Kyle Bass - RACE TO THE BOTTOM AND CURRENCY WAR

Kyle Bass

Tuesday, 15 Sep 2015

BASS: I THINK THAT WHEN YOU LOOK AT WHAT'S HAPPENED FOR THE LAST DECADE, AS YOU'VE SEEN FLOWS INTO EMERGING MARKETS, YOU HAVE SEEN DEVELOPED NATIONS RUN BIG CURRENT ACCOUNT DEFICITS, AND YOU'VE HAD A SEA OF NATIONS ESSENTIALLY RUN GIANT CURRENT ACCOUNT SURPLUSES AND THAT HAS BUILT FX RESERVE PILES IN THE EMERGING MARKETS. WHAT WE'RE SEEING NOW, FOR THE FIRST TIME IN A LONG TIME, IS A HUGE FX RESERVE DRAIN. I THINK YOU HAVE TO THINK ABOUT THIS CONCEPTUALLY FROM THE TOP. IN 2009, WHEN THE GLOBAL FINANCIAL CRISIS WAS AT ITS PEAK, KIND OF Q1 OF '09, WHAT YOU SAW IS THE CHINESE BANKING SECTOR GREW EXPONENTIALLY. IT ADDED 50% OF GDP IN '09, 50% OF GDP IN 2010. IN FACT, CHINESE BANK ASSETS SINCE 2007 ARE UP 400%. LET'S TALK DOLLARS. THEY'RE AT $31 TRILLION AGAINST AN ECONOMY THAT'S GOT 10 TRILLION OF GDP. SO THE CHINESE BANKING SECTOR IS 310% OF GDP OF ASSETS. WHEN YOU RUN A BANK EXPANSION THAT AGGRESSIVELY, THAT QUICKLY, YOU ARE GOING TO HAVE SOME LOSSES. AND OUR ASSERTION IS THAT YOU'RE JUST ENTERING THE NONPERFORMING LOANS CYCLE IN ASIA. AND THE SCARY THING ABOUT THAT IS, LET'S FORGET ABOUT CHINESE STOCKS FOR A MINUTE. IF YOU HAVE 30 TRILLION IN YOUR BANKING SECTOR AND YOU LOSE LET'S SAY 10% OF ASSETS, WHICH WE THINK IS LIKELY, YOU ARE GOING TO LOSE $3 TRILLION. WELL, WHEN YOU BREAK DOWN THE FX RESERVE PILE, IT'S KIND OF A ELUSORY THAT THEY ARE GOING TO HAVE TO USE A LOT OF THAT MONEY, THEY WILL HAVE TO SELL SOME MORE BONDS AND RAISE SOME MORE DEBT TO RECAP THEIR BANKING SYSTEM. AND THAT HOLDS TRUE PAN ASIA. SO IF YOU LOOK AT NON JAPAN ASIA, YOU LOOK AT COUNTRIES LIKE MALAYSIA, THAT HAVE ALMOST 700% OF GDP IN THEIR BANKING SYSTEM AND IT'S RUN BY SOMEONE THAT HAS MAGICALLY FOUND ALMOST A BILLION DOLLARS OF MONEY FROM HIS SOVEREIGN WEALTH FUND SITTING IN HIS PERSONAL ACCOUNT, AND HE IS ARRESTING PEOPLE – JOURNALISTS THAT ACTUALLY COVER THIS STORY – IT'S BECOMING PROBLEMATIC ALL OVER ASIA WITH FX RESERVE DRAINS AND THE SIZE OF HOST COUNTRIES' BANKING SYSTEMS TO THIS PROBLEM. THE COMMODITY COLLAPSE IS CAUSING THESE BANKING SYSTEMS TO HAVE STRESS. AND NOW YOU ARE SEEING INDUSTRIAL PRODUCTION LOOKING LOWER ALL ACROSS ASIA. YOU ARE SEEING DOUBLE DIGIT DECLINES IN INDUSTRIAL PRODUCTION. SO I THINK THOSE THAT ARE WATCHING WHETHER CHINESE STOCKS GO UP OR DOWN AREN'T PAYING ATTENTION, IN MY OPINION, TO WHAT IS THE REAL PROBLEM. AND THE PROBLEM IS THE LOANS THROUGH IN THIS BANKING SECTOR.

