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Kyle Bass: "The Next 18 Months Will Redefine Economic Orthodoxy For The West"
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:
- The current account allows the country to self-finance its deficit
- The Bank of Japan is not monetizing debt
- 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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I wonder what story he was working on at the moment?
Given his history, it just screams Benghazi to me.
On counterparty risk (which Kyle Bass seems perfectly hedged against):
Let's say you have $1,000,000 in bitcoin. Who or what is your counter party risk? None (except for "the kill switch")
It seems to me if you have 50% of your savings in gold and the other 50% in bitcoin than you're hedged to perfection while also protecting against inflation.
If the government throws the internet kill switch than $ is worthless anyway as most money exists in the form of 1000101. But that's why you have the other 50% in gold, because in that case gold doesn't have a kill switch.
A perfect amalgam of hedging and defense against inflation. Gold and Bitcoin. Love it.
Don't misunderstand me -- I'm a proponent of both AU and BTC -- but both trade counter-party risk for currency exchange/valuation risk. Don't delude yourself into thinking you're risk free and your assets are protected. Both gold and BTC have demonstrated in just that past few months sizable exchange risk. Economy blows up or internet gets shut down, and you'll see (at least for a short while) massive deflationary risk to your assets as no one has any means to buy them from you, and the value of AU/BTC is incredibly low relative to food or gasoline during that time.
AU lets you bridge wealth across financial systems, and protect from longer-term impacts of inflation/hyperinflation. The jury is out on BTC, but my sense is that the main value will be allowing one to escape currency controls primarily, but you could find it's devalued within countries that don't have controls if the moves are large enough.
I would put a meaningful portion of savings into durable goods useful during a crisis, and probably not risk anywhere near 50% of savings on BTC, and diversify PM holdings to include silver as well, all of which would happen after said durable goods (and associated expendables, such as cartridges.)
What I was referring to:
If you have a savings account of say $100,000.
It would behoove you to convert that into $50,000 BTC; $50,000 gold.
Keeping your gold in the physical format and your BTC on a thumb drive (or other external source disconnected from the internet)
...and don't talk about "exchange risk" with a strait face regarding BTC juxtaposed against the EUR or JPY (or even the dollar as the dollar has lost 95% of it's value over the last 100 years)
Are you seriously proposing people keep half their cash in BITCOINS?
Physical preps are #1 but personally I would rather hold the remaining wealth in BTC+AU+AG than in the USD. USD "FDIC-insured" accounts have a far worse government kill switch than Bitcoin: The Banking Holiday. Wherein, your money becomes their money for as long as they decide.
Would it not be better to hold some bitcoins, but mostly hard assets?
I'm with seek on this one, except I'd replace BTC with physical USD.
People's perception of what "money" is and all...
Kyle Bass sees the elephants in the room.
Being informed on prior bubbles and manias of history, I can tell you that there has NEVER been a time like this where EVERYTHING is in a bubble and damn near EVERYONE is delusional.
We all know that the source of the whole thing is the dollar and I just can't wait until it implodes in on itself and then goes supernova--Boom! I feel bad for the billions that it will effect, including myself, but it's going to be just amazing to watch it all unfold.
And then the guillotines come out to play and, well, things get messy from there.
[Raises hand] Ahem... actually, just about the only asset not in a bubble, are PMs.
These are the very elements that get created when a massive star goes supernova. 'Stellar alchemy', you might say.
Correct. Quote from a recent Kyle Bass talk; "sell JPY and buy Gold; and go to sleep for ten years; you'll be fine".
no he is missing almost everything.
For one the reason Japan does not like to allow a lot of immigration is because the Japanese are the indiginious people of Japan. ie he doesnt look indian to me so he:s a European foriegner decendant that killed/ desecrated the native indians stole their land and then sure is pro immigration because it suits his narative.
The Japanese Pension funds / lifers will follow the Govt line they will go down with the ship they wont be allowed to diversify too much if the Govt says stop and they will sell their foreign assets if the Govt tells them too.
