Friday, March 6, 2009

Deep Thoughts From Kyle Bass

Unlike the previous letter, this one actually is worth your time. Kyle Bass, the one man Spartan who took on the Xerxian hordes of sub-prime with his Hayman Capital (which has returned 6% in 2008, 9% in 2009 and is up 340% since inception), and won, shares some very valuable insight. Must Read.

Kyle's summary:

The world needs a “do‐over” and [a global default] would be the cleanest way to rebuilding the world's financial system. As much as I would like to think there is another path to salvation that does not include enormous pain, there is just no other way when you look at all of the numbers.

Note: highlighted text which is inelligible is as follows:

p.2: Alan Greenspan said it best when he wrote Gold and Economic Freedom in 1966
p.3-1: It is an interesting point to ponder – the United States has been operating in asystem of limitless credit creation for ONLY 38 years.
p.3-2: There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.
p.3-3: The Bad News? The Rest of the World Looks Worse
p.4: the scorecard so far reflects a relatively mild downturn compared to the rest of the world.
p.9: the results are staggeringand frightening.
p.11-1: Our work suggested that there could be a "cluster" of government defaults over the next three years (or possibly sooner).
p.11-2: we find that serial default is a nearly universal phenomenon[.]
p.12: The fact that he thinks stealing money from the savers in his economy and confiscating itthrough the hidden tax of inflation/currency debasement should scare everyone.
p.13: To be clear, we believe that the U.S. (and in fact, the world) is in an ongoing debt deflationary spiral that will likely continue for some time (possibly years). The rampant printing of currencies around the globe is not, in our opinion, likely to be immediately “inflationary” (in the common understanding of the term) as leverage comes out of the private sector and asset values continue to decline. The greater concern is the potential inflationary time bomb that grows as governments continue to borrow, print and “stimulate.” What happens to inflation when the velocity of money goes from zero to 100?
p.14: default - and - 50%
p.18-1: I am sure I will upset Wall Street firms and insurance companies and all of the other participants that like the old system of posting no collateral and having the marketplace opaque so they could fleece the unwary participants. It is time to have an “Adult Skate” only from now on.
p.18-2: The problem is that they have already taken all of the “suckers'” money in the securitization marketplace.
p.19-1: For your wealth, you must think about the enormity of this problem around the world, and what the likely governmental responses will be. I believe they only have two paths to walk down eventually.
p.19-2: There will be a time to get bullish (my guess is many years from now).
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Anonymous said...

cannot see bass letter its blank thanks

Anonymous said...

"almost matching Zero Hedge's 35%"

Tyler: Do you have list of stocks that you are basing this off from? and if so where can we see this list?


Anonymous said...

Why not revisit the C preferred tender.

Looks like the spread blew out today.

Tyler Durden said...

If and when marketing time comes you will be made aware. As for Citi common, the 8% run up on monday was enough to unwind late friday purchases.

Anonymous said...

Just to make sure we are on the same page, I refer to the fact that C is flat today, and the Preferred's have been crushed.

Anonymous said...

35% what? What is this referring to?

Unknown said...

i get the fiat money thing, but i just never fully understood the whole gold as the ultimate store of value argument. what is gold actually good for?

wouldn't i rather own oil? or even iron ore?

Tyler Durden said...

if gold is implicitly worthless, what value is iron ore or oil?

Anonymous said...

All other metals have intrinsic economic value because they are necessary in real products. Besides jewelry gold is useless.

also, what was that 35% the person above referred to?

Tyler Durden said...

in a world where (contrary to prehistoric to modern times) gold is worthless, both oil's and iron ore's intrinsic values will also be 0 as end markets for these will likely be nonesitent.
the 35% was a tongue in cheek comment subsequently removed about ZH's own internal ytd returns.

Unknown said...

Gold is a perceived "store of value". Because it is rare, its marginal value is therefore very high.
Water or air are NOT valuable, conceivably, because there is so much of each. There more there is of something, the less value it carries.

This is the perceived "problem" of fiat currency. Certainly, when money is created haphazardly (as it was during various bubble periods, and probably now), fiat currencies are dangerous. You can keep printing money and it will eventually have no value. Keynes called this "pushing on a string" - or the floor for interest rates beyond which you cannot get people to borrow. If money is so easy, then there is no value to it. If there is no value, why borrow it?

It is true that there is too much currency out there. This doesn't mean fiat currencies are bad. Just that they are bad right now, and because they are managed by politicians (who are universally evil), they will always wind up being debased at some point.

Gold, as an alternative, has a limited stock. As a result, if you set the currency in circulation to your gold holdings, then you have a limited amount of currency on hand - you've limited your risk to value. Any increase in prices MUST come from either in increase in gold stocks OR an increase in the velocity of money. Or, alternatively, an increase in the set price of currency to gold...which is supposedly NOT going to happen.

The problem with gold, of course, is that it limits growth. When substantial change occurs in an economy due to market dislocating technologies (such as the last 20 years), you have to expand currencies quickly and easily. Gold prevents this, or at least makes it a cumbersome process. As a result, boom times are snuffed out before they can really take off.

Gold, however, makes the recessions less painful (IN THEORY, in fact history shows they can be quite painful).

The REAL problem in all this is the amount of debt. Leverage creates debt. Some degree of leverage is always good. But the infinite leverage we've seen existing in some institutions is a net bad - and this impacts the companies that APPEAR healthy, but have obligations from firms that have infinite leverage. IF these infinitely leveraged firms default, it puts pressure on the balance sheets of all the firms it has obligations to. These firms must now make up the lost obligations and sell some assets, and it becomes a deflationary spiral.

There is some thought that we are at this point. It's quite possible we are.
I remain doubtful. There are no pain free solutions, but the least pain free solutions are the worst ones - and we're testing them now. They are the worst because they increase leverage in order to "deleverage". That is, I'm taking out an equity loan in order to pay off my mortgage, now that I don't have a job.
It delays the day of reckoning. And if you delay the day of reckoning, you make the end result that much worse.

Unknown said...

i hear ya. long srs (discussed previously) short REITs - 200% short CMBS. who is this brad pitt character?

Unknown said...

i wasn't at all saying gold is totally worthless, but it has always seemed to me that the uses of things like oil (fuel, heat) and iron ore (steel) make them more intrinsically valuable.

i mean i guess gold has some industrial uses but at the end of the day its just a soft, shiny metal, no?

Tyler Durden said...

ok boys, time to do some damage at local fat repository. carry on