Kyle Bass Warns When "Everyone Is 'Beggaring Thy Neighbor'... There Will Be Consequences"

Tyler Durden's picture

"There are going to be consequences to central bank balance sheet expansion all over the world," Kyle Bass tells Steven Drobny in his new book, The New House of Money, adding "It’s a beggar-thy-neighbor policy, but everyone is beggaring thy neighbor." The Texan remains concerned at QE's effects on wealth inequality and worries that "at some point this is going to ignite and set cost pressures off." While Gold-in-JPY is his recommended trade for non-clients, his hugely convex trades on Japan's eventual collapse remain as he explains the endgame for his thesis, "won't buy back until JPY is at 350," and fears "the logical conclusion is war."

Excerpted from Steven Drobny's The New House Of Money,

Drobny: You’re on the tape saying that dollar/yen is going to 200.

Bass: If I’m right, it will go much further than that. I don’t think it will hit 500, but in crises, currencies swing too far. They can start discounting 15% or 20% rates out ad infinitum because they are in a full bond crisis. But once they flush the debt and have a reset, you’re not going to have 20% rates ad infinitum. We’ve committed more capital to the currency market, but all of the convexity is in the bond market.

Drobny: Recently we’ve seen the yen move your way and everyone is getting excited about “The Japan Trade” – is this the big move you’ve been looking for?

Bass: No, this is just the beginning. It’s not the real move. The real move happens when it runs away from the authorities and they lose control.

Drobny: At what point do you go the other way and buy Japan?

Bass: When the yen is 350 and they’ve wiped out their debts.

Drobny: Let’s play out your Japan scenario. If the yen goes to 350 and Japanese government bond yields go to 20% and they can no longer finance themselves such that it becomes a financial disaster, what are the implications for the rest of the world?

Bass: Well, policymakers have been changing the rules, which is challenging for macro hedge funds. But that’s the beauty of this situation.

Drobny: What if they decide to just knock a few zeros off the debt?

Bass: In the end, they may be forced to do so.

Drobny: What if they bought the whole debt stock at 1% yield?

Bass: That’s the St. Louis Fed’s school of thought, which contends that countries that have their own central banks can print their own currency and will never fall. For the world’s sake, I wish that were true. For the last 2000 years, it hasn’t been true, and I don’t believe it to be true. If it is true, I’ll lose 150 basis points a year and move on. Our core portfolio will be fine. Still, if it were true, then why even have fiscal policy? We don’t need a fiscal policy if that’s the case – we could just spend the money however we want. Policymakers don’t believe there are consequences to their actions, but the consequences will come. Economic gravity will actually set in.

Drobny: But you don’t suffer the consequences if you are out of office. That’s the next person’s problem.

Bass: The point is that no one will make those difficult decisions unless they’re forced to make them. The politics of all these situations tell me how this is going to play out, and that’s through massive central bank balance sheet expansion and capital controls.

The Fed recently wrote a paper that actually endorsed capital controls if done concurrently with other nations. It’s hard for me to fathom that capital controls can ever be a great idea, but this is what you’re going to see.

We are in a period that will be characterized by enormous cross-border capital flows. How will it play out? Let’s assume that I’m right about Japan. What happens then? Nominal interest rates in the US and Germany go negative. The Pavlovian response is to fly to perceived safety; this is why we’re not betting against US rates. In fact, we’re receiving rates in Europe and Australia right now because some sort of stagflation will play out first, before you start to see the real problems in Japan. If you look at history and try to understand what has created despotic rulers and wiped out populations financially in the past, and what happens next, the logical conclusion is war.

Drobny: Who is the war going to be between?

Bass: I’m not exactly sure, but it seems to me that the aggressor in Asia is China and they don’t get along with Japan.

Post-World War II, Japan has been constitutionally limited, such that they cannot declare war. But current Prime Minister Abe is talking about rewriting the constitution so that they can actually declare war again. That’s not stabilizing for the region. Nationalism is rearing its head as we speak.

