I am lucky enough to be attending the Value Investing Congress. I took extensive notes on every speech and hope to post each one on GuruFocus over the next few days, in addition I will be posting a couple of interviews I plan on conducting. To follow my live updates from the Congress sign up for my Twitter alerts
http://twitter.com/valuewalk Kyle Bass spoke on the second day of the conference.
Kyle Bass spoke on the second day of the conference.
Kyle is the Managing Member and Principal of Hayman Advisors LP’s general partner, formed in December 2005. Hayman Advisors serves as the investment manager to the Hayman Capital Master Fund LP and Japan Macro Opportunities Master Fund LP.
Mr. Bass is well known for his prescient investment analysis of the subprime crisis. In September 2007, he appeared as an expert witness before the House of Representatives Financial Services Capital Markets Subcommittee and in 2010, he appeared as a Financial Market Participant before the Financial Crisis Inquiry Commission, a bi-partisan 10-member panel established by Congress to examine the causes of the financial crisis. He is on the Board of Directors for The University of Texas Investment Management Co. ($16 billion AUM) and is a founding member of the Serengeti Asset Management Advisory Board.
Prior to forming Hayman Advisors, Mr. Bass worked as a Senior Managing Director at Bear, Stearns & Co., and as a Managing Director at Legg Mason, Inc. Mr. Bass graduated with honors with a Bachelor of Business Administration from Texas Christian University.
I will cover all the points of his speech that I was able to write down. Any statement I was unsure of I did not include. However, it is possible that I misheard one or two things. 99 weeks of unemployment.
The recent Nobel Prize winners for economics have demonstrated that more unemployment benefits generate more unemployment. We are now up to 99 weeks of unemployment benefits.
Kyle focuses on broad bass unemployment which is currently 17% which means 25 million people are unemployed. We are close to 1983 and 1985 in that respect.
We thought we could import cheap goods and leave their cheap wages behind. Bass thinks we cannot ignore the bad and just have the good.
He thinks there is permanent unemployment.
Bernanke understands this but the only way to solve this is significant wage deflation or dollar deflation. Both of which he believes are highly unlikely.
He believes we are in a currency war and it will only get worse. You will see more quiet intervention to devalue their currency.
Retail sales, and industrial production is staggering low compared to prior years.
Nine trillion more of debt is projected to be added to our national debt over next ten years. These are based on CBO estimates. But this assumes very favorable factors. It assumes real GDP of 4.4% in 2013 and the ten year treasury at 5.9% by 2016. However, if GDP is that high it is likely treasury yields will be higher.
What would you do with a trillion dollars to help economy?
Kyle has been following T Boones plan. A trillion dollars would fulfill the entire Pickens plan. One trillion dollar could remove the need for all of our coal power plants. We could be one of the most competitive nations in energy policy in the world if we did this.
Instead we are using one trillion to extend unemployment benefits.
Europe is in even deeper trouble.
To just plug fiscal deficits we need 4.5 trillion worldwide. This is a massive amount.
In 2002 total credit market debt worldwide was $60 trillion, today it is $188 trillion.
When Iceland went down, Kyle was curious to know how this could happen from in such a prosperous country. The three banks the Iceland Government saved had assets that were 10x GDP, and 40x the country’s revenue.
Iceland and Ireland are the highest countries in this regard. They have over 50% of their GDP in off balance sheet debt. Ireland cannot possibly save itself. Kenneth Rogoff spoke to Kyle about this issue and Rogoff could not believe how bad it was.
When you get past the point of no return like Ireland there is little you can do. Their fiscal deficit this year will be 40% higher than last year.
Iceland cumulative deficit in past two years is 40% of GDP. Countries will have to default and the ECB does not have a plan to deal with this.
Barney Frank said to Kyle that it is now big deal if the US lends $100 billion to IMF because it will never be drawn. Kyle responded so why not lend them $3 trillion. Barney Frank did not have a good answer.
The first loan IMF was to Hungry, then Latvia, and then to Greece. The IMF never expects to get repaid.
Sovereign default is not uncommon as Rogoff points out in his best-sellerThis Time Is Different: Eight Centuries of Financial Folly
. We have the largest peace time debt in history. But we will not see a physical war soon, the only war we will see is the currency war.
Japan Will Default Not If, But When:
In Japan corporate debt has deleveraged over past twenty years, but Government GDP has exploded. This is what happens when the Government tries to paper over problems in the banking system.
Japan now has expenses that are double revenue. Their deficit service has basically exceeded their revenue. Just between social security and debt services, expenses exceed revenue.
The population decline also is going to be very detrimental to their economic conditions.
For the next twenty years (barring immigration) they will likely have to default.
Personal savings are now below zero, and corporate savings are getting lower. In 2008 the amount of Government debt has increased above their ability to internally fund their debt.
If interest rates increase slightly, it will become even more impossible for Japan to refinance its debt.
The largest owners of Japanese debt are now selling.
Greece too has no way out and neither does Iceland. They both are eventually going to default.
Kyle has been buying out of the money interest rate options for one basis point. If the investment works out, Kyle will make a return of 50-100x.
Retail investors cannot make the types of bets that Kyle is making.
A 50% devaluation of the dollar would be great for the US, but we are competing against Japan and Europe.
