Thursday, October 4, 2012

Kyle Bass: Where He Sees The World & How He Is Investing

There are few people in the financial world today that cause me to completely shut down what I am doing and hang on their every word they have to say.

Kyle Bass is one of those people.

Most hedge fund managers hope to capitalize on one "black swan" type of event during their career. Kyle has hit the last two in succession out of the park. He was one of the very few who bet heavily against subprime mortgages (making him a household name) and then probably the only member of that small group who immediately took his profits and bet heavily against a small off the radar country back in 2008: Greece.

The value of both sets of bonds plunged over 90% making the returns on his leveraged bets almost impossible to calculate. He is interestingly today now back in the US market purchasing subprime real estate credit. Let me briefly explain that buying credit does not mean he is out buying US real estate at face value, he is purchasing deeply discounted mortgages on the secondary market. If he can purchase a tranche of subprime loans for 40% of par value and they end up being worth 60% of par value he once again makes a killing.

Where is the next subprime mortgage, Greece-like, black swan he sees today? He sees every potential opportunity in Japan. Again, this does not mean that he is necessarily shorting the Japanese stock market or the Japanese government bond market; he is in the credit markets purchasing insurance against those losses which allows his gains to be magnified. Unfortunately, for the average investor there is not an EFT available that allows you to do this. You have to invest in a fund, such a Hayman Capital that Bass runs, in order to get this exposure.

Kyle sees no reasonable discussion ever taking place on the US debt crisis because doing so would make a politician completely un-electable.  That simple sentence sums everything you need to know if you decide to spend three full hours hanging onto every word spoken by talking heads of Romney and Obama as they go back and forth over absolutely nothing of meaning.

The real change needed will only come with a crisis.

I can talk about his thoughts for hours, but before I digress too far I'll let you hear the full interview from the Michael Jordan of finance himself:

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