A third of the population in Japan is over the age of 60, and a quarter is over the age of 65. To put this into context, in the broader developed world only about 8% of the population is over 65. At a point when these people need the money the most, they could lose 30-40% of their savings, maybe more in terms of purchasing power. The social repercussions bother us more than the financial repercussions because the social fabric of Japan will either be stretched or most likely torn, and we don’t know what’s going to happen next.

Drobny: Besides Japan, what bothers you?

Bass: There are going to be consequences to central bank balance sheet expansion all over the world. Look at currency cross rates. If all central banks are expanding at the same rate, the cross rates aren’t moving, but your purchasing power, in terms of goods and services in the country where you live, is diminishing. You’re not focused on real returns, you’re preoccupied with the cross rates. It’s a beggar-thy-neighbor policy, but everyone is beggaring thy neighbor.

I really worry about the true cost of goods and services, but people are preoccupied by the dollar/euro exchange rate to gauge the relative strength of the European economy. You see this preconditioned response and even macro players say things like, “Oh, buy the Nikkei at week end.” They’re picking up a dime in front of a bulldozer. Japanese industry has been hollowed out. The exchange rate may stop the decline for a certain period of time but it’s a secular decline. The people that own Japanese equities right now are tourists. But this creates opportunities in the marketplace.

Bass On inflation,

When you look at what’s going on from an inflation perspective, central banks have printed about $10 trillion dollars since the beginning of the crisis. The first $4-5 trillion went into re-equitizing heavily leveraged structures and bringing down rates. The second $4-5 trillion is making its way into the monetary base, and even though the multiplier is not working, at some point this is going to ignite and set cost pressures off. Again, it won’t be demand-pull, which is technically a good kind of inflation. Rather, it would result from too much money in the system.

Bass On QE's effects on wealth inequality,

It will show up in food in the early stages. Global QE is filtering its way into asset prices. Those closest to the proverbial spigot are enjoying the printing the most with most in the middle and lower class not feeling the love at all. All you have to do is look at the gap between median income and mean income growing ever wider. This means the rich are getting richer while the rest stay stagnant or even decline.

Drobny: If you could do only one trade for the next ten years - non-risk-managed...

Bass: Actually, the answer to this one is easy – I would buy gold in yen.


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Pladizow's picture

"....There Will Be Consequences"

Sooooo, go long Herbalife?

Pladizow's picture

If Bass is saying his #1 10yr trade is to buy gold in Yen, then he has tremendous faith in the system, because he is buying paper.

Contradicts his feduciary recomendation to U of T?

Supernova Born's picture

Freudian slip.

Meant to say buggering their neighbor.

markmotive's picture

Not all agree with Kyle.

Watch Kyle Bass go head-to-head with John Mauldin, Mohamed El-Erian, David Rosenberg, Barry Ritholtz and John Hussman.


Popo's picture

Seriously, what the fuck would Kyle Bass know? It's not just that he's been consistently wrong since 2008, it's that he has consistently presented his arguments as inescapable mathematical certitudes.

This form of presentation is appealing because it lulls readers and viewers into thinking that somewhere behind the curtain he has performed mathematical proofs and that the path we are on is inexorable. Coupled with he fact that Bass is a seriously well-spoken, charming motherfucker, his fame clearly outperformed his returns.

But ... He's been wrong. Not just a little wrong, but major-fuck-up wrong. His bets against JPY (a legendary widow maker trade) turned out to be ...well.. widow-makerish.

So now he's bullish?

A man can change his mind right?

Well. No. Not quite. ... And by the way fuck you, Kyle.

It's not that you just presented a thesis and now you're amending your thesis. It's the *way* you presented your thesis as (in the words of John Maclaughlin), "metaphysical certitude". Everyone else was clueless and you were right. Right?

Sorry but you own that shit Kyle. And never again will your theses carry quite the same weight.

You can only play the "I'm smarter than everyone else in the room, and I'm going to make you all look like buffoons" card once. ...Because the second time around, you're the buffoon.

anonymephistopheles's picture

I think that you are talking about short JGB, short JPY has done pretty well over the past year.

