8/3/2019 48887451-Kyle-Bass-Feb-14
1/134
February14,2011
TheCognitive
DissonanceofitAll
"Men,ithasbeenwellsaid,
thinkinherds;itwillbeseenthattheygomadinherds,
whiletheyonlyrecovertheirsensesslowly,andonebyone."
-CharlesMackay,ExtraordinaryPopularDelusionsandtheMadnessofCrowds.
DearInvestors:
8/3/2019 48887451-Kyle-Bass-Feb-14
2/134
Wecontinuetobeveryconcerned
aboutsystemicriskintheglobaleconomy.Thusfar,thesystemicrisk
thatwasprevalentintheglobalcreditmarketsin2007and2008has
notsubsided;rather,ithassimplybeentransferredfromtheprivatesectortothepublicsector.Wearecurrentlyinthemidstofacyclical
upswingdrivenby
8/3/2019 48887451-Kyle-Bass-Feb-14
3/134
themostaggressivelypro-cyclicalfiscalandmonetary
policiestheworldhaseverseen.Investorsaroundtheworldareengaging
inanacuteandseverecognitivedissonance.Theyacknowledgethatexcessiveleveragecreated
anassetbubbleofgenerationalproportions,buttheydoeverythingpossibletopreventrationaldeleveraging.Interestingly,equitiescontinuetomarchhigherinthefaceof
Europeansovereignspreads
8/3/2019 48887451-Kyle-Bass-Feb-14
4/134
remainingneartheirwidestlevelssincethe
crisisbegan.ItiseerilysimilartoJuly2007,whenequitiescontinued
higherascreditmarketsbegantocollapse.Thisletteroutlinesthemajorsystemic
faultlineswhichwebelieveallinvestorsshouldconsider.Specifically,weaddressthefollowing:
WhoisMixingtheKool-Aid?(KnowyourCentral
Bankers)The
8/3/2019 48887451-Kyle-Bass-Feb-14
5/134
Zero-Interest-Rate-PolicyTrapTheKeynesianEndpoint
WhereDeficitSpendingandFiscalStimulusBreakDownJapanWhat
OtherMacroPlayershaveMissedandtheComingofX-DayWillGermany
GoAll-In,oristhePriceTooHigh?AnUpdateonIcelandandGreeceDoesDebtMatter?Whilegoodinvestmentopportunitiesstillexist,
investorsneedto
8/3/2019 48887451-Kyle-Bass-Feb-14
6/134
exercisecautionandparticularcarewithrespect
toinvestmentdecisions.Weexpectthat2011willbeyetanothervery
interestingyear.
8/3/2019 48887451-Kyle-Bass-Feb-14
7/134
In2010,ourcoreportfolioof
investmentsinUSmortgages,bankdebt,high-yielddebt,corporatedebt,andequities
generatedourpositivereturnswhileourtailpositionsinEuropecontributednominallyin
thepositivedirectionandourJapaneseinvestmentswerenominallynegative.Webelievethisreboundinequitiesandcommoditiesismostlyaproductofgoosingby
theFedsprinting
8/3/2019 48887451-Kyle-Bass-Feb-14
8/134
pressandarenotenthusiasticaboutinvesting
toofaroutontheriskspectrum.Wecontinuetohavea
portfolioofshortdurationcreditalongwithmoderateequityexposureandlargenotional
tailpositionsintheeventofsovereigndefaults.
WhoisMixingtheKool-Aid?
Unfortunately,academichasbecomeasynonymforcentral
banker.Thesedays
8/3/2019 48887451-Kyle-Bass-Feb-14
9/134
ittakesaparticularpersonalitytypeto
emergeasthehighestfinancialcontrollerinamoderneconomy,andtoo
fewhaverealfinancialmarketorcommercialexperience.RogetsThesaurushasnotyet
adoptedthisuse,butthepracticalrealityissadandtrue.WehaveattachedabriefpersonalworkhistoryoftheUSFedgovernorsto
furtherillustratethis
8/3/2019 48887451-Kyle-Bass-Feb-14
10/134
point.Sofewcentralbankersaroundthe
worldhaveeverrunabusinessyetsomuchfinancialtrust
isvestedwiththem.Indiscussingthesovereigndebtproblemsmanycountriescurrently
face,theacademicelitetendtoarrivequicklyattheproverbialforkintheroad(inflationversusdefault)andchooseinflationbecausetheyperceiveit
tobeless
8/3/2019 48887451-Kyle-Bass-Feb-14
11/134
painfulandlessnoticeablewhilepushingthe
harderdecisionfurtherdowntheroad.Greenspandroppedratesto1%and
tradedthedotcombustforthehousingboom.Heknewthatthe
roadoverthenext10yearswasgoingtobefraughtwithsomuchdangerthathehandedthereinsovertoBernankeandquit.
Centralbankerstend
8/3/2019 48887451-Kyle-Bass-Feb-14
12/134
tobelievethatinflationanddefaultare
mutuallyexclusiveoutcomesandthattheyhavebeenanointedwiththepower
tochooseonepaththatisseparateandexclusiveoftheother.Unfortunately,
whencountriesareasindebtedastheyaretoday,thesechoicesbecomesynonymouswithoneanotheroneactuallycausestheother.
ZIRP
(ZeroInterestRate
8/3/2019 48887451-Kyle-Bass-Feb-14
13/134
Policy)isaTRAP
As
developedWesterneconomiesbouncealongthezerolowerbound(ZLB),fewparticipants
realizeoracknowledgethatZIRPisaninescapabletrap.Whenaheavilyindebted
nationpursuestheZLBtoavoidpainfulrestructuringwithinitsdebtmarkets(household,corporate,and/orgovernmentdebt),theZLBfacilitatesapursuitofaggressiveKeynesianism
thatonlyperpetuates
8/3/2019 48887451-Kyle-Bass-Feb-14
14/134
therelianceonZIRP.Theonlymeaningful
reductionofdebtthroughoutthiscrisishasbeentheforceddeleveragingof
thehouseholdsectorintheUSthroughforeclosure.Totalcreditmarketdebthas
increasedthroughoutthecrisisbythetransferofprivatedebttothepublicbalancesheetwhilerunningdouble-digitfiscaldeficits.Infact,thisisan
explicitpartof
8/3/2019 48887451-Kyle-Bass-Feb-14
15/134
acentralbankersplaybookthatpresupposesthat
netcreditexpansionisanecessarypreconditionforgrowth.However,the
2
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
16/134
problemofoverindebtednessthatis
amelioratedbyZIRPisonlymadeworsethelongerasovereignstays
attheZLBwithevergreaterconsequenceswhenshortrateseventually(and
inevitably)returntoanormalizedlevel.
