For Kyle Bass This Is "The Greatest Investment Opportunity Right Now"

Tyler Durden's picture




 

Over the weekend, when citing from an excerpt of the latest Wall Street Week episode, we revealed what to Kyle Bass was the "best investment for the next 3-5 years": the energy space. Bass added he was 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. He also added that "the energy rebound, when it happens, will be comparable to the housing rebound post 2009."

Coming from the guy who correctly predicted the collapse of housing going into 2009, one should take his prediction seriously, even though as Bass himself admitted, he was early to this trade which led to "one of the worst years in the last ten" for his Hayman Capital. Judging by today's very modest reaction in the price of oil to a dramatic escalation in the Middle East, the market will need a far more dramatic reduction in supply before it agrees with Bass' thesis.

But what about the shorter-term for those who don't have a 3-5 year investment horizon? Bass discussed that after a question by Gary Kaminsky asking the Texas hedge fund manager "when you look at opportunities as an investor right now, what's the greatest opportunity?"

His response:

"Given our views on credit contraction in Asia, and in China in particular, let's say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there's one thing that is going to happen: China is going to have to dramatically devalue its currency."

He is quick to note that this is not a trade for everyone: "it's very tough to invest as a non-professional" very much the way buying CDS on subprme MBS was a trade only for a select few. That said, the trade - which we agree with thoroughly, and have repeatedly said that China has to devalue further, in fact we predicted China's devaluation just three days before it happened - makes a lot of sense. Bass continues:

"China many years ago attached its currency to the dollar: they hitched their wagon to our star very smartly because back then our goal was to depreciate our dollar through inflation. So we issued debt to the rest of the world to depreciate the dollar. And so now the real problem is China has hitched their wagon to our star, and their currency has effectively appreciated about 60% versus the rest of the world since 2005 and it's killing them... China's effective exchange rate moving up versus the rest of the world made their goods and services a little bit more expensive each year and now that labor arbitrage is gone. And if that labor arbitrage is gone, and the banking system has expanded 400% in 7 years without a nonperforming loan cycle, my view is we are going to see a non-performing loan cycle."

We fully agree with this as well: incidentally, China's NPL time, or "neutron" as we call it, bomb, has been extensively covered on this website in the past for the simple reason that while the official print here is about 1.5% of all bank loans are said to be "bad" or non-performing, the real number is likely around 20%, something which virtually guarantees a financial crisis in China at any given moment (more on that in a latter post). This is our summary on China's NPL debacle:

If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 20% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $3 trillion. That, as we suggested three weeks ago, may help to explain why round after round of liquidity injections (via RRR cuts, LTROs, and various short- and medium-term financing ops) haven't done much to boost the credit impulse. In short, banks may be quietly soaking up the funds not to lend them out, but to plug a giant, $3 trillion, solvency shortfall.

Incidentally, this is precisely what Bank of America just said overnight:

When debt problem gets too severe, a country can only solve it by devaluation (via the export channel), inflation (to make local currency debt worth less in real terms), writeoff/re-cap or default. We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem, particularly if the growth continues to be driven by debt-fueled investment in a weak-demand environment. We consider the most likely forms of financial instability that China may experience will be a combination of RMB devaluation, debt write-off and banking sector re-cap and possibly high inflation. Given the sizeable and unstable shadow banking sector in China and the potential of capital flight, we also think the risk of a credit crunch developing in China is high. In our mind, the only uncertainty is timing and potential triggers of such instabilities.

But back to Bass and his best trade idea - he conveniently even puts a time horizon:

"We are not short Chinese equities, but we are very invested in the Chinese currency: we think we are going to see a pretty material devaluation; we think it's going to be in the next 12-18 months."

Finally, judging by the ongoing collapse in the onshore and offshore Yuans overnight, which saw the currency tumble to fresh 5 year lows...

... it may be far sooner, especially when considering what Macquarie Capital’s strategist Thierry Wizman said earlier today: "the big drop overnight reflects policymakers’ willingness to allow currency to account for weak data." He expects the USDCNY to rise ~8% this year.