I THINK WITH EMERGING MARKETS BEING 42% OF GLOBAL GDP, WHAT I'M TELLING YOU IS GLOBAL GDP IS GOING TO SLOW DOWN MORE THAN PEOPLE THINK IT IS. NOW, THAT DOESN'T MEAN THAT THE U.S. MARKET IS AT SERIOUS RISK. I THINK THE U.S. MARKET AND THE U.S. MAY GROW INSTEAD OF A ONE TO TWO, IT MAY GROW – OR INSTEAD OF TWO TO THREE, IT MAY GROW ONE TO TWO. BUT IN EMERGING ECONOMIES LIKE THE ONES I AM TALKING ABOUT, THINK ABOUT SOUTH AFRICA FOR EXAMPLE. SOUTH AFRICA RUNS A 4.5% CURRENT ACCOUNT DEFICIT OF 4.5% FISCAL DEFICIT AND THEY HAVE 34 BILLION OF FX RESERVES. JUST A COUPLE OF MONTHS OF IMPORTS. SOUTH AFRICA IS COMPLETELY BROKE, AND WHEN YOU TALK TO THE RATINGS AGENCIES' ANALYSTS ABOUT SOUTH AFRICA, THEY SAY, WELL BECAUSE IT IS A LARGE PART OF EMERGING – EM – THEY HOPE THAT PORTFOLIO FLOWS PLUG THESE HOLES BECAUSE THEY HAVE FOR THE LAST 20 YEARS. WELL, THAT'S NOT – HOPE IS NOT THE PROPER INVESTMENT STRATEGY. FOR THOSE THAT ARE RESERVE MANAGERS AND THOSE PEOPLE THAT INVEST IN EMERGING MARKETS, YOU BETTER PAY ATTENTION TO THE SIZE OF THEIR BANKING SYSTEMS, AND YOU BETTER THINK ABOUT WHAT THE LOSSES ARE GOING TO BE WHEN THEY RUN A REGULAR NONPERFORMING LOAN CYCLE THROUGH THEIR BANK. SO, WHAT WE'RE LOOKING AT ARE THE COUNTRIES AROUND THE WORLD THAT RUN TWIN DEFICITS. THE COUNTRIES AROUND THE WORLD THAT HAVE TO DEVALUE THEIR CURRENCY IN ORDER TO COME BACK TO SOME LEVEL OF COMPETITIVENESS WITH THE REST OF THE WORLD. AGAIN, WE TALK ABOUT THIS RACE TO THE BOTTOM AND THIS CURRENCY WAR. WELL, IT'S HAPPENING AS WE SPEAK AND CHINA JUST LITEREALLY JUST STARTED WITH ITS DEVALUATION PROCESS. WAIT UNTIL YOU SEE WHERE THAT GOES.

IN CHINA, LOANS GREATER THAN 90 DAYS PAST DUE GREW 167% IN THE FIRST HALF OF 2015. IT IS HAPPENING AND WE ARE ALREADY HERE. SO NONPERFORMING LOAN CYCLES TAKE ROUGHLY 10 TO 12 QUARTERS TO HIT THEIR PEAK. I THINK WE ARE KIND OF ONE OR TWO QUARTERS IN AND THE NEXT TWO YEARS ARE GOING TO BE TOUGH. BUT, THAT DOESN'T MEAN THE END OF THE WORLD. THAT JUST MEANS YOU BETTER PAY ATTENTION IF YOU HAVE A BIG EM PORTFOLIO.

Carl Icahn - "Danger Ahead"

Billionaire investor Carl Icahn thinks stocks could go down "a lot more" as the market comes to grips with bubbles exacerbated by the Fed's zero interest rate policy.