TotalGlobalDebt(LeftAxis)andGlobalDebt/GDP(RightAxis)
TotalGlobalDebt(Trillionsof
Dollars)
8/3/2019 48887451-Kyle-Bass-Feb-14
17/134
$220350%$200340%$180330%$160
320%$140310%$120300%$100290%$80280%$60270%$40
260%$20250%$240%
2002200320042005200620072008
20092010E
GlobalDebt/GDP
PublicDebtSecurities
PrivateDebtSecurities
BankAssets
Debt/GDP(RightAxis)
8/3/2019 48887451-Kyle-Bass-Feb-14
18/134
Source:IMFGlobalFinancialStability
Report;IMFWorldEconomicOutlook;MoodysCountryCreditStatisticalHandbook;BIS;CIA
WorldFactbook;Haymanestimates.
ConsidertheUnitedStatesbalancesheet.The
UnitedStatesisrapidlyapproachingtheCongressionally-mandateddebtceiling,whichwasmostrecentlyraisedinFebruary2010to$14.2trilliondollars(including$4.6trillion
heldbySocial
8/3/2019 48887451-Kyle-Bass-Feb-14
19/134
Securityandothergovernmenttrustfunds).Every
onepercentagepointmoveintheweighted-averagecostofcapitalwillend
upcosting$142billionannuallyininterestalone.Assuminganythingbutaninverted
curve,amovebackto5%shortrateswillincreaseannualUSinterestexpensebyalmost$700billionannuallyagainstcurrentUSgovernmentrevenuesof
$2.228trillion(CBO
8/3/2019 48887451-Kyle-Bass-Feb-14
20/134
FY2011forecast).EvenifUSgovernment
revenuesweretoreachtheirpriorpeakof$2.568trillion(FY2007),
theimpactofariseininterestratesisstillstaggering.Itis
plainandsimple;theUScannotaffordtoleavetheZLBcertainlynotonceitaccumulatesafurther$9trillionindebtoverthenext
10years(which
8/3/2019 48887451-Kyle-Bass-Feb-14
21/134
willincreasetheannualinterestbillby
anadditional$90billionper1%).IfUSratesdostartmoving,
itwillmostlikelybeforthewrong(andmostdire)reasons.Academic
researchonthissubjectisbestdefinedasalchemymasqueradingashardscience.Theonlyhistoricalobservationofadebt-drivenZIRPhasbeenJapan,and
thetrueconsequences
8/3/2019 48887451-Kyle-Bass-Feb-14
22/134
haveyettobefelt.Neverbefore
havesomanydevelopedwesterneconomiesbeeninthesameZLBboat
atthesametime.Bernanke,ourcurrentWizardofOz,offeredthislittle
tidbitofconjectureinapieceheco-authoredin2004whichwasappropriatelytitledMonetaryPolicyAlternativesattheZeroBound:AnEmpiricalAssessment.He
clearlydidnot
8/3/2019 48887451-Kyle-Bass-Feb-14
23/134
wanttocallthispaperaHypothetical
Assessment(asitreallywas).
3
Hayman
CapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
24/134
Despiteourrelativelyencouragingfindingsconcerning
thepotentialefficacyofnon-standardpoliciesatthezerobound,cautionremains
appropriateinmakingpolicyprescriptions.Althoughitappearsthatnon-standardpolicymeasuresmay
affectassetpricesandyieldsand,consequently,aggregatedemand,considerableuncertaintyremainsaboutthesizeandreliabilityoftheseeffectsunderthecircumstancesprevailingnear
thezerobound.
8/3/2019 48887451-Kyle-Bass-Feb-14
25/134
Theconservativeapproachmaintainingasufficientinflationbuffer
andapplyingpreemptiveeasingasnecessarytominimizetheriskofhitting
thezeroboundstillseemstoustobesensible.However,suchpolicies
cannotensurethatthezeroboundwillneverbemet,sothatadditionalrefiningofourunderstandingofthepotentialusefulnessofnonstandardpoliciesfor
escapingthezero
8/3/2019 48887451-Kyle-Bass-Feb-14
26/134
boundshouldremainahighpriorityfor
macroeconomists.
-Bernanke,Reinhart,andSack,2004.(EmphasisAdded)Itis
tellingthatheusestheverbescapinginthatfinalsentenceinstinctively
heknowstheZLBisdangerous.
TheKeynesianEndpointThingsBecomeNon-Linear
AsProfessorKenRogoff(HarvardSchoolofPublic
PolicyResearch)describes
8/3/2019 48887451-Kyle-Bass-Feb-14
27/134
inhisnewbook,ThisTimeis
Different:EightCenturiesofFinancialFolly,sovereigndefaultstendtofollowbanking
crisesbyafewshortyears.Hisworkshowsthathistorically,theaverage
breakingpointforcountriesthatfinancethemselvesexternallyoccursatapproximately4.2xdebt/revenue.Ofcourse,thisisnotahardandfastruleandeach
countryisdifferent,
8/3/2019 48887451-Kyle-Bass-Feb-14
28/134
butitdoesprovideausefulframe
ofreference.Webelievethatthetwocriticalratiosforunderstandingand
explainingsovereignsituationsare:(1)sovereigndebttocentralgovernmentrevenueand
(2)interestexpenseasapercentageofcentralgovernmentrevenue.Webelievethattheseratiosarebetterincrementalbarometersoffinancialhealththanthe
oftenreferenceddebt/GDP
8/3/2019 48887451-Kyle-Bass-Feb-14
29/134
GDPcalculationscanbeverymisleading.