The full Kyle Bass interview is below, and the part discussing the best investment opportunity begins 10:40 in.

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Tue, 01/05/2016 - 00:37 | 6998548 Never One Roach
Never One Roach's picture

Lets say the yuan is devalued 30%. Do you think foreign-owned [mostly overpriced] real estate will not drop in price at some point during the Great RE Correction? Canadain RE is heading for a yuuuge reversion to the mean as is Australian. An RE correction of 30-40% is very probable. Example article of many:

 

Australian House Prices to Fall by 7.5% in 2016

 

http://www.dailyreckoning.com.au/house-prices-to-fall-by-7-5-in-2016-why...

 

The Canadian taxing authorities [under pressure from various consumer groups] have compiled a list of every foreign Chinese owned RE in the nation and are comtemplating taxing it and/or requesting information such as source of the purchase money. Will they follow through? I don't know but RE is much harder to lose in a boating accident then a house or raw land. One other problem is gold has already corrected and is cheap; RE is still significantly overpriced at this point.

Tue, 01/05/2016 - 00:45 | 6998560 847328_3527
847328_3527's picture

One problem I see with land for this purpose is that it is very easy to idenitfy the owner and therefore very easy to confiscate if things get conflicted between Uncle Sam and China. It's too juicy of a prize for DC to ignore since confiscation of Mainlander-owned RE would serve two purposes---one, an easy source of $$$$ for DC and second, the gubmint would use the conflict as justification for taking it and handing it/selling it to American citizens. The gubmint comes out smelling like a rose at home here.

 

RE has its risks.

Tue, 01/05/2016 - 01:11 | 6998586 FreedomGuy
FreedomGuy's picture

While you make valid points concerning China and real estate you need to see it through their eyes. Many or most are old enough to remember Mao. There is still a lot of visible autocracy there if you have not dealt with China. It is not impossilbe that they will hang market shorters even today. So, every risk you mention is a relatively smaller risk to them. In fact, it is lower risk in most any scenario.

Home prices in China can crash, too. Legally, you cannot own a home in China. You get a 99 year lease after which the State owns it. The theory is that they will not take it...in theory.

So, losses in real estate here are a small risk and one  that is both managable and acceptable. Remember, they often pay 100% cash so they have equity and losses are on paper till they sell.

I hope there are no Canadian taxes, etc. Remember that whatever government does to one person, especially on property rights and taxation, it can do to you. If they buy the properties legally and honestly they should not be punished for doing so. How would you like similar treatment if you made a foreign investment?

Tue, 01/05/2016 - 09:53 | 6999260 roddy6667
roddy6667's picture

In America you can never own land, you must rent it from the government. That's what property tax is. They don't have property tax in China. Also, if you owe money to a hospital, a credit card company, a person suing you, or anybody else for that matter, your land is collateral. Don't pay your debts and a lien is placed against your land and house. Your land gets taken by the courts to settle the debt. It happens all day every day in America. Your land is safer in China.

Mon, 01/04/2016 - 23:05 | 6998381 BarkingCat
BarkingCat's picture

I own real estate but I am never delusional enough to think that doing so keeps my investment beyond government control. 

If I ever do become that delusional, it will only last until my next contact with the county assessor's or treasurer's office.

Tue, 01/05/2016 - 08:08 | 6998902 Big Corked Boots
Big Corked Boots's picture

You forgot the zoning officer, planning board, building inspector, Dept of Environmental Fundraising, etc...

Tue, 01/05/2016 - 00:19 | 6998513 sprintjump
sprintjump's picture

The best investment for a person holding yuan is gold seems like it's a no brainer.

Imagine a scenario where the Chinese citizens sell their gold, and the government literally acquires nearly every bit of it in the land. Game over... for a long long time. Ouch.

 

Mon, 01/04/2016 - 20:49 | 6997921 123dobryden
123dobryden's picture

there is no such thing mate, sorry, really

Mon, 01/04/2016 - 17:45 | 6997301 Citxmech
Citxmech's picture

Doesn't Bass have something like a million dollars in nickles stored at his compound in TX?  My guess is that any "profit" he takes will be turned into something "real" or productive at some point (land, Au, Ag, more Barrets, etc.).

