Actually this is a summary of the introduction from Michael Lewis’s new book, Boomerang, which we are giving away this month. Definitely read it.
Hayman Capital’s Kyle Bass says “Buy Guns and Gold”
OCTOBER 4, 2011
Kyle Bass, “one of 15 people” who put on the CDS subprime trade, has been interviewed a couple times of late.
Bass has bought 20 million nickels for $1million. He said the metal inside each coin is worth 6.8 cents
Ken Rogoff, who wrote the book on sovereign debt defaults, was shocked at the numbers Kyle Bass shared.
Thus his new investment thesis: the subprime mortgage crisis was a symptom of the problem, not the cause.
The crux of the problem is too much debt, which must go bad. Post crises, the debt is now carried on the public balance sheets.
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.”
Would tell his mother to buy “guns and gold,” but the physical not futures.
When the next crisis struck, the gold futures market was likely to seize up, as there were more outstanding futures contracts than available gold.
“We’ve never had this kind of accumulation of debt in world history,” said Bass. Critically, the big banks that had extended much of this credit were no longer treated as private enterprises but as extensions of their local governments, sure to be bailed out in a crisis. The public debt of rich countries already stood at what appeared to be dangerously high levels and, in response to the crisis, was rapidly growing. But the public debt of these countries was no longer the official public debt. As a practical matter it included the debts inside each country’s banking system, which, in another crisis, would be transferred to the government. “The first thing we tried to figure out,” said Bass, “was how big these banking systems were, especially in relation to government revenues. We took about four months to gather the data. No one had it.”
“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.”
“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.”