Kyle Bass @ Mauldin Conference

[oddballstocks]

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...

 

I continue to pound the table on this issue, there are great investors, and there are great marketers.  You can be a rich fund manager with mediocre performance.  Or a fund manager with great performance who barely scrapes by because they can't sell.

 

Investments are a commodity product for the most part, the difference is in the sales.  Bass is a great marketer, the genius of this trade is he can promote it and promote it and it might take years to happen, all the while gathering assets.  If it fails it's 1% of his portfolio, he's not hurt.  If it works he can tout it and gather more assets, he wins no matter what happens.

 

Note that HE wins, his investors have a chance of winning, but HE will win no matter how this works.

 

I am always skeptical of people who are rooting for failure.  As Buffett says the world is biased towards growth, when Japan/Europe/US start to deal with their debt problems I have a feeling some novel and creative solutions no one has thought about will emerge because the problem is very large indeed.  But maybe the solutions will be novel enough that the great destruction everyone is waiting for never occurs.

 

I sometimes think about second order effects with Japan as well.  As Plan mentioned they are a creditor nation, they also hold a LOT of Treasuries.  What if they decide to sell all of their Treasury holdings to support the Yen, I can't imagine China would stand still and watch the price drop.  Maybe China dumps their holdings as well, the one who gets screwed in the deal is the US who'd see rates spike as the price fell.  Maybe this is a plausible scenario, maybe it's just as contrived as Bass' scenarios, time will tell.

[oddballstocks]

 

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?!

 

giofranchi

 

It should be pointed out that building wealth isn't a necessity for a successful life.  There are many people deep in the hock who are living the life of luxury, and for some it never catches up.  They live beyond their means, they have fancy houses and fancy cars, and somehow they cruise through life without any problems.

 

On the converse side there are people who are wealthy where the wealthy is a burden to them.  It destroys their family and their relationships, and in some cases it ruins their life.

 

I'm just pointing out that:

A) Wealth isn't a golden ticket in life, you can be poor and be happier, or more content than some of the richest

B) Bad decisions don't always catch up with those who make them, eventually someone has to pay, but it might be generations later. 

[bmichaud]

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.

 

 

Perhaps I missed something, but his response was that the currency would collapse if the BOJ just forgave all outstanding JGBs.

 

Is your point that Bass is underestimating the willpower of the BOJ in tackling its deflation problem?

[hyten1]

oddballstocks,

 

my sentiments exactly.

 

i am no mr kass, i am sure he knows a lot more than me. but i guess i am just skeptical and uneasy with someone like him promoting this on and on when its such a small position of his portfolio (i honestly have more respect with someone who has a LARGE position and they promote it). this presentation of his has been done many a time in various events etc. for years now.

 

not saying he is right or wrong (personally i don't like so much debt and I agree too much debt is not a good thing)

 

but i guess it just don't sit well with me his style promoting disaster if he is really concern there are other more discrete ways or doing it. but we all know that is not his primary concern.  he is out to make a buck and I guess that is just not how I like to see it done, especially when what he is promoting is a DISASTER.

 

maybe, maybe for some "minute" chance WITHOUT his promotion, things can work out for the better for Japan. maybe his constant promotion is the tipping point between a DISASTER vs a hard long way for Japan to work itself out (I guess you can argue maybe its due to his promotion that save Japan, but we will never know).

 

I just rather not be the one that might have cause a DISASTER no matter how small the chance might be.

 

 

hy

 

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...

 

I continue to pound the table on this issue, there are great investors, and there are great marketers.  You can be a rich fund manager with mediocre performance.  Or a fund manager with great performance who barely scrapes by because they can't sell.

 

Investments are a commodity product for the most part, the difference is in the sales.  Bass is a great marketer, the genius of this trade is he can promote it and promote it and it might take years to happen, all the while gathering assets.  If it fails it's 1% of his portfolio, he's not hurt.  If it works he can tout it and gather more assets, he wins no matter what happens.

 

Note that HE wins, his investors have a chance of winning, but HE will win no matter how this works.

 

I am always skeptical of people who are rooting for failure.  As Buffett says the world is biased towards growth, when Japan/Europe/US start to deal with their debt problems I have a feeling some novel and creative solutions no one has thought about will emerge because the problem is very large indeed.  But maybe the solutions will be novel enough that the great destruction everyone is waiting for never occurs.

 

I sometimes think about second order effects with Japan as well.  As Plan mentioned they are a creditor nation, they also hold a LOT of Treasuries.  What if they decide to sell all of their Treasury holdings to support the Yen, I can't imagine China would stand still and watch the price drop.  Maybe China dumps their holdings as well, the one who gets screwed in the deal is the US who'd see rates spike as the price fell.  Maybe this is a plausible scenario, maybe it's just as contrived as Bass' scenarios, time will tell.