Anybody who buys physical nickles is pretty much a full-on SHTF prepper no matter what their day job is.

Mon, 01/04/2016 - 17:50 | 6997314 Cognitive Dissonance
Cognitive Dissonance's picture

I know Bass advocates some type of PM 'protection'. But so many others who are attempting to 'profit' from this situation are not. So what exactly do they think is going on? Is their denial that deep? Or is mine?

Mon, 01/04/2016 - 18:48 | 6997502 greenskeeper carl
greenskeeper carl's picture

same thing that convinces the "murica is exchepshonal" that despite centuries of evidence to the contrary, all of this nonsense in our own country will somehow turn out ok because we are so special, I suppose.

 

As to the rest of it, Bass has always seemed like a smart guy. Prepare for the worst, and hopefully be as ready as you can be, but still live your life and work.

Mon, 01/04/2016 - 20:14 | 6997785 Boris Badenov
Boris Badenov's picture

Carl, you and CG have been here a long time, and have your heads screwed on straight. What is missing in this whole argument is the blanket assumption that Kyle Bass has done everything he has said... That is wrong! Did his Texas University endowment fund ever get the gold they requested? Did Kyle ever get the $1 million in nickels he requested? CD knows how much this stuff weighs, and so does Mrs. Cog...(love those food pix)....

$1million in nickels, at 20 per $1 equals 20,000,000 coins weighing roughly 5 grams each. Which is like 220,000 lbs or 110 tons. 

Kyle's a smart guy, but I call Bullshit because I know he's not carting his nickels around in a wheelbarrel. The NY Fed said 7 years to Germany for its gold, I doubt Texas has any of it's "paper".

Followup anyone?

Mon, 01/04/2016 - 21:51 | 6998163 durablefaith
durablefaith's picture

insightful comment. Nickels are very heavy.

I had to use a little red wagon to wheel mine into the bank. Hated to part with them but needed the cash. The hassle was totally worth it though.

The shock on the face of the tellers..still laughing at the memory.

Mon, 01/04/2016 - 19:23 | 6997626 Mr.Sono
Mr.Sono's picture

You are betting on the collapse of the United States. Do you think that tptb will let that happen with out a fight? They all know way more then we do and they are prepared way ahead.

Mon, 01/04/2016 - 20:04 | 6997745 Cognitive Dissonance
Cognitive Dissonance's picture

I am assuming 'they' will debase the dollar. This is standard operating procedure for hundreds of years of fiat. That which is not sustainable will not sustain.

If the US 'collapses' with the dollar there is no reason for me to go down with the ship. Other greater fools have that well covered. I'm busy pursuing my own greater foolishness. :-)

Mon, 01/04/2016 - 20:18 | 6997801 Mr.Sono
Mr.Sono's picture

Good luck with that:)

Mon, 01/04/2016 - 20:24 | 6997814 Boris Badenov
Boris Badenov's picture

"They"?  Who is the THEY of which you speak...Mr. Yellin? Mr. Clinton? The other Mr. Clinton? Thebernanke?

The US Military defends the US Dollar worldwide, while the Federal Reserve is the one who debases the value....

 

Mon, 01/04/2016 - 20:37 | 6997867 Cognitive Dissonance
Cognitive Dissonance's picture

'They' are those who have debased the dollar from $1.00 in 1913 to less than $0.05 today.

Or those who happily assure me inflation remains on average under 2%, which means since the turn of the century we have suffered 'only' a 34% debasement of 'our' currency while wages have remained stagnant using the same 'inflation' adjustment.

'They' are certainly not 'me'. Are 'they'.....'you'?

Mon, 01/04/2016 - 22:32 | 6998296 mademesmile
mademesmile's picture

"I'm busy pursuing my own greater foolishness. :-)"

So am I! I just bought pregnant goats, due to kid in a few weeks.
Need to round out the other meat with some milk. And it's only 75 days till spring, garden here I come.

