Kyle Bass Bearish on Emerging Markets for at least 2 More Years. Looking to Short Currencies

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Kyle Bass, the founder and manager of Hayman Capital and the man who spotted and shorted successfully the subprime bubble was interviewed today at CNBC. He shared during the “Squawk on the Street” show that he is bearish emerging markets and believes that the Chinese economical issues are just starting and that’s because the banking sector still has more bad debts to reveal and write-off. According to Kyle the loans pass due in 90 days grew by the whooping 167% just for half an year. He thinks that it will take at least 2-3 quarters until the banking sector reaches its NPL peak and thinks that this will force the government to recap its banks. But Kyle shares that it will be at least 2 more years until the emerging market slowdown is over and banking problems are fixed.

Another country he is bearish on is Malaysia. He sees the same problems in their banking system. It just grew too quick and too much. Michael Arnold quoted a paper from the San Francisco FED according to which emerging markets of countries with twin-deficits suffered the most in the taper-related selloff. One of the governments in panic last summer was that of Malaysia. The country had high fiscal deficit which it used to finance infrastructure projects and it made a lot of steps not to also get its current account into deficit. Other vulnerable countries are: India and Indonesia, which were punished  by the markets. A tool developed by Deutsche Bank Asia and which combines 16 factors of country analysis such as: debt, current account, household debt, reserves cover, interest rates, currency valuation and credit growth showed that the countries most at risk in Asia are: Malaysia, Indonesia and Singapore.

We at Octafinance disagree with them about Singapore due to country’s super competitive position in high-tech and high-valued added products and services. Another country Kyle mentions he is bearish about is South Africa. He shared that it runs 4.5% twin-deficit and has only $34 billion reserves which are enough to cover just 2 months of imports. This is probably the reason their currency went down so much so far.

About trading, Kyle is currently looking to short the currencies of countries that run twin-deficits as these are usually the countries to enter a currency war. He thinks that some of these countries could devalue their papers a lot. We at Octafinance wonder whether China also a possible devaluation candidate after its recent shock devaluation which made the authorities panic. Its true that China doesn’t run twin deficit but all of its trade partners devalued their currencies a lot: Europe, Japan, Russia, Australia. Its hard to be competitive during such cycle.

Kyle said: “We talk about this race to the bottom and this currency war. Well it’s happening as we speak,” he said. “China literally just started with its devaluation process—wait until you see where that goes.”

He believes that the Asian problems could affect the world and this could be serious. He shared that China’s reserves which are about $3 trillion are enough to cover just 10% bank asset losses. This is because since 2007, the Chinese banking assets rose more than four times and reached $31 trillion. This is too much for an economy of $10 trillion. Its 300%+ banking assets to GDP. We at Octafinance think that the Chinese stock market is just forecasting the future and these issues and the question of whether the stock market will go up or down depends on the real issue, which according to Kyle is the banking sector NPL. Kyle thinks that same as the US and the UK did, its now time for China to recapitalize its banking system.

When asked about his legal fight against drug patents that are unfair to the people and the market, he stated that he will not stop here and will continue filling legal challenges.

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