[giofranchi]

It should be pointed out that building wealth isn't a necessity for a successful life.  There are many people deep in the hock who are living the life of luxury, and for some it never catches up.  They live beyond their means, they have fancy houses and fancy cars, and somehow they cruise through life without any problems.

 

On the converse side there are people who are wealthy where the wealthy is a burden to them.  It destroys their family and their relationships, and in some cases it ruins their life.

 

I'm just pointing out that:

A) Wealth isn't a golden ticket in life, you can be poor and be happier, or more content than some of the richest

B) Bad decisions don't always catch up with those who make them, eventually someone has to pay, but it might be generations later.

 

Well, of course you are right! But I don’t want to make it a moral issue… too difficult and multi-faceted!

My point of view is much easier: you don’t want to see a generally high stock market, after two generations have squandered their savings and lived beyond their means… just because anyway human ingenuity will save us all in the end… Instead, you want to see a generally high stock market as the result of hard working, thrift behavior, and disciplined channeling of substantial savings into productive investments.

 

giofranchi

 

[Guest]

 

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?!

 

giofranchi

 

It should be pointed out that building wealth isn't a necessity for a successful life.  There are many people deep in the hock who are living the life of luxury, and for some it never catches up.  They live beyond their means, they have fancy houses and fancy cars, and somehow they cruise through life without any problems.

 

On the converse side there are people who are wealthy where the wealthy is a burden to them.  It destroys their family and their relationships, and in some cases it ruins their life.

 

I'm just pointing out that:

A) Wealth isn't a golden ticket in life, you can be poor and be happier, or more content than some of the richest

B) Bad decisions don't always catch up with those who make them, eventually someone has to pay, but it might be generations later.

 

Very good points, Nate. I'd encourage all of you guys to watch the documentary "Happy". It really talks about how little wealth affects our overall happiness - but how other things are much more important, like relationships and the like.

[giofranchi]

Geo - I agree with you about thrift personally. First, it is not clear to me where these guys get the savings data - there is discretionary income and disposable income. The government publishes the disposable income table which I think has issues. Inorder to measure it - one should know what my pre-tax pay is ( known ) and after tax pay is (known). I don't think there is a good way to know how the money is spent or where it is invested. I think this calculation is prone to error.

 

Well, to that I can only answer:

I’d rather be vaguely right, than precisely wrong.

:)

 

giofranchi

[txitxo]

 

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

 

 

  Well, I don't even qualify as a macro tourist, but some of Kyle Bass arguments sounds quite convincing to me when I look at the stock market statistics. The "expensive-junk" indicator is still very low for Japan (it was incredibly low 9 months ago) whereas the CAPE is extremely high  > 40. It hasn't really come down to bear market bottom valuations since the late 80's.

 

  So how do you reconcile a prediction of a bull market in stocks with a strong contraction in the CAPE? With a huge nominal earnings increase, and given the state of the Japanese economy the only reasonable way I see for that is through very strong inflation.

 

So even if Japan has to inflate away its debt, it does not necessarily mean it will implode. They may still pull off a "beautiful" deleveraging, combining structural reform (look at what they achieved in the Meiji era), taxing (they certainly have plenty of wealth to tax) and printing (after all, they don't have to buy all those JGBs at once). Although at this stage, it will probably be as hard as landing a freight train on an aircraft carrier.

 

 

 

 

[PlanMaestro]

  So how do you reconcile a prediction of a bull market in stocks with a strong contraction in the CAPE?

 

Hi Txixo, I don't have an opinion on the Japanese stock market. Top-down metrics can be misleading (net cash, amortization, hidden assets, …) I much rather invest bottom-up and that takes time. For the moment I have prioritized other things. Oddballstocks might be your man (by the way, good post Oddballstocks.)

 

With a huge nominal earnings increase, and given the state of the Japanese economy the only reasonable way I see for that is through very strong inflation.

 

Doesn't have to be that high. Shinzo Abe's talk of 5% inflation should be way more than enough. Even the 2% target can be a good start.

 

They only need for NominalGDPGrowth > EffectiveRate … goal that the European periphery is not achieving because printing and spending has been taken out of their control. The advantages of having your own currency.

 

So even if Japan has to inflate away its debt, it does not necessarily mean it will implode.

 

Actually it shouldn't, but I prefer to show more restrain than Bass in the fool's game of macro predictions.

 

For a start there is room for error from the Japanese authorities. It's no secret that central banks do make unforced errors sometimes. And second, despite many experiences of inflationary deleveraging there are not many at these high levels of fiscal debt to GDP. The few I know are France after WWI and the UK after WWII, both successful.

