Japan Will Follow Europe With a Debt Crisis: Kyle Bass
LAS VEGAS — Japan is about to join Europe in the debt crisis ranks, with the two regions offering the best opportunities for investors to bet against, hedge fund manager Kyle Bass said.
While the world's attention has been focused on sovereign debt issues in Greece and elsewhere, Japan will emerge as a problem area as well as the European developmentsaccelerate, Bass told attendees at the Skybridge Alternatives, or SALT, conference.
"Greece will circle the drain and be ungovernable in the next 30 to 60 days," said Bass, founder of Heyman Capital and famous for presciently shorting subprime mortgage bonds before the industry collapsed. "Japan is in the crosshairs of the market...I've never seen more mispriced optionality in my entire life."
The Bank of Japan, the nation's equivalent of the U.S. Federal Reserve, is effectively monetizing the national debt by buying up 50 trillion yen-worth of Japanese Government Bonds, commonly referred to as JGBs in the marketplace, Bass said.
There are a number of perils commonly associated with the strategy of a central bank trying to print its way out of a debt crisis, not the least of which is inflation and lack of confidence in stability of debt, though Bass did not mention specific threats.
However, he said it's easy to see a crisis coming.
"The fact of the matter is this is no longer an exercise in quantitative analysis," he said. "It's a question of when, not if."
An aging Japanese population and entitlement culture are primary factors contributing to the national debt problem. Bass used disgraced money manager Bernie Madoff to make a point.
"Madoff taught us something," Bass said. "You can make promises for a long time as long as you don't have to live up to them."
As for Europe, Bass rejected the notion that Greece can put together an orderly default of its debt.
"It won't be orderly and I think in the end they're going to have to wipe out the troika," he said, referring to the European Union, International Monetary Fund and European Central Bank, a group that has tried to stave off the debt crisis from spreading.
As for investment choices, Bass promises that "you can effectively hedge yourself from this systemic risk."
He likes mortgages, specifically committing one-third of his portfolio to nonagency loans, or those not underwritten by government-sponsored enterprises Fannie Mae and Freddie Mac.
He likes housingin general, believing that "concentric circles" are coming together on the industry and indicating a turnaround.