Today, Kyle Bass, founder and principal of Hayman Capital Management, spoke at the iCIO Investment Summit in New York City. He spoke and took questions on a range of issues, and ValueWalk was there to take notes on the event.
Kyle Bass on Argentina
Argentina is a pretty Interesting place to invest, but let’s look at what is wrong first. It has the largest sovereign default, and Paul Singer is still fighting it out. 25% inflation, capital controls etc., but maybe it’s time to start looking at is as a long.
Rwanda, Nigeria (Kyle Bass once invested in a mine there which was nationalized) can all raise money for much lower cost than these countries. The European discounts have a 12% yield trading at 73 cents. The court case will could be settled and Paul Singer will win, but Kyle thinks Argentina actually has a really good chance of winning. Argentina pays debts in dollars and Euros and compared to neighbors Argentina is almost at the top. The investment thesis is that the credit risk is priced in too high. There is a capacity to pay and the government plans to pay – it’s only 1% of GDP, 6% of TA revenue – but their real problem is that inflation is much higher than they admit, which is partially due to oil imports. However, imports will switch around and be oil rich soon.
The President is gone in 2015 and the top candidates are both pro business. Argentina has found the second-largest shale formation in the world and oil experts Kyle spoke to said it’s high quality and could get $100 billion in investments. Halliburton Company (NYSE:HAL), Schlumberger Limited. (NYSE:SLB) etc. are all sending teams now and balance of payments will improve over the long term. Sovereign debt is a great way to invest and once the Supreme Court case is over they will be able to access capital markets and then it is a new ballgame as elections come up.
The price caps and capital controls are so rigid once they are removed (right now everything is paid in cash) – they should pay par and risk of default is really low, you want to own assets as these come under control.
“If I was Argentina I’d be handling the case exactly as they are since I know my FX balance is okay, you hire a really good lawyer (they have one of the best) and they have a ‘gun in the gunfight now’ instead of a knife. The market thinks there’s a 2% chance of being heard; I think its 90%. If the Supreme Court grants I’d say there’s a 65% chance of reversal.”
The government realizes they need to settle but it’s hard to predict what a lame duck paranoid will do… the risk is that he’d nationalize things.
“If Paul wins, the exchange bonds trade up so this is a really win-win for me.” Kyle thinks that Singer is trying to say we are here to settle because he won twice but the Supreme Court case is a different ballgame.
Kyle Bass on hedge funds
“You don’t get paid for complexity – we had Lehman something notes and made as much as others who had regular Lehman notes.”
Investors looking for more simplicity today. The best speculators like Soros if they are up 10% before 40% up would be out of business these days.
Kyle Bass has been following J.C. Penney Company, Inc. (NYSE:JCP) for a while: “they are based in our backyard, and with everything that happened we were just betting on stabilization (not turnaround) and you saw that in comps yesterday. We missed one thing which was 40% dilution.”
Following other investors: Herbalife
Asked about Stiritz involved in Herbalife, Kyle Bass says he bought Herbalife Ltd. (NYSE:HLF) before Stiritz got involved. Bill Ackman has done a lot of work; Kyle Bass read about MLMs from Gotham 10 years ago. “I think once they get audited they could buy back 40% of shares. I don’t know how he sleeps at night with 15% of his assets in there.” Kyle Bass says he called every state regulator and Herbalife Ltd. (NYSE:HLF) only has 233 complaints. That is lower than most retailers have.
Kyle Bass on GM and government stake
General Motors Company (NYSE:GM) will get rid of government stake, they have done well with their pension scheme. Short term – GM mandatory conversion and government selling will soon be gone and GM has still gone up. They are taking market share from Ford Motor Company (NYSE:F) and Chrysler, their unfunded pension liabilities are going down rapidly and they are trading at 3x it should be trading a lot higher. In near term they could take more market share.
Stephanie Ruhle asked Kyle Bass about Steve Kuhn’s Progressive short related to driverless cars. Kyle Bass says the biggest fear is losing money but sometimes you need to make large investments. He has done that several times successfully throughout career.
Stephanie notes that Druckenmiller agrees with this statement. Kyle Bass says prudent risk management is still important.
On a related note, he mentioned he was glad with the court decision because Detroit is completely bankrupt.
Kyle Bass on JPMorgan
Kyle Bass can’t believe that they are going after JPMorgan Chase & Co. (NYSE:JPM). “With rates staying low I don’t think anything good will come from the banks.” Kyle Bass likes mortgage lenders but not the big banks.
Kyle Bass on Japan
Japan is now making transformative changes and things will happen at the start of the first fiscal year. They are running a 50 trillion yen deficit and they only have about a 10 trillion cushion, they already spent that on bonds, so they will need to raise more capital.
If they sell bonds it will increase bond volatility. Internally, their target for the Yen is about 1/118 for the dollar if they want 2% inflation. BOJ will have to buy lots of bonds and that will come before April. “The question, is can they hold onto rates? My guess is they cannot.”
Kyle Bass on the Fed
Kyle Bass says the Fed is more aggressive today than it was a year ago if you look at fiscal contraction. The Fed should say that they will narrow buying as the deficit contracts so I think right now they can taper 40 billion a month. Timing of taper has no impact on investments.
Kyle Bass on Gold
“I have no idea what will happen but think it will eventually will be 2,000 or 2,500 a month.” What percentage of assets? Kyle Bass is not sure but he honestly does not know why it’s gone down in the past few years.
On the housing market and tapering
Ben Bernanke talks to avoid the zero percent rates in his paper as much as possible. But investors saw mortgages move up 110 basis points – it took housing from best affordability to the worst numbers since 2009.
Kyle Bass on Bitcoin
Bass has not looked much into it but sees many problems and reasons why so many businesses have not taken it. It’s very easy to money launder and that is why the Senate is looking into it. The idea in itself though is interesting.
Velocity of money
“We have basically restructured the banking sector. The first $4-5 trillion just went to re-cap and prevent deflation. The next $4-$5 did not increase the velocity of money.”
European banks 3.5x more levered than US banks and are the biggest risk next to Japan. They do not have the money to recap and Kyle Bass is shorting European banks.
Kyle Bass on Brazil
On Brazil, no thoughts, but “it’s so dependent on China you might as well directly guess on China.”