Kyle Bass Suffers "Worst Year In The Last Ten", Reveals His Best Investment For The Next "3-5 Years"

Tyler Durden's picture

One year ago, when oil was trading in the mid-$50s, and when MarketWatch released an article saying "Now’s time to consider energy stocks: Goldman Sachs, Morgan Stanley" (from December 15), we took the other side and on January 29 we explained why "Either Oil Soars Back To $88, Or Energy Stocks Have To Tumble By Over 40%."

Oil stocks did indeed slide, if not as much as we expected, although out other forecast was virtually spot on: we said that the implied price of oil one year out would tumble by over $14 to just $36/barrel. This is precisely where oil closed the year: at the lows (and at $36/barrel), despite the daily protests of hundreds of so-called experts who took every opportunity to tell the world they are using other people's money to BTFD, and daily called for "imminent bounce" in oil prices. Simply said, dogmatism at its worst.

One person who admits their "dogmatic views" cost them dearly, was Hayman Capital's Kyle Bass, who in an interview to be aired tomorrow on Wall Street Week, says that "this has been one of the worst years in the last ten."

And yet, even though his expectations for a rebound in energy prices in 2015 did not materialize, Bass is doubling down and told Gary Kaminsky that there is a "massive opportunity in energy." He explains his optimism as follows:

The margin of safety for the globe is the smallest it's ever been in energy: global demand is 96 million barrels per day, the highest it's ever been, and incremental supply capacity, or swing capacity, is at the lowest point of that, about a million and a half barrels a day.

He notes that very little marginal production has come offline, with US production declining by just 400k barrels per day from 9.6 million bpd to 9.2 million bpd. Of course, the wildcard in Bass' forecast is that demand will remain in an uptrend based on his assumption that "global GDP will still be positive."

Alas, that is only the case when denominating GDP in local currencies, something which for a USD-denominated asset (which is where the collapsing price problem stems from in the first place) like oil, and energy in general, is meaningless. As we have shown before, in USD terms the global economy shrank by just about $3 trillion in 2015, and as Deutsche Bank added, this was the worst dollar-denominated GDP recession in 50 years!

 

Macroeconomics aside, Bass' thesis about the virtually non-existent margin of error at the, well, margin is the following:

"The U.S. added a million barrels a day five years in a row, but it took $100 crude for us to do that.  We were the marginal swing producer for the world.  And now we're going to go down a million barrels a day, I think, in the next 12 months.  So, we're going to go from a glut to all of a sudden a deficit.  And the world's not ready for a deficit."

Once again correct, but once again incomplete: recall "I Know Of No One Who Predicted This": Russian Oil Production Hits Record As Saudi Gambit Fails", in which we showed how as US shale became less important as the world's marginal source of oil, it was none other than Russia who is aggressively stepping in to fill the US shale void.

This morning Reuters reminds us of just that: "Oil output in Russia, one of the world's largest producers, hit a post-Soviet high last month and in 2015 as small- and medium-sized energy companies cranked up the pumps despite falling crude prices, Energy Ministry data showed on Saturday. The rise shows producers are taking advantage of lower costs due to rouble devaluation and signals Moscow's resolve not to give in to producer group OPEC's request to curb oil output to support prices."

In other words, anyone hoping that there is a small margin of error when it comes to incremental supply will likely be very unpleasantly surprised in 2015.

Which brings us to Kyle Bass' best investment idea for the medium-term: "If you are going to allocate capital for the next three to five years, you should do it now" into the energy space over the next 6 months.

Bass is agnostic as to what subsector of energy one should invest in: whether it is infrastructure, pipelines, producers, upstream, downstream, he believes that there are places in the cap structure of each of these where once can put new capital and generate substantial returns.

Bass' summary is that the energy rebound, when it happens, will be comparable to the housing rebound post 2009... which, we would like to remind readers, has not nearly as "strong" as many wish to make it appear, and was driven by three core pillars: a shortage of inventory (due to the foreclosure scandal of 2010 which plugged the REO pipeline for years), foreign capital and Wall Street investment in distressed properties. For everyone else it has been largely a wash.