 

But those are just reservations, not the kind of stuff that would prompt anyone to say something like "The Next 18 Months Will Redefine Economic Orthodoxy" like Kyle Bass said. And it would not be the first time he has wrong but never in doubt.

 

[Guest wellmont]

I don't think Soros went around on a lecture tour before he broke the back of the bank of england.

[txlaw]

But those are just reservations, not the kind of stuff that would prompt anyone to say something like "The Next 18 Months Will Redefine Economic Orthodoxy" like Kyle Bass said. And it would not be the first time he has wrong but never in doubt.

 

This is what irks me about Bass the most.  He is never in doubt. 

 

Furthermore, he treats people on the other side, who quite frankly have done just as much "work" on this issue as he has, with derision.  He's becoming like Jim Rogers -- gold is going to $5000 you idiots! 

 

I also love how he uses pop behavioral psychology to explain how people (and the market) are in denial and they just don't want to admit that the apocalypse is coming.  Perhaps he should think about how that applies to his own thinking.  He seems to totally reject any arguments coming from the other side in quite an irrational manner.  Now, I tend to agree with Plan on what will happen in Japan, but I at least recognize that I could be wrong and am willing to respectfully listen to the other side's arguments.

 

And then I particularly love the sales pitch about how he's really a "liberal" and would love to live in a world filled with unicorns and lollipops but, "as a fiduciary," he just has to take the position he is taking.  That's total BS.  The asymmetric nature of his bet on the Yen or JGBs is fine -- but the fact that he is consistently taking this hard line position and dissing the "people in charge" very publicly smells like he is mostly trying to increase his media exposure and collect up AUM. 

 

And that bothers me a lot.  But, hey, that means he's a good business man, I guess.

[Guest wellmont]

 

And that bothers me a lot.  But, hey, that means he's a good business man, I guess.

 

he's a salesman.

[bmichaud]

One of my fundamental flaws (among many) is that I tend to give so-called "experts" the benefit of the doubt. So with that being said upfront....

 

Setting aside whatever you may think of Bass's marketing tactics (and honestly is he that much worse than Berkowitz, Buffett, Ackman etc... etc...?), does his track record of appropriately "calling" the Subprime and Eurozone debt crises not give anyone pause when criticizing his Japan analysis? Could one have not said in 2007 that we would come up with "creative solutions" to such a large-scale problem as the Subprime debt bubble in order to avoid the melt-down Bass was predicting? If I remember the CNBC Subprime documentary accurately, Bass's playbook for his Japan analysis is precisely the same as his subprime analysis - rigorous analysis of the facts on his own, many meetings with key players, disgust with the lack of concern by the key players, and prediction that the problem was very large.

 

I have no clue what will happen with Japan. Given Japan's underlying economic strength, I don't see it being a Weimer-type situation, but I do know that you can't control interest rates, inflation and the exchange rate simultaneously.....

 

1. They can drive up inflation (if that's even possible in a population decline-led deflationary environment) via money printing while simultaneously pinning the yield curve to 1%, but they will have zero control of the exchange rate. Currency declines massively as outside money flees a ZIRP/high-inflation malaise, and they only have a finite amount of Treasury bonds to defend the currency with.

 

2. They can drive up inflation via money printing, but NOT pin the yield curve so that interest rates will keep the currency in check. Best of luck those holding JGBs in a 2 to 5% inflation environment without yield curve support....

 

I'm not smart enough to A) figure out whether 1 or 2 will occur and B) what the economic consequences will be in either scenario. All I know is it is an monster monetary/fiscal experiment that has no real precedent - in that, debt to GDP is sky high with a declining population and interest unable to fall any further. Who knows.

 

Though I do see a decent path to the resumption of gold's secular bull run  8)

[txlaw]

 

And that bothers me a lot.  But, hey, that means he's a good business man, I guess.

 

he's a salesman.

 

Which is vital to having a successful investment management biz. 

[AchilliesValue]

Plan hit the nail on the head w/ Europe. Spain can't push nominal GDP growth above the effective rate because they don't have control of their own currency. Bridgewater put this out awhile ago about the history of deleveragings that's worth a read. http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings--ray-dalio-bridgewater.pdf

[txlaw]

Well, we have to ask ourselves who and who is not an expert -- and what level of credibility we will give to the guys we're claiming are experts. 

 

Kyle Bass, who I would not necessarily classify as a "macro-tourist" (I'll give him some credit), is essentially saying that central bankers and economists like Paul Krugman are wrong.  These guys are experts in economics, and he is saying their policies are wrong.  Now, experts are not infallible -- as we saw during the financial crisis.  However, IMO, there has been an overreaction such that now everyone thinks the "so-called experts" (i.e., people who are conventionally considered experts) are idiots.  "Value investors," in particular, are susceptible to over-discounting the views of conventional experts (think about the derisiveness with which we view analysts, who often provide a lot of good biz-related info that the typical value investor doesn't even think about).  And they like to view other investors as more credible experts.

