The founder of Hayman Capital Management Kyle Bass gave a presentation at the Chicago Booth Initiative on Global Markets last week. He focused on Japan, a subject he’s been following, and investing around, for over a year. According to the hedge fund manager, Japan can’t be fixed and current efforts to reform the economy will not work.

Kyle Bass

Toward the end of the interview, Bass discusses the similarities between what’s going on with Japan right now and what was going on in the sub prime mortgage market back in 2007, on the cusp of the financial crisis. According to Bass, financial memory lasts two years. That doesn’t bode well for the Japanese economy, or asset markets.

An article at Zerohedge, covering a segment toward the end of the presentation, outlines anecdotal evidence that the attitude to Japan is going to cause chaos. Bass says that he bought one year jump risk on Japan for less than 1 basis point. Here’s the story in his own words:

“We bought half a trillion dollars worth of these ‘options’… and interestingly enough, one of the biggest banks in the world called me the other day and asked me if I would close my position – that was an interesting day for us – that happened to me in 2007 right before the mortgages cracked.”

The banks that sold Kyle Bass insurance on Japan’s collapse at ridiculously low cost tried to convince him to get out of that position. Mr. Bass said that the bank explained that the reason they asked him to close his position was that a new, more stringent, stress test had been run on the model. That test had turned out some pretty nasty results.

Bass’ point here is not that the higher stress levels turned out a poor result for the bank, but that the bank chose to run those stress at all. Kyle Bass reckons that the banks are worried about Japan, and the story he told at the end of his presentation backs that idea up.

The “single best investment you can make today” according to Kyle Bass, is to sell Japanese Yen and buy gold. Do that and you’ll be fine in ten years. Bass is fairly pessimistic about prospects in the next few years. If he’s wrong on Japan, it may well be a tough few years for him.