Webelievethatcentralgovernmentrevenueisamoreprecisemeasureof
agovernmentssubstantiveabilitytopaycreditors.EconomistsuseGDPasahomogenizing
denominatortoillustratebroadpointswithoutparticularattentiontotheidiosyncrasiesofeachnation.Usingourpreferreddebtyardsticks,wefindthatwhendebtgrows
tosuchlevels
8/3/2019 48887451-Kyle-Bass-Feb-14
30/134
thatiteclipsesrevenuemultipletimesover,
(everycountryisuniqueandthemaximumsustainablelevelofdebtfor
anygivencountryisgovernedbyamultitudeoffactors),thereisa
non-linearrelationshipbetweenrevenuesandexpensesinthattotalexpendituresincreasefasterthanrevenuesduetotheriseininterestexpensefromahigherdebt
loadcoupledwith
8/3/2019 48887451-Kyle-Bass-Feb-14
31/134
ahigherweighted-averagecostofcapitaland
thenaturalinflationofdiscretionaryexpenditureincreases.Themeansbywhichsovereigns
fallintothisinescapabledebttrapisthecriticalpointwhichmustbe
understood.Insomecases,on-balancesheetgovernmentdebts(excludingpensionshort-fallsandunfundedholesinsocialwelfareprograms)exceed3xrevenue,andcurrentfiscalpolicies
pointtoa
8/3/2019 48887451-Kyle-Bass-Feb-14
32/134
continuingupwardtrend.4
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
33/134
TheBankofInternationalSettlementsreleased
apaperinMarch2010thatisparticularlysobering.Thepaper,entitled
TheFutureofPublicDebt:ProspectsandImplications(Cecchetti,MohantyandZampolli)paints
ashockingpictureofthetrajectoryofsovereignindebtedness.WhiletheauthorsfocusonGDP-basedratiosasopposedtoourpreferredmetrics,theforecastis
neverthelessalarming.The
8/3/2019 48887451-Kyle-Bass-Feb-14
34/134
studyfocusesontwelvemajordevelopedeconomies
andfindsthatdebt/GDPratiosriserapidlyinthenextdecade,exceeding
300%ofGDPinJapan;200%intheUnitedKingdom;and150%in
Belgium,France,Ireland,Greece,ItalyandtheUnitedStates.Additionally,theauthorsfindthatgovernmentinterestexpenseasapercentofGDPwillrisefrom
around5%[on
8/3/2019 48887451-Kyle-Bass-Feb-14
35/134
average]todaytoover10%inall
cases,andashighas27%intheUnitedKingdom.Theauthors
pointoutthatwithoutaclearchangeinpolicy,thepathisunstable.1
Whencentralbankersengageinnon-standardpoliciesinanattempttogrowrevenues,theresultingincreaseininterestexpensemaybemanymultiples
ofthechange
8/3/2019 48887451-Kyle-Bass-Feb-14
36/134
incentralgovernmentrevenue.Forinstance,Japan
currentlymaintainscentralgovernmentdebtapproachingonequadrillion(onethousandtrillion)Yen
andcentralgovernmentrevenuesareroughly48trillion.Theirratioofcentralgovernment
debttorevenueisafatal20x.Aswediscusslater,Japansailedthroughtheirsolvencyzonemanyyearsago.Minuteincreasesintheweighted-average
costofcapital
8/3/2019 48887451-Kyle-Bass-Feb-14
37/134
forthesegovernmentswillforcetheminto
whatwehavetermedtheKeynesianendpoint -wheredebtservicealoneexceedsrevenue.
InJapan,somethoughtfulmembersoftheDiet(Japansparliament)decided
thattheymusttargetamoreaggressivehardinflationtargetof2-3%.Forthepast10+years,theinstitutionalinvestorbaseinJapanhasagreed
tobuy10-year
8/3/2019 48887451-Kyle-Bass-Feb-14
38/134
bondsandreceivelessthan1.5%in
nominalyield,aspersistentdeflationbetween1-3%peryearprovidesthebuyer
witharealyieldsomewherebetween2.5%-4.5%(nominalyieldplusdeflation).(Webelieve
thatJapaneseinstitutionalinvestorsmaybasesomeoftheirinvestmentdecisionsonrealyieldswhereasexternalJGBinvestorsdonot.)IftheBankofJapan
(BOJ)wereto
8/3/2019 48887451-Kyle-Bass-Feb-14
39/134
targetinflationofjust1%to2%,
whatratewouldinvestorshavetochargeinordertohavea
positiverealyield?Inordertoachieveevena2.5%realyield,the
nominal(orstated)yieldsonthebondswouldhavetobeinexcessof3.5%.Hereinliestherealproblem.IftheBOJchoosesan
inflationtarget,the
8/3/2019 48887451-Kyle-Bass-Feb-14
40/134
Japanesecentralgovernmentscostofcapitalwill
increasebymorethan200basispoints(overtime)andincreasetheir
interestexpensebymorethan20trillion(every100basispointchangein
theweighted-averagecostofcapitalisroughlyequalto25%ofthecentralgovernmentstaxrevenue).Forcontext,ifJapanhadtoborrowatFrances
rates(aAAA-rated
8/3/2019 48887451-Kyle-Bass-Feb-14
41/134
memberofthe
U.N.Security
Council),theinterestburdenalonewouldbankruptthegovernment.Theirdebtservice
alonecouldeasilyexceedtheirentirecentralgovernmentrevenue -checkmate.TheZIRPtrapsnaps
shut.Thebond1http://www.bis.org/publ/work300.pdf(p.9)
5
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
42/134
marketstendtoanticipateeventslong
beforetheyhappen,andwebelieveaJapanesebondcrisisislurking
rightaroundthecornerinthenextfewyears.
Below,please
findapieceofourworkdetailingsomeimportantcountriesandthesekeyrelationships:
GovernmentDebt/Revenue(2010E)
2000%1900%
400%300%200%
8/3/2019 48887451-Kyle-Bass-Feb-14
43/134
100%0%
Note:Iceland
dataincludesgrossIcesaveliabilities.Source:MoodysCountryCreditStatisticalHandbook.Japan
datasourcedfromJapaneseMinistryofFinance.
GovernmentInterestExpense/
Revenue(2010E)
35%
30%25%20%15%10%5%0%
Note:IcelanddataincludesgrossIcesaveliabilities.
Source:Moodys
8/3/2019 48887451-Kyle-Bass-Feb-14
44/134
CountryCreditStatisticalHandbook;Haymanestimates;Japan
datasourcedfromJapaneseMinistryofFinanceFY2011budget.
6
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
45/134
WhatotherMacroParticipantsHaveMissed
andtheComingofX-Day
Japanhasbeenakey
focusofourfirmforthelastfewyears.Whileitrepresentsa
smallamountofcapitalatriskintheHaymanCapitalMasterFundL.P.,itremainstheplacewherewebelievethemostasymmetryandoutsized
returnswillbe
8/3/2019 48887451-Kyle-Bass-Feb-14
46/134
generatedinthecomingyears.Wecould
spendanother10pagesdoingadeepdiveintoourentirethesis,
butwewillsavethatforourinvestordinnerscheduledforApril26th.
Fornow,WearegoingtostickwiththecatalystsfortheupcomingJapanesebondcrisis.
Investingwiththeexpectationsofrisingrates
inJapanhas
8/3/2019 48887451-Kyle-Bass-Feb-14
47/134
beendubbedthewidowmakerbysome
oftheworldsmosttalentedmacroinvestorsoverthepast15-20years.
Itisourbeliefthattheseinvestorsmissedacrucialpiecetothe
puzzlethatmighthavesavedthemuntoldmillions(andmaybebillions).TheyoperatedundertheassumptionthatJapaneseinvestorswouldsimplygrowtiredoffinancing
thegovernment
8/3/2019 48887451-Kyle-Bass-Feb-14
48/134
directlyorindirectlywithsucha
lowreturnoncapital.However,webelievethattheabsenceofattractive
domesticinvestmentalternativesandthepreponderanceofnewdomesticsavingsgeneratedeachyear
enabledtheJapanesegovernmenttoself-financebysellinggovernmentbonds(JGBs)toitshouseholdsandcorporations.Thisisdonedespitetheirpreferenceforcashand
timedepositsvia
8/3/2019 48887451-Kyle-Bass-Feb-14
49/134
financialinstitutions(suchastheGovernmentPension
InvestmentFund,otherpensionfunds,lifeinsurancecompanies,andbankslikeJapan
Post)thathavelittleappetiteformorevolatilealternativesandlittleopportunityto
investinnewprivatesectorfixed-incomeassets.Essentially,theytakeinthesavingsasdepositsandrecyclethemintogovernmentdebt.Thus,itisnecessary
tounderstandhow
8/3/2019 48887451-Kyle-Bass-Feb-14
50/134
largethepoolofcapitalforthe
saleofnewgovernmentbonds.
