Kyle Bass: The Global Economy, Japan, & Why He's Buying Mortgages

I'm going to do my best not to "gush like a little girl" over the person who I personally hold in the highest regard over all other financial market participants due to both his track record and ridiculous understanding of the global economy.

In brief, because I have told this story in depth a few times before, Kyle Bass was one of the handful of investors that made massive bets against subprime mortgages through Credit Default Swaps (CDS) back in 2006 - 2008. He then sold out of his position in 2008 and re-invested the profits into gold and bets against Greece government bonds. This was two years before Greece was in any headlines, just as he placed bets years before any headlines emerged on subprime mortgages.

Today he has the same trade on with a massive bet against Japan. Just as with his subprime mortgage and Greece bets he continuously is called "crazy" as the mainstream feels that betting against Japanese debt and currency (a losing trade for two decades) is the absolute wrong move.

Before you read or watch any financial article or show for the rest of the month, I would highly recommend reading this letter in full. If Japan rolls over in 2013, it will be looked back on as perhaps the most prescient letter in history; the equivalent of having the blue print for why you should have bet against subprime mortgages and Greece before they blew up. Bass feels that based on the way Japan is currently priced in the market compared to the risks the country faces, it could be the greatest opportunity in modern financial history. Click "View In Full Screen" on the bottom right to enlarge.

Kyle Bass

As a bonus you can hear his most recent, and rare, interview with CNBC discussing some of the same topics provided in his in depth letter.


  1. I hold Bass in similarly high regard. However, I have been unable to ascertain the best way to bet against Japan without having a substantial sum of money (as Bass, of course, does) to allow one to wait years for the collapse.

    In other words, is there some way that a small investor can take advantage of leverage, limit downside, yet still enjoy big profits if, in fact, Japan begins to implode sometime in the next year or so?

    Any guidance that you can provide would be greatly appreciated.

  2. Unfortunately, it's much more difficult for the smaller investor. He makes his plays through the derivatives market, allowing him to buy insurance that he pays a small annual fee to carry (think home insurance) that explodes in value when the market begins to move (the hurricane arrives and hits the home).

    There are a limited few ETF's that allow you to bet against Japanese government bond yields (inverse ETF's). Do your homework and speak to a professional before buying.

  3. Can a small investor become a customer of Mr. Bass's investment firm?

    1. No. It requires a minimum of seven figures of investment capital.

    2. How about JGBS PowerShares DB Inverse Japanese Govt Bond Futures ETN? Its an inverse ETN. Tuna, I know you wouldn't like to be specific, but is they at least aimed correctly?

    3. Yes. That is an option to target the bonds. You also have to remember that this battle is going to be different than the one fought in Europe because you have a central bank that stands ready to defend the market with "unlimited" firepower. So the question will be whether or not they will announce a massive QE program to purchase government bonds in order to keep rates artificially low in the short term. This will immediately hurt the currency and perhaps temporarily push back rising rates. This in the end, fundamentally, will only drive rates even higher, but my guess is that you see some fireworks in the currency market.

      So you can decide if you want to short the currency, the bonds, or both. This is a new chapter in the global sovereign debt crisis so I can't say exactly how it will play out. Japan will help create the blue print for how the UK and the US approach their sovereign debt crisis when it arrives as they also have central banks with unlimited purchasing ability. Unless one of those two countries implodes first, which could certainly happen.

  4. Indeed, the Japanese opposition leader(quote below) thinks there hasn't been ENOUGH QE. The problem here is that the half-life of Japanese QE seems to diminish with each successive attempt. But a HUGE QE may be big enough to have some short term effect. The applicationa huge QE and a possible blow up of debt in Europe are two factors that may, temporarily, enhance the 'safe haven' aspect of JGBs. Timing is the trick.

    "as opposition party leader Shinzo Abe - possibly set to come to power in coming elections - makes clear his position: "The biggest economic problem is prolonged deflation and a strong yen ... Markets will only start to react once unlimited monetary easing is conducted."


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