Kyle Bass, addressing Chicago Booth’s Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. “The AIG of the world is back
– I have 27 year old kids selling me one-year jump risk on Japan for
less than 1bp – $5bn at a time… and it is happening in size.” As he
explains, the regulatory capital hit for the bank is zero (hence as
great a return on capital as one can imagine) and “if the bell tolls at
the end of the year, the 27-year-old kid gets a bonus… and if he blows
the bank to smithereens, ugh, he got a paycheck all year.” Critically,
the bank that he bought the ‘cheap options’ from recently called to ask
if he would close the position – “that happened to me before,” he warns, “in 2007 right before mortgages cracked.” His single best investment idea for the next ten years is, “Sell JPY, Buy Gold, and go to sleep,” as he warns of the current situation in markets, “we are right back there! The brevity of financial memory is about two years.” (more)
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