In a recent article on Value Walk’s website, Kyle Bass, the investor once held as a wunderkind for foreseeing the housing bust has issued his latest predictions on the Chinese economy. In the article, Bass said that he expects the Chinese economy to have a hard landing based in part on the undercapitalization of the Chinese banking system.
Banks normally hold a percentage of their deposits against losses. According to Bass, the Chinese banks only have reserves to cover about 10% of their outstanding loans. Citing statistics other emerging market countries’ last economic downturn, Bass told Fortune magazine that losses of 30-40% would not be unrealistic. Furthermore, Bass argues that the Chinese banks are overleveraged in terms of their total assets when compared to the total Chinese gross domestic product. He cites that during the last US economic crisis, US banks held roughly sixteen times the US GDP.
While Bass’ predictions may sound dire, you have to remember, Bass has held that the Japanese economy would crash, not just once, but almost every year since 2005. Otherwise, his abilities to correctly call the markets have to be questioned when looking at the returns produced by his hedge fund Hayman Capital Management. While successful hedge funds were throwing 30% positive ROI’s, Bass’ Hayman was showing losses of 30%.
Bass gained his fame by assembling a large portfolio of subprime mortgages that he identified as having a high likelihood of going into foreclosure. Through he profited handsomely through that series of transactions, Bass have turned to the even less ethical dealing of late. One of his misadventures has been in collaboration with Erich Spangenberg, widely known as one of the most notorious patent lawsuit trolls. In this scheme, Spangenberg and Bass short sell a pharmaceutical stock, then files a patent lawsuit that causes the stock price to fall.
This scheme has been so bad that the US Patent Office’s Patent Trial and Appeals Board has stopped Bass from filing lawsuits, and Congress has taken up the matter trying to enact legislation that would close the loopholes allowing this despicable behavior.
Bass has also aligned himself with Argentina’s despotic Cristina Fernández de Kirchner. While other investors are fleeing Kirchner and her economic policies, Bass continues to sing her praises. So wrapped up in Kirchner’s policies, Bass even denounced other investors’ outcries when Argentina was ordered to pay all creditor’s when the country defaulted, not just the one’s who had agreed on a lower settlement.
Between the fiasco with Argentina, Spangenberg, continued losses on ROI at Hayman, and his ever self-promoting, the predictions of a Chinese economic collapse should be viewed with all the caution a sophisticated investor can muster as Bass’ record of late shows nothing to add to his credibility.