Kyle Bass

A single work of genius does not prove the existence of such inspiration. It is merely a correct decision, not made by many. In science or the arts, each work is judged on its own account. An artist producing a single work of genius not judged by that work alone, but by their entire catalog.

In finance things are different. The investment world is fraught with people attempting to tell the future. Many different methods are used to achieve an approximation of the future, but one stands far above the rest in popularity , and probably effectiveness. That method is the passing off of such responsibility to somebody else.

Clairvoyants are difficult to pick reliably. Past performance is no guarantee of future results. So comes the question of the efficacy of Kyle Bass, and his future as one of those clairvoyants.

Kyle Bass became one of the world’s most celebrated traders earlier this year, when his bet on a Greek default, and a subsequent payout on the country’s Credit Default Swaps, came to fruition. His newest bet on sovereign debt may not be so successful.

Bass says that Japan is headed directly for a default. His logic is simple, the country’s population is contracting, while, at the same time, the country’s debt to GDP ratio is over 200%, for Bass this believes a default is inevitable. There are many reasons to think he’s wrong and very few to agree with him.

Japan’s default does, in a way, make sense. It certainly makes more sense than European default would have four years ago. Right now the market is full of traders who have gotten their first taste of sovereign default profits in Greece. They are searching for the next big “impossible default”. That puts a dangerous amount of trust in their leading light, Kyle Bass.

Bass’ visibility during the Greek crisis, and his constant lead of the charge against the country have made him a powerful force, with a powerful name. The fund manager’s original break into the minds of investors, came in 2008, when he was one of the few to make money off of the collapse of the subprime mortgage market.

The big winner from that collapse, or at least the biggest name to emerge in its midst, was John Paulson. He became a household name overnight for his actions in betting against the subprime market. That was his moment of genius. He gained further fame, after being portrayed in The Greatest Trade Ever by Gregory Zuckerman.

Bass’ moment of Genius came with his leading of the charge against Greece’s financial future. That genius has earned him a glorified name, and a privileged place, in the game of clairvoyance.

A lot of people are sending their money into Bass’ hedge fund, Hayman Advisors, even more are following his words when he appears on television or in print. His actions influence the markets as John Paulson’s did.

Those who put their trust, and their money, in John Paulson soon learned the dangers associated with picking the man of the hour as an eternal flam. Paulson’s funds lost close to half of their value in 2011. That year was a bad one for hedge funds, but Paulson came away looking like an inept fortune teller.

Paulson’s fund is still struggling this year. He has settled back into position as a less than exciting hedge fund, the awe from his victories of the last decade has been lost. Paulson was not the  first, nor will he be the last, to be an agent in this particular pattern.

Bass is now being raised as a standard. His words influence the flow of money, not quite to the degree that Paulson’s did after 2008, but certain sectors of the market hang on his every word. He is probably wrong about Japan.

He may very well be right, but the question is not only whether the country will default, but when. The fundamentals suggests an eventual default, in the words of John Maynard Keynes “In the long run we are all dead”.

Hayman Advisors does not need to use long run modelling to predict its own demise, given its current path. The Japan fund is down by 61% from inception in July 2010 until March 2012. The fund wont be around much longer with those numbers.

Kyle Bass’ bet on a Japanese default may reveal him to be less than the preeminent fortune teller that many supposed, but it doesn’t prove him terrible at his job. Bass is likely to pull off of those trades before they manage to ravage his fund, and ruin his firm altogether.

His reliance on a single big win in Japan has caused him trouble, as Paulson’s reliance on US recovery in 2011 almost destroyed his fund. Kyle Bass may not have aligned himself with the idea as of yet, but he is far more like Johnn Paulson than any would have believed earlier this year.