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Kyle Bass @ Mauldin Conference


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Devils Advocate: No disagreement with the facts as I am definitely not one of the 80 smart guys at Bass' ranch, but just a couple of thoughts.

[*]The other side of the trade is the central banks of the world (not just Japan) and the money centers, they will put up a fight,

[*]Does any Asian country besides China really want to see Japan implode, any currency advantage would subsequently dry up,

[*]Who says the US will not back stop the Japanese Central Bank like they have other European banks,

[*]Something will happen but difficult to see it in 18 months where Bass has mentioned/hinted before that no one is taking the trade more than 2 years out (is this the reason for the large public push the last 6 months),

[*]Who the hell is buying Yen now given these facts and the new policy (Yen back up to where it was in the year 1995!)

[*]In this topsy-turvy game we are playing, can the inmates run the asylum longer than we can stay liquid?

 

Cheers

JEast

 

Disclosure: One (1) Japanese equity holding.

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49:00 Why can't the Central Bank just buy all the JGBs and then forgive them?

 

A speechless Bass responds...

 

52:00 Bank VaR and under-capitalization

 

Read again what he is saying. VaR and under-capitalization … not inflation or political feasibility.

 

And first he was speechless. I guess nobody told him about the printing press and he thinks the Bank of Japan is just another hedge fund.

 

Kyle Bass is the reason why the term macro tourist had to be invented.

 

The Widowmaker

http://www.readability.com/articles/ztfnbpep

 

But, the hedge fundies say: "What if the economy recovers and starts to boom? What if inflation shoots up? The Fed could loose $500 billion on its portfolio as it moves to control inflation! Why doesn't that fear that?"

 

The Fed does not fear that. That is what it is aiming for. The Fed is charged by law with "promot[ing] effectively the goals of maximum employment, stable prices, and moderate long term interest rates". A full-employment economy is not something to be feared but something to be welcomed.

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Macro tourist? Bass has run a large, successful macro hedge fund for the last 7 years.

 

CDS buying, trend following, and inventing phrases like "Keynesian endgame" doesn't a macro expert make. Soros, Dalio, I give.

 

Disclosure: I own HIG warrants that used to be a Japanese stock.

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Kyle Bass is the reason why the term macro tourist had to be invented.

 

 

PlanMaestro,

I don’t think you are being fair with Mr. Kyle Bass…

Anyway, if you didn’t like his presentation, please watch Mr. Lacy Hunt’s and Mr. Charles Gave’s presentations. And look at the picture in attachment: clearly, we have got a problem. How we can go on denying it is beyond me… And the problem is fairly simple, but extremely difficult to admit, because, if you admit it, you must also acknowledge there is no easy way out…

Let me ask you a question: have you ever tried to live with a debt burden that is 3 times your yearly income? If the answer is yes, let me ask you another question: have you ever saved, and invested in productive enterprises, just 2% of your yearly income? If the answer is yes again, let me ask you a third question: have you ever experienced those two miserable states of being together?

Put them together and no one will be able to grow wealth: not a person, not a family, not a company, not a nation.

Unfortunately, there is no getting around this. And sooner or later you must bring down your debt and increase your savings and investments. You might be able to buy some time, the way Mr. Keynes has thought us, but ultimately a successful person, a successful family, a successful company, and a successful nation know how to live within their means and invest for the future. And once those things have been forgotten, sooner or later you must endure the pain of relearning…

 

giofranchi

Real_GDP_1790-2012_decade_average_growth.jpg.6ab95e6b2230ae62c2e9f5c0fa085ebb.jpg

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I'm too dumb to be able to tell whether Bass or our own Plan is correct  :)

 

I don't know if Bass will be right, but the logic and rationality of his argument is correct in my opinion.  Not only with Japan, but Europe, European banks and even to some extent the U.S.' ability to repay their obligations. 

 

I don't know what the outcome will be, but I can see that the risks relative to the risk premium provided in most investments  is not adequate, and it is very concerning.  Nearly as concerning as 2007, but a lot of the leverage in the United States has been mitigated...on a corporate level.  This has not happened in Europe...nor China! 

 

Buy something if you think the risk premium is adequate, otherwise be patient...premiums always rise at some point...spreads widen...good investments at great prices will eventually become available.  If Charlie Munger is not certain of the outcome of this grand experiment, how can any of us be confident in the end result?  Cheers!

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but the logic and rationality of his argument is correct in my opinion

 

Agreed, but what if we live in an irrational world?