Wefocusonincrementalsales
orflowversusthestockofaggregateddebt.Tosimplify,theavailablepools
ofcapitalarecomprisedoftwoaccountshouseholdandcorporatesector.TheformeristheincrementalpersonalsavingsoftheJapanesepopulation,andthe
latteristhe
8/3/2019 48887451-Kyle-Bass-Feb-14
51/134
after-taxcorporateprofitsofJapanesecorporations.These
twopiecesofthepuzzlearetheincrementalpoolsofcapitalto
whichthegovernmentcansellbonds.Asreflectedinthechartbelow,as
longasthesumofthesetwonumbersexceedstherunninggovernmentfiscaldeficit,theJapanesegovernment(intheory)hastheabilitytoself-financeor
selladditionalgovernment
8/3/2019 48887451-Kyle-Bass-Feb-14
52/134
bondsintothedomesticpoolofcapital.
Aslongasthebluelinestaysabovetheredline,the
Japanesegovernmentcancontinuetoself-finance.Thisisthekeyrelationshipthemacro
investorshavemissedforthelastdecadeitisnotaquestionofwillingness,butoneofcapacity.AstheJapanesegovernmentsstructuraldeficit
growswider(driven
8/3/2019 48887451-Kyle-Bass-Feb-14
53/134
bytheincreasingcostofanageing
population,higherdebtservice,andsecularlydecliningrevenues)thedivergencebetweensavings
andthedeficitwillincrease.Interestinglyenough,AlanStanfordandBernieMadoffhave
recentlyshownuswhattendstohappenwhenthisself-financingrelationshipinverts.Whentheavailableincrementalpoolofcapitalbecomessmallerthantheincremental
7
8/3/2019 48887451-Kyle-Bass-Feb-14
54/134
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
55/134
financingneedsofthegovernmentor
aPonzischeme,therubberfinallymeetstheroad.Theseveredecline
inthepopulationinadditiontoJapaneseresistancetolargescaleimmigrationcombine
toformavolatilecatalystforatoxicbondcrisisthatcouldverylikelybethelargesttheworldhaseverwitnessed.Belowischart
depictingthisrelationship:
8/3/2019 48887451-Kyle-Bass-Feb-14
56/134
JapaneseNetDomesticSavingsvs.
GeneralGovernmentDeficit
(%ofGDP)
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
Excessdomesticsavingsprovidedsignificant
roomforprivateand
8/3/2019 48887451-Kyle-Bass-Feb-14
57/134
publiccreditexpansionatlowinterestratesThe
deficit/savingsgapneedstobefilledfromexternalcapital
NetSavings/GDPDeficit/GDPSource:IMF
WorldEconomicOutlook;JapanNationalAccounts;Haymanestimates.
Personalsavingsin
Japan,whilehistoricallyhigherthanalmostanyothernation,isnowapproachingzeroandwillfallbelowzerointhecomingyears(asrecentlypointed
outbythe
8/3/2019 48887451-Kyle-Bass-Feb-14
58/134
BankofTokyoMitsubishi)asmorepeople
leavetheworkforcethanenter.Foratleastthenext20years,
webelievethatJapanwillhaveoneofthelargestnaturalpopulationdeclines
inadevelopedcountry.
JapaneseHouseholdSavingsRateand60+PopulationRatio
(%)
BTMUbelievesJapanesehouseholdsavingswillcrossintonegativeterritoryin2015thedownwardtrendisirreversiblewithoutasignificantchangeindemographicprofile.Source:BankofTokyo
Mitsubishi.
8/3/2019 48887451-Kyle-Bass-Feb-14
59/134
8
HaymanCapitalManagement,
L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
60/134
OnelastpointaboutJapanthat
ismorepsychologicalthanquantitative:thereisaninterestingpsychologicalparallelbetween
JGBsandUShousing.Inthelast20years,Japanesestockshavedropped
75%,Japaneserealestatehasdeclined70%(withhigh-endrealestatedropping50%inthelasttwoyears),andnominalGDPisexactlywhereit
was20years
8/3/2019 48887451-Kyle-Bass-Feb-14
61/134
ago.Whatoneassethasneverhurt
thebuyer?Whatoneassethasearneda20yearpro-cyclical,Pavlovianresponse
associatedwithsafetyandevenmoresafety?ThebuyersandownersofJGBs
haveneverlostmoneyinthepurchaseoftheseinstrumentsastheirinterestrateshavedonenothingbutfallforthebetterpartofthe
last2decades.
8/3/2019 48887451-Kyle-Bass-Feb-14
62/134
Itisfascinatingtoseeaninstrument/asset
beviewedasoneofthesafestintheworld(10-yrJGB
cashratesarecurrently1.21%)ataperiodoftimeinwhichthe
creditfundamentalshaveneverbeenriskier.WithoutrevealingtheMasterFundspositioninghere,wecertainlyintendtoexploittheinefficienciesofoptionpricingmodelsover
thenextfew
8/3/2019 48887451-Kyle-Bass-Feb-14
63/134
years.Theprimaryflawinpricingthe
riskofrisingJGByieldsistherelianceonhistoricalvolatilitywhich,
tothispointintime,hasremainedverylow.Webelievethatvolatility
willrisesignificantlyandthatcurrentmodelsundervaluethepotentialmagnitudeoffuturemovesinJGByields.
Withalloftheevidenceliterally
stackingupagainst
8/3/2019 48887451-Kyle-Bass-Feb-14
64/134
Japan,afewmembersofsomeof
themajorpoliticalpartiesarebeginningtodiscussandplanforthe
ominouslynamedX-Day.AccordingtoTheWallStreetJournalandBusinessWeek,X-Dayisthe
daythemarketwillnolongerwillinglypurchaseJGBs.Planningisintheveryearlystages,butcentersaroundhavingasetofseriousfiscal
changesthatcould
8/3/2019 48887451-Kyle-Bass-Feb-14
65/134
beannouncedimmediatelywiththeintentionof
givingtheBankofJapanthecovertheywillneedtopurchase
massiveamountsofJGBswithmoneyprintedoutofthinair.Ifthe
BOJweretoengageinthistypeofbehavior,webelievetheYenwouldplummetagainstthebasketofkeyworldcurrencieswhichwouldin
turndriveJapanese
8/3/2019 48887451-Kyle-Bass-Feb-14
66/134
interestrateshigherandfurtheraggravatetheir
bondcrisis.NeithertheFed,theBankofEnglandnortheEuropean
CentralBankhavebeenabletoconsistentlysuppressbondyieldsthroughpurchaseswith
printedmoneythebiggerthepurchase,thegreatertheriskofacollapseinconfidenceinthecurrencyandcapitalflight.Nomatterhow
theyattemptto
8/3/2019 48887451-Kyle-Bass-Feb-14
67/134
quellthecrisis,nomatterwherethey
turn,theywillrealizethattheyareincheckmate.
