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Kyle Bass Interview


Parsad
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Is Mr. Bass a US dollar bull?  I find it interesting that many say the world financial system is unsustainable -- but against what?  If the Yen sucks, the Renminbi sucks, the Euro sucks, does that mean we are going to end up with a Loonie bubble :)

 

Cheers

JEast

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The idea of shorting Japanese government securities is certainly interesting but also pretty darn complex I think. The arguement that bad things are certain to flow from countries that have debt to GDP ratios like Japans is pretty compelling. The historical record is no country has reached the levels that Japan is experiencing without default and or a currency collapse. Where when is the tipping point and how to profit is the billion dollar question. Any ideas or discussion would be appreciated.

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In fact , I really want to know how to buy some out of the money  options of  long term GJB or long term GJB interests ;

but I don't see how I can buy these things, seems only big players can get them from investment banks

 

The idea of shorting Japanese government securities is certainly interesting but also pretty darn complex I think. The arguement that bad things are certain to flow from countries that have debt to GDP ratios like Japans is pretty compelling. The historical record is no country has reached the levels that Japan is experiencing without default and or a currency collapse. Where when is the tipping point and how to profit is the billion dollar question. Any ideas or discussion would be appreciated.

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What is a coherent counter to his view points?  Ultimately, of course, there's no ability to change the math.  But the status quo has gone on for so long, you have to wonder if it couldn't go on for another 20 years? 

 

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This evening, Japan's Central Bank and government have announced that they are focusing on a 2% inflation target.  Bass was saying in his presentation, that once they move from deflation to inflation, that's the end game because the swaps on the yen move and their interest costs multiply. 

 

Now you have a 2% inflation rate, while institutions and your citizens expected to remain in a deflationary environment, retaining an 80-150 basis point difference.  Obviously, that cannot exist if the government is now targeting 2% inflation, while their 10 year notes pay 100 basis points and their 30 year notes are paying 200 basis points.  Cheers!

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What does this forum think about this instrument:

http://dbfunds.db.com/notes/Japanese/short.aspx

 

The PowerShares DB Inverse Japanese Govt Bond Futures Exchange Traded Note (Symbol: JGBS) and the PowerShares DB 3x Inverse Japanese Govt Bond Futures Exchange Traded Note (Symbol: JGBD) (collectively, the "PowerShares DB Inverse JGB Futures ETNs," or the "ETNs") are the first exchange-traded products to provide investors with short leveraged or unleveraged exposure to the U.S. dollar value of the returns of a Japanese sovereign bond futures index.
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This evening, Japan's Central Bank and government have announced that they are focusing on a 2% inflation target.  Bass was saying in his presentation, that once they move from deflation to inflation, that's the end game because the swaps on the yen move and their interest costs multiply. 

 

Now you have a 2% inflation rate, while institutions and your citizens expected to remain in a deflationary environment, retaining an 80-150 basis point difference.  Obviously, that cannot exist if the government is now targeting 2% inflation, while their 10 year notes pay 100 basis points and their 30 year notes are paying 200 basis points.  Cheers!

 

Japan's 2% target is going to be a bit low:

 

http://www.oanda.com/currency/historical-rates/

 

Cheers!

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How can we short japanese bonds like he says? He thinks japan is a disaster waiting to happen in 2-3 years. Is shorting bonds or other derivatives possible? What's an easy solution via a us discount broker who does options/derivatives?

 

This is an interview from Tres Knippa ,who runs smaller-size fund to bet upon the collapse of JGBs and YEN .  From what I understood he buys short-dated put option for JGB. And if the yield of JGBs picking up ,he will shift to short futures instead. 

http://www.informedtrades.com/755338-tres-knippa-yen-overvalued-implied-volatility-suggests-japanese-government-bonds-cheap.html

 

 

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This evening, Japan's Central Bank and government have announced that they are focusing on a 2% inflation target.  Bass was saying in his presentation, that once they move from deflation to inflation, that's the end game because the swaps on the yen move and their interest costs multiply. 

 

Now you have a 2% inflation rate, while institutions and your citizens expected to remain in a deflationary environment, retaining an 80-150 basis point difference.  Obviously, that cannot exist if the government is now targeting 2% inflation, while their 10 year notes pay 100 basis points and their 30 year notes are paying 200 basis points.  Cheers!

 

I maintain that this line of thinking misunderstands the mechanics of various government securities (T-bonds, reserves).  The JCB can set the interest rate of both instruments explicitly, regardless of inflation (if they set the rate below, it is commonly known as "financial repression", which you can dislike for all sorts of normative or policy reasons but is nevertheless perfectly viable from a technical perspective).

 

The risks, broadly, are 1) that the JCB will mismanage the situation, or 2) that a decrease in the value of the currency precipitated by selling (whether it be by domestic or international market participants) will spiral into a psychological rejection of the currency.  To be clear, there are few, if any, applicable precedents for the situation of a currency issuer with a floating currency and no foreign-denominated debt.  The basic adjustment mechanism in such circumstances is not interest rates, but exchange rates.

 

No position, but I believe currency depreciation is FAR more likely than interest rates spiking in any case I can conceive of.

 

EDIT: To be clear, I believe I understand this situation, but even I can see it is without precedent in certain ways and therefore am standing aside and am eager to learn either way as events develop!

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On the Japanese situation, he is talking about a trade that will deliver a 300 to 1 gain... Any idea what this could be? Something really far out of the money? A derivative on what factor, currency or instrument?

 

He mentioned that U.S. treasuries would likely rally on a JGB meltdown, but not as an endorsement, just as a place to hide. Could it be some inverse derivative U.S. treasuries vs JGB? In some ways, I am not sure that is what he is looking at since he would want to be absolutely certain to be in the right instrument to capture the move after discussing this issue in public for so long.

 

It has to be something pretty rock solid too since he has seen the benefit of collateralized CDS during the financial crisis. So no way that he would accept large counterparty risk.

 

The sad part is that I think he will be right and this would have major repercussions on things like on-going QE in the U.S., austerity and possibly accelerate deleveraging worldwide.

 

Cardboard

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On the Japanese situation, he is talking about a trade that will deliver a 300 to 1 gain... Any idea what this could be? Something really far out of the money? A derivative on what factor, currency or instrument?

 

He mentioned in one of his talks to a business school that he was buying some CDS for something like 1 basis point and talked about how insane it would be to insure anything (even US treasuries) for that cheap. He talked about how the people learned nothing about the financial crisis and now some 25 year old kid is selling him this CDS and will probably get a big bonus before everything goes to hell. I'm wondering which bank this is.

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In my opinion the key statement in this whole interview was that, his position was 1% of his portfolio. For all the media coverage on this topic, i felt it was a huge position. Apparently he is long Structured Credit (MBS, ABS and CDOs) 90% of portfolio.

 

So sizing is important and the bet would be 300 to 1. May be  he was able to get a JGB CDS which payout in terms of restructuring or default ??  Given low interest rates and 2nd biggest economy the credit risk was worth 1bps?

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