What makes Japan different is the Japanese are the most successful indiginious people. (Europe is mix of each country invading the other)
Maybe Kyle Bass should return to where ever he is from (Frace what ever) and give the indians their land back and preach immigration in his own original country..
Did the indians simply sprout straight from the earth to become the indigenous people of the continent? How are these cultural property rights created exactly?
The french have already been invaded, killed in great numbers and had their land stolen, this was known as the Roman Empire. The romans then suffered the same fate, this was known as the Decline and Fall of the Roman Empire. Rome itself was almost completely depopulated during the fall. Today the eastern portion of the roman empire is arab and muslim. Expansion is a sign of a culture's health; in World War 2, japan was showing that health by taking over Asia, which had orders of magnitude more people than America. They were moving against degenerate societies like China but underestimated the health of the american culture, which ultimately blocked their expansion. They are now in sharp decline and quite honestly, I very much doubt the japanese culture will survive to 2100. It will likely be assimilated into some other culture, by force, as countless cultures have, including the native american cultures that preceded the ones that were wiped out by european migration.
thats just victors history.. watch the video below. (its an australia documentry ) on the white Australia policy.. how the White nations refused to implement a non racist based poiicy after WW1 and how in part (as well as US blockade of Japan) set of WW2..
https://www.youtube.com/watch?v=WAz-TSmjnFc&list=WL38AC4AE5250AC93F
japan;s been around for 2000 years and they will be herel long after you Americans are speking Chinese..and using chop sticks..
Yes the Japanese will still be around and they will have the added advantage of glowing in the dark.
What is just victor's history? The fact Japan invaded, conquered and brutally butchered the native populations of east asia in an attempt to set itself up as a master race of the continent? Yea, right...
Japan will be around after America is incorporated into China? Is that a joke? Granted that China is on a similar path of decay as Japan (just not as far along that path) so I wouldn't worry too much about the chinese taking over, though they might. In previous centuries, Japan had various advantages which can be summed up in one world: isolation. Today, Japan is going through an unprecedented process of decay. Other dying civilizations did not have a combination of high population density, nuclear reactors and a high incidence of natural disasters, along with neighbors that mostly hate them. All of these things are manageable in healthy societies but not in decaying ones.
Japan will not be around. I can't even see how it could restructure itself to turn the corner. Even if nobody bothers to attack Japan, it will collapse under its own weight. The only thing it has going for it is that the world as a whole might be ravaged by war, making all of Japan's problems meaningless.
Japan, the Incredible Shrinking Country: http://www.nytimes.com/2012/04/29/opinion/sunday/douthat-incredible-shri...
"The Japanese birthrate hovers around just 1.3 children per woman, far below the level required to maintain a stable population. Thanks to increasing life expectancy, by 2040 “there could almost be one centenarian on hand to welcome each Japanese newborn.” Over the same period, the overall Japanese population is likely to decline by 20 percent."
BTW, the Ainu and the Okinawans are the indigenous people of Japan: http://www.iwgia.org/regions/asia/japan
actually true both those groups are insiginious people but not of Japan (Okinawa and the islands near Russia have been tacked on over the years) ie Honshu (the island where Tokyo is located) is the native home of indiginious Japanese) its true when these two groups move to main Japanese area:;s they have been discriminated against but there only small part of modern day Japan (and located on islands away from what most Japanese consider true Japan..
the fact is the Janese on the main Japanese Islands are the original people.. they didnt invade another group (ie that goes for the Okinawans as well.. ie they really consider mainland Japnese to be there invaders some times)
I am not saying their perferct I just sating their situation is different to western countries that are made up of Eurpeans that invaded other lands (US/Australia/Canada/NZ) not that their bad people and its too late to change the situation .. but just the committment is a different level for Japanese ie they wont go down as easily as Kyle Bass would like.. thats my point..
There were white people in America thousands of years ago. Take your Marxist garbage and shove it.
