For Kyle Bass This Is "The Greatest Investment Opportunity Right Now"
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.
(27 votes)
»
- Login or register to post comments
- Printer-friendly version
- Send to friend
- advertisements -
as a hedge go long the paper they use for the notes inside- they're gonna need more of that?
Soon, they can use worthless US dollars.
Sure, China may want to devalue its currency because exports have been hurt because of its peg to the U.S. dollar - but the big question is - will they only devalue the Yuan - or will they keep the peg - then attack and devalue the US dollar?
And of course you must wonder - if you intend to devalue just the Yuan - then why announce to the world that you have a huge stockpile of gold? Or has the plan all along been to buy cheap gold with a strong yuan - before you devalue?
If China really was a country capable of standing on its own two feet, they would drop the peg. But whether they devalue or not, they will keep the peg.
I am always surprised when they act and talk like they can run with the big dogs.
No Kyle. Who has the energy and an economy that is probably the least in debt in Eastern Europe?...
And they have the ability to convert that war machine technology and workforce that just sold $10 billion more to the Indians to do lots... and lots... and lots... of other things commercially.
Superior on too many level(s) to count!
Your just like the ex-Goldmanite that still has his nose up Master Soros' ass Jim Rogers!!!
Nope. You are leaning way too far over your skiis. Plus Rogers does not like Soros, and vice versa. But keep reading... you are understanding more.
The only thing keeping Russia from destroying what is left of the U.S. of A. is the obstacles en masse being thrown in their direction including war on there "borders"! Who fears the Russians the most and always has and it's not just because of there sophistication in military hardware?...
By all means... Elaborate!....
Jim Rogers is old school American and still hates 'em which is just fine with me and everyone else that sees the future with the Russian Federation without the U.S. of course chafing at the bit to throw another "monkey wrench" into it!
Russia better hurry if they really want to destroy the USA or Barry is going to beat them to it.
You know they read the same books, like Marx.
Russia better hurry if they really want to destroy the USA or Barry is going to beat them to it.
I didn't say Russia would do anything of the sort!... Russia simply wants to go it's own way unfettered and pick and choose it's business partner(s) as it sees fit!!!! I believe that constitutes what the Western establishment once called Free Market economics?!!!
It's clearly the U.S. through it's action(s) since the Sochi Winter Games that wants to do the "destruction"!
It's clear the only destruction is uni-directional and it's all coming from Washington D.C., Tel Aviv and London.
Same as it ever was when a competitor can think out of the box as good if not better than the U.S. of A. after WWII!
Case in point. NSA should have fun with this "as it matures"?...
My only hope for the Russians is that they don't have any Russian Jews with dual citizenship to Israel working on this!
http://rbth.com/science_and_tech/2016/01/04/russian-breakthrough-in-quan...
"the energy rebound, when it happens, will be comparable to the housing rebound post 2009."
I'm guessing right on time for a presidential election.
Tough to invest as a non-professional? Not really, the big China crash will bring pretty much all equity markets down.
And the fact that there are hundreds of funds from Europe and America who told everybody to put their nestegg in the land of the rising sun...
Blackrock alone is worth a trillion and is crumbling like a cookie.
We'll all feel the pain when China breaks. We're all so interconnected right now that when a chinese farmer farts, Obama talks.
Last sentence is comedy genius
"...when a chinese farmer farts, Obama talks."
A new form of ventriloquism?
Which smells worse?
Both 'Breath of Compost'.
" land of the rising sun...
I think that's the country China hates.
Bass better worry about "tragic accidents" if he's taking on Big Pharma. And since Pharma can control the news....you can guarantee the accidents will never go mainstream.
Wait, I thought Jews and leftists owned the media. They hate big pharma, too, right?
China devalues, then India, Malaysia, Indonesia, Philippines, etc all do the same.
A Race To The Bottomless Pit!
And still no one wants to do the right thing and back Gold.
Gold is a luxury commodity. What do you think is going to happen to luxuries if the world (China) crashes?
WTF? Is your car or homeowner's insurance a luxury too? I sleep a lot better knowing I have SOLID $$ backing me. Although the tax man taketh if I go the metals -> fiat route, it won't tank with the bonds, derivatives, and other paper garbage, esp. GLD/SLV to be proven as the junk it is.
Assuming government doesn't impose a 95% transaction tax on PMs. Do not forget, its not the economy, its the government who is the source of our problems.
Seasmoke: > And still no one wants to do the right thing and back Gold.
Back Gold?! Gold backs itself. Gold doesn't need to be backed with anything else.
