Kyle Bass’s recent investor letter was released where he updated his thoughts on the Euro Zone.
Bass has long been bearish on European credit. As a matter of fact, Bass has proven himself by recognizing and profiting from the U.S. mortgage bubble.
Here are the highlights:
- debt has grown at 11% CAGR for the last decade while GDP has grown at 4%. The reason why the Western world is in a debt spiral is due to a decade of out of control spending. Bass’ analysis begs the question – if debt growth is reduced to 4%, what would happen to real GDP?
- “there is no magical pool of capital to stave off this unfortunate conclusion to the global debt super cycle
- Bass thinks that Italian and Spanish bond yields are suggesting that Euro has already broken up
- Bass reiterated that the leveraged EFSF CDO idea is collapsing because a guarantor of debt (Italy) is now a recipient of aid. In other words Italy went from being a creditor to a debtor
- forget about the IMF bailing out Euro debt. The IMF was designed to bail out small third world nations not to fund profiligate spending by countries like Italy
- Bass attacks the widespread notion that the ECB would eventually “print away the problems.” Bass thinks that National Central Banks will print post-default in order to recapitalize their banking systems.
- Bass thinks that investors have become complacent that there would always be a bailout and thus cannot even conceive of the possibility of a wave of defaults.
- Bass thinks that Japan’s debt problems will be front page news once the market is not fixated on Europe anymore
