With the dollar’s recent post-Fed bout of appreciation providing some much-needed relief for Haymarket Capital’s P&L, its founder Kyle Bass sat for an interview on Friday with Bloomberg’s Erik Schatzker. During the 20 minute discussion, Bass expounded on the importance of holding gold, his cautiously optimistic view on digital currencies, the misguided notion that holders of Puerto Rican debt will someday be made whole – oh, and Bass’s next big call: Long Greece - particularly the stocks and debt of Greek banks.
A few weeks ago, Bloomberg view published a Bass-penned editorial in which the hedge fund founder and CIO called on the IMF to stop bullying Greece - publicizing the fact that he is now effectively long Greece. Greek government bonds have performed reasonably well so far this year: They’re up about 16%.
And if Bass is right, they could have another 20% to 30% over the next 18 months if the IMF abandons its insistence on austerity and acknowledges that debt relief will need to be part of the long-term alleviation of debt. Bass added that, in the near future, voters will elect a more business-friendly government that will help reestablish the country’s creditworthiness, much like the government of Mauricio Macri did for Argentina.
I think you also have an interesting political situation in Greece where I think there's going to be a handoff from the current Syriza government to kind of a more slightly-center-right but very economically independent new leadership in the next, call it, 18 months.
And so, I think you asked why now? And I think you're starting to see green shoots. You're starting to see the banks do the right things finally in Greece and you are about to have new leadership.
So, I think that you're going to see - and if you remember Argentina as Kirschner was going to hand-off – hand the reins over to someone that was much more let's say focused on business and economics than being a kleptocrat, I think you're going to see something again slightly similar in Greece where you have leadership today that might not be the right leadership and the government-in-waiting, I believe, and I think you know Mr. (Mitsutakous) - I think you're going to see something great happen to Greece in the and next, kind of, two years.
Asked if he still considers himself a China bear after the yuan’s surprising run of strength against the dollar, Bass answered in the affirmative. But the language he uses to talk about China has softened notably, with the investor now expecting a correction instead of an all-out collapse.
Chinese President Xi Jinping has been laser-focused on consolidating power during this year’s quinquennial Communist Party National Congress, set for Oct. 18. Once it passes, Bass believes that the PBOC’s grip on the yuan exchange rate will loosen and market forces will reassert themselves. Meanwhile, the country will also relax its focus on appeasing President Trump.
What I'm telling you is my guess is their laser-like focus on exchange rates and dealing with the Trump Administration is going to be relaxed a bit once Xi consolidates his power.
You know, their electoral cycle is a little different than ours if you want to call it that. Their NPCs happen every five years. Xi - this is the end of his first term. He's going to solidify a second term. He's going to reconstitute the Standing Committee of the Politburo and we think that he has consolidated power.
He's quickly becoming the most powerful Chinese ruler since Mao and the question is will he have a third term. And so, once this consolidation of power is over and the NPC is finished I think you're going to see more natural economic forces acting on their banking system.
He acknowledged that the appreciation of the yuan "has been terrible this year" for his hedge fund, which has predicted that the yuan would fall more than 30%. But he’s standing by the position for now with the expectation that over the next nine months “you’ll see the rubber hit the road.”
It's been terrible this year. And again, you think about the time continuums of these big global macro events.
Unfortunately, it doesn't fit into a nice envelope that works every month, every quarter, every year. And so, you have to stick with it as long as you can and in this environment, I think in the next call it nine months from October you'll see the rubber hit the road.
Bass scoffed at the notion of investing in Puerto Rican debt, saying that investors would be lucky to walk away with between 10 and 20 cents on the dollar. The idea that the island, with a workforce of just 1.4 million people, will ever be able to pay back $70 billion in debt is ridiculous, he said.
These are two different questions - one is, should we help with hurricane? Absolutely. We should do everything possible.
Puerto Rico is just a simple math 101 question.
But on the debt question I just think you have to be a little crazy to think that $100 billion worth of debt or even $70 billion of on-balance sheet debt is worth anything with 1.4 million workers in an economy like Puerto Rico's.
When you look at sovereigns and you look at history of sovereign defaults, recoveries and wipeouts are $0.10-$0.20 on the dollar - that's what I think people are going to end up with.
Asked for his view on bitcoin, Bass said he’s accepted that he was wrong to dismiss it early on, saying he failed to grasp the technology. He acknowledges now that digital currencies are a “real asset class”. While he hasn’t yet figured out how to value digital assets, bitcoin’s deflationary features would presumably make it a strong performer as inflation rebounds over the coming years, Bass said. Bass said he doesn’t own digital currencies.
Early on I summarily dismissed bitcoin and I shouldn't have. And didn't understand - truthfully, I don't understand the depth of the algorithms, the technology and the fundamental foundation of bitcoin I didn't understand. I spent a lot of time trying to understand it in the last call it six months and I believe that the digital-asset class of cryptocurrency is a real asset-class but in terms of kind of how the world views digital currencies we talked - when you look at global cash positions today given global Q/E, they're now north of 110 percent of global GDP. So, we're talking about almost $100 trillion of cash in the world.
That has never happened before in world history and so when I think about inflation - you're starting to see wages move. You're starting to see the price of all goods and services move. The thing that's been really deflationary in the globe has been technology. It's been a very positive deflationary force and I think that's played out.
The technological deflation has played out so, now I think you're going to start to see inflation and wages move. And this gets into crypto-currency.
The collective value of crypto currency is a little over $100 billion today. Global M2, global cash is like $80 trillion, $100 trillion; so, what's $100 billion? The question is, what's it worth? And as a store of value, a media of exchange and other currency I don't think there's any true institutional investor has any money in bitcoin – I know some have a little bit. They have nominal amounts invested but I think it will be an asset class that will work over time. I'm not sure how to value it yet - I really have no idea.
To be sure, Bass expressed skepticism about the red-hot market for ICOs, referring to it as a “digital gold rush” that will end with “a lot of people losing a lot of money.”
I think there's a digital gold rush that's gone on.
I think a whole bunch of people are going to lose a lot of money. These ICOs - you're going to see a bunch of them go completely broke - a bunch of them are frauds. And that's going to be problematic for all the people that just rushed in and so I feel like it's a bit of a mania at the moment but
With the end of the interview approaching, the conversation veered toward gun control. Bass said that he and his son own dozens of guns and are close to many members of the armed service. However, he still believes that the state and federal government should maintain comprehensive gun registries, even though such precautions probably wouldn’t have stopped Las Vegas shooter Stephen Paddock from carrying out his horrifyingly deadly crime.
My son and I have this - we have this place here that we enjoy and when I think about this debate - should guns be registered? Absolutely. Should people be able to sell a gun from one to another without recording the buyer and the seller? Should every gun have a serial number and be registered with the federal government and local authorities?
I think this is a no-brainer. That's just a pragmatist. The NRA fights that tooth-and-nail.
After all, people need to register their cars with the state, Bass said. Why not guns, too?
So, to sum up: Buy Greek bonds, buy Greek debt; hold gold, hold bitcoin; sell Puerto Rican debt, sell ICOs, sell yuan warning that "within nine months, the rubber will hit the road" on China's currency collapse, and register all your guns...