The way to weaken the Yuan, if that's what they want to do, is to buy ever more gold and pay for it in Yuan.
I thought that the sharks are all buying high and shorting well. With delta-up v. delta-down well contained.
I'm out of the Casino market this quarter, and maybe next.
I'm out for 2016.
If she-who-shall-not-be-named becomes the next TotUS, I'm probably out for the rest of my life.
Last I heard, inflation in China doesn't go over too well. See http://fee.org/freeman/the-great-chinese-inflation/
perhaps now the Chinese may buy a few million ounces of Gold to protect their wealth?
Now?? Me thinx you're behind the times... The Chinese in particular, with Russia and India have been buying plenty of Gold! Silver is welcome there too. Indeed, it is safe to say China is THE roach motel of Ag/Au. I will continue stacking until phyzz is near impossible to get, and that point continues getting closer and closer.
Think of it this way. China could take the useless US treasuries and fiat, then revalue the PMs by offering an offload of said garbage paper for metals. Bill Holter thinks this is possible. So do I!
Hear that sucking sound yet?
I'd say he's right about energy being a bargain, specifically oil and gas.
However his timing may still be a little premature. Overall the world hasn't picked up that much and likely won't pick up much the next couple years.
But he's right about the long term investment potential of energy. It's energy that makes the world go around, nothing happens without it.
But what about climate change? You are assuming they don't outlaw carbon fuels completely. There is the distinct possibility that NONE of this is an accident. While many of us believe the economic disaster is a deliberate means for a world government power grab, its just as possible these "greeny" motherfuckers are also using it a means to kill oil, coal and gas. It's a big chessboard.
Kyle's thesis is wrong.
Oil will trade between $20 and $50 for years ahead.
http://blogs.reuters.com/anatole-kaletsky/2014/12/19/the-reason-oil-coul...
The ability for shale producers to come into the market quickly is an underweighted disruption in his analysis.
I like Kyle and all, but when it comes to energy and China be clear that you are either a player or a Muppet.
If the Saudis can hold down oil to $30 indefinitely to spite Russia without any fundamentals AND plunge into a regional religious war, then just know 'here there be tigers.'
On China and currency and bad debt. The Chinese say; "so what?"
Those guys are building ghost cities for decades - pouring more concrete in 10 years than the US did in a hundred. And that does not count the development of Africa and Sub-Asia markets.
The same face-saving Daoist economics of Japan were constructed in Laozi-Kongzi China.
On top of that you are either Chinese or your not. It's a badge of honor to burn a high profile barbarian over there.
100,000 new people on the planet everyday. Invest in deflation in this "age of abundance."
Hmmm...1 Billion Chinese looking to hedge currency risk..what do they buy? They will want something that holds value, fungible, doesn't spoil, and after all the fraud and business failures something they can posses....hmm Gold? Would that be a way to play the chinese fraud, currency depreciation, and likely depressionary collapse of over extended businesses ?
Coming from the guy who correctly predicted the collapse of housing going into 2009, one should take his prediction seriously...
Meh. Ancient history. What have you done for me lately? Kyle Bass can suck my weenie.
Hmm..., Both shorted subprime but now Burry likes water and Bass likes oil. Its going to be interesting.
We're Just Going to Kill the Dollar| Kyle Bass
Our Zionist allies have been robbing the United States taxpayers. The Jews are finally seeing the bullshit. We love are ally, not the corruption. May I present the old tricks used.
Jewish Religions and The Prospect of Dissent
neo-clown monetarist BS.
So Modern Monetary Theory is better? MMT
I think his oil call is ridiculous (save for WWIII or more of what's going on right now in the MENA), so he may have been uncannily prescient but he might be onto something with this one.
The call is 12-18 months away; only time can reveal if he is right.
Bass is right that even though oil reserves aren't that thin that margin to bring on additional existing capacity is pretty damn tight unless Iran really is in better shape, getting sanctions fully lifted indefinitely & makes up the US fracking shortfall on global markets. Low oil prices will really hurt several US states but it is easily outweighted by US foreign policy interests. Venezuela can't balance their budget unless oil is at $122, Russia at $104 and Iran at $77.
Any bet on energy is just making a crapshoot bet though on too many geopolitical issues right now for my liking.
So, I thought Japan was supposed to crater and make Kyle billions? What happened?
Bass had said going short the Yen was a good trade. The Yen is down every year for the last four. Sounds like a winner to me.
Saudi Arabia raised oil prices, key factor.... Iran is coming online kinda um messing things up....