“[China has] recklessly built a system that’s going to need to restructure and that just so happens to be metastasizing right when Trump becomes elected. This is a fire that’s been smoldering and it’s now starting to burn, and Trump is just more gasoline.”
“What you see when the liquidity dries up is people start going down… and this is the beginning of the Chinese credit crisis.”
Kyle Bass, Hayman Capital Management, May 2, 2017 in an interview with Bloomberg
The Bearish Bass
Known in the investment world for making half a billion dollars successfully by betting on the subprime financial crisis, hedge-fund guru Kyle Bass was in the headlines earlier this month with a round of ultra-bearish commentary on China. Using headline-generating words like “metastasizing” and “smoldering,” he said that China’s credit system was beginning to unravel.
Bass may be right, or he may be wrong. But it’s worth remembering that he – along with any other superstar hedge fund manager – is doing what’s called “talking his book”.
Talking your book is when you’re a cheerleader for the long positions in your portfolio, and a doomsday prophet for your short positions (where you stand to gain if a particular security falls in price).
Hedge fund managers clearly have a vested interest in talking their book. They can move markets, especially if they have credibility for past successes like Bass does with his subprime bets.
Bass’s fund Hayman Capital LP had a turbulent 2016. Half-way through the year he was down 10 percent and managing US$770 million (down from US$2.3 billion in 2014). He managed to turn it around and end the year up 25 percent after currency and bond shorts paid off.
Bass has in the past 18 months opened two funds focused on Asia. Given his very downbeat tone on China, this includes bets on the renminbi weakening in particular.
So, when you hear people like Bass making these kinds of proclamations, you should always bear in mind that he’ll be talking his book. Bass gets a lot of airtime in the media when he speaks. In this case, if he can convince more people to either avoid investing in or bet against China, then great – every little helps.
You should also bear in mind that although he made a mountain of money on his sub-prime bets, he’s gotten plenty of things wrong.
Bass on Japan
How about his opinions on Japan?
“Japan now sits on the doorstep to its own demise. We believe they have reached zero-hour, where things will begin to unwind altogether….
We believe that Japan is teetering on the precipice of financial collapse, and any number of data points or events in the coming weeks and months could be the proverbial tipping point”
Bass’s call for an imminent financial apocalypse in Japan is similar to his more recent rhetoric on China.
But Bass wrote that in a quarterly investor letter that he sent out in November… of 2012. That’s four and a half years ago.
Since then, 10-year Japan Government Bond (JGB) yields have rallied from 0.75 percent to just 0.03 percent. (As yields fall, bond prices go up). And Japan’s stock market is up 60 percent in U.S.-dollar terms (despite the yen weakening).
If you’d followed Bass’s advice on Japan, you’d be hurting right now. Perhaps someday he’ll be right – but after four and a half years, (and counting) it no longer counts. After all, a stopped clock is still right twice a day, as the old saying goes.
Bass on Hong Kong
There’s more. How about these comments from May of last year?
Hong Kong’s property market is in “free fall”.
“Hong Kong’s in a worse position than it was in prior to the ’97 crisis today.”
China is in a “hard landing as we speak”.
As it happened… Bass is – so far – wrong. Here in downtown Hong Kong, we’re still waiting for the “free fall” in Hong Kong real estate to materialise.
(I actually wrote an email to the journalist who’d published the “free fall” comments, to ask him whether Bass had ever set foot on Hong Kong. He responded that in fact Bass had.)
Recently Bass hasn’t been the only fund hotshot to stake out highly vocal positions on China and Hong Kong. He’s been joined by Pershing Square Capital Management’s Bill Ackman.
Bets against the Hong Kong dollar peg
Ackman is one of the stars of a recently released docu-drama Betting on zero which chronicles his high-profile bearish bets/crusade against nutrition supplement multi-level marketing company Herbalife. He launched his effort with a door-stopper 334-page presentation in December 2012. His stance was that the company was a pyramid scheme and that the stock would fall. But since then, the stock is up more than 60 percent.
But it’s unlikely there will be any movies made about his bet on the Hong Kong Monetary Authority de-pegging the Hong Kong dollar from the U.S. dollar. He said,
“We believe the HK government will repeg the HKD at a stronger exchange rate to the USD while leaving the LERS [Linked Exchange Rate System] intact…
We believe the HKMA [Hong Kong Monetary Authority] may indicate that the HKD will eventually be pegged to the RMB or to an RMB-led basket when the RMB is fully convertible.
We believe a 30% revaluation to 6:1 [6 HKD to 1 USD] is likely”
Ackman then goes on to talk about how, because of the peg, HKD/USD currency volatility is very low. As a result, call options (i.e. betting on a stronger HKD) are cheap.
He makes a perfectly good case for a change in his 140-page presentation which I read through.
However, he made the case in September 2011. Five and a half years later, there’s no sign of a de-peg.
Consider the source
I don’t have any issue with fund managers talking their book. They are clearly well-researched and passionate about their positions.
I’m just saying when it comes to how much weight you give to what these guys say, you should bear in mind that there is a huge amount of money at stake here. We’re talking billions of dollars. These guys stand to make more than we’ll earn in a lifetime if their bets payoff.
So, take the hyperbole with plenty of salt.
Good investing,
Tama
