman saying it's "The Model"; but they still haven't addressed the problem of their debt."

46:35 Do you worry about the US?

"I quit worrying about them because it's just a waste of time - I always leave DC demoralized"

"The central bank is the great enabler of congressional profligacy"

48:00 How does the small investor play the Japanese market - Bass responds that they can't and shouldn't. Shorting JGB futures means high carry costs and negative convexity

And our favorites question!!

49:00 Why can't the Central Bank just buy all the JGBs and then forgive them?

A speechless Bass responds...

52:00 Bank VaR and under-capitalization


Well worth an hour of your time before the FOMC tomorrow...

(h/t David)

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mickeyman's picture

The next 18 months will reacquaint the West with grinding poverty

TwoShortPlanks's picture

I’ll go you one better; since Fast Food is now cheaper than Fruit & Veg, it seems “grinding poverty” may well go hand-in-hand with grinding illness.

On a lighter note:


fuckitall's picture

Criminal is now just "intellectually dishonest"?

Chupacabra-322's picture

It's a criminal system, run by criminals for criminals. The new norm.

Skateboarder's picture

Somewhere along the way, ahem 1913, some people decided to lead us on a road of exponential debt. The exponential part wasn't seen until the final 15-20 years, but even as it was seen and pointed out, the people at large chose not to acknowledge, understand, care, or address the issue and the people behind it. Now there is no turning back.

markmotive's picture

When this all reverses (or simply expands at a slower pace) there could be riots in the streets. Turkey...over a park. Brazil...a $0.10 hike in transport fees. How will people react when prices double over night...or unemployment triples?

Here's something to remember when the SHTF.

Turkish protesters have turned the tables with the use of tear gas:

r3phl0x's picture

I doubt we'll see prices double overnight, but they may double over 1-2 years in countries such as Japan. The CB Chairsatans are smart enough to prefer a massive, but relatively slow, CTRL-P that keeps up appearances & keeps them firmly in power. A true hyperinflation would be highly disruptive & not in their self-interest and they certainly have the motive and ability to stop it.

SRSrocco's picture

Kyle Bass is big in Gold & Nickels.  Here is an interestiing video called Drutter's Divergence about American Gold & Silver Eagles:

Amazing Silver Data Came From Citizen Journalist

123dobryden's picture

its a very very old norm my friend...first this norm, then big bang

Alexandre Stavisky's picture

Exponential criminal money means even the glorious events of air travel, petroleum, mass production, digital and computer and information revolutions, China's enmasse labour pool, global coordination in rule, fusions of so many new and old industries, medical breakthroughs, refrigeration, continental transport highways, innovation of every kind--it is all consumed and more is wanted.  Without jubilee or letting too big to fail (which it is known these babel towers always become), it morphs into Must All Fail.  Masking with counterfeit (Keynes and Krugman) or by printing more markers from an already defunct and bankrupt entity lolls innocent passengers to ignoring the ultimate outcomes, but it also prevents them from making any preparations against the horrible folly.  Just another cycle, just another recession.

That is why a gov't chartered on expansive human freedom and inalienable rights, begins chewing away at human dignitiy in other's nations and then brings it home.  Torture, Spying, biased application of law, extortion, intimidation.  The fruits of the labours of those who choose to defer judgement and dilate times of execution.

The axe is laid at the root of every tree, and that plant which brings forth not good (or even poisonous) fruit, must be hewn down and cast into the fire.  And the husbandman and ever gardener never grieves the loss.  Rottenness contaminates the entire organic structure.  The death throes are horrific to witness as every wicked contrivance is exhausted.

Nothing new under the sun...and all is man's vanity. Balance sheets so out of balance must be reconciled.  This system devours all and is never quenched.  Which we will soon all witness.

A great and disparate herd of humanoids (who knows maybe they really are the smartest in the room) and their acquisition of the endowments of their planet and the manufactures due to their opposable digit and 2lb brain stem/helmet cap, this is the determinant of all future lives and quality thereof.  Greedy donut-like vacuuming pustules of greed which deny their own highest research and seek to defy gravity, make the ocean their slave, impose will upon nature ambivalent to their existence.

Nothing like a 2X4 in the teeth which will be nature's kindest kiss, but probably will deliver much worse.

LawsofPhysics's picture

Exactly, species come and go, and apparently, humans will not be any different, at least we are trying to make it so, sad, such great potential.  Oh well, for me another field is under fucking water...

kliguy38's picture

no but I can say counterfeiting, ponzi, motherfuckers........

Quinvarius's picture

Do you even know what an SDR is?  The history of the SDR? Or why they have existed for decades and no one uses them?  An SDR can never be the solution to globally failing currency because an SDR is made up of globally failing currencies.  That is all it is.  It is just a basket of national currencies. 

The one solution is and always has been a new currency kickstarted with gold backing.  That is the only thing that has ever worked.  All the dumbasses on the planet just want to keep playing the stupid game of "I can create a better system without gold" and always just need a little more time to fix their growing messes.  There is no fix without self stable money.  There is no self stable money without asset backing.  These monetary fantasylands everyone keeps creating can only exist at the point of a gun, but they never actually work.

