October 20, 2012

Kyle Bass: Buy Guns and Gold

Kyle Bass is one of the chosen 15 people who have made use of the subprime trade of CDS. He has been interviewed a couple of times recently and had very interesting ideas to share. Bass recently bought a record number of 20 million nickels for a price of 1 million US dollars. Bass says that the worth of each metallic coin is around 6.8 cents. Ken Rogoff reports his shock on the numbers that have been shared by Kyle Bass. The new investment thesis that Bass has come up with stats that the crisis caused by subprime mortgage was not the cause of the problem, buts it affect. The main reason for the problem is that there is just too much debt and this is never a good sign because after the crisis, this debt is transferred to the balance sheets of the public.

"Our biggest positions now are Japan and France. If and when the dominoes fall, the worst, by far, is France. I just hope the U.S. doesn’t collapse first. All my money is bet that it won’t. That’s my biggest fear. That I’m wrong about the chronology of events. But I’m convinced what the ultimate outcome is.”

“If Japan had to borrow at France’s rates, the interest burden alone would bankrupt the government.”

By the time the next crisis came our way, the gold market was most probably going to collapse as more pending future contracts were on hold than the total available gold.

“We’ve never had this kind of accumulation of debt in world history,” Bass said.

An important point to remember here is that the banks that invested huge amounts of money were being started to be treated as much more than just private financial institutions. They were considered as a symbol of their local governments and it was assumed that they would be bailed out in the time of crisis. The public debt of all the rich countries appeared to be at a dangerously high level and as a result of the crisis, this level increased further. As a fact, the official public debt was no longer considered to be the public debt and it actually contained the different debts of a country's banking system. Bass goes on to say,

“I believe that Germany and the balance of the Eurocrats will attempt to default Greece within the euro zone first. The frictions associated with such an event will prove to be problematic and the usual benefits of a substantially weakening currency that would historically accrue to the country in default will not be available to Greece. Greece will therefore be forced to go back to the drachma at some point in the near future.”

Continuing with his discussion he states that

“In the end, it is most likely that after Greece and the next peripheral country begin to hard default, Germany will exit the [European Monetary Union] and recapitalize their own banks. After recently conducting a population study on the German people, we have determined that the overwhelming majority of the people of Germany think that they would be better off never having formed the euro in the first place. Two thirds of the people do not think that they have any obligation to bail out profligate members of the EMU. The market’s hopes rest upon Germany and the [European Central Bank] going ‘all-in’ at some point in the future. I don’t think that is likely at all.”

“There is no playbook for how the world will most likely deal with a cluster of sovereign defaults…I believe it will all read like fiction from here. The organizers and members of the EMU are desperate and have nowhere to turn. The circular references of the optical backstops [International Monetary Fund and European Union] are showing in broad daylight.”

Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.