Bass Says Beware of the Japanese Yen

Bass Says Beware of the Japanese Yen

Kyle, I want to get to Hong Kong in a moment, but first, um, I mentioned how the dollar is very active, especially against the yen, and I want to get your sense on the drama in Japanese markets as well, because the yen is stronger. Uh, we had a route in Japanese, uh, JGB yields uh, in the last couple weeks that sent yields to the highest since about 2008. Uh, we also had JGB auctions that didn’t do that well, and now there’s political uncertainty going forward. What’s your take on Japanese markets, the bond and the yen? Yeah, I think it’s important to note that um look, the Japanese rates are still pegged out to 10 years and they’ve decided the BOJ’s elected to let the uh the 30-year uh I guess freely trade even though it doesn’t trade every single day. Um Japanese sovereign debt to GDP is north of 260%. It’s kind of the world’s most interesting debt laboratory. And so when you get a scenario like you had with COVID where the you have to remember the whole world is priced in dollars. And so when the US Fed and the US administration decides to print and spend as much as we did, remember we put 40% more M2 into the system between 2020 and 2023. And what did we get? We got about a 40 or 50% inflation of almost everything. And I I’ll caveat that there are a few things that didn’t move 40 or 50% higher in in expense, but let’s say dwellings and consumer goods and things that people have to buy every day or pay for rent did. So what what happened in Japan is the yen went from roughly 100 to 160 and now it’s sitting around what 145 147. So when you think about the yen, the yen is just moving uh in the amount of purchasing power it has in dollars. It’s really that simple. Uh, and so they’re in a really bad situation from a debt perspective. They’ve got a population decline. They are a very important trading partner of the United States and one of the the stalwarts of ours in in in Asia. So, um, I think we’re going to do all we can to trade and help the Japanese going forward, but I think they’re in a precarious position, i.e. they either have to let their currency go or their bond market go, and they’ll never let their bond market go. So, I I would beware of the end uh into the future. All right. Well, we’ll keep an eye on that one. I mentioned the Hong Kong dollar. You’ve bet against the Hong Kong dollar in the past, which of course is pegged to the US currency, and it has experienced some swings because of President Trump’s tariffs and the impact there. The HKMA intervening, spending a lot of money to support that currency peg. As Roma was saying, every so often people wonder whether it’s time for the Hong Kong dollar to be repegged to a basket of currencies or repegged maybe to the Chinese currency. Are we at one of those times right now? Yeah, I think again when you think about this peg, it’s been around since 1983. Back then, the reason the peg was put into place is there was a massive run on the Hong Kong dollar. If you remember, there were rumors back in 198182 about um the British handing Hong Kong back to the Chinese. And when those rumors got out, money started fleeing Hong Kong and and Asia kind of writ large. And so the Hong Kong dollar depreciated 50% versus the dollar in a in a basket of world currencies. And we the United States and the United States dollar provides the stability to Hong Kong and therefore China in their currency regime. So uh when you think about that peg, it used to be that as Hong Kong’s economy went, so did those of the United States and and the West. Now Hong Kong’s economy is more inextricably linked with China’s and there’s a divergence in economic uh activity. China has had its worst financial crisis in in maybe its modern day history in the last two or three years. Its 10-year bonds at 1 and a.5% uh its overnight rates are roughly one and a half%. Uh so China’s having a really difficult economic period internally. Uh and so those economies no longer move in with the same synchronicity that were was required. So look at Hong Kong’s overnight rates today. The overnight rate is still close to zero. US overnight rates are 4.3. one-year rates in in Hong Kong are not one around 1%. Ours are still around 4%. And if you can interchangeably own the HKD or USD, you’d be crazy not to convert it to USDs, right? You may earn 3 to 4% more. That’s why you’re seeing the weakness in the Hong Kong dollar. The question is, can Hong Kong afford to move its rates higher? Because the majority of Hong Kong mortgages are floating rate mortgages tied to short rates. So, Hong Kong’s in a really bad position right now. And uh also the geopolitical risks are there. Well, well, I’m curious about the geopolitical side as it relates to the economics because I mean Hong Kong and China being more wedded or more in sync. I I would think that would almost blunt the positive impact that Hong Kong has had on mainland China and really just the region overall. I mean, we just had a couple of reports last week of executives at Wells Fargo, apparently a patent and trademark employee from the US being detained over there. And then when you look at the interplay between those two economies, what is the potential upside with continuing to do business there? Yeah, I mean uh again I think you know remain over the over the last call it five six years maybe longer um I’ve said that uh you know at some point in time the hard decoupling is certainly coming. uh we don’t have we don’t share anything in common from a values perspective with the Chinese Communist Party and that ends up interlacing itself into trade and and our and our relationship our bilateral relationship. So when China took over Hong Kong postco without a shot fired uh and and call it corrupted the judiciary and and uh decided to to break the the the cenino British joint declaration and the US declaration of our relationships with Hong Kong. Um, I don’t understand why the West continues to do business with Hong Kong and or China. Uh, and I think those that continue to do so will pay a hefty price in the coming years. Well, what about all the big US companies that of course want to do business in China, certainly mainland China because of the population and obviously uh the perception of a rising middle class and a rising wealth class. I mean, just last week, I mean, we spent countless hours on this network talking about uh the deal that Jensen Wong struck to be able to sell uh some of his Nvidia chips over there in China. Yeah. Um look, uh I I think that the Nvidia deal was a basically a hostage exchange. Uh the US desperately needed uh rare earth uh magnets. Uh and China desperately needs Nvidia’s H2O chips. And I think we agreed to do to execute a hostage transfer i.e. give them the chips. Uh they give us the magnets. But the interesting thing in that transaction is they’re requiring us or US companies to enter a licensing agreement uh with uh the Chinese rare earth magnet manu uh suppliers and we have to disclose very sensitive data to them. How many units of production we have, what the cost per unit is of each car. Ford is basically having to sell it soul to get those magnets and uh we’re just letting those chips move freely into the Chinese Communist Party’s People’s Liberation Army and they’re being used to develop AI on the battlefield, AI and their weaponry, AI to develop things to point back at us. Uh so I think that was a deal with the devil that I think we’ll end up regretting. Well, I am curious though, but from an investment standpoint, Kyle, do you find yourself looking for places to put your money that would maybe counter what you just laid out with regards to China? Yeah, I think that uh you know we we happen to have a partnership with the US defense department called uh roachfort management company where we are we are looking for uh advanced defense technology both on the offensive side and defensive side in the United States uh to help the US military and US defense department. uh and there are a number of managers entering into programs like that where you know we spend about 2.9% of GDP on defense today and we all know NATO is trying to catch up to 2% just gave a 5% uh target. Uh when you look historically at periods of war whether you’re talking about the Cold War, the Vietnam War, the Korean War andor World War II. Uh, in World War II, there was one year, 1945, where we spent more than 40% of our GDP on defense. So, I think you’re going to see the wind in the sales of defense and defense tech for the next decade or more. Uh, you saw it in the big beautiful bill. There’s there’s another $200 billion going into shoring up uh, let’s say, where our holes are and where we need to advance. So, I think you’re going to see defense spending as a percentage of GDP move higher. And I think the money to be invested is on the front end of defense and defense tech in the United States for the next decade.

Kyle Bass, chief investment officer at Hayman Capital Management, talks about the strength of the Japanese markets and yen. He is on “Bloomberg The Close.”
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