 

There's nothing wrong with saying that the other "experts" are wrong and providing a case as to why you think they are wrong.  But Bass goes overboard and gets a lot of undeserved credit for it.  He always says that "if you do the work," you will come out on his side.  As though economists, central bankers, and other investors have done absolutely no rigorous analysis!  And to say that these other experts are not concerned with the dangers of all this policy is wild hyperbole that is quite self-serving.

 

My view is that Bass doesn't care about what's good for the global economy -- he wants to be right, and he wants penance (self flagellation, really).  And I think that's a sort of fundamentalist viewpoint that is both misguided and selfish.  Note that this sort of explains my distaste with short sellers as well.

 

Bass certainly is viewed as a credible expert because of his "call" on the subprime crisis.  Sort of like how people think Michael Burry is god -- I'm sure he will raise a ton of money if people think he's going to find the next big short.  But I'm skeptical that because Bass was right on subprime (as many others who have the opposite view were), he is right on this issue.  I'd be more inclined to go with a Ray Dalio than a Kyle Bass if I were to take their side of the debate.  I tend to be on the Richard Koo side of the debate in any case.

 

On Japan, I will leave that discussion to the rest of you guys, except I will say that is it really such a bad thing if there is a massive currency devaluation?  I mean, that's just the way it is.  Yeah, there may be generational inequalities in that current generations are now paying for past consumption/investment -- but what's done is done, and you have to move forward in a way that is optimal.  I was the first to say back in the day that the US government was overspending, but I was and am against austerity right now because I think it's non-optimal in an economy where money printing (stealth tax, I know) is possible.  We need to get these economies back on track and then start really working on the liabilities side. 

[Guest valueInv]

Well, we have to ask ourselves who and who is not an expert -- and what level of credibility we will give to the guys we're claiming are experts. 

 

Kyle Bass, who I would not necessarily classify as a "macro-tourist" (I'll give him some credit), is essentially saying that central bankers and economists like Paul Krugman are wrong.  These guys are experts in economics, and he is saying their policies are wrong.  Now, experts are not infallible -- as we saw during the financial crisis.  However, IMO, there has been an overreaction such that now everyone thinks the "so-called experts" (i.e., people who are conventionally considered experts) are idiots.  "Value investors," in particular, are susceptible to over-discounting the views of conventional experts (think about the derisiveness with which we view analysts, who often provide a lot of good biz-related info that the typical value investor doesn't even think about).  And they like to view other investors as more credible experts.

 

There's nothing wrong with saying that the other "experts" are wrong and providing a case as to why you think they are wrong.  But Bass goes overboard and gets a lot of undeserved credit for it.  He always says that "if you do the work," you will come out on his side.  As though economists, central bankers, and other investors have done absolutely no rigorous analysis!  And to say that these other experts are not concerned with the dangers of all this policy is wild hyperbole that is quite self-serving.

 

My view is that Bass doesn't care about what's good for the global economy -- he wants to be right, and he wants penance (self flagellation, really).  And I think that's a sort of fundamentalist viewpoint that is both misguided and selfish.  Note that this sort of explains my distaste with short sellers as well.

 

Bass certainly is viewed as a credible expert because of his "call" on the subprime crisis.  Sort of like how people think Michael Burry is god -- I'm sure he will raise a ton of money if people think he's going to find the next big short.  But I'm skeptical that because Bass was right on subprime (as many others who have the opposite view were), he is right on this issue.  I'd be more inclined to go with a Ray Dalio than a Kyle Bass if I were to take their side of the debate.  I tend to be on the Richard Koo side of the debate in any case.

 

On Japan, I will leave that discussion to the rest of you guys, except I will say that is it really such a bad thing if there is a massive currency devaluation?  I mean, that's just the way it is.  Yeah, there may be generational inequalities in that current generations are now paying for past consumption/investment -- but what's done is done, and you have to move forward in a way that is optimal.  I was the first to say back in the day that the US government was overspending, but I was and am against austerity right now because I think it's non-optimal in an economy where money printing (stealth tax, I know) is possible.  We need to get these economies back on track and then start really working on the liabilities side.

 

Great post!

[bmichaud]

+1!!

[rogermunibond]

Bravo txlaw.

 

I'd also be more inclined to go with Bass if he was pasty faced instead of bronzer spray tanned and if he wore thick glasses like some of my heroes.

 

Call it my cognitive bias.  ;)