Will
GermanyGoAll-InoristhePriceTooHigh?
Webelieve
thatanappreciationoftheextentandlimitsofGermancommitmenttofullfiscalanddebtintegrationwiththerestoftheEurozoneiscrucial
tounderstandingthe
8/3/2019 48887451-Kyle-Bass-Feb-14
68/134
pathforwardforEuropeansovereigncreditissues.
DespiteconsistentattemptsbytheEuropeanCommissionandothermembers
oftheEurozonebureaucraticvanguardtopubliclypromoteasdonedealsvariousproposals
toextenddebtmaturities,engageindebtbuybacksanddramaticallyextendboththescopeandsizeoftheEFSFtheoutcomehasremainedin
doubt.In
8/3/2019 48887451-Kyle-Bass-Feb-14
69/134
9
HaymanCapital
Management,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
70/134
theend,thenationalgovernmentsof
thememberstateswilldeterminethesepoliciesregardlessofwhatunnamedEuropean
officialsleak
tothenewswires.
WebelievethatAngelaMerkelhas
heededthediscordintheGermandomesticpoliticalsphere(whereconsistentpollingshowsadeclineinsupportfortheEuroandanincreaseinbelief
thatGermanywould
8/3/2019 48887451-Kyle-Bass-Feb-14
71/134
havebeenbetteroffnotjoining)and,
asaresult,setaseriesofsubstantialcriteriaforanyGerman
approvaloffurtherreformandextensionoftheEFSFstructure.Theareascanvassed
balancedbudgetamendments,corporatetaxrateequalization,eliminationofwageindexationandpensionageharmonizationreadlikeawishlistforremakingthe
entireEurozoneinto
8/3/2019 48887451-Kyle-Bass-Feb-14
72/134
aresponsibleandconservativefiscalactorin
themoldofmodern-dayBerlin.However,webelieve(absentadramaticchange
inthepoliticalmood)thatseveralmemberstateswillneverallowtheserequests
tobecomebindingprerequisitesforfurtherfiscalintegration -theIrishandSlovaksontax,theFrenchonpensionage,theBelgiansandPortugueseonindexationand
almosteverybodyon
8/3/2019 48887451-Kyle-Bass-Feb-14
73/134
thebalancedbudgetamendment.
So
theEurozoneseemstobeatanimpassetheGermansare
reluctanttostepfurtherintothequagmireofperipheralsovereigndebtwithoutassurances
thatallnationswillbecompelledtobringtheirhousesinorder,andtherestoftheEurozonerejectstheburdenofaGermanfiscal
straightjacket.Wecontinue
8/3/2019 48887451-Kyle-Bass-Feb-14
74/134
tobelievethat,intheend,the
Germanpeoplewillnotgoall-intobackstoptheprofligacyandexpediency
oftherestoftheEurozonewithoutacredibleplantorestructureexisting
debtsandensurethattheycanneverreachsuchdangerouslevelsagain.
Avarietyofsolutionshavebeenproposedtoallowthede-facto
restructuringofGreek
8/3/2019 48887451-Kyle-Bass-Feb-14
75/134
debtwithoutengaginginformaldefault.The
ECBandECcontinuetobeobsessedwithpreventingwhattheyhave
deemedtobespeculatorsfrombenefitingviathetriggeringofCDSonGreek
sovereigndebt.Notonlyisthispointlesslystatistinitsoppositiontomarketparticipants,butitisalsocounterproductivetotheirotherstatedaimsof
maintainingfinancialstability
8/3/2019 48887451-Kyle-Bass-Feb-14
76/134
andbanksolvency,asmuchofthe
notionalCDSoutstandingagainstGreeksovereigndebtisheldasabona
fidehedge.DatafromtheDepositoryTrustandClearingCorporation(DTCC)clearlyinvalidates
theassertionthataroguearmyofspeculatorsisinstigatingaGreekbondcrisisforaprofit.AccordingtotheDTCC,thereisonly$5.7
billionnetnotional
8/3/2019 48887451-Kyle-Bass-Feb-14
77/134
CDSoutstandingonsovereignobligationsofthe
HellenicRepublic,versusapproximately$489billionoftotalsovereigndebtoutstanding(as
ofSeptember30,2010).NetCDSonGreeksovereigndebtisequalto
1.2%ofdebtoutstanding.2
AnyrevaluationofdebtthatreducestherealornominalvalueofGreecesdebtoutstandingeitherthroughmaturity
extensionsorthrough
8/3/2019 48887451-Kyle-Bass-Feb-14
78/134
discounteddebtbuybacksnecessarilycreatesaloss
forexistingholders.The
2http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=5.
10
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
79/134
Europeanstresstestsshowedthatup
to90%ofsovereigndebtisheldtomaturitybyinstitutionalplayers,
andthusisstillatriskoffuturewritedowns.Thereisno
incentivetovoluntarilysubmittoanextensionorabuybackthatreducesthenominalorrealvalueofthesebonds,andcoercionwillsimply
forcethelosses.
8/3/2019 48887451-Kyle-Bass-Feb-14
80/134
Intheendthemathematics
ofthedebtsituationinGreeceareinescapablethereismore
than350bnofGreeksovereigndebtandatleast200billionofit
needstobeforgiventoallowthedebttobeserviceablegivencurrentyieldsandthegrowthprospectsoftheGreekgovernmentsrevenues.Thisloss
hastobe
8/3/2019 48887451-Kyle-Bass-Feb-14
81/134
bornebysomeoneeitherbondholdersor
non-Greektaxpayers.ThecurrentpolicyprescriptionthathasGreeceborrowingitsway
outofdebtispurefolly.Thatistherealityofasolvency
crisisasopposedtotheliquiditycrisisthattheEurozonehasassumedtobetheproblemsincelate2008.
Untilaworkableplan
iscreatedthat
8/3/2019 48887451-Kyle-Bass-Feb-14
82/134
sharestheburdenoftheselossesand
thenformalizesarecapitalizationplan,itwillcontinuetofesterandspread
discordintherestoftheEurozone.Infact,itisclearfrom
thepriceandvolumeactioninperipheralbondsthatthereisaneffectiveinstitutionalbuyerstrike,anditisonlythemoneyprintingbythe
ECBthatis
8/3/2019 48887451-Kyle-Bass-Feb-14
83/134
keepingtheseyieldsfromenteringstratosphericlevels
yetstilltheygrindhigher.Someofthismoveinperipheral
Europeanbondyieldshasbeendrivenbybroadermoveshigherinrates,but
puttingthesespreadsaside,itistheabsoluteyieldlevelsthatgovernserviceabilityforthesestatesandbothSpainandPortugalarecurrentfinancingat
unsustainablyhighlevels.