Icahn, in a new video titled "Danger Ahead" that he produced himself, warns that major market upsets of the past could be seen again, perhaps even worse, as a result of interest rates that have been kept too low for too long.

"It's like giving somebody medicine and this medicine is being given and given and given and we don't know what's going to happen – you don't know how bad the end of this is going to be," Icahn said in the 15-minute video. "We do know when we did it a few years ago it caused a catastrophe, it caused '08, so where do you draw the line here?"

Low rates are one of five major worries Icahn outlines in the video, along with tax loopholes, financial engineering of earnings, balance sheet-weakening stock buybacks, and strains on the high-yield bond market.

But while Icahn argues the Fed should have hiked interest rates month ago, he admits that doing so now is harder, given China's weakness and concerns about other emerging markets.

Icahn told CNBC the Fed "may have backed itself into a corner."

It's just one reason why he thinks stocks, which have been correcting for several weeks now, could go down "a lot more," admitting he's more hedged than he's been in years.

Mark Spitznagel Warns: If Investors Thought August Was Scary

Mark Spitznagel Warns: If Investors Thought August Was Scary, “They Ain’t Seen Nothin’ Yet” 19-SEP-15 08:10 AM0 COMMENTS The man who made a billion dollars on Black Monday sums up his strategy perfectly in this excellent FOX Business clip with the money-honey, “I’m a hedge fund manager that actually hedges for his clients. This is something of an old fashioned idea in this day of just gambling on the next Fed bailout.” Spitznagel, who is wholly unapologetic in his criticism of The Fed (and any central planner), unleashes eight minutes of awful truthiness on what is going on under the surface of the so-called ‘market’, concluding ominously, “if August was scary for people, they ain’t seen nothin’ yet.” Grab a beer and relax… Some key excerpts: On Universa’s tail-risk strategy.. “We tend to lose or draw—most of the time—these small battles or skirmished. But, ultimately, we win the wars.“ On the Great Myth of centrally planned economies.. “Great myths die hard. And I think what we’re witnessing today is the slow death of one of the great myths of human history: this idea that centrally planned command economies work, that they’re even feasible, and that they can be successful. It’s one of these enigmatic mythologies of the last hundred years in particular that we’ve been grappling with, and here we are today yet again thinking about this. Let’s remember that in the last hundred years a lot of blood has been shed over this mythology. And here we are today, how did we get here again? On today’s “all alpha is beta” hedge fund community… There was this notion not long ago of the Bernanke put, the Greenspan put. It was sort of a dirty thing to admit that it was part of our investment strategy. But today, it’s everyone’s investment strategy.“ On “it’s different this time”… “I think that another generation will look back and say ‘how could you have made that mistake all over again? How could you have failed to understand Hayek’s notion of the fatal conceit, that central planners can’t do better than the dispersed knowledge and signals of free market processes?‘” On the crazy world in which we live… “There’s something self-fulfilling about this mythology, only in the short run. But in the long run we know that it is ultimately self-defeating. When bureaucrats mandate low interest rates it doesn’t spawn long term productive investment.What it spawns is this short term gambling, punting on momentum-driven moves, on levered buybacks. This is the world we’re in today.“

Stan Druckenmiller - 20% of his portfolio now in GOLD

So why has Druckenmiller gone so aggressively into gold at this particular time?

Fortunately, he was kind enough to basically tip his hand when he gave a speech during Q2 to some high-end investors in which he said the following:

“Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us [in the 2008 financial crisis] and enabled those bad actors to do what they do. Now, no matter what you want to say about them, if we had had 5% or 6% interest rates, it would have never happened, because they couldn’t have gotten the money to do it.

This is crazy stuff we’re doing. So I would say you have to be on alert to that ending badly. Is it for sure going to end badly? Not necessarily. I don’t quite know how we get out of this, but it’s possible.”

It seems Mr. Druckenmiller believes that this unprecedented stretch of miniscule interest rates that the central bankers around the world have cooked up has created the potential for a major financial disaster.