Mon, 01/04/2016 - 23:00 | 6998357 Cognitive Dissonance
Cognitive Dissonance's picture

True freedom comes from not giving a shit what other people think about your lifestyle. May your kids be healthy and multiply.

Mon, 01/04/2016 - 18:00 | 6997329 Motorhead
Motorhead's picture

Ah, you beat me to it...indeed....the nickels (have to say "the nickels" like Humpherey Bogart and "strawberries" in the "Caine Mutiny").

Mon, 01/04/2016 - 18:45 | 6997494 Uchtdorf
Uchtdorf's picture

Yes, but when he bought those nickels, he was up 40% immediately as the cupronickel content was worth about 7 cents. Now? According to coinflation.com only:

$0.0278698

I'm not knocking his investment strategy because I like physical, too. Ups and downs (based on Federal Reserve Hiney Wipe fiat) are to beendured until things get real.

Mon, 01/04/2016 - 19:15 | 6997603 Killtruck
Killtruck's picture

Incorrect. His nickels are now worth $0.05 each, just as the day he bought them...which is WHY he bought them. It's a Can't-Lose trade.

Mon, 01/04/2016 - 20:26 | 6997832 RafterManFMJ
RafterManFMJ's picture

Same reason I got mine; same as "buying" dimes back in 1964...if you show up at the bank with a hand truck, you're looked at oddly, btw.

Mon, 01/04/2016 - 19:23 | 6997622 Blankone
Blankone's picture

In which case, if he really is a smarter trader, he would have already sold his nickels.  He has shown, at the least, to have difficulty in timing his trades since his big hit that earned him a rep..

And far the comment made by another that the nickles were still worth 5 cents and that was the pupose of the trade.  Well, how is that different than just buying dollars and holding them?

Mon, 01/04/2016 - 19:51 | 6997709 Oldwood
Oldwood's picture

Dollars are PAPER

Mon, 01/04/2016 - 20:46 | 6997905 Blankone
Blankone's picture

When the fiat currency devalues then the paper portions and the metal portions of the fiat currency devalue equally. 

Thus in regards to fiat, there is no difference be it paper or coins made of lead, tin or copper.

You can try to salvage the value by converting the coin into base metals and then selling those metals seperately.  But then why do so when you can just buy the metals to start with.  And do you really have the ability to melt it down and seperate the components?

To try to help you out.  50 yrs ago a nickle would buy you 1/20 of what a dollar would buy.  Today a nickle will still only buy you 1/20 of what a dollar will buy even though a dollar buys much less than it did 50yrs ago.  If the dollar devalues or crashes further the relationship will remain.  No difference if used as fiat.

Tue, 01/05/2016 - 01:17 | 6998590 FreedomGuy
FreedomGuy's picture

Saying a dollar is paper is really meaningless, even though I get your point.  Your home title is just paper. Your car title is paper. You reciepts and marriage certificates are paper. Your bank acounts are memory bits and electronic entries.

It is what they represent that is important. Paper as a material is fine. The argument is about what it really stands for and that is where the shenanigans come in.

Mon, 01/04/2016 - 19:43 | 6997690 Blankone
Blankone's picture

Re Citx:

"Anybody who buys physical nickles is pretty much a full-on SHTF prepper"

Why is buying nickles better than buying a block of copper?  Because they are currency?  Paper dollars are just as much currency as a nickle.  A US nickle, other than the value of the melted down metals, will be no more valuable than holding paper dollars if SHTF occurs.  A block of copper might be better if going for value of metals.

 

Mon, 01/04/2016 - 19:55 | 6997724 Oldwood
Oldwood's picture

Again, dollars are PAPER, or even not that...electrons. A nickle will always be worth 5c, but could be worth more. Copper is only worth what you can sell copper for. Metal Money, the best of both worlds. And as Bass explains, if the shit really do hit the fan, he would rather be out bartering for a loaf of bread with a bag of nickles rather than a gold piece worth thousands. Its just one more hedge, and he can afford them all.