As to whether Bass will be correct this year, or whether he will suffer another "worst in ten years" performance over the next 12 months, tune in in one year to find out.

Excerpted interview below:

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trader1's picture

and what does mr. bass say about his nickel and gold positions?

38BWD22's picture

 

 

trader1

About a month or two ago I just took my rolled up nickels to the bank and traded them in for paper.

FYI: You can get about $53 worth of nickels into a 1 liter Aquafina bottle...

*   *   *

Bass is a smarter man than I am.  I will be looking at energy when I have some time.  My only position (and it's way down) is (ticker) AMJ, the ETF of LPs in the oil & gas midstream (pipelines, gas processing, etc.).

Looney's picture

Kyle Bass will be proven right as soon as a Saudi refinery goes up in smoke ;-)

TEHRAN (FarsNewsAgency)- The Yemeni army and popular forces destroyed Saudi Arabia's strategic oil reservoirs in the Southern province of Asir with a Qaher-I ballistic missile.

Military sources said that the missile hit large crude stockpiles in Abha region of Asir province with high precision and "caused heavy damage".

Smoke spiraling above the reservoirs can be seen from kilometers away, local witnesses said.

It was the 11th Qaher-I ballistic missile fired at the Saudi targets in the past 20 days, meaning that Yemen targeted its enemy with one ballistic missile every other day, they added.

What’s the next item on the “Happy Meal Menu”, a Saudi refinery? ;-)

Looney

DipshitMiddleClassWhiteKid's picture

guess i should reconsider my CAD short...

Laowei Gweilo's picture

Kyle Bass has had horrible years for the last 6 years... the fund he works for made incredibly bad calls. dumped all his MTG at $1.50 and now it's $10. he's just popular in ZH because his nickle comments lol 

SoilMyselfRotten's picture

I call BS on that story Looney, no way Yemen would endanger the environment with that kind of bombing attack.

Jam's picture

He has no roll of nickels in his pocket, he's just happy to see you.

AE911Truth's picture

The owners of fossil fuel based energy resources have been overcharging everyone (by an order of magnitude) for more than 60 years. The cost to repay direct damages are in excess of $200Trillion, but since the cost of energy is embedded into everything we buy, total damages are ten times that amount.

Word is getting out about Tesla and Keshe fueled energy devices. Imagine electric cars that needs no battery and never needs charging, ever. Now scale that up to include all transportation energy, all manufacturing energy, and all household energy.

Nov. 2015
http://youtu.be/oHxGQjirV-c

At 3:21:01 to 3:21:20 Greer is looking for a legal team to take this case.

At 2:21:17 Financial crimes.

glenlloyd's picture

I'm not understanding what 'overcharging' and 'direct damages' means TBH.

If you're suggesting that we can produce engergy, to power vehicles, from nothing, then I think you're going to be disappointed in the end.

AE911Truth's picture

It would be very helpful (to you and everyone else), if you did understand. Did you study the video? It contains useful knowledge.

Mentaliusanything's picture

During the holidays I spent a week in Melbourne Australia- Truly the Worlds most livable city BTW.

I hired a Toyota Corolla to do some day excursions and to my surprised that nippy vehicle returned 36Mpg (US). damn near the same as my 2015 Suzuki 1000cc motorcycle. 

I spent some time this year at Cummins in Connecticut. Trucks can now return 9.9 MPG and work is underway for diesel electric for heavy haulers that reduce fuel consumption a further 50+%.

Fuel savings are $25,000 to $30,000 per truck (do some reverse maths x by # of heavy haulers in the US alone) Soon you won't need wages for drivers. Caterpillar a running ore dump trucks in Australia ,driver less including the loading and using new breed diesel electrics and regenerative braking Cost savings are enormous over the old methods and the pay back time is months.

Technology and computer control is a wonderful tool

QEpp's picture

I don't see much benefits of hybrid electric-diesel trucks for on-road applications.  If the engine runs at pretty much constant RPM on highway, there's no excess energy that can be recaptured through regenerative breaking and all the extra motors and batteries just act as dead weight.  Fleets care about fuel economy.  If there was a significant additional benefit in having hybrid trucks, they would have already done it a decade ago.