 

This may be the stuff that Warren talks about that he wants whoever takes over to think about stuff that has never happened before.

 

To Bass' point, if I could put 2% of my portfolio in this trade -- I would, but I can't and it appears no one else can either as the trade is not being rolled over.  At least from my reading between the lines.

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please forgive my ignorance, i just want to throw this out there for arguement sake

 

giofranchi mention the following:

 

have you ever tried to live with a debt burden that is 3 times your yearly income?

have you ever saved, and invested in productive enterprises, just 2% of your yearly income?

 

Now, if you think of the question from and micro/individual level the answer "yes", it is actually a very common phenomenon (now on a macro and nation level that is beyond me) a phenomenon that i think most of you wouldn't even blink or worry about if you heard your friend or someone you know are in.

 

A typical US family could be making lets say $100k (1 income or 2 income combine) a year with a take home of approx $65k. This family might have a 30 year mortgage of $200k with a interest rate of lets say 5%.

 

- $200k is approx 3x $65k

- The national average saving rate is approx 2.5%

 

Now I for one would never do something like above. I personally save a lot more than 2% of my income nor do I have 3x of debt compare to my income.

 

The question is how do you folks feel about the financial situation of the family/individual? On a micro level.

 

Also to accurately access the financial situation of the family there are few things I would like to know for example:

 

1. How much asset/saving does this family have ($0 vs $500k would make a huge difference)

2. The likely hood of this family losing its $100k income.

3. Since the debt is lock in at 5% (30 yr mortgage) we don't have to worry about interest rate changing.

 

This discussion is beyond me, I honestly don't know what will happen, my gut says I don't like debt, but that doesn't mean the debt will led to disaster. If you talk to our grand parents or their grand parents generation their jaws would drop to hear above #. In the past people save up to buy a home. But now the above scenario is a very common thing.

 

The above family can easily service the debt, sure not if they lose their income, that is why how much asset they have is very important.

 

 

EDIT: I guess the question i have is, why does the above # look ok for a typical family (I think thats how people would feel), but people go nuts when its on a national level (arguable the fed/gov has more weapon to deal with the debt/income situation vs an individual). JMHO.

hy

 

 

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Hi Hyten,

 

Bass isn't saying that the debt is any worse than personal debt.  What he is saying is when do the lenders call the loan or ask for a greater risk premium through the bond yield?

 

So in your example, what if the bank decided that the mortgage is not fixed, but variable, and that they were changing the interest rate?

 

It's not that the family would necessarily have to sell the house, but there would naturally be repercussions to them trying to maintain the house and mortgage...either through selling the family car and jewels (Japanese asset sales), another job (greater taxes for the Japanese), buy less groceries and other goods (lower purchasing power) or tap into savings (reductions in pension plans, other benefits). 

 

There is always a cost to every decision, and I think that is the main argument for Bass...Japan, among others, will have to finally pay the piper at some point.  Cheers!

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the question is how do you profit from this

 

or not lose money from this

 

Hold your nose and go look for good businesses that are selling well below their IV. While the market looks expensive I think there are still bargains to be found in the sub 300 mil area.

 

Also I thought the best question was about the counterparty risk. Defiantly some food for thought.

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I'm too dumb to be able to tell whether Bass or our own Plan is correct  :)

 

I don't know if Bass will be right, but the logic and rationality of his argument is correct in my opinion.  Not only with Japan, but Europe, European banks and even to some extent the U.S.' ability to repay their obligations. 

 

I don't know what the outcome will be, but I can see that the risks relative to the risk premium provided in most investments  is not adequate, and it is very concerning.  Nearly as concerning as 2007, but a lot of the leverage in the United States has been mitigated...on a corporate level.  This has not happened in Europe...nor China! 

 

Buy something if you think the risk premium is adequate, otherwise be patient...premiums always rise at some point...spreads widen...good investments at great prices will eventually become available.  If Charlie Munger is not certain of the outcome of this grand experiment, how can any of us be confident in the end result?  Cheers!

 

I get persuaded by Bass, and then I get persuaded by counterarguments like Plan's.  From that I conclude I probably shouldn't put much money down on either side.  I do worry about rising debt levels, and central banks enabling profligacy.  But for investing purposes, I don't know how to treat it.

 

It's nice not having to swing at every pitch.

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Bass has convexity on his side. He probably isn't 100% right, and he probably isn't 100% wrong. If he's right, he'll do very well. And if he's wrong, hopefully he didn't put up too much of his capital. My guess is that, on a pari mutuel basis, he's got a good trade going.

