Kyle Bass: Japan Is Insolvent; U.S. Q.E. Only Making The Rich Richer


We bring you some insights into an interview with Kyle Bass, legendary hedge fund manager, the first part of which was published a few days ago by Financial Sense. Check out the ValueWalk Resource Page on Kyle Bass here.

Kyle Bass: Japan Is Insolvent; U.S. Q.E. Only Making The Rich Richer

Kyle Bass on America’s debt

Kyle says the developed economies of the world are basically suffering the same kind of problems regarding debt, and brushes off the hullaballoo over the debt ceiling saying these limitations were basically “glass ceilings” that were moved when the situation so demanded. He makes the point that since 1960 the U.S. has raised its debt approximately 82 times its former level.

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Kyle Bass on Japan’s debt

On the question of how Japan is sustaining its huge debt mountain, currently at 230% of GDP, Kyle said a more relevant metric would be the ratio of debt to central government tax revenues. By this standard, Japan is already insolvent because its debt is 24 times government revenue.

A very relevant point Kyle made was that typically, defaulting economies that red-lined the Debt:GDP danger line of 100% were emerging market countries. These economies, in contrast to the developing economies, suffered much higher interest rates.

Kyle Bass on the Fed taper

The trigger for the taper would be a reduction in the Fed deficit – likely brought on by better tax revenue rather than a reduction in expenses. By this assumption, it is unlikely that the Fed would be in a position to taper for at least 3-5 years.

An interesting point he made was the fact that due to the Fed’s QE, the monetary base was expanding but the velocity of money was trending lower. However, inflation would rear its head whenever the velocity would ultimately turn around. (Read Hoisington’s take on the velocity of money here)

Kyle Bass on the stock market’s current situation

Very simply, new money being printed could end up chasing stocks because of the almost non-existent nominal yields in the bond market, and therefore “the only game in town.”

He made a significant comment on the wealth effect here: “The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off.”