_ConanTheLibertarian_'s picture

All the fat in the Fast Food should give enough lubrication to fix the grinding problem.....oh wait

thestarl's picture

Hmmmm... current world population >7billion on current trends by 2045 >9billion with this broken system go figure?

seek's picture

No, that's months #19-300.

The scary part? The final transition to grinding poverty happens over the course of a few weeks.

fonzannoon's picture

He keeps saying the U.S have recapped their banks. So we are all good?

AssFire's picture

I can't  believe it continues...

Let it end.. All the made up shit around me is fatiguing

Go Tribe's picture

"So you’re starting to see cracks in the façade of the qualitative belief system of the participants."

At 31.10, great quote. So true in the markets and so true about obama and the federal government. The cracks are growing quickly.


ZeroPoint's picture

I have said this many times. Let the SHTF already. I don't have all decade.


seek's picture

Yup, we're good. The first $5T recapped a leveraged financial system. That worked so well they upped the leverage, maybe they can break it mo better this time.

There are days now I just can't do it, and don't come here or read the news.

I used to think when this unwinds, as horrible as it would be, watching it would be awe-inspiring. Now I'm convinced the collapse won't be televised, or on the internet, because if there is an internet (and there probably won't be within a few days of the start of the fireworks due to a secret kill switch being flipped) you won't be allowed to talk about it.


fonzannoon's picture

agree completely. There is a small poart of me that hopes to see Bob Pisani get stampeded over by traders running for their rooftop helicopters. But I won't get the satisfaction.

otto skorzeny's picture

it'll look like the fall of Saigon with all of the rats hanging onto the skids of Paulsen's Sikorsky.

fonzannoon's picture

"don't confuse people's love for their country with their love for their government"

Goddamn I wish he was not talking about Japan.

seek's picture

My guess is that airports on the east coast are going to see 50% of their corporate jet fleet leave in a week or less. A handful of stalwarts will stay hoping to game the last dregs or the reboot, and the rest will bail out to islands and south america.

It would be pretty classic to see them using bulldozers to push gulfstream V's into the carribean to clear space on the runway at Grand Cayman like the way 'copters were during the fall of Saigon, though.

otto skorzeny's picture

That is when all of those dual US/Israel citizenships come in handy

Herd Redirection Committee's picture

Geez, Otto, you would think being Hitlers bodyguard and outing George Scherff to the world would get you more respect (and less downvotes).  Don't worry, it happens to the best of us.

ZeroPoint's picture

Israel will be one of the most dangerous places to be once the fiat collapse happens.

Steverino's picture

I'd pay good money to watch Santelli pissing on Liesman as the market curbs kick in..

Croesus's picture

I'd pay good money to watch Santelli pissing on Liesman as the market "curb kicks" him...

There, fixed it for ya!

I need Another Beer's picture

Right there with U, thought it would be interesting to watch history unfold. Truth is I hope it does not collapse, I like civilization and cold beer.

otto skorzeny's picture

sure they are- that's why the Bernank will have to double down to $170B a month.

kito's picture

Bass is a numbers guy.....we are fine...he says just raise a little here and cut a little worries......we are all wasting our time worrying about u.s. problems....bass says buy temperpedic stock (his number one holding) because we will all need to catch up on our sleep from wasteful worrying........

fonzannoon's picture

Listen between 25 and 30 mins. That is not what he says.

kito's picture

I'm bassed out...ive listened to him many times.....very clearly said just some numbers adjustment is needed for the u.s.....I'm not going to listen again.....has he changed his tune???

fonzannoon's picture

They seem to purposefully avoid talking about America. He talks about Japan the way Schiff yells about America.

kito's picture

Maybe Kyle's grandpappy was in a Japanese POW camp......

fonzannoon's picture

Go to 46 mins in for U.S. He admits that we are fucked but just punts the whole thing. 

Bay of Pigs's picture

He said he has "given up" on the US (at 47).

xtop23's picture

He's still a connected guy and not a moron. He's not going to burn bridges he might need at some point in the future.

He positions himself in the manner required to make himself, and his investors, money. I don't begrudge him that.

If you listen closely though, he pretty much gives you the story. 

Thanks for posting this Tyler. Bass is always a strong speaker.

Treason Season's picture

Cosidering how corrupt and sinister the Japanese elite is, Bass is pretty brave saying what he says. It's a wonder the Yakuzi hasn't already taken him out.

zhandax's picture

I'm bassed out...ive listened to him many times

I am hearing you have ignored what he says many times.

Go Tribe's picture

Government's got ears, ya know?

Vint Slugs's picture



"I'm bassed out".  Well LOL.  You sound like so many bullshitters here at ZH – just run down anybody who is successful because you aren't.  You talk but it sounds that you don't have any money on the line.  "I'm not going to listen again"  -- because you can't make the commitment to risk money for the potential that Bass talks about? Listening to Bass and reading the free (that I hear may be ending) technical stuff at, I turned $2750 margin per contract into $17500 between December and February - and I missed the start and finish!

kito's picture

Gosh I wish I was you.......earning all that money here in the zh comments section.....