Kyle Bass

"When you let the politicians run monetary policy, well, that is how it [ends]... All of the ingredients are there [for Japan now] for this vicious cocktail to fall apart" is how Kyle Bass concludes this broad and succinct recent interview. With total credit market debt-to-GDP globally around 350% (or ~$200 trillion), his thesis remains that many countries will reach their profligate endpoint soon (if not already in Greece's case - where investors have already lost 90c on the dollar); but that managing around this current evolution is the single-hardest period for investing of the last few decades. The modest Texan notes it is naive to think he can call the end of a 70-year debt-super-cycle with any precision (as in mid-December's Japan fiscal data and Abe's election) but when you look at all of the inputs, he believes that Japan has crossed the proverbial Rubicon in the last two months and describes in this rather breathtaking clip how the end of twenty years of conjecture on what may happen to Japan will come to pass.

Kyle Bass, Larry Edelson, Charles Nenner, Jim Rogers and Marc Faber Predict Widespread War

Yesterday, in what is an appetizer to the great 2013 convergence trade (that, between the now thoroughly dead Greek and the Spanish economy, which is rapidly getting there, of course), several thousand Spanish policemen took the streets of Madrid protesting the latest round of austerity, which included frozen pensions and the elimination of the Christmas bonus (they will have many more opportunities to protest not only the loss of any future upside, but the eventual cut of existing wages and entitlements). As RT reports, protesters blew whistles, shouted slogans, and carried anti-austerity banners as they marched through the city centre to the interior ministry. But perhaps the most telling message read on one of the slogans, was the following: "Citizens! Forgive us for not arresting those truly responsible for this crisis: bankers and politicians."

"Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation."

"A popular revolt will happen" is how Kyle Bass sums up the endgame from kicking the can in Europe. Dismissing the headline-making 'But, Blackrock is buying European bonds', Bass reminds Bloomberg's Stephanie Ruhle that very few ever get the crises correct and that the herd will keep buying things until it blows apart. With massively over-leveraged banks and a Greek dependency, Bass notes that investing in Europe now is like picking up a dime in front of a bulldozer and expects Germany will eventualy leave the Euro (within 3-4 years) as the 'joint-and-several' liabilities will never happen. 150 well-spent seconds to summarise just what is going in Europe, as he concludes with Milton Friedman's quote on Europe: "when they hit a bump in the road, it will tear them apart at the core."

Hugh Hendry: "I have resigned from the professional undertaking of coin flipping. I am not here to tell you where gold’s going to be. I have no idea. That’s my existentialism. I am a student of uncertainty, I have no idea where the stock market is going to be. So when I am creating trades in my portfolio for my clients, I am agnostic. I just want to enhance the probability that I make money come what may."

The head of industrial and precious metals trading at Barclays, Cengiz Belentepe, has told Bloomberg that investors are selling their investments in gold ETFs and opting for the safety of allocated physical gold.

Barlcay’s Belentepe said “the question is whether the pace of buying has slowed, or whether the people have become a bit more sophisticated in recognizing the costs and liabilities.”

Imagine if in 2007, Ben Bernanke, Mervyn King, Jean Claude Trichet et al, had actually possessed the analytical foresight to see what was coming, organised a meeting with the world's media and explained how, using their collective wisdom, they would solve the problem.

"There's going to be a massive global crisis, but there's no need to worry. We're just going to print money."

 

"Is that it?"

How would most people have reacted then? We think they would have laughed out loud. Why are so many of us reacting differently now? The nature of markets is that they periodically forget the lessons of history. Confidence in the status quo seems as entrenched now as it was in 2007 but Gold appears to be exhibiting 'Giffen-like' behavior where, instead of falling, demand is rising as prices rise.

Hayman Capital's Kyle Bass is back and cutting through the caustic bullshit that surrounds every waking moment in this kick-the-can world. Dispelling the myth of our 'deleveraging' virtue, with global debt having grown from $80tn to over $200tn in the last ten years alone (a 10.7% CAGR) and the frightening reality of central bank balance sheet growth of 16% per annum, Bass concludes (rightly) that "you can't do this for very long" as governments infinitely leverage and central banks have begun the endgame of open-ended money-printing. Addressing the question of timing, Bass notes that while Europe and Japan are 'perceived' to be 'staying together' there are in fact devastating losses occurring (ask Greek bond-holders) and he firmly believes that "Germany will never go joint-and-several with the rest of Europe." The world sits at a place it has never been before in peace-time - as far as global debt balances and deficits - and that is why the global investing playbook is so hard. He goes on to address hyper-levered economies, delayed inflationary outcomes, and worries that the cost-push (lower GDP, higher CPI) prints are just beginning in Europe. As a fiduciary, and something all investors should consider, Bass states "Given what we see coming, our job is not to lose money!"