Mon, 01/04/2016 - 20:37 | 6997872 Blankone
Blankone's picture

Oh my.  Ok, a nickle is always worth a nickle - and a dollar is always worth a dollar.  As far as fiat currency is concerned there is no difference whatsoever.   Fiat currency be it paper, lead, tin, is only worth the value of the fiat currency.  If a crash occurs both the paper dollar and nickles buying capacity will decline equally.   Unless you plan to convert that fiat currency into the base materials.  So, a nickle is no better than a dollar bill unless you plan to melt it down for the base metals.  And if you do plan to melt it down and seperate the metals you would have been better off just buying the base metals to start with.

 

Mon, 01/04/2016 - 23:18 | 6998416 BarkingCat
BarkingCat's picture

Are you this thick or are you just screwing with us?

 

The value of the paper in any fiat note will always be worth less than face value (unless we go full on Zimbabwe) .

The nickel will be worth no less than its face value but could be worth more in case of devaluation or increase in the price of metal that it contains.

It is pretty much equivalent to buying a 1oz gold coin whose face value is $1,000.00. 

I know there is no such coin, but if there was.

Tue, 01/05/2016 - 02:10 | 6998518 Blankone
Blankone's picture

It is surprising that you guys cannot understand the basic concept.

"The nickel will be worth no less than its face value"  Well, that is the same as for the dollar bill.  The dollar bill will be worth no less than it's face value.  However, the amount you can buy for the face value of one dollar can decline as can be seen over the last 50 yrs.  Same for the nickel.  The nickel is 1/20 of a dollar, you can buy 20 nickels for a dollar.  That is the basic math.  A dollar is worth 100 cents, a nickel 5 cents.  In terms of fiat.  What you can buy for a nickel has declined in direct proportion to the decline in the dollar.

To get the value of the base metals in the nickel out for use it has to go from the exchange of fiat to the exchange of a metal it is minted in.  When you use gold you are using a metal, not fiat.   You should also note that using your definition of the face value of a coin of 1 oz of gold - that therefore the face value of gold does and has varied. 

You should also note that the content of the metal in coins has declined as the value of the metal within has increased.  And even then, the value of the metals within coins has varied based upon the market value of the metals, such as copper. 

A tidbit.  If the metal in a coin are worth more than the buying ability of the coin.  They will reduce the amount of those metals.  (And they have in the past.)  If you hold coins for 20 yrs because of the metal content, and then they decrease the metal in the coins in circulation and institute a policy of collecting and remelting the coin as it circulates - and then you try to spend the nickel you have with the higher metal content - your nickel will not buy any more product than the regular nickel in circulation.  To get the increased value you have to melt and seperate it, or go to a coin store who will give you a reduced price and then remelt it in bulk (if legal).

 

Tue, 01/05/2016 - 07:27 | 6998827 mrjohn
mrjohn's picture

yup

It costs nine cents to make a nickel. Not because the copper and nickel used are worth nine cents, but because the process required to make the coin costs more than the value of the coin. The cost of the energy used to melt the metals, the cost of the labour, the cost of the facility, the cost of transport and storage, the cost of security.

All these costs also apply to the reverse process, without the economies of scale.

Mon, 01/04/2016 - 18:18 | 6997408 Loucleve
Loucleve's picture

I believe he is SHORT the Chinese currency.

He gets out after it tanks by buying it back.

why i got 10 down arrows is beyond me.

Mon, 01/04/2016 - 18:52 | 6997527 bentaxle
bentaxle's picture

We shorted some folks

Mon, 01/04/2016 - 19:20 | 6997613 pakled
pakled's picture

You called a long time and well respected member an idiot.

 

Plus, not a very productive comment was yours.

 

And look again... you got more than 10.

Mon, 01/04/2016 - 23:59 | 6998489 Lies All Lies
Lies All Lies's picture

So one can't disagree with a comment from a 'long time & respected memeber'?  Utter crap.

Tue, 01/05/2016 - 03:41 | 6998676 mkkby
mkkby's picture

Cog Dis made the idiot comment.  Implying the trade is no good because it has to settle in dollars is a straw man.  If that is true, then no trade is worth while, no job or any other economic activity is either.  Fuck you cog dis.