Escrava Isaura's picture

 

 

Not all Oil issues, and oil are the Same

 

Professor Patzek: A better way of looking at it, is to subtract the actual oil production from the population-based projections and calculate the unrealized oil consumption. By this standard, the peak of global per capita consumption happened in 2005, and we now live in an era of permanent destruction of consumption.

The US and EU consume more per capita, have exported their manufacturing elsewhere, and are unable to withstand the high price of oil. Hence the destruction of demand for 1.6 million bbl per day that already happened in the U.S. A similar destruction trend will continue to happen in the future, because the U.S. can no longer compete for expensive oil with China.

http://patzek-lifeitself.blogspot.com/2012/11/a-gobal-oil-peak-or-plateau.html 

 

Jeffrey Brown: Production rises by 2.5 mbpd in the oil exporting countries, so total supply increases from 80 mbpd to 82.5 mbpd. However, consumption in the oil exporting countries rose by 5 mbpd. So, Net Exports = Production – Consumption = 82.5 mbpd – 45 mbpd = 37.5 mbpd.

My point is that a global supply and demand analysis would not accurately represent the situation in the net oil importing countries, i.e., a 6.25% decline in the supply available to net importers (40 mbpd to 37.5 mbpd), although global supply is up by 3.125%, 80 mbpd to 82.5 mbpd.

For example, Indonesia subsidizes petroleum consumption and the UK heavily taxes petroleum consumption, but both former net oil exporters showed accelerating rates of decline in their net exports (in excess of their respective production decline rates). http://econbrowser.com/archives/2015/03/u-s-oil-supply-update

 

Kyle Bass: Global oil supply is short 1.5 million a day

It is much worse than that: http://peakoilbarrel.com/wp-content/uploads/2014/06/Slide041.jpg

 

Kyle Bass: OPEC production is moving higher than 32 million barrels a day

Not much longer: Saudi Aramco admits that it is injecting 13 mmb/d (13 million barrels per day) of treated seawater, most of it to sustain production at its giant (but ageing) Al Ghawar field, historically the source of about half of the kingdom’s production. Strategy Insights — Page 71

http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf


Kyle Bass: Global GDP is growing

 

No. it’s not: http://www.shadowstats.com/imgs/sgs-gdp.gif?hl=ad&t


DipshitMiddleClassWhiteKid's picture

so.how many nickels was that?

38BWD22's picture

 

 

DipshitMiddleCl...

What a pleasure to respond to a moniker like yours  :)

One 1-gallon milk jug (3.7 liters, approx) + two.three 1-liter Aquafina bottles = 6 liters of nickels

6 * $53 = $318 (approx.) 

20 * 318 = 6360 nickels, it took years to accumulate them.

I have a picture around somewhere...

SunRise's picture

I wonder what an auction on Z-Hedge would have brought for them?

i_call_you_my_base's picture

Or his JGB short? I've always liked him, but he's been wrong a lot, at least in terms of timing.

kliguy38's picture

That's because we are subject to a distorted market, manipulated/controlled by the Central Bankers, creating a mountain of malinvestment that, for now, only grows larger. Investors like Bass are subject to only "guessing" the time that gravity begins to take over. Unfortunately for Bass and many Hedges there is NO CONtrol on the paper printing (for now). Unfortunately for the rest of us, we will bear the brunt of Nature's law when it is eventually obeyed.

i_call_you_my_base's picture

I agree with you, but in the case of Japan, his thesis was based on the BOJ not being able to hold it together. It was that they would continue and it would fall apart.

Pool Shark's picture

 

 

Exactly. Kyle will ultimately be proven correct on JGB's, but his early timing will murder anyone who's betting on it happening in the near term.

Being right is no help if you get the timing wrong.

I fear his call for an energy rebound this year will again be wrong. The world economy continues to slow, with many countries soon to fall into recession/depression. This implies no real growth in energy consumption.

Also, never underestimate the ability of the Saudis (and now the Russians) to pump oil at a breakneck pace to sink western production and maintain market share.

