Kyle Bass, one of the hedge fund managers who made a killing betting against subprime, sent a letter to his investors containing his thoughts on this weekend’s big bailout in Europe.
Absolute Return + Alpha has posted a copy of it, and not surprisingly, he’s rather concerned about what he sees.
For one thing, he notes the wild amount of moral hazard that’s been established.
Beyond that, he’s stunned that Germany (Germany!) would make such a concession, and allow other members of the European family to spend recklessly on its dime.
But most importantly, he sees the endgame nearing — or as he puts it the “Keynesian End,” when bailouts just don’t work anymore.
We at Hayman believe this theoretical endpoint is reached when debt service exceeds government revenues. Of course, any particular country has certain fixed expenses beyond debt service; therefore, the real endpoint occurs significantly in front of our definition. Outside of Greece and “Club Med” countries, Japan will begin to grace the front pages of newspapers very shortly. Japan has already reached a point where its central government tax revenues are eclipsed by debt service and social security payments alone. Coupled with its debt and demography problems, the world’s second largest economy is about to enter a real bond crisis.
Bass’ bearishness on Japan is well known. The mortgage on his home is in yen, meaning his home will basically be free when the yen turns to toilet paper.
He goes onto predict another round of competitive devaluations from Tokyo to DC to Brussels.
Meanwhile, his “play” is already going to plan.
We increased our holdings of gold on Monday morning as well as taking other steps to position ourselves for the most likely outcome over the next few years. Interestingly enough, based upon the market reaction in the last 36 hours, it seems the law of diminishing returns applies to bailouts as well
Yep, that’s gone well already.
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