market folly

Kyle Bass of hedge fund Hayman Advisors has a very dim outlook on parts of the world. In a recent interview with CNBC, Bass laid out his themes his hedge fund is playing and positions they've taken as a result. Remember that Kyle Bass will be presenting ideas at the Value Investing Congress in October as well. Market Folly readers can receive a discount here.

Hayman is positioned to benefit from a Japanese restructuring that will likely take place over the next few years. Bass defines the Keynesian end-point as, "when your debt service excedes your revenue". And, he thinks Japan is there. Japan's tax receipts in nominal terms are the same as they were back in 1985, whereas their expenses are 200% higher. He argues that Japan is in secular decline and they're spending roughly twice what they make. Japan has funded themselves by selling bonds to their citizens at low rates and he doesn't feel they'll be able to do this anymore.

As you can see, he has outlined tail risk plays. At the same time, he is trying to earn nominal returns while he waits for these tail events to pay off. As such, 35% of Hayman's investments are in US Mortgages, 25% are in bank debt, 17% are in U.S. distressed positions, and 23% are in high yield. Now these are some of Hayman's 'core' positions but it sounds as though Bass thinks his tail positions could possibly generate quite a return.

In particular, he's focused on Japanese Government Bonds (JGBs). Of them, Bass notes, "At a time at which the bond I think is the most risky asset (or one of them) in the world, the pricing of that asset using the Black-Scholes model is the best it's ever been. So you have this huge convex moment that you can put enormous positions on in Japanese interest rates very cheaply."

Overall, in terms of tail risk plays, he's positioned 10-15% of his portfolio betting against European sovereigns and Japan. Given his view of the world, Bass doesn't know how you can be long stocks. If you want to become instantly depressed, he's the guy to talk to. And Bass isn't the only well known investor betting against Japanese JGBs. In a recent interview, Passport Capital's John Burbank has been short Japanese Government Bonds as well.

Embedded below is a video of Kyle Bass' recent television appearance (email readers will have to come to the site to watch it):



To hear both John Burbank (Passport Capital) and Kyle Bass (Hayman Advisors) present investment ideas, register for the upcoming Value Investing Congress (special discount here).