Kyle Bass: America is at risk of turning Japanese

Kyle Bass, chief investment officer of Hayman Capital Management LP © Patrick T. Fallon/Bloomberg via Getty ImagesKyle Bass, founder and chief investment officer, Hayman Capital Management

America is at risk of turning Japanese, says hedge-fund manager Kyle Bass. The US central bank, the Federal Reserve, is expected to cut interest rates later this month, in hope of boosting inflation. Markets already expect a significant reduction in rates over the longer term, but Bass tells the Financial Times that he thinks even the gloomiest projections are wrong.

This is based on his view that, despite relatively solid recent economic data, the US will be heading for recession by the middle of next year. As a result, he expects Federal Reserve chief Jerome Powell (pictured) to slash rates to close to zero once again. And “as we have all learned, once an economy falls into the tractor beam of zero rates, it’s almost impossible to escape them”. That could see the Fed taking ever-more extreme measures to bail out markets – printing more money (in the form of quantitative easing) and perhaps even using it to buy stocks, as the Bank of Japan already does.

Bass has a record of being bearish – he spent many years warning that Japan’s vast public debt would cause a collapse in the value of the Japanese yen. More recently, he gave up betting on a big drop in the Chinese yuan, having entered a short position in mid-2015 in the belief that the Chinese government would burn through its foreign-currency reserves and fail in its efforts to prop the yuan up. As Bloomberg notes, the yuan fell by about 10% over that time, but Bass had been calling for a drop of closer to 30%.