I listened to an interview with hedge fund manager Kyle Bass today. Then, I looked at a chart of his holdings and compared that with what he said in this interview. At first, I experienced a bit of cognitive dissonance because his portfolio seems at odds — at least on the surface — with his stated views from the interview and in a recent client letter (see below).
Where should we be investing now?
First, why does this matter? The question I am always asking myself is this: Where should we be investing now? What opportunities exist? And, what risks do we incur? Kyle Bass has a good record of investing and he is a thoughtful and articulate guy, so I wanted to hear his views. Before I get into that, here is the chart:
Source: Clusterstock
This is a broad overview of Bass’s hedge fund portfolio. It undoubtedly does not include some of the more exotic positions, which fall into what Bass called ‘long tail’ positions, which are those that have relatively low probabilities, but significant payoffs if they do pan out. Nonetheless, something jumps out at me when I look at this portfolio–it is allocated to bonds, not stocks.
I don’t know how you can be long stocks
In the video, he remarked that he did not see how he could be long stocks given his view of the world. Back in May, he was forecasting inflation ahead and normally bonds would be a negative in that environment while stocks would be pretty good.
Here, in a client letter (found at market folly) is what Bass wrote back then [emphasis added]:
“…This weekend, the EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world. We believe the agreement released was nothing more than a Potemkin agreement in order to placate bond investors. In the end (and there will be a reckoning for many countries) nations, including the United States, need to dramatically cut spending and get their fiscal balances in order. Unfortunately, our elected officials are on the hamster wheel of electoral cycles and are not able to make tough decisions like this as they would likely not be re-elected without a “sea change” in public opinion towards government spending and deficits. We are therefore on the path to significant currency devaluation around the world that will likely result in significant inflation…”
For the full letter from Hayman Advisors, you can go here: ARHedge.
A couple of points from Hayman Advisor’s letter and the more recent interview linked above are that Kyle Bass sees a very high probability that certain countries around the world will be forced to restructure their sovereign or national debt. Also, he believes that Japan in particular has reached or come close to the end point for Keynesian-type government spending and stimulus.
In all fairness to Japan, hedge fund managers and others have been predicting trouble for Japanese government bonds for a long time and it has not really panned out. The time may be at hand, but news of Japan’s demise has been premature so far.
These are not exact quotations, but rather points Bass made in the interview linked above:
So, what are the elements of his portfolio now? As you saw above, he holds plenty of somewhat contrarian debt instruments including mortgage bonds, bank debt, event driven or distressed securities and high yield or junk bonds. They are all fixed income securities, but they undoubtedly have handsome yields and low prices. Finally, his portfolio is roughly 90% long U.S. securities with the balance being bets against Europe and Japan so he is more positive about the environment here than he is about Europe or Japan.
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Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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