Kyle Bass and Hugh Hendry on shorting Japan

Two good interviews here with these fund managers.

EDIT: The Bloomberg interview of Kyle Bass is no longer playing, and I can’t find it on youtube, so I’ll just post a couple of other links:
All I could find was this on his new fund:
Here he is talking inflation last October:

Hugh Hendry on the rationale for shorting Japanese corporate credit (extremely low yields, overexpansion, China crash & contagion)

FYI, I think talk of inflation is still premature, since there is still too much credit to be liquidated before currency creation overwealms credit destruction. Significant inflation is more likely to appear towards 2020 than 2012, and we could easily see another episode of deflation in the next year or two.

Max caution alert: exit or hedge all market risk

This is one of those times where markets are stretched to the limit and any further upside will be minimal in relation to the extreme risk entailed. Sentiment has been dollar-bearish and risk-bullish for so long that a violent reversal is all but guaranteed. This is not to say that the absolute top is in, but that at the very least, another episode like last April-June is coming up.

Watch for a sharp sell-off in stocks, commodities and the EUR-CAD-AUD complex. Even gold and silver are vulnerable, especially silver. We could be near a secular top in silver, where the recent superspike has all but gauranteed an unhappy ending to what has been a fantastic technical and fundamental play for the last decade. Gold is much more reasonably valued and should continue to outperform risk assets because the monetary authorities are so reckless, but there is just too much froth in silver to hope for even that.

The rally since early 2009 has been not just another dead cat bounce in the bear market from 2007 (like I thought it would be), but another full-blown reflation and risk binge like the 2003-2007 cyclical bull. The secular bear since 2000 is still here, and valuations and technicals suggest that another cyclical bear phase is imminent. There is no telling how long it will take or how it will play out, but the only prudent move at times like this is to take all market risk off the table. Bears still standing should think about going fully short. Anyone holding stocks should sell or get fully hedged. History shows that the expected 10-year return on stocks from conditions like this is under 3.5%, and such a positive figure is often only acheived after a major drawdown and rebound. See John Hussman’s excellent research on the topic of expected returns from various valuation levels:

Want to know what a secular bear looks like? Check out 1966-1982: a series of crashes and rallies that resulted in a 75% inflation-adjusted loss. In the absense of 70s-style inflation, this time the nominal loss should be closer to the real loss. Think Japan 1989-who knows?

The headlines this time around should have less to do with US housing, though that bear is still raging. We’re likely to hear much more about European sovereign debt, where haircuts and defaults need to happen, and Canadian, Australian and Chinese real estate. When the China construction bubble pops it will remove a major fundamental pillar from the commodities market.

There is no safe haven but cash, and cash is all the better since everyone has feared it for so long. If I had to build a bulletproof portfolio that I was not allowed to touch for five years, it would be something like this: 20% gold bullion, 25% US T-bills, 25% US 10-year notes, 25% Swiss Francs (as much as I hate to buy francs at $1.13) and 5% deep out-of-the-money 2013 SPX puts (automatic cash settlement).

There will be a great value opportunity in stocks before long (the tell will be dividend yields over 5% on blue chips). It’s just a matter of having the cash when it comes, so that you aren’t like the guy who said in 1932 that he’d be buying if he hadn’t lost everything in the crash.


PS – For those of you who think QE3,4,5,6 will save the markets, I’ll counter that it doesn’t matter, not on any time frame that counts. Risk appetite and private credit are what matter the most, and the Fed can’t print that. At 3AM, spiking the punchbowl doesn’t work anymore.

Or I can put it this way: the Fed has increased the monetary base from 850 billion to 2500 billion since 2007. Have your bank balance, salary and monthly bills increased 200%? If not, why should stock and commodity prices? Not even Lloyd Blankfein is 200% richer than four years ago.

Jim Rogers discusses his euro long and stock shorts

I happen to have similar positions at the moment, though unlike Rogers, I’m a bear on commodities and China, which he seems to be perpetually long.  Here’s today’s Bloomberg interview.