His view (and I agree) is that you can keep JGB high (through CB JGB purchases) or JPY high, but due to the massive imbalances, one of them is going to give.  The primary focus of Abenomics is pretty much that JPY has gotta go.

Oracle of Kypseli's picture

Kyle Bass is now bulish GM as per bloomberg interview. Just like Hugh Hendry changed his view. I wonder if they get rewarded by TPTB to turn bulish in exchange of the exit signal ahead of the heard.

GetZeeGold's picture



GM.....the car company?


Are we all gonna get free Obama cars now?

Might as well start passing them out....they're just sitting there idle in the parking lots now.

mickeyman's picture

Centuries from now, when archaeologists study the fall of our civilization, they will note that it was capped by a single, distinct, black layer--of compressed T-Bills.

explosivo's picture

That's what I thought. Gold is gold. Once you have it you can sell it for whatever fiat currency you want including Yen. 

kaiserhoff's picture

It's confusingly worded.

I think he means long gold/short yen as a pair trade.  It isn't a hedge, but pair trades are popular among the hedgies, which is why they are so dangerous.  Just add leverage and all hell can break loose.

Martel's picture

I think he means long gold/short yen as a pair trade.

Yes, this was evident. Borrow JPY, invest it in gold. Not many common people manage this with reasonable costs. So, they do it via some broker. They end up paying all kinds of rolling costs for their short JPY position, and owning paper gold.

Winston Smith 2009's picture

Yep, that's why in one of his presentations he said there's no way for the small investor to easily capitalize on this. I believe the minimum investment with his Hayman Capital is $5 million.  As usual, only the rich get richer from the policies of their central banks and the eventual consequences.

Oracle of Kypseli's picture

You can sell a few Yen contracts with $15k margin and buy GLD as a poor man's trade. But you are not going to become rich quick or slow. 

Martel's picture

It would work for somebody living in Japan. Borrow from your bank, invest in physical gold. That gold part would have to be kept secret.

BandGap's picture

Isn't this exactly what the Chinese have been doing for awhile?

kaiserhoff's picture

There are many versions of the carry trade.  Have been for decades.  Just borrow for almost nothing in yen, and play momentum, buy whatever is going up.  It hasn't always worked out that well.

China is such an elephant these days, that any mistake there creates a safe haven run to Japan.  WB7 has a great feel for Asia.  Orly is fearless trading this stuff.  I prefer to trade corn and beans and watch the blinking lights.

Frozen's picture

Three months ago I put all my money into a full-fledged contract SCUBA outfit.  Mainly we specialize in the area of underwater loss and metals recovery.  Sad that boating accidents are trending up, but we work where needed.

kito's picture

bass will tell you he needs to dance while the music is playing. he is a dance instructor. or perhaps a choreographer. he gets paid based on his artistic performance. 

TN Jed's picture

Yup.  The alternative for anyone running a fund is a pink AR and lectures on the evils of the penis.

ClassicalLib17's picture

I wonder what she looks like naked without that pink AR in her grip? 

TN Jed's picture

I've wondered that too, followed quickly by which of us would end up pregnant.

Lost My Shorts's picture

When a financial titan says buy gold in yen, I think what he means is short (or borrow) yen and use the proceeds to buy gold.  It doesn't necessarily mean buying paper gold.

N.B. Bass also took a stake in channel stuffer supereme (per ZH) General Motors, and touted it as a great value, according to the MSM.  ZH brushed by that one.

CrashisOptimistic's picture

If so it would be insane.

Yen 350 to the dollar DESTROYS GM.  How could they sell any cars when a Camry is $6000?

As for war, come on.  China and Japan both survive on imported oil.  No one would bomb either's cities.  Why bother?  Just blow up one tanker enroute Shanghai and one enroute Tokyo and the Lloyd's people would not let any others sail.  Both countries then starve in a week or so.

This is not the old normal, people.  This is the age of oil scarcity and never ever ever forget . . . it decides everything.


Hughing's picture

Absolutely, killing is out, poverty and hunger are in

Zero Point's picture

Well.... Poverty, hunger (and more importantly to the neck nervous politicians) civil insurrection.