A few days ago, the BOE's Andy Haldane, rightfully, lamented that the apparent "solution" to the exponentially growing level of complexity in the financial system is more complexity. Alas, there was little discussion on the far more relevant central planning concept of fixing debt with even more debt, especially as the US just crossed $16 trillion in public debt last week, right on schedule, and as we pointed out over the weekend, there has been precisely zero global deleveraging during the so-called austerity phase. But perhaps most troubling is that with 2 days to go to what JPM says 77% of investors expect with be a NEW QE round (mostly MBS) between $200 and $500 billion in QE, the world is, also in the words of JP Morgan, drowning in liquidity. In other words, according to the central planners, not only is debt the fix to record debt, but liquidity is about to be unleashed on a world that is, you guessed it, already drowning in liquidity. The bad news: everything being tried now will fail, as it did before, because nothing has changed, except for the scale, meaning the blow up will be all that more spectacular. The good news: at least the Keynesians (or is it simply Socialists now?) out there will not be able to say we should have just added one more [    ]illion in debt/liquidity and all would have worked, just as our textbooks predicted. Because by the time it's over, that too will have happened.

When one thinks US Treasurys, and demand thereof, two entities pop into mind: the Federal Reserve, which over the past 3 years has been the biggest institutional buyer of US paper, and China, which is the largest foreign holder of US TSYs. Yet over the past year something curious happened: when it comes to setting marginal demand for US Treasurys, it was neither the Fed, whose sterilized Operation Twist has kept its holdings of US Tsys relatively flat, nor China, which has actually been a major seller of US paper, that has been the dominant source of marginal demand for Uncle Sam's never to be repaid obligations. Japan.

George Soros more than doubled his shares in the SPDR gold trust ETF. He increased his position in SPDR Gold to $137.3 million in the second quarter from $52 million previously. SEC filing for the second quarter showed Soros Fund Management more than doubled its investment in the SPDR Gold Trust from 319,550 shares to 884,400 shares at the end of June. In September 2010 (see chart), Soros called gold "the ultimate bubble" and largely dumped his stake in the ETF before gold recorded annual gains in 2010 and 2011 and rose to a nominal high of $1,920.30 per ounce in September.  There was speculation at the time that he may have sold the SPDR trust in order to own far safer allocated gold bars. Another billionaire investor respected for his financial acumen is John Paulson and Paulson & Co increased its holdings by 26% by purchasing an additional 4.53 million shares of the SPDR Gold Trust to bring entire holding to 21.8 million shares.  It was the first time Paulson & Co had increased its position in the SPDR Gold Trust since the first quarter of 2009, when the investment firm initially acquired 31.5 million shares. It means that Paulson's $21 billion hedge fund now has more than 44% of the company's assets allocated to gold.

Sayonara internal funding. In what we suspect will become a major issue (and warned in April of last year), Bloomberg reports that Japan’s public pension fund, the world’s largest, said it has been selling domestic government bonds as the number of people eligible for retirement payments increases. "Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash." It would appear the Ponzi has reached it's Tipping Point. Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and eligible for pensions. That’s putting GPIF under pressure to sell JGBs so it can cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year. GPIF is historically one of the biggest buyers of Japanese debt and held 71.9 trillion yen, or 63 percent of its assets, in domestic bonds as of March.

Tony Robbins warned about the risk of dollar devaluation and spoke about the opportunities in gold

On the heels of Fitch's sovereign credit downgrade to A plus (the fifth-highest investment grade), Japan's government debt continues to swell. With its debt at over 200% of its GDP, the Land of the Rising Sun appears to be embarking on a trek into the debt-laden unknown. As with any well-known macro-trend, there are speculators eager to capitalize on it. A ballooning government debt is often associated with sovereign debt crises, as market shocks can send the interest rate paid on the debt to unsustainable levels. Coupled with Japan's shrinking population (and thus tax base), the country is setting itself up for a hairy situation (data for both charts are from the IMF's World Economic Outlook Database). Enter Kyle Bass, one of the few hedge fund managers who made a killing when he bet against housing during the subprime mortgage bust. He and his fund have now set their sights on Japan, specifically shorting Japanese yen and Japanese government debt. His thesis is simple: with a debt-to-GDP ratio over 200% and a contracting population, it's only a matter of time before a sovereign debt crisis sets in, thus triggering a rise in Japanese interest rates – which the government would be unable to service with a shrinking and aging tax base. So far this strategy hasn't worked as Bass intended: according to ValueWalk, Bass' fund lost 29% of its value in April alone. That's not to say Bass' assumptions are incorrect. But there are alternative ways of looking at Japan's situation.