- Long euro as a contrary position. Too many shorts out there.

- All these countries (Spain, Portugal, UK, US) are spending money they don’t have and it will continue.

- ECB buying government and private debt is wrong.

- EU is ignoring its own rules about bailouts from Maastricht Treaty.

- Governments are still trying to solve a problem of too much debt with more debt.

- Fundamentals are bad for all paper currencies. Good for gold.

- Is “contagion” limited now? Well, for those who get the money…

Here’s a longer interview from a few days ago on the same topics as well as stocks:


- Rogers has a few stock shorts: emerging market index, NASDAQ stocks, and a large international financial institution.

- Rogers owns both silver and gold, but is not buying any more. He’s not buying anything here, “just watching.”

- Optimistic about Chinese currency. Expected it to rise more and faster, but still bullish.

- Thinking of adding shorts in next week or two if markets rally (my note: they have now).

- “Debts are so staggering, we’re all going to get hit with the problem,” no longer just our children and grandchildren.

Still 2007

Yahoo! Finance

I can’t draw on this chart, but you can clearly see the similarities in price, RSI and MACD between the last 6 months and the period leading up to final top of the even bigger bear market rally of 2003-2007. Will we levitate up here for a year like we did back then? I doubt it, since this is a smaller degree wave and the time scale is more compressed. It appears to be running out of steam after 12 months, not 4 years.

Since summer, the bears have been demoralized by time, not price — we’re only 1000 pts higher than last August. The bullish complacency and dejected state of the bear camp is what you need for a final top.

RSI and put:call signals like we have right now are what you need for a smaller-degree top. One of these smaller degree tops will turn out to be the big top. This is not the time to give up on shorting.

Excellent interview with Michael Lewis on the “oddballs” who made the big short.

Here on Bloomberg. Very long but worth the time — just put it on in the background.

He says that the only guys doing serious credit analysis on mortgage bonds in 2005, 2006 and 2007 were those looking to find the very worst and go short.

Also, Goldman would have been just another bagholder if the market had cratered a year before it actually did. They didn’t start to get their trading book in order until Spring 2007.

So, who does he think were the villians? Not just guys who were going with the flow, but the knowing perpetrators. He fingers bankers such as those at Goldman who created and sold synthetic CDOs and pushed them on firms like AIG. Goldman and certain people there are among the “genuine elites” and don’t have a “sense of social obligation.” Basically, they have no shame.

The TARP recipients were “unnaturally selected.”

As much as I like Michael Lewis as a narrator, I do not agree with his take on the role of government. He still believes that regulation can contain the market. When Goldman owns the regulators, it just can’t. Markets find a way around regulations, and connected players find ways to use regulations as a weapon. Simply take away the moral hazard of the Treasury and Fed, and these firms would have had the incentive neccessary for caution.

Upside momentum waning (update 10:53EST)

SPX has broken sideways out of its channel. If it now chops around up here and fails to move on to new highs (by more than a couple of points), we’ll have a nice set-up for a short position, just like the action in January:

Even if stocks oblige with a nice drop, we can’t be sure that it will be the start of something big unless we see strong downside volume and impulsive waves.


Very nice impulsive decline. Don’t count on it holding though — we might just ramp late this afternoon or early tomorrow if January is any indication. But this is looking good so far – if we do test the highs, it will be a sweet entry for a short with a tight stop (as is, I’m pretty short already, but would get more so at 1110).


There is decent support at this morning’s low at 1095, but if we break it we could head right to 1080-1085, where there is better support. I suspect that break of 1095 would call into question the January analogue and suggest something more immediately bearish. Counting the waves on the 2-min chart, we could use a 5th wave and new low here.

What do REITs think they’re doing at 2005 prices?

IYR is an ETF loaded with commercial and residential real estate investment trusts:

At 4.44%, you can get almost as much yield from a 10-year Treasury note (3.8%). Why mess around with these debt-laden monsters?

SRS of course is the 2x inverse of IYR, and URE is the 2x bull version (not a bad way to short, IMO).