8/3/2019 48887451-Kyle-Bass-Feb-14
84/134
Absentaseriousrestructuringplan,
theEurozonewillcontinuetoreelfromoneminicrisistothe
nexthopingtoputoutspotfiresuntilthebankingedificefinallycomes
crashingdownunderitsownweight.Inourview,itwillseverelyaffectafewstatesconsideredtobeinthecoreofEuropeas
well.
8/3/2019 48887451-Kyle-Bass-Feb-14
85/134
OfIcelandandGreece
We
recentlytraveledtoGreeceandIcelandinordertobetterunderstandthe
situationsineachofthesefinancialwastelands.Wemetwithcurrentandformer
governmentofficialsaswellaslargebanksandothersystemicallyimportantcompaniesandwealthyfamilies.Thistripconfirmedourquantitativeanalysisandultimatelywasa
lessoninpsychology.
8/3/2019 48887451-Kyle-Bass-Feb-14
86/134
Wemetmanyinterestingpeopleinboth
placesbutvirtuallyallofthemlivedinsomestateofdenial
withregardtoeachcountrysfinances.AsMarkTwainoncesaid,Denialaint
justariverinEgypt.
InGreece,theycurrentlyspend14%ofgovernmentrevenuesoninterestaloneandarefranticallyattemptingtoget
toaprimary
8/3/2019 48887451-Kyle-Bass-Feb-14
87/134
surplus.Thisisanalogoustoaheavily
indebtedcompanytryingtogettopositiveEBITDAwhilestillbeingcash
flownegativeduetointerestexpense.TheGreekgovernmentsrevenueisamonstrous
40%ofGDP(only15%intheUS)andGreecehasraisedtheirVATtaxto23%fromjust17%thispastsummer.Wedont
11
8/3/2019 48887451-Kyle-Bass-Feb-14
88/134
HaymanCapitalManagement,L.P.
2011
8/3/2019 48887451-Kyle-Bass-Feb-14
89/134
thinktheycanpossiblyburdentheir
tax-payingpopulationmuchmoreeventhoughtheprevalentthoughtinGreeceis
thattheyneedtotaxthepopulacemoretomakeupforthose
whopaynotax.Greeceskeyproblemstodayareallofthesmallandmediumenterprise(SME)loansthatarebeginningtodefault.Asthe
governmentbeginsto
8/3/2019 48887451-Kyle-Bass-Feb-14
90/134
increasetaxesontheGreeks,businessesare
movingoutofGreecetoplaceslikeCyprus,Romania,andBulgaria(analogous
toCalifornians,Illinoisans,andNewYorkersmovingtoTexas)wheretaxratesare
muchlower.GiventhefiscalsituationinGreece,arestructuringoftheirdebts(i.e.default)seemsthemostprobableoutcome.Atnearly140%sovereigndebt
toGDPand
8/3/2019 48887451-Kyle-Bass-Feb-14
91/134
3.4xdebttogovernmentrevenues,Greeceput
itselfintocheckmatelongago.
Inoneofthemore
comicalmeetingswehaveeverattended,onechiefeconomistatoneofthe
largestbanksinGreecesurmisedthatifthesovereigncouldtransfer100billionofgovernmentdebttothepersonalbalancesheetsofthepopulationthat
itwouldbe
8/3/2019 48887451-Kyle-Bass-Feb-14
92/134
apotentialmagicalfixforthestates
finances(andsubsequentlypointedoutthatGreecewouldnotbesuchanoutlier
as
aresult).WhenaskedhowtheGreekstatecouldaccomplishsuch
afeat,hesaidhedidnotknowandthatmaybeHarryPottercouldfindaway.Itishardtobelieve,buthewas
completelyserious.For
8/3/2019 48887451-Kyle-Bass-Feb-14
93/134
him,itwasntimportanthoworif
itcouldhappenaslongasthepotentialoutcomemadethe
situationlookbetterforprospectivebondinvestors.Greekbankshavebetween33.5xtheir
entireequityinvestedinGreekgovernmentbonds.Considerthatifthesebondstooka70%haircut(Haymansestimateofthenecessarywrite-down),Greekbankswould
losemorethan
8/3/2019 48887451-Kyle-Bass-Feb-14
94/134
twicetheirequity.
Shortlyafter
thismeeting,myhostinformedmeofanauditrecentlydoneon
oneofthelargesthospitalsinAthens.ThishospitalwashemorrhagingEuros,and
theGreekgovernmentisrequiredtomakeupthedeficitwithcapitalinjections.Officialsbegananinquiryintotheselossesandfound45gardenerson
staffatthe
8/3/2019 48887451-Kyle-Bass-Feb-14
95/134
hospital.Themostinterestingfactaboutthe
hospitalwasthatitdidnothaveagarden.Thecorruptionis
endemicinthesociety,anditisnowonderthatGreecehasbeen
aserialdefaulterthroughouthistory(91aggregateyearsinthelast182orapproximatelyhalfthetime).Itisunfortunatethatitisabout
tohappenonce
8/3/2019 48887451-Kyle-Bass-Feb-14
96/134
again.Althoughaswehavepreviously
stated,restructuringisactuallythegatewaytorenewedgrowthandprosperityover
timewehaveidentifiedatleasttwoassetsthatwewouldlike
toowninGreeceinapost-restructuringenvironment.
Iceland,ontheotherhand,hasasimilarbalancesheetanddifferentculture.Icelands
abruptdeclineinto
8/3/2019 48887451-Kyle-Bass-Feb-14
97/134
financialobscuritywasthedrivingforceat
Haymanthatpromptedustolookattheworldthroughadifferent
lens.IfirstencounteredIcelandshistoryandcultureinabookIhad
readseveralyearsagotitledCollapse:HowSocietiesChoosetoFailorSucceedwrittenbyPulitzerPrizewinnerJaredDiamond.Diamondisaprofessorof
geographyatUCLA
8/3/2019 48887451-Kyle-Bass-Feb-14
98/134
andadeterminedenvironmentalist.Hisanalysisis
basedonenvironmentaldamagethat
12
Hayman
CapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
99/134
societiesinflictonthemselvesandthat
thereareothercontributingfactorstoacollapse.Onecommentmadeearly
inthisbookcaughtmyeyemanyyearsago:
Somesocieties
thatIshalldiscuss,suchastheIcelandersandtheTikopians,succeededinsolvingextremelydifficultenvironmentalproblems,havetherebybeenabletopersistfor
alongtime,
8/3/2019 48887451-Kyle-Bass-Feb-14
100/134
andarestillgoingstrongtoday.
-JaredDiamond,Collapse:HowSocietiesChoosetoFailorSucceed.