Stop telling the truth! You will only confuse the trolls.
The next 18 months will reacquaint the West with a new head of money printing
As always, Kyle clearly reveals the koolaid drinkers. "It's not monetization until the market says its monetization." Gawd!!!
$1.1T deficit in 2012 which was 7% of the $15.65T GDP. So, 7% of GDP in borrowed money was spent into the economy, but the GDP grew by only 2.2%. Labor participation rate is at 1978 levels, all time high of food stamp recipients, most new jobs are low-paying service sector or temporary/part time. And we're doing just great compared to most of the EU.
A total farce that would be funny if I actually cared enough to laugh about it.
I got a good laugh out of it. "Laughter is the best medicine". You have to admit it's pretty funny.
Yo Kyle, the bait fish in the Atlantic Ocean have disappeared.
Where do I hedge this opportunity?
#DPRK Ministry of People's Security: Measure adopted to "physically remove" "human scum" under #ROK & "brigandish US imperialists."
Something might be about to go down...
2015 is the mother crash..........this should be the full cycle from 2007-8 crash.
"This is happening again, and on a much larger scale."
Precisely!
Kondratieff and Bass would be friends.
Hard to believe this guy is fom Texass.
Here is why Japan is heading - at ever increasing speed - down a dead end:
http://nipponmarketblog.wordpress.com/2013/04/25/japan-is-insolvent-but-...
"
Kyle Bass. Chairman of The Federal Reserve.
IT would never happen. Why? Because if he were to be "voted in" aka "appointed"...everyone reading this, within five years from now, would be worth no less than 7 figures. And your owners would prefer otherwise. So instead, grey nothingness...as it will play out...eyes wide shut...fattened for the kill.
After the Japanese implosion: Japan Inc. 2.0:
http://nipponmarketblog.wordpress.com/2013/06/19/the-phoenix-japan-inc-2-0/
What's with ZH's love affair with Kyle Bass?
The guy runs a hedge-fund that profits from gaming the "excesses" (to put it mildly) of an illusory, financialised, sham economy - created , in large part, by these very hedge funds.
Mr Bass is part of the problem.
"Know thy enemy", and all that ...
It's because he seems to be able to predict the outcome of this mess with accuracy. Accurate enough to make money off of it. Aren't you curious about what is really going to happen?
I don't need KB to tell me what's "really going to happen".
If you feel that you do - then by all means go for it, enjoy.
You're delusional; he's not "part of the problem".
So what if he profits on clear insight of observed trends? This is 'part of the problem'?
Are you serious? The man is brilliant, genuine and cares about the people. AND he is trying to help governments by bringing up the issues and giving them a chance to find solutions. He is consulting our (the US) government as well, in case you missed it. We should all wish that we had more people like Kyle Bass.
When I studied statistics, I learned that the longer the calm BEFORE the storm, the more momentous will BE the storm!
That has been my observation also in working in the financial markets.
The longer the period of quiet, the bigger the break-out to two, three, or even four standard deviations. This is because the longer the period of apparent ease, the more people dismiss risk and take greater risk. It's perfectly logical!
Thanks to Bass and others for making this point. Of course, they will, as always, be roundly disregarded until those black swans occur. This is also historically typical. It's the nature of the beast!
I love listening to one of the financial Einsteins of the world. Fantastic.
Don't let the tree hide the forest.
Kyle BAss is a pure product of "free market oligarchy mayhem", the Reaganomics model that bequeathed this crazy financialised world. A model that went kaput in crazy careening overdrive in 2008. He benefitted from his acumen then, as Gordon Gekko, by shorting the model that made him like all those other oligarchs; biting the hand that fed him by being one step ahead of the herd.
Now he preaches a return to virtuous capitalism of a "true market model" having benefitted from its past corrupt profligacy as pirate flying the Jolly Roger; all the while raiding the coffers of an ailing, surrogate Japan victim of same malinvestment model.
Poacher turned gamekeeper, drilling holes into the Titanic on which he sleeps, he will burn with the model when it comes down.
