Courtesy of Mish.
Late last month, Kyle Bass, managing partner of Hayman Capital, shared his thoughts in a video at the University of Virginia Darden School of Business Investing Conference with Professor Ken Eades.
It is a fantastic interview that echoes many of the things I have been saying about Japan for quite some time.
Link if video does not play: Conversation with Kyle Bass
Interview Snips
Ken Eades kicks off the interview welcoming Kyle Bass mentioning that over the past few years his investment thesis has been then same. Eades then asks Bass to recap and review. what follows is Bass’ reply.
Thematically, the bottom line is the total credit market debt-to-GDP globally is 350 percent. It’s 200 trillion dollars’ worth of debt against global GDP of roughly 62 trillion.
It’s of our belief you are going to continue to see lower global growth, and you’re going to see certain countries hit the proverbial end-point or wall where they have to restructure their debt. We’ve been particularly dogmatic with our view there.
Investing around that particular idea is very difficult. As Dick Mayo [Chairman, Mayo Capital and Founding Partner of GMO] said today, it’s actually the most difficult time in the world to invest in his lifetime, and I would echo his comments. Investing in the environment that I am describing to you is the single hardest thing to do as far as investing is concerned over the last few decades.
So this is a debt super-cycle that is coming to an end at various end-points for different countries. We think you are going to continue to see yield compression in the developed world. We think the US and Europe could actually see negative nominal rates over the next 12 months which is something that as an academic is very hard to understand, as a participant really hard to understand. But it seems we are seeing enough rhetoric and research done on the subject that it’s actually a real possibility. Maybe it’s only a 20% possibility but the fact that it’s even on the white board is something that’s worthy of paying attention to.
A lot has happened in Japan in the last 12 months. In fact, in the last 2 months we believe Japan has crossed that proverbial Rubicon. We think that you’ve seen 20 years of conjecture regarding Japan’s eventual demise. And now we see a point where, in the last couple months what you see is a continued deterioration in their balance of trade. It’s actually running at about negative $100 billion or close to 10 trillion Yen. And we think given this resurgence of Chinese nationalism over the Senkaku crisis [disputed islands], you’re going to see that move another 1.5 to 2 percent or another $100 billion. Put that in perspective. What that means is we could see full current account negativity in Japan in October. That’s something nobody is ready for.
Think about it. You have a secular decline in the population, you have a balance of trade that is literally being rewritten and falling off a cliff, and their GDP is now tracking negative 3.5 or 4 percent. …