WhatcaughtmyattentionwasthefactthatDiamondusesIcelandas
acountrythathasbeenabletogetitrightasasocietyforaverylongtime.Whatbroughtthemtotheirkneesin
thelastfew
8/3/2019 48887451-Kyle-Bass-Feb-14
101/134
yearswasacompletedisregardforthe
risksinherentinallowingtheirbankingsystemtogrowunchecked(dueto
theoverwhelminglypositivecontributiontoGDPandjobgrowth).Inanationof
318,000peopleandapproximately$20billionUSDofGDP(2008),Icelandhadover$200billionUSDinassetsinjustthreebanks.Moreimportantly,Iceland
hadover34x
8/3/2019 48887451-Kyle-Bass-Feb-14
102/134
itscentralgovernmentrevenueinbankingassets.
Toputthisintocontext,a3%lossratiointhebanking
systemwouldcompletelywipeoutthebanksandthecountrysabilitytodeal
withtheproblem.Ofcourse,thisispreciselywhathappenedandIcelandfindsitselftodayinastateofsuspendedanimation.Thegovernmentimmediatelyimposed
capitalcontrols(money
8/3/2019 48887451-Kyle-Bass-Feb-14
103/134
wasallowedin,butnomoneywas
allowedout)andbeganaprocessofdeterminingwhichdebtstheycould
payandfromwhichmultilaterallendinginstitutionstheywouldhavetobeg.Conventional
wisdomsuggeststhatIcelandhasturnedthecorneranddealtwithitsdemonsandwillemergestrongerandsmartergoingforward.Unfortunately,wedontbelieve
thattobe
8/3/2019 48887451-Kyle-Bass-Feb-14
104/134
thecaseyet.
Icelandcurrently
spendsanestimated118billionIcelandickroneroninterestexpense(includinggross
interestonIcesaveliabilities)aloneagainstapproximately600billionkronerofrevenuesat
aweighted-averagecostofcapitalofroughly4.7%(evenwithheavilysubsidizedloansfromtheIMFandotherNordiccountries).Withgrossdebtsasa
percentofGDP
8/3/2019 48887451-Kyle-Bass-Feb-14
105/134
(includingIcesave)thatexceedGreece(whose10-yr
bondsyieldover11%),wecouldntfindarealpublicmarketfor
Icelandsdebt.
Today,theirstatedexchangerateofkronertotheUSDhovers
around117andtheblackmarketoroffshorerateforthekroneris176(a33.5%devaluationfromtheonshorerate).Pre-crisis,theofficialexchange
ratewas60
8/3/2019 48887451-Kyle-Bass-Feb-14
106/134
kronertothedollareventhe
onshoreofficialrateshavedevaluedbynearly50%totoday.Governmentrevenue
declinedinnominaltermsthroughoutthecrisisevenwhilethecurrencydepreciatedby
50%!Imaginesufferinga50%devaluationinpurchasingpowerandaconcomitantincreaseinexportcompetitiveness,yetthegovernmentcannotmaintainnominalrevenue,whichis
akeypart
8/3/2019 48887451-Kyle-Bass-Feb-14
107/134
oftherecoveryplantoavoideventual
restructuring.WhileIcelandishardlyanoasisoffiscalreform,weexpect
overtimethatitwillrecognizethatrestructuringwillaffordthebestopportunity
tosharefinancialpainevenlyandrestartalongthepathofgrowth.LikeGreece,wehaveidentifiedattractiveassetsand
13
HaymanCapital
8/3/2019 48887451-Kyle-Bass-Feb-14
108/134
Management,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
109/134
investmentopportunitiesinIcelandoncethe
restructuringoccursandcapitalcontrolsarelifted,allowingthecurrencytodepreciate
furthertowardsarealmarketrate.
Icelandisamicrocosmof
whatwentwrongwiththeworld,butaftertheIMFandNordicloans,attentionwasdivertedawayfromtheproblem.IcelandandIrelandsharesimilar
rootswhenit
8/3/2019 48887451-Kyle-Bass-Feb-14
110/134
comestotheiracuteproblems.Withthe
developmentoftheEuropeanUnionandthecreationofaEuropeanfree-trade
zone,inefficiencies
wereexploitedbetweencountrieswhohaddifferingtaxanddepositstructures.
SmallcountrieslikeIrelandandIcelandcouldactuallycompetewithmuchlargercounterpartsbyofferingslightlyhigherdepositrateswithprogramslikeIcesaveaccounts.The
keyproblemwas
8/3/2019 48887451-Kyle-Bass-Feb-14
111/134
thatnoprovincialregulatorpaidanyattention
tothesizeandleverageineachcountrysbankingsystemsoreven
crossbordercapitalflows.Inmeetingswithkeypoliticians,academics,andregulatorsin
early2009,itbecameclearthatabsolutelynobodywaspayingattentiontothegrosssizeofeachcountrysbankingsystemsortheabilitytodeal
withtheproblems
8/3/2019 48887451-Kyle-Bass-Feb-14
112/134
emanatingfromthecrisis.
Both
IcelandandGreecewillhavetorestructuretheirdebtsbeforetheyare
toattractsustainedforeigndirectinvestmentagain.Webelievelossesontheirgovernment
andgovernmentguaranteedbondswillexceed50%andnewchaptersinfinancialhistorywillbewritten.Untilthen,weaskallofourreadersto
rememberaquote
8/3/2019 48887451-Kyle-Bass-Feb-14
113/134
fromC.NorthcoteParkinson:Delayisthe
deadliestformofdenial.
InflationAnImmediateConcern
Wewillkeepourthoughtsonthissubjectbriefandstraightforward.While
theinflation/deflationdebateisvigorouslydefendedonbothsides,andwecertainlyrecognizetheongoingneedfordeleveragingwhichshouldapplydeflationarypressures,itis
difficulttoignore
8/3/2019 48887451-Kyle-Bass-Feb-14
114/134
simpledatawhichpointstothecontrary.
Infact,wefindveryfewassetsaroundtheworldoutsideof
UShousingthatareactuallydeflatinginvalue.Hardandsoftcommoditiesacross
virtuallyallclassificationscontinuetoclimbinvalue(innominalterms)andmanyareatornearall-timehighs.
14
HaymanCapitalManagement,
8/3/2019 48887451-Kyle-Bass-Feb-14
115/134
L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
116/134
CommodityPriceIndiciesfromJanuary2009
White=FrontmonthWTICrudeFutureRed=
BloombergSpotPreciousMetalsIndexYellow=BloombergSpotBaseMetalsIndexGreen
=UBSBloombergCMCIAgricultureIndexSource:Bloomberg.
AveryinterestingchartfromarecentGoldmanSachsresearchpublicationcaughtourattention.The
authorshighlightedthe
8/3/2019 48887451-Kyle-Bass-Feb-14
117/134
severeriskstoheadlineinflationstemmingprimarily
fromglobalfoodprices.Morespecifically,theyassesstherisktoheadline
inflationonacountry-by-countrybasisinascenariowherelocalfoodpricescatch
uptointernationalfoodpricesinlocalcurrency(aswasthepatterninthe2007-2008foodinflationspike).