I lived and worked through the oil crash circa 1984; the price of oil didn't recover until the 90's.

This feels a lot like deja vu all over again

I suspect it will be years before the price of oil gets back over $100...

 

armageddon addahere's picture

I like Kyle Bass and I hope he can stay solvent longer than the markets stay distorted.

mkkby's picture

This is why YOU NEVER let someone else invest your money for you.  Bass is smart, but that just means HIS MARKETING MESSAGE is better able to con you into giving him your money.

These fund managers are nothing but gamblers who take a cut of the winnings when they get lucky, and who lose nothing when they cost you money.

He fell for all the doomsday bullshit back in 2009, so he piled into gold, nickels and japanese cds.  As soon as gov's threw out mark to market he should have liquidated those trades.  The jap banks have been called zombies since the early 90s.  Everyone knew this.

jm's picture

Why does everyone say he is smart when all he has done for years is make a bunch of suckers poor?  

The guy was a one-hit wonder.  If the extent of his brilliance is "long some energy somewhere on the capital structure" he should go into retirement.

Blankone's picture

He knows the market it distorted, or should.  He and other like him who made a couple good calls have had difficulty understanding the depth of the control TPTB have over the markets or how far they will go and how bold/obvious they are willing to be.

It is his business to know how to make money in the reality of the markets. 

The theory's about efficient markets, valid true legit markets, markets that move on principals not corrupt influence have been disproved.

I am surprised he has not adjusted, or adjusted his timeframes.  Watched a video where he talked about how his office worked and how he had to hire a consultant to help weed out some people to make it efficient.  Some of it was disappointing to hear.

But I still try to listen to him whenever he talks or give an interview.  Maybe his plays will hit big shortly.

kliguy38's picture

I sat in a room with "the banker" charged with finding out what happened at Third Avenue the day after Third Avenue announced they had gated. "the banker" happened to be in "the bank" we all love to hate. He discussed how THEY found out the news on Third Avenue since THEY had quite a pile of their money in it. It was shocking to hear just how uninformed they were about it a full day after the news came out. I watched them read the ZH article out that morning LINE BY LINE. Now understand this is a top banker tasked by THE BANK to find out what happened to TA and they didn't know shit. That is quite disturbing since I assume their tentacles would be all over it at that point. Not a clue. That makes me very worried.

Pool Shark's picture

 

 

Seems that 'Organized Crime' isn't all that organized...

 

kliguy38's picture

exactly and that reinforces the side that believes they are "incompetent" ...... maybe the top tier of puppetmasters knows when the switch gets flipped but that little display was startling to behold

bamawatson's picture

"incompetent" is too generous; stone cold idiots; could not survive one day on the streets. there are two in my poker group, i love em. dumber that any principal of a public junior high school.

Welfare Tycoon's picture

This is one of the subjects that my thoughts have most recently been preocuppied with, and I have to agree.

Examples like the Hersh article that recently came out about the miliatary heads in the ME subversting the orders of Obama and the CIA are great examples as to how big of a shit-show this whole spectacle is. 

It seems that there probably are only a handful of people in the world who truly pull the strings and know where the main pieces of the puzzle may fall, but even these entities do not know of ALL the ramifications of their actions. At the very least, many of TPTB may not know what the people in control of other industries may actually be doing at some particular point in time.  

If the entities that we think are in power are actually NOT in power (or at least have a firm control of the variables that we think they should easily be able to control in the first place), then what does that say for us?

Maybe the best thing we can do from our end is to prepare accordingly and make the best out of this wild ride while it does last? Unless nuclear bombs end up being used, life will continue as always. Better to make the best of it while you can. 

 

 

Escrava Isaura's picture

 

 

kliguy38: I sat in a room with "the banker" charged with finding out what happened at Third Avenue….. It was shocking to hear just how uninformed they were…..

 

Knowledge,  understanding, and vigilance at the higher echelons are exceptions rather than the rule.

 

armageddon addahere's picture

So the people we thought were pulling the strings are making it up as they go along? Does that mean nobody is in charge?

