Hedge Fund manager Kyle Bass is interviewed by the BBC: France and Japan are on deck for collapse.

The BBC’s Hard Talk show recently interviewed Kyle Bass, Managing Partner of hedge fund Hayman Capital.  I think the 20 minute interview  (part 1 and part 2) is well worth your time.  Note that his interview ends 5 minutes into part 2 so you can stop watching there.  But if time is short for you then here’s my brief synopsis:

• The interviewer tried to demonize him for betting against the markets and she tried to imply that he made tons of money on other people's suffering.  His response was that he needed insurance because he saw all the problems coming and he had a duty to his investors to not lose their money.  He also indicated that he made big percentage gains but on a very small amount of money invested against the markets.  His real goal was to insure his main holdings against catastrophic losses which he succeeded in doing with his hedging strategy.  My take: if you are in financial markets then you are effectively trying to screw the next guy out of his money.  That's basically what non-dividend investing is.  So if you lose then don't be a poor sport.  Don't get angry at the winner for being smarter than you.  Instead, use the feedback as a growth mechanism.
• Greenspan blew up the housing bubble as an attempt to stop the dot com bust from playing out.  Then he walked away and handed the reins to Bernanke.  Bass saw this and made leveraged bets against the housing bubble.
• Every time a big bank or company got into financial trouble, governments bailed them out.  Bass noted that governments were doing this and then looked at government debt and how much damage it would do to them to take on debt from banks and industry.  This is how he figured out where to place his hedges which resulted in profitable bets against Greek sovereign debt.
• He talks about “asymmetry” quite a bit and so I want to decode that.  What he really means by that term is that a particular market is/was not realistically pricing in the economic truth of a situation.   For example, back in 2007 Greek debt was carrying similar interest rates to German debt as if they were both similarly credit worthy even when anyone who could do math could see that was ridiculous. Because of this ridiculous assignment of good credit ratings to low quality Greek debt, it was possible for Bass to buy derivatives that would pay off “asymmetrically”.  In other words, a small amount of money would be lost (think of it as an insurance premium) if the "insurance contract" never paid off, but a huge payoff relative to the insurance premium if the insurance had to pay up.  Needless to say, the insurance paid off for him.  Because it was highly asymetric, a very small premium was needed in order to produce a big return.
• The easy money has already been made on the Greek crisis and so Bass is already looking to the next markets that he thinks will blow up and those would be French and Japanese sovereign debt.  These are still highly rated with low interest rates being demanded by creditors even though their economies are weak and debt load is already very high.  In the case of Japan, it’s going to be a wipe out.  I have written about these things in more detail here and here. 
• When asked the specific question of whether Germany can bail out Europe, Bass was adamant: No Way.  Germany has not recapitalized its banks like the US and UK have.  While people currently consider them the economic powerhouses of Europe, both Germany and France will swirl the bowl with the rest of Euroland when the sovereign debts of the PIIGS begin to default to the degree that they eventually must.  Any bailouts that Germany provides from now on are just throwing good money after bad.  The PIIGS cannot have real austerity measures without riots and perhaps civil war.  Thus, each time they fail to implement austerity they will just ask for another bail out.  They will have no choice.
• Global debt has gown from $80 trillion to $210 trillion in the past 9 years (12% annually).  During the same time, global GDP has only grown 4% annually.  Despite Keynesian promises that you can grow the economy sustain-ably using debt, debt is outpacing growth at an exponential pace.  Nobody can say when it will blow up, but you have to be sort of brain dead to believe that exponential aggregate debt growth can end up any way other than badly.
• Bass compared the Japanese (and by extension the global) sovereign situation to Bernie Madoff’s Ponzi scheme.  It will collapse when there are more people exiting the debt market than entering it.  Japan currently spends 50% of tax income on debt service alone.  Half of that amount is spent on interest payments.  If Japan’s interest rates move up by a measly 2% then its debt service costs will exceed its tax revenue income.  Think they can just raise taxes to make up for shortfalls?  Think again.  This is at a time of population reduction due to their baby boomers dying off when there are not enough young people to replace them.  Japan will eventually default on its debt because math will not allow any other outcome.
• Bass pointed out that Italy was thought to be doing great and then a 1% rise in interest rates sent the country into a financial crisis.  In other words, things appear to be OK until they suddenly collapse. 
• I wrote about the exponential nature of these collapses here.  In short, the damage has been done slowly over a period of time but people only figure it out at the very end (as in the case of Madoff) and that’s when everyone runs for the exits in panic.  Anyone who doesn’t run away gets left holding an empty bag in a Ponzi scheme.  Very few people understand even today that fiat currency and fractional reserve banking have created a global debt Ponzi that must collapse at some point.  At some point everyone will understand and they will all try to get out of the markets at the same time.  Many will lose everything.  The eventual collapse of the debt Ponzi is mathematically guaranteed.  There is no saving it.  People who let other people hold their retirement funds will be the worst hit IMO.  Smart people will lay hands on their own money whatever it takes.  Any penalties paid today will seem cheap compared to the haircuts that are bound to happen later on.
• Bass recommends that everyone invest in “guns and gold”.  He says that the US and Europe have created 6 trillion dollars out of thin air since the crisis began.  As a result he wonders why anyone would want to own paper currency.  As for guns, he suggests that people look back into history.  When people rack up this much debt and it results in default, it generally ruptures the social fabric and civil unrest is the likely result.

As an aside, Bass recently diversified his fund into nickels to the tune of $1,000,000.  I guess I was not far wrong when I seriously suggested that exact strategy back in March of this year for the same reasons he stated.