Theresultsarealarming:
PhilippinesDec-10
8/3/2019 48887451-Kyle-Bass-Feb-14
118/134
2.99HeadlineifInternationalFoodPricesRemain
atCurrentLevelsQ22011Change10.067.07SwitzerlandDec-100.52Headline
ifInternationalFoodPricesRemainatCurrentLevelsQ22011Change1.581.06
Russia8.7315.006.27Japan0.000.920.92China4.769.064.30Mexico4.435.090.66Chile2.996.593.60Poland2.903.550.65Korea
3.506.252.75
8/3/2019 48887451-Kyle-Bass-Feb-14
119/134
Euroland2.192.710.52Israel2.575.24
2.67Indonesia7.007.340.34Turkey6.409.062.66Hungary4.614.83
0.22Singapore4.586.632.05Sweden2.112.200.09HongKong3.084.77
1.69UK4.774.55(0.22)Brazil5.787.441.66Taiwan0.640.30(0.34)SouthAfrica3.484.871.39India8.297.53(0.76)USA1.392.54
1.15Norway2.72
8/3/2019 48887451-Kyle-Bass-Feb-14
120/134
1.75(0.97)CzechRepublic2.333.401.07
Source:GoldmanSachsGlobalEconomics,CommoditiesandStrategyResearch,Global
Viewpoints,February9,2011.15
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
121/134
Webelievethatthatcommodityprice
inflationhasprimarilybeendrivenbydemandcoupledwith(insomecases)
supply-sideshocksin2010.Interestingly,UnitedStatescoreinflationwillnotmovematerially
untiltheUShousingmarketturns,whichwebelievecouldbeupto3yearsaway.Thereasonforthisphenomenonisthathousing(excluding
theenergycomponent)
8/3/2019 48887451-Kyle-Bass-Feb-14
122/134
comprisesroughly37%oftheheadlineCPI
calculationand49%ofthecoreCPIcalculation3.Therestisjust
details,especiallywhenfoodandenergyareremoved.Unfortunately,ifyoueator
driveeveryday,youarealreadyfeelingtheimpactofinflation.
UnweightedCPIComponents(December2008=100)
95100105110115120125130Dec-08Jan-09
Feb-09Mar-09Apr-09
8/3/2019 48887451-Kyle-Bass-Feb-14
123/134
May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09
Dec-09Jan-10Feb-10Mar-10Apr-10May-10Jun-10Jul-10Aug-10Sep-10Oct-10Nov-10
Dec-10
HeadlineCPICoreCPIFoodEnergyHousingMedicalCareOther
Goods&ServicesRecreationTransportationApparelEducation&Communication
Note:HousingandTransportationcomponentsshownaboveeachincludetheirrespectiveenergycomponents(approximately
10%and29%
8/3/2019 48887451-Kyle-Bass-Feb-14
124/134
ofHousingandTransportation,respectively).Forillustrative
purposes,Energyisalsoshownasaseparateitem.Source:FederalReserve
BankofSt.Louis.
Justremember:
Hyperinflationsarealways
causedbypublicbudgetdeficitswhicharelargelyfinancedbymoneycreation.Ifinflationacceleratesthesebudgetdeficitstendtoincrease(TanzisLaw).
-PeterBernholz,Monetary
8/3/2019 48887451-Kyle-Bass-Feb-14
125/134
RegimesandInflation.(EmphasisAdded)
WithHelicopterBenprinting$3.3billionperday($2.3millioneveryminute),
theconsequencesofthisfinancialexperimentcouldbestaggering.
3http://www.bls.gov/cpi/cpiri2010.pdf.
16
HaymanCapitalManagement,L.P.2011
8/3/2019 48887451-Kyle-Bass-Feb-14
126/134
DoesDebtMatter?
We
spendalotoftimethinkingaboutanddiscussingsystemicrisk.This
isnotbecausewearenaturalpessimists;rather,webelievethatmanyinvestors
cannotseetheforestforthetreesastheygetcaughtupintheshort-livedeuphoriaofthemarkets.
Weaskourselves,and
urgeyouto
8/3/2019 48887451-Kyle-Bass-Feb-14
127/134
askyourselfonesimplequestion:Doesdebt
matter?Itwasexcessleverageandcreditgrowththatbroughttheglobal
economytoitsknees.Since2002,globalcredithasgrownatanannualized
rateofapproximately11%,whilerealGDPhasgrownapproximately4%overthesametimeframecreditgrowthhasoutstrippedrealGDPgrowthbyan
astounding275%.We
8/3/2019 48887451-Kyle-Bass-Feb-14
128/134
believethatdebtwillmatterlikeit
haseverytimesincethedawnoffinancialhistory.Withoutaresolution
ofthisglobaldebtburden,systemicriskwillfesterandgrow.
Whilewepositionourselvesdefensivelyagainsttheriskswehaveidentified,weareopportunisticinotherareasoftheportfolioandareconstantlyseekingunique
situationsacrossmultiple
8/3/2019 48887451-Kyle-Bass-Feb-14
129/134
assetclasses,longandshort.Weare
enthusiasticaboutsharingmoredetailonsomeofourkeypositionsat
ourupcominginvestordinneronApril26thinDallas.Atthedinner,the
investmentteamwilldiscussindetailsomeofthewaysinwhichweintendtoopportunisticallycapitalizeonourmacroviewsdiscussedherein.
BestRegards,
8/3/2019 48887451-Kyle-Bass-Feb-14
130/134
J.KyleBassManagingPartner
Theinformationsetforthhereinisbeingfurnishedonaconfidentialbasis
totherecipientanddoesnotconstituteanoffer,solicitationorrecommendationto
selloranoffertobuyanysecurities,investmentproductsorinvestmentadvisoryservices.Suchanoffermayonlybemadetoeligibleinvestorsby
meansofdelivery
8/3/2019 48887451-Kyle-Bass-Feb-14
131/134
ofaconfidentialprivateplacementmemorandumor
othersimilarmaterialsthatcontainadescriptionofmaterialtermsrelatingto
suchinvestment.Theinformationandopinionsexpressedhereinareprovidedforinformationalpurposes
only.AninvestmentintheHaymanFundsisspeculativeduetoavarietyofrisksandconsiderationsasdetailedintheconfidentialprivateplacementmemorandum
oftheparticular
8/3/2019 48887451-Kyle-Bass-Feb-14
132/134
fundandthissummaryisqualifiedin
itsentiretybythemorecompleteinformationcontainedthereinandinthe
relatedsubscriptionmaterials.Thismaynotbereproduced,distributedorusedforany
otherpurpose.Reproductionanddistributionofthissummarymayconstituteaviolationoffederalorstatesecuritieslaws.
17
Hayman
CapitalManagement,L.P.
8/3/2019 48887451-Kyle-Bass-Feb-14
133/134
2011
8/3/2019 48887451-Kyle-Bass-Feb-14
134/134