Disclosure: I am long a short cap Japanese ETF
http://www.valuewalk.com/
http://twitter.com/valuewalk Kyle Bass spoke on the second day of the conference.
Kyle Bass spoke on the second day of the conference.
Kyle is the Managing Member and Principal of Hayman Advisors LP’s general partner, formed in December 2005. Hayman Advisors serves as the investment manager to the Hayman Capital Master Fund LP and Japan Macro Opportunities Master Fund LP.
Mr. Bass is well known for his prescient investment analysis of the subprime crisis. In September 2007, he appeared as an expert witness before the House of Representatives Financial Services Capital Markets Subcommittee and in 2010, he appeared as a Financial Market Participant before the Financial Crisis Inquiry Commission, a bi-partisan 10-member panel established by Congress to examine the causes of the financial crisis. He is on the Board of Directors for The University of Texas Investment Management Co. ($16 billion AUM) and is a founding member of the Serengeti Asset Management Advisory Board.
Prior to forming Hayman Advisors, Mr. Bass worked as a Senior Managing Director at Bear, Stearns & Co., and as a Managing Director at Legg Mason, Inc. Mr. Bass graduated with honors with a Bachelor of Business Administration from Texas Christian University.
I will cover all the points of his speech that I was able to write down. Any statement I was unsure of I did not include. However, it is possible that I misheard one or two things. 99 weeks of unemployment.
The recent Nobel Prize winners for economics have demonstrated that more unemployment benefits generate more unemployment. We are now up to 99 weeks of unemployment benefits.
Kyle focuses on broad bass unemployment which is currently 17% which means 25 million people are unemployed. We are close to 1983 and 1985 in that respect.
We thought we could import cheap goods and leave their cheap wages behind. Bass thinks we cannot ignore the bad and just have the good.
He thinks there is permanent unemployment.
Bernanke understands this but the only way to solve this is significant wage deflation or dollar deflation. Both of which he believes are highly unlikely.
He believes we are in a currency war and it will only get worse. You will see more quiet intervention to devalue their currency.
Retail sales, and industrial production is staggering low compared to prior years.
Nine trillion more of debt is projected to be added to our national debt over next ten years. These are based on CBO estimates. But this assumes very favorable factors. It assumes real GDP of 4.4% in 2013 and the ten year treasury at 5.9% by 2016. However, if GDP is that high it is likely treasury yields will be higher.
What would you do with a trillion dollars to help economy?
Kyle has been following T Boones plan. A trillion dollars would fulfill the entire Pickens plan. One trillion dollar could remove the need for all of our coal power plants. We could be one of the most competitive nations in energy policy in the world if we did this.
Instead we are using one trillion to extend unemployment benefits.
Europe is in even deeper trouble.
To just plug fiscal deficits we need 4.5 trillion worldwide. This is a massive amount.
In 2002 total credit market debt worldwide was $60 trillion, today it is $188 trillion.
When Iceland went down, Kyle was curious to know how this could happen from in such a prosperous country. The three banks the Iceland Government saved had assets that were 10x GDP, and 40x the country’s revenue.
Iceland and Ireland are the highest countries in this regard. They have over 50% of their GDP in off balance sheet debt. Ireland cannot possibly save itself. Kenneth Rogoff spoke to Kyle about this issue and Rogoff could not believe how bad it was.
When you get past the point of no return like Ireland there is little you can do. Their fiscal deficit this year will be 40% higher than last year.
Iceland cumulative deficit in past two years is 40% of GDP. Countries will have to default and the ECB does not have a plan to deal with this.
Barney Frank said to Kyle that it is now big deal if the US lends $100 billion to IMF because it will never be drawn. Kyle responded so why not lend them $3 trillion. Barney Frank did not have a good answer.
The first loan IMF was to Hungry, then Latvia, and then to Greece. The IMF never expects to get repaid.
Sovereign default is not uncommon as Rogoff points out in his best-sellerThis Time Is Different: Eight Centuries of Financial Folly
. We have the largest peace time debt in history. But we will not see a physical war soon, the only war we will see is the currency war.Japan Will Default Not If, But When:
In Japan corporate debt has deleveraged over past twenty years, but Government GDP has exploded. This is what happens when the Government tries to paper over problems in the banking system.
Japan now has expenses that are double revenue. Their deficit service has basically exceeded their revenue. Just between social security and debt services, expenses exceed revenue.
The population decline also is going to be very detrimental to their economic conditions.
For the next twenty years (barring immigration) they will likely have to default.
Personal savings are now below zero, and corporate savings are getting lower. In 2008 the amount of Government debt has increased above their ability to internally fund their debt.
If interest rates increase slightly, it will become even more impossible for Japan to refinance its debt.
The largest owners of Japanese debt are now selling.
Greece too has no way out and neither does Iceland. They both are eventually going to default.
Kyle has been buying out of the money interest rate options for one basis point. If the investment works out, Kyle will make a return of 50-100x.
Retail investors cannot make the types of bets that Kyle is making.
A 50% devaluation of the dollar would be great for the US, but we are competing against Japan and Europe.
Disclosure: I am long a short cap Japanese ETF
http://www.valuewalk.com/
