September 26, 2014

Kyle Bass Thinks Japan’s Debt Crisis At “Transformative Moment”

Bass said recent ECB quantitative easing decision is "going to be difficult to stop" as he sides with Loeb over Ackman in Herbalife dispute

Kyle Bass is taking sides in the William Ackman / Herbalife Ltd. (NYSE:HLF) dispute, thinks Japan is at a “transformative moment” in its government debt crisis and likes one segment in the U.S. banking sector, and it’s not the banks.
Kyle Basson ECB’s quantitative easing program

The recent European Central Bank (ECB) announcement that it is engaging in U.S.-style quantitative easingis a historical benchmark that is providing opportunity. “It’s the beginning of something that is going to be difficult to stop,” Kyle Bass said on a CNBC interview.

“The opportunity right now happens to be in the currency market place,” but the impact will be felt by multinational corporations, he said. The rising U.S. dollar over the past 6 months one consequence, Kyle Bass said, touching on a trade that started in anticipation of the ECB move well before the official announcement.

Kyle Bass’s observations on Japanese government debt crisis

Kyle Bass is known for his keen observations regarding Japan’s government debt crisis, and his thesis is beginning to materialize. “When debt gets to 150 percent of gross domestic product and 25 percent of tax revenue is used on interest payments alone (with very low interest rates), when you get to that point you are already technically insolvent,” he said.

“It’s a bit hyperbolic to say they are headed for a crash, but we believe there are two outcomes,” that will impact the currency and rates. “So far the BoJ has bought all the bonds. They have monetized the fiscal deficit and will monetize the current account deficit. So far that has worked, meaning it held rates low and devalued the currency.” The Japanese currency has gone from 76 yen to the dollar to 108 yen to the dollar as a result. Kyle Bass doesn’t think this is the end, predicting that the yen is headed to 125 to the dollar “fast,” because for the first time the BoJ will run a full current account deficit.

“This is a transformative moment in their debt crisis,” he said.
Kyle Bass says U.S. housing market has rebounded nicely

When considering the U.S. housing market, Bass says it has “rebounded nicely,” as year over year home prices up 5 percent. “It’s not the double digit gains we saw in the last couple of years, but it is just normalized.” Housing should normalize to where median income is, he observed. How’s he playing this opportunity?

Kyle Bass is focused on one sector, and that is the non-bank mortgaging servicing sector. New capital rules for the banks require banks to sell non-performing loans, which should present opportunity.

When CNBC’s Andrew Ross Sorkin asked Bass what he thinks of the banks, he responded that he doesn’t own any banks, noting that capital standards are tougher and “regulations a lot tougher,” he observed.

“I don’t think there is huge opportunity there.”

When asked about Herbalife Ltd. (NYSE:HLF) and William Ackman, in the live broadcast (the recording of these comments was not posted) Kyle Bass said he supported Dan Loeb and Herbalife, noting that when he was invested he sent one of his hedge fund’s employees in to become a distributor and examine the business from the inside. “This is a legitimate business, it is not a Ponzi scheme,” he said, although he is no longer invested in the firm. Bass said he would take Loeb over Ackman any day.

Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.