This man is J. Kyle Bass, but you can call him Kyle. Actually, you should probably be calling him Mr. Bass.
Back in 2006, after a decade plus working for Legg Mason and Bear Stearns in Texas, Bass took $5M of his own money and raised another $26M to start Hayman Capital Partners, as you can see if you squint a little looking at the above picture of his handsome mug. Once Hayman gained regulatory approval, they quickly started betting against subprime mortgages. They bought up all the credit default swaps they could get their hands on (which are essentially insurance contracts that pay out only when the underlying asset goes bankrupt) and sat, patiently waiting for the market to collapse. Since you could buy $1000 worth of protection for about $2 back then, it was very easy to take a huge position while taking on very little risk.
Once it became evident the mortgage market was blowing up, Bass sold his positions that bet against subprime mortgages. It’s widely speculated he got between $750-$800 for the very same CDS contracts that only cost him $2 to buy just a couple years before that.
Bass then quickly moved those profits into bets against European government debt, focusing on Greece, but also countries like Italy, Ireland, Portugal, Spain and France. I couldn’t find out whether he’s since sold those positions, but there’s little doubt Hayman has made significant money on all those bets.
Bass hasn’t limited himself to betting on government debt blowing up. He’s a major bull on gold, but he’s figured out that futures contracts actually lack the underlying physical gold. Meaning, if everybody who owned gold futures suddenly wanted their gold, there wouldn’t be enough for everyone. That would be bad, so Bass actually has a whole bunch of gold in a vault somewhere underneath Dallas. No word on whether he gets naked and rubs the shiny yellow medal against himself in some sort of weird sexual way.
He gets weirder. The number crunchers at Hayman did some work, and discovered there’s actually 6.8 cents worth of metal in every nickel. So Bass went out and bought a million bucks worth of nickels. That’s 20 million nickels. As you can imagine, getting 20 million nickels is a little more complicated than just calling up your bank and asking. The Federal Reserve got involved, but Bass got his nickels. I’m not sure what Bass is going to do with all these nickels, since melting down U.S. currency is kind of against the law.
Meanwhile, he’s bought a 4000 square foot house on a huge tract of land, all which happens to be surrounded by a fence. Oh, and he drives around on his land using a U.S. Army Jeep, while he shoots beavers and blows crap up for fun. It’s rumored he’s sitting on a mountain of weapons, explosives he buys over the internet and a bunch of stored up food. If you’re selling girl scout cookies, I’d suggest hitting up Kyle’s neighbors instead.
So the dude is clearly a little weird, but this isn’t especially crazy for Texas. His two big bets (betting against subprime mortgages and betting against Europe) have worked out spectacularly well. What’s next for Hayman? They’re betting against Japan.
If you’ve been paying the least bit of attention, the American fiscal situation is becoming worse by the day. America currently owes creditors approximately $15 trillion, which is approximately the same as their most recent GDP figure. This 100% debt to GDP ratio – which will become important in a minute – is the highest in the country’s history except immediately after World War 2. It costs approximately $500B to service that debt, while the government takes in approximately 2.5T in revenue. For the time being, thanks to low interest rates, this is manageable.
Meanwhile, let’s look at Japan’s situation. Their debt to GDP ratio is over 200%, as the government recently borrowed heavily to fund the cleanup costs of the Fukishima reactor mess. Last year, their deficit was over 10% of GDP, and like America, there’s little pressure to get that number down. There are no plans to balance the budget in Japan.
Japan, like the U.S., has benefited greatly from low interest rates. Rates in Japan have essentially been zero for a decade now, yet the Japanese government still spends 25% of their revenues on debt servicing every year. Japan’s debt is almost exclusively held by their citizens who were happy to take zero return in a deflationary environment. This will change though.
There are two reasons why Japan will need to seek foreign buyers for their debt. Firstly, debt is growing too fast for the Japanese people to keep buying it. This is partially due to the growth rate of the debt and partially because Japanese people are old and dying. Over a third of their population is above 60. They’ve lost over 3 million people over the past 5 years. Immigration won’t solve their problems, the Japanese are a very xenophobic people.
Once Japan runs out of its own people to buy debt, they’ll have to go to foreigners. Once foreign banks figure out how bad Japan’s balance sheet is, they’ll start demanding higher interest rates. This is the beginning of the end, as ultimately the country is forced to either default or print enough money so they inflate the debt to nothing. Neither of these situations is ideal.
You’ve heard about the entitlement programs in Greece? Japan’s might be a bigger problem. Almost 30% of government spending is on their old age pension program, another 25% is on interest payments. A third of the population is either collecting or is about to collect their pension. It would be political suicide to cut pensions, so they won’t until it’s too late.
How can you short Japan? You can buy long-term put options on the Nikkei 225, either betting against the index itself or the ETF that tracks it, EWJ. You could also short the Japanese bond ETF (JGBL) Or you could bet against the two largest banks (Mizuho and Mitsubishi) which both have ADRs that trade on the NYSE. Or, you could open an account with one of the discount brokers that allow you to invest directly in the Japanese market, where I’m sure there’s all sorts of fun stuff you could short.
Or you could just sit back, relax, and see if Japan blows up. And maybe sell your Toyota stock in the meantime.