It’s been a mixed week for Kyle Bass, the Dallas-based hedge-fund manager who made a killing shorting subprime mortgages, says The New York Post. He appeared to strike gold again when FBI agents raided a Texas real estate investment trust that Bass had shorted, saying it was a “house of cards”.
But that was followed by a setback in his high-profile campaign against pharma companies and their drug patents, which forced him to return $700m to investors. In all, however, these are small fry concerns for Bass. His really big bet, notes InsiderMonkey.com, is against China. His firm, Hayman Capital, “has devoted most of its assets under management to shorting the Chinese yuan”.
Although far from the only hedge-funder betting on a renminbi collapse (see below), Bass has given the “angriest debate in financial markets” its “most strident, forensic and colourful voice”, says the Financial Times. He’s convinced that China’s government “doesn’t have the resources to prevent a banking crisis and a vicious currency devaluation”.
Bass has predicted Armageddon in various countries for at least a decade, and not all his bets have come good. Indeed, his returns since the financial crisis have been modest by hedge-fund standards. “But enough of his predictions have come true to justify taking him seriously” – and many of his peers do. “He’s a really smart, independent thinker,” adds activist investor Daniel Loeb. “Maybe it is coming from Texas, but there is an evangelical quality about him: he has very deeply held convictions about his analysis.”
Bass first came to popular attention as a result of Michael Lewis’ book, Boomerang, “driving around his ranch in a tricked-out Hummer that can evade villainous pursuers by spewing out tacks, James Bond-style”. He spends time there sniper-rifle shooting with friends (he owns over 100 weapons), or hosting his famous Barefoot Economic summit – a “mix of some of the most powerful hedge fund managers, investors, academics [and] special forces personnel”, says GuruFocus.com. He’s fond of spear fishing because it’s “the number two calorie-burning exercise you can do, behind fast axe chopping”.
Bass was born in Miami in 1969, raised in Texas and attended the Texas Christian University at Fort Worth. He always had a burning desire to move beyond his middle-class upbringing. “My dad [a middle manager in the hotel business] never saved,” he told the FT. “So from the day I left school I have saved at least 50 cents of every dollar I have ever made.” He started mixing with the hedge-fund set in the 1990s when working as a stockbroker in the Dallas office of Bear Stearns.
When he eventually amassed enough capital to launch his own fund in 2005, he immediately started betting against subprime mortgages. The money, he says, is no longer important. “Vindication is the sweetest trophy that one can possibly have.” He’s waiting for it in China.
Betting on a renminbi collapse
In a recent 12-page dissection on China entitled The $34 Trillion Experiment, Kyle Bass argued that banking losses could be four times as big as those on subprime mortgages in America during the financial crisis, says Stephen Foley in the Financial Times – and the People’s Bank of China (PBOC) doesn’t have the reserves to plug the hole and defend its currency. The upshot is that the country is “on the precipice of a large devaluation”.
Bass’s calculations have a “back-of-the-envelope feel”, notes Halkin Services. Non-performing loans (NPLs) in China leapt 51% on the year to the equivalent of $200bn in December. That’s a big jump but it’s an NPL-to-asset ratio of 1.67%. Although “it is fair to assume” that official figures “are something of an understatement”, Bass’ estimate of the ratio approaches 30%.
Critics argue he’s on equally shaky ground on China’s foreign-currency reserve adequacy, says Gabriel Wildau in the FT. China’s stated FX reserves stand at $3.2trn, but Bass maintains they’re more than $1trn below that – taking the nation perilously close to the $2trn deemed necessary for reserve adequacy by the International Monetary Fund. The biggest adjustment Bass makes is $700bn in reserves, which he says is tied up in the sovereign wealth fund, China Investment Corp (CIC).
But China economists insist that CIC’s assets are not included in the main forex data. “The idea that the PBOC is running out of… reserves doesn’t stand up to scrutiny,” says Mark Williams of Capital Economics. “But the fact that many take it seriously is a sign of how far sentiment has swung against China.” China’s problem is that it is impossible to pursue independent monetary policy, a fixed exchange rate and free capital movements simultaneously, says George Magnus in the FT.
Resolving this – either by devaluing the renminbi or tighter capital controls – may not have the apocalyptic impact Bass envisages, but it will have “far-reaching consequences”. The point at which China must choose its path “is approaching fast”.