Kyle Bass On Macro Themes

Benzinga is at the Value Investing Congress in New York and we had the opportunity to speak with Hayman Capital's Kyle Bass about some of the significant macro themes he sees on the horizon. Bass called for, and profited handsomely from, the subprime mortgage meltdown. With regard to the currency wars that are currently taking place in the FX market, Bass said that central banks around the world are essentially, "a hammer in search of a nail." He added, "their policy prescription is based upon their own domestic economy, its not necessarily based on the world economy." He said, "When the G-20 met in April 2009, it was to save the world from a huge debt bust. So they all decided to print exactly the same amount of currency as a percentage of GDP and expenditures. In theory, you weren't supposed to have big currency cross rate movements. Now that they have achieved saving the entire bust, they are more focused internally on saving themselves. That is where you are going to see risks from central banks' policies." Bass argues that the EU, Japan, and the United States all want to devalue their currencies in order to stimulate their economies and ease debt burdens. He said that all of these countries will announce enormous QE programs so that their currencies are not the strongest one in the group. "That is how the fight is going to happen." Bass is very bearish on Japan and said that he is unsure what catalyst will set off a meltdown in the Japanese bond market, but that "once another country defaults, the dominoes will start falling and the spotlight will move to Japan immediately." On the corporate bond front, Bass said that the interesting areas right now are event-driven bank debt, IO debt, and distressed debt. In equities, the hedge fund manager said that he is 22% net long stocks with 32% of his portfolio long stocks and 10% in short positions. He said that a lot of his returns recently have been "driven by special situation equities," such as Six Flags SIX whose debt he bought in bankruptcy. When the debt was converted to equity, he was left with a large ownership chunk of the company. Bass also commented that "now is the time to have big tail positions," meaning that he sees tremendous opportunity in making highly convex bets on outcomes that currently do not seem likely and are non-consensus. Essentially, risk a little in order to make a lot if a tail event does indeed transpire in the next couple of years - such as a full blown meltdown of the Japanese Bond market. Bass is so bearish on Japan that he has actually taken out a mortgage on his house in Yen. The noted hedge fund manager also shared his thoughts on the chances that China will allow the yuan to rise against the U.S. Dollar. He said, "I asked a senior member of the Chinese government in November, 'are you ever going to re-value the yuan and kind of concede to U.S. demands?' He put his glasses up on his head and sat back in his chair and said 'You want me to mark down my holdings of $880 billion in U.S. Treasuries and make myself less competitive on the world stage?' He said, 'I don't think so'"