Which is scarier the idea that the world is controlled by some monster conspiracy or that we are lurching from crisis to crisis with a bunch of clueless monkeys on the bridge?

jaxville's picture

 I agree that he is basically correct but a little early to this game.  I don't see oil going up until there is a washout in the US fracking industry.  Oil needs to get to the low twenties for that washout to occur.  Even if global GDP and oil demand decline,  prices will go higher as the US oversupply is taken off market.

mkkby's picture

That is why oil gluts happen every 20 years or so.  The frackers, oil sands and deep drillers are going under now.  As soon as oil goes back up, they'll find more investors to try it all over again.

Ditto for electric cars.  Nobody wants that shit now.  But as soon as gas goes back up, more idiots will throw away money investing in that disaster.

Bangin7GramRocks's picture

I think the best investment for Mr. Bass for the next 3-5 years would be a baseball hat. BOOM!

Remington IV's picture

Bass is too busy visiting CNBC every other day to worry about his positions

jomama's picture

I wonder how all those nickels are playing out for him?

tarsubil's picture

Hey, they maintained their face value. :)

It does seem Bass got lucky with finding his CDS trades and he isn't particularly brilliant as a trader.

He spoke about in an interview last year about a trade that he found that reminded him of the housing disaster CDS trade that he was going to reveal in 6 months. I thought it might be something in junk bonds but I guess that didn't turn out?

blabam's picture

Yeah, I'm gonna wait a little longer.

tarsubil's picture

Probably a good call.

Kirk2NCC1701's picture

What about PM?  Doesn't the fool see the imminent rise of gold to "Infinity and beyond!"?

And how could he have missed the biz opportunity to have a gold storage facility in Dubai?  No doubt Simon Black would've been all over it, promoting the storage of gold in safe, peaceful offshore places.

/sarc off

I've heard so much dogmatic shilling and financial Elmer Gantrys  in the past few years, that from now on, in 2016, "I shall heed my own council".  I don't need any middlemen, to get the Big Picture, akin to the global perspective of  the "Guy in the Sky".

Yen Cross's picture

    I think I like his usd/jpy explosion call better then the energy one. [If the fed keeps raising rates.] ;-)

Angus McHugepenis's picture

Yen: I think Kyle was a "playa" for the big money before his luck ran out and they're now kicking him to the kerb.

What say you my lunatic pal?

Edit: Another thing... I saw a video a couple years back where Kyle says he met Mark Carney (at that time the Bank of Canada head honcho) and Kyle said he liked him and got along with him. Guess where Mark is now? I'll give you a hint... not in Canada.

Oh, and they are all Goldie Sach alumni.

22winmag's picture

Holy crap.

 

This is a bellwether if nothing else is.

JamaicaJim's picture

I like the fact that several times, Bass uses the phrase "for this crowd".

NEVER used on cnBullshitc...ever.

Bass at least, knows whom he's talking to.

That said, he is correct in using an ETF, because it WILL be survival of the fittest in the oil patch.

Newager23's picture

Kyle is right about a looming rebound in the energy sector. However, don't expect it in Q1, because of increasing oil exports from Iran. The key for higher oil prices is going to be global export supply. Oil exports peaked in 2005 at 43 to 44 mbd, and ten years later, global exports are still 43 to 44 mbd. Those exports totals are not going to increase much (if at all) going forward.

As oil exporting countries consume more internally, global exports are going to begin to shrink. It's inevitable, and when that day occurs, we will be back over $100 oil. I don't expect it in 2016, but 2017 is a possibility, and 2018 is likely. So yes, a rebound is coming.

I'm not sure why Kyle is so excited about energy as in investment, when shorting debt is a bigger short than the housing market in 2006, where he made a fortune. And soon the dollar is going crash and burn. Those are much more exiting plays than energy. I guess it was a 5 minute interview that only focused on energy. He probably has a strategy on how he is going to bet against debt and the dollar. I'm looking forward to THAT interview.

 

 

_ConanTheLibertarian_'s picture

Prediction: energy rebound won't happen this decade. Not enough demand.

Titus's picture

Supply and demand are less important in this market.