Tptb won't go quietly.

formadesika3's picture

Toyota (and every other industrial concern in Japan) has a lot more to worry about than competing with GM with Yen 350 to the dollar.

Quantum Nucleonics's picture

Not really.  He's basically saying buy gold and short the yen. The only part of that trade that is paper is the short yen, and you're selling the paper now in the hopes/expectation that it will be worth(less) later.

Gotta say, that Bass is off his game lately.  Didn't he get creamed jumping into JCP?  He just bought government motors.  So far, he's been wrong/early on the Yen trade.  Maybe it will work out eventually, his investment thesis is certainly sound and logical.  That said, shorting the yen and JGB's has been a widowmaker for two decades now.

saveandsound's picture

That said, shorting the yen and JGB's has been a widowmaker for two decades now.

Yep, that is indeed interesting. I assume the fiat-system continues working until there is a shortage on the supply side. So far we live in a world of complete abundance.

saveandsound's picture

@Pladizow: actually not. He has been saying that if you own Yen - i.e. you live and work in Japan - buy Gold.

Living outside the Yen currency area you should invest in his fonds ;-) - if you can spare at least 5 Mio. US$ equivalents - he says, because as a private investor you can't handle mathematics and paper as a pro can.

Found someone arguing against Kyle Bass:

Starts arguing with arguments ad-hominem. Judge yourself.

RafterManFMJ's picture

Open letter to the Power Shares banner ad that I cannot dismiss and blocks my reading, scrolling, and takes me to your site when I inadvertently clik on it:

As Christ Himself is my witness, I will shit in your mouth should the opportunity arise.

drdolittle's picture

I laughed out loud, thanks. Isn't it great how that shit is an advertisement and not a malicious virus?

Herd Redirection Committee's picture

Flashblock and Adblock are your friends.

Tall Tom's picture

Life on this site has become much easier after installing Ad Block. Thanks for that Heads Up. If I remember correctly it was you who published the link. Thanks again.

fedupwhiteguy's picture

I use adblock with firefox. no problems, as you describe, anymore. :)

augustusgloop's picture

what happened to all the man - crushes on bass?

Supernova Born's picture

How did Sally feel after she missed tricks or treats waiting for the Great Pumpkin?

Midas's picture

They say being early is the same thing as being wrong.  I'm sticking with him though, I absolutely cannot fathom how Japan gets out without a meltdown (sorry).  Considering debt, fierce competitors, demography, and a lack of resources, why be optimistic?   Matter of fact, do they have any positives?

fedupwhiteguy's picture

Hell yeah!! Beautiful women with a penchant toward serving the males in the family.

ZH Snob's picture

what a colossal mess when the only way out is WAR.  mankind will never fix this world without God in charge.  right now satan runs the show, and the results are quite evident.  but still people insist on the cleverness of man and how we are destined to be superman, but we can't even take care of our world or each other.  this is why we are eventually headed to our biblical fate.  God is just giving us a chance to see for ourselves.   He offered us a chance at redemption long ago and till this day through the sacrifice of His beloved son, Jesus.  and all people can do is laugh at the notion of a savior from sin.

party on, unbelievers.

Reptil's picture

War or a totalitarian coup. The japanese are well underway on that last count. Or totalitarian coup and then war.
As Mycle Schneider (Nuclear expert of the U.N.) said after a visit "no one trusts anyone anymore in Japan"
So it's all or nothing now.

slobbermut's picture

Amen time, they won't be laughig anymore.  Let not your heart be troubled, nor afraid - look up and rejoice for.....

Rock On Roger's picture

look up and rejoice for.... the annunaki have arrived.

Looking for their gold.

amen has lost some of his gold, gone to cathay, it belongs to a different god now.


Stack On

Get a free ride to heaven. Yeh Haw

savagegoose's picture

he gave us the choice at some tree. " believe all your parents tell you as truth, or go  and  find the truth yourselves. "  we chose scince.


edit,  well the devil said that, but he was made by god, so  indirectly theyre gods words