You cannot be part of empire and hope to escape paying the bill when the cookie crumbles; if you do then you are the exception that confirms the rule; like Jonas and the whale.
The tree that didn't burn in the forest fire. This new model of capitalism is all about CB control and burning the old model as well as its poacher barons. Bail-ins galore, even if it means ten years of statist head up assery, we've been there before under FDR. Play on crazy world.
Kyle Bass runs a hedge fund, Hayman Capital Management, that manages $2 billion of other peoples' money.
When you have that much to invest you have to put a large part of it into government bonds.
It is his duty to study the bond markets, and the financial affairs of governments, to invest wisely.
These studies tell him certain governments are taking risks in managing their finances.
Therefore, it is his duty to hedge these risks.
That is how he made hundreds of millions off the financial crisis. He saw the bad management and hedged his investments. Not mentioned is how much he lost on the investments, just what he made by the hedges.
If someone managed millions in real estate investments you would think them very foolish if they did not buy insurance. Bass is in the same position in managing his clients' money.
Yep. Listening to Kyle Bass for an hour is the best way to start a day.
an empire shows it face in many ways; and the more it goes unilateral the more that face is distorted into stony denial of anything that challenges its raison d'etre.
Politics is first and foremost about power; and once we feel we ARE civilization's leading edge, we will never accept to lose that high perch even in the face of evidence to the contrary. That's the past repeating.
We have to fall like Humpty Dumtpy under gravity of our own momentum; the harder the fall the higher the pretention.
Don't count out the war expedient for an empire that now will not accept it being called "band of thieves" --- "land of despotism" by the common man all over the world.
So who will play the role of Kevin Bacon at the end of Animal House when the SHTF ?
Loved it all, except for the part about how the small guy just can not do what they do at his firm. Can you elaborate some more, kyle?
What do we do with all those winnings when japan is in ruins (over a lot of filthy fiat) old men and women in the streets and the Chinese ready to bring down the hammer? Maybe the Chinese can erect a monument like Little Big Horn when they swamp the place and turn it into another toxic industrial shithole, genocide included. Keep your money Kyle. You will need it in a sick world without a Japan.
PS. Anyone who visits Japan and can't take their uni culture, racists ideals along with their great food and culture should spend their vacation in the philippines.
I cannot help but wonder if the Central Banks of the world will all try to hyperinflate in coordination with each other. Hyperinflation would allow them to destroy the debt load associated with those currences then they can try to paper over it with NEW-Dollars and Neo-Yen or some other new fiat toliet paper.
43:30 Iceland - not as great as some would suggest.
Note he brought out that Iceland STILL OWES the debt held by the Central Bank in Iceland and is paying interest on those debts. They haven't "thumbed their noses" at the Banksters in any way except a phony way. They are following the IMF plan for Iceland, they still have a fiat currency, they still owe the Central Bank debt, they are still paying interest on the Central Bank debt, and, as Bass stated, they are a finanical roach motel. Maybe some of the Iceland pumpers here on ZH can learn something real for a change, at least about Iceland.
Trotting out Pierce Brosnan to gin up support for a ban on Icelandic seafood on the phony cavil that they do a little whaling apparently had the desired effect of bringing them to the banksters' heel.
The question is, will they stay there?
As for things not being able to go on as they have been ... it depends how long a timeline you're using. Viewed in the context of the whole of history, there will be some larger nasty wars on account of the global financial mess, which is pretty much the same as things have always been.
10 year treasury at 1.70? Video is six weeks old? Six months?
I would imagine that Kyle Bass is usually the smartest guy in the room. Shame on him that he doesn't give Him credit for his wisdom in finance. Of course if you listen to Satan long enough, you will believe what he says is the truth.
What happened to the audio?!
Kyle Bass is in fine form here, which is great because his baseline is solid.
[ The video does not play well in my deskop browser; I had to play it on my phone(!) Content-wise, they don't show the slides, unfortunately. ]