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i am always looking for company trading well below IV, reading/contemplating/responding to this pos have not stop me from doing that

 

 

the question is how do you profit from this

 

or not lose money from this

 

Hold your nose and go look for good businesses that are selling well below their IV. While the market looks expensive I think there are still bargains to be found in the sub 300 mil area.

 

Also I thought the best question was about the counterparty risk. Defiantly some food for thought.

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Bass has convexity on his side. He probably isn't 100% right, and he probably isn't 100% wrong. If he's right, he'll do very well. And if he's wrong, hopefully he didn't put up too much of his capital. My guess is that, on a pari mutuel basis, he's got a good trade going.

 

Not to mention all the marketing glory he's getting...

 

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Not to mention all the marketing glory he's getting... That's how you do it.

 

And that's precisely why I don't trust him.  Never mind how suspect the thesis, he never shows any restrain if there are asymmetries involved.

 

Remember how he gamed the GSE's preferreds and the total conviction?

 

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giofranchi mention the following:

 

have you ever tried to live with a debt burden that is 3 times your yearly income?

have you ever saved, and invested in productive enterprises, just 2% of your yearly income?

 

Now, if you think of the question from and micro/individual level the answer "yes", it is actually a very common phenomenon (now on a macro and nation level that is beyond me) a phenomenon that i think most of you wouldn't even blink or worry about if you heard your friend or someone you know are in.

 

Hi hyten,

the fact imo is not there are people who live with a debt burden 3 times their yearly income and who save and invest just 2% of their yearly income. Of course there are! It simply is the average of the world we are living in! Given that you and I have no debt and save and invest 20% of our yearly income, it automatically follows that there must be some people who live with a debt burden HEAVIER that 3 times their yearly income and who save EVEN LESS than 2% of their yearly income! Right?

The fact is: do you know people like that, who are also successful in building lasting wealth? Personally, not only I don’t know any, I wouldn’t even know how to increase my net worth, or the net worth of my firm, if I had to be burdened with such an high debt, or if I had to save and invest so little. Now, how can a nation of individuals, who stay poor, get richer?!

 

I am surely a macro tourist… But you don’t need macro… You only need to go back to old Ben Franklin… reread his Poor Richard and his Autobiography… Imo, what a person, a family, a company, or a nation need to build lasting wealth is all in there.

 

If you'd be wealthy, think of saving, more than of getting: The Indies have not made Spain rich, because her Outgoes equal her Incomes.

--Benjamin Franklin

 

Now, what are the investing implications? I think that you must stay flexible. If you study any great investor and entrepreneur of the past, not one excluded that I know of, they never aimed for a 15% return every year, year after year. Instead, they all understood that to get a 15% average annual return, they had sometimes to be careful, and be content with a 7%-10% return, and sometimes to be aggressive, and shoot for a 20%-25% return. All of them grew moderately when times were good and opportunities were few, and grew by leaps and bounds when times were hard and opportunities were plentiful. Don’t ask me how: it is up to you! But I think we won’t regret to have learnt from them and tried to follow their example. :)

 

giofranchi

 

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Hi Geo - one way to cross check this thesis is to invert the assumption. Where do you come up with the 2% number and how is it calculated?

 

The answer is not clear - but the numbers don't tally with bank deposit growth. Also a person like Ericopoly is not in the equation as he doesn't have a disposable income..

 

Just saying.

 

 

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Hi Geo - one way to cross check this thesis is to invert the assumption. Where do you come up with the 2% number and how is it calculated?

 

The answer is not clear - but the numbers don't tally with bank deposit growth. Also a person like Ericopoly is not in the equation as he doesn't have a disposable income..

 

Just saying.

 

Hi shalab!

The two images in attachment are from Mr. Shilling and Mr. Hunt. Look at what happened between 1939 and 1945: a personal saving rate that increased from 2% to 25%. Massive productive investments followed, that laid the foundations for the post WWII economic boom and secular bull market in equities.

But, you might argue, history can be interpreted in many different ways… maybe it is so… Therefore, anyone must reach his own conclusions: if you were to save and invest just 2.6% of your yearly income, do you think you’d still be able to achieve a satisfactory CAGR for your net worth?

As far as my net worth, or my firm’s net worth, are concerned, the answer is NO!

 

giofranchi

U.S._Personal_Saving_Rate.jpg.eee9a06f5591df1f809a5614e9636a62.jpg

U.S._Personal_Saving_Rate_2.jpg.f0dfb16678e407edaaf97596986eaff8.jpg

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