Kyle Bass to David Faber (CNBC):
"Global debt has grown from 80 trillion dollars to 200 trillion dollars in the last ten years....a whopping 10.7% CAGR...this is not "deleveraging" as everyone seems to think the world is experiencing..."
"Global central bank balance sheet is growing by 16% per annum"
"Global population is growing by 1.6%"
"Global GDP is expected to grow by 3.4%"
Listening to Kyle Bass, who manages several billion dollars in his Hayman Capital, a very successful hedge fund, is always quite exciting and highly informative. In a world where people continue to indulge in "collective stupidity" of "emperor has new clothes", Kyle Bass is a breath of fresh air. While most money managers suffer from confirmation bias and see economic data suggesting never-ending "global growth", Kyle Bass (and there are others) is not shy of painting a bleak picture for the global economy.
Of course, Kyle Bass made money by being "negative" and fully grasping the economic realities of US housing sector prior to its spectacular collapse. He is one of the now famous "Big shorts" (John Paulson, Michael Burry and few others are equally famous for their substantial "short" subprime trades that made them billions) who successfully timed their "short" strategies against subprime-based mortgage-backed securities (MBS)to make incredible returns for their investors.
Kyle is also famous for his in-depth research on many of the debt-ridden nations around the world and was prescient in predicting "sovereign debt crisis" in the EU zone way back in 2006, much before PIIGS (Portugal, Italy, Ireland, Greece and Spain)became a household acronym for all the wrong reasons.
Right now, Kyle's big bet is against Japanese debt (JGBs - Japanese Government bonds) and the currency, JPY. Both are highly inflated given the realities of 200% debt-to-GDP and aging population of Japan. Of course, Kyle's fund is losing money, as Japan continues to defy all logic despite being so heavily indebted. Japanese bonds continue to enjoy global demand (very low yields) and Japanese Yen is still considered as a "safe haven" currency. It is quite a conundrum that the Japanes Yen has defied the logic that applies to most economies where "quantitative easing" is conducted by the central bank of that country. When more money is printed out of thin air, it usually results in currency depreciation. Not in Japan; even after a decade of easing, JPY has rallied from 144 to 78 yen per US dollar! Of course, it's all relative. The US has lost the trading edge, in the meantime.
Well, I digress. The point I was trying to make was that Kyle's bet against the Japanese debt and the currency is losing money despite the right analysis based on fundamentals. My own take from my research is that, Japan, unlike many other debt-ridden nations, has a current account surplus because of its export-economy and all that foreign money from trade is exchanged for JPY and JGB thereby keeping both very strong. Until Japan suffers in terms of its international trade due to strengthening currency, this facade of economic health will continue. Moreover, Japanese central
bank (BOJ) has a strong balance sheet with more than $1.2 trillion.
Now, to end this blog (I was not planning on writing so much)I want to come back to Kyle Bass's interview I saw on CNBC today. Kyle did not say much but mentioned those four data points (see at the top), which was followed by, " you can't do this for very long." And, I think serious macro thinkers (rest of the world is busy with iPhone and social networks)have to pay attention to this:
Kyle is saying, with the current projected global growth at 3.4%, with a population growth of 1.6%, what we are experiencing in terms of global debt and deficits and central bank balance sheet expansion, there is only one possible outcome one can foresee...INFLATION or worse, in my opinion "STAGFLATION." Kyle is right about this alarming growth of global debt, which could plunge the global economy into another depression when the debt-bubble finally bursts. But before that, the monetary expansion (all this printing of fiat currencies)undertaken by major central banks (US Fed, ECB, BOJ, PBOC etc.)around the world will certainly lead to painful inflation, even hyper-inflation, as suggested by historical evidence (Weimer republic in Germany in 1930s and Zimbabwe recently).
Kyle is prepared to take advantage of this situation. I am sure he doesn't wish that the world suffers what he thinks is inevitable. Yet, all data point toward this worst case scenario. The sad thing is, while Kyle and his ilk can safeguard their assets and investments, billions of ordinary people around world the will be left holding the bag for all the incredible stupidity of all those who call themselves as our "leaders." We have seen corruption, greed, mismanagement and complete disregard for the consequences of one's actions. No dharma here. When the music finally stops, who knows what the collateral damage will look like. As many wise men, throughout the ages, have repeatedly cautioned us, "to stay detached is the only way to eternal happiness" seems to be the only solution. That's not being passive. I think, as I said somewhere in this blog, in a world dominated by those who hail naked emperor's "new clothes", is it realistic to go against the current (mixing metaphors here)? Is there a point shouting "fire" in a theater full of deaf people watching silent movie? Only when it starts burning, does the reality of fire becomes very real. I hope better senses prevail.
I think it's Darwin who once said, "it's not the strongest or the smartest that survives, but one that adapts to change." That quote may not be the most appropriate here, yet, Darwin is right: we need to recognize the change that is happening...change in terms of economic realities, caliber of leaders, insatiable desire for consumption, extreme materialism, rampant violence, ideological clashes, widening economic divide...the list can go on. The globe is catching infection due to multiple infections; and, this change for the worse is simply not sustainable. We need to adapt by changing the course. That, my friends, is possible when we go back to nature...Dharma. We need to understand our essence...human dharma.