As for "well respected", a few of us remember cog dis trying to sound like a hollywood preacher warning about vague secrets that only he knows.  I called him a con man several times. 

Mon, 01/04/2016 - 19:26 | 6997637 Kayman
Kayman's picture

Loucleve

Never take red arrows personally- there are new trolls rolling through all the time that think harvesting red arrows is the purpose of ZH.

Odd thing about the yuan though- didn't the IMF just stuff it into their little basket, saying it was a stable/ up and coming currency?

If the Chicoms couldn't keep things together yesterday, it tells me that they might also be jiggy-jigging their foreign currency reserves too.

K

 

 

Mon, 01/04/2016 - 20:34 | 6997855 WonderDawg
WonderDawg's picture

You're getting pummeled with down arrows be you call Cog Dis an idiot, which he assuredly is not. Pick your fights a little more carefully.

Mon, 01/04/2016 - 18:51 | 6997516 tarsubil
tarsubil's picture

Man, they've got me? 5 years now on the hedge and they got me. I really think the global financial collapse is a long ways off. His short if correctly placed should pay off.

Tue, 01/05/2016 - 11:34 | 6999747 MrSteve
MrSteve's picture

I suspect he is working the Schumpeter creative destruction capitalist meme. His nickels represent a real asset position in a raw material used to make stainless steel and he has them as a face value coin. As such, he is short the dollar and long manufacturing / mining inventory. Sorta like a really poor man's gold.

We should all work at stock-holding the good stuff for the day when it is needed, like tools and skills and support for your community- food banks, book banks and churches and temples that actually work with people in need.

Mon, 01/04/2016 - 17:35 | 6997254 Escrava Isaura
Escrava Isaura's picture

 

 

I don’t think one in one million New Yorkers understand what Kyle is talking about. And how he will get pay.

 

 

Mon, 01/04/2016 - 21:39 | 6998134 TheReplacement
TheReplacement's picture

Even 1:1,000,000 NYers leaves us with a double digit total.  I think you are being too generous.

Didn't vote.

Mon, 01/04/2016 - 23:23 | 6998434 BarkingCat
BarkingCat's picture

New Yorkers are some of the dumbest fucks on the planet.

As proof I give you - carpet bagger Hillary Clinton elected as US Senator.

Mon, 01/04/2016 - 18:36 | 6997470 Scooby Dooby Doo
Scooby Dooby Doo's picture

"he is short, idiot."

Come'on gang, let's not call each other mean names. ok?

Mon, 01/04/2016 - 19:22 | 6997625 pakled
pakled's picture

There are two things in this world I hate... Scooby doo and Barney ( I REALLY hate Barney).

 

But I fully agree with your sentiment!

 

And yes, I get the Flintstones reference in your handle. ;>

Mon, 01/04/2016 - 20:28 | 6997840 RafterManFMJ
RafterManFMJ's picture

They jumped the shark with Scrappy Doo. I watched for a few more episodes hoping he would be violently killed, but no.  After I realized he was sticking around I dropped Scooby Doo.

Mon, 01/04/2016 - 19:46 | 6997657 Boris Badenov
Boris Badenov's picture

Oh Lou, you must know who you coat-tailed, the Great Cognitive Dissonance...was 2nd post in thread that important to you?

Beyond that, there is a great concern amongst traders that their counter-parties are not good. If you own puts with 2 week expiration, and they close the exchanges for 3 weeks, what happens to your "investment" when the exchanges re-open? Or what if you buy something from AIG or BAC and the trade goes the wrong way for them? Hank Paulson is gone, and there are no more bailouts for banks (depositors' funds are still nowhere near the level of liabilities).

NYSE is owned by Euronext. ICE is owned by Goldman and JPM. The ABX index was owned by JPM GS BS MS, we know this, so when CogDiss asks who is gonna pay us? It is a real concern. Kyle Bass is the idiot here, not the first poster of this thread. 

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