Kyle Bass, the founder of hedge fund Hayman Capital Management, L.P. appeared in an interview with John Mauldin of Mauldin Economics. The hedge fund manager talked about the subprime mortgage crisis, Europe, quantitative easing, currency devaluation, Japan and the average investor.

Kyle Bass

Kyle Bass on Currency Devaluation

Kyle Bass said that central bankers around the world are involved in a competitive currency devaluation. He says central bankers have a mutual admiration society, and they are the world’s biggest brotherhood. Kyle Bass says quantitative easing is not the first choice of central banks to bring stability. According to Bass, quantitative easing is the second or third consequence of other actions bankers have taken which didn’t turn out right.

Talking about austerity, Kyle Bass says politicians and countries initially spend money by borrowing from others. And they suddenly realize that they can’t even afford to pay interest. In these situations, the only way out is austerity. Bass says austerity is not a punishment, it’s a consequence of what countries have done for years. He says a country has absolutely no choice when the debt-to-equity ratio is at 360%.

Kyle Bass on Japan

When John Mauldin asked him about his views on Japan, Kyle Bass said the Bank of Japan has over the past two decades been one of the most boring central banks. But suddenly BOJ chief Haruhiko Kuroda and prime minister Shinzo Abe come up with an aggressive stimulus program. In fact, the world’s most aggressive policy so far. They plan to double Japan’s monetary base in less than two years to beat about two decades of deflation. The move is very risky. It’s the Bank of Japan’s last shot at rescuing the economy before it explodes. A few months ago, Kyle Bass said that he expects the yen to fall to 200 against the dollar.

Kyle Bass says average investors are at the mercy of central bank puppeteers. They are being played by central bankers to invest in “high yielding” equities and get out of safer Treasury bonds that give a far lower return. Higher exposure to equities increases the risk for average investors. He said average investors are being forced with their money at the wrong place and at the wrong time. His final tip? Average investors have to be very careful doing what the central banks want them to do.