Kyle Bass of Hayman Capital Management is known for successfully betting against the housing bubble, and was featured in the book Boomerang by Michael Lewis. He also has done substantial, thought-provoking work on the sovereign debt crisis facing Europe. In this video Bass covers the potential timing, order, and magnitude of sovereign debt defaults in Europe. He also discusses his view on the housing market, Japan sovereign debt problems, and the U.S. dollar among other topics.
Some noteworthy quotes and points from the interview:
“Debt has grown in the last 9 years at a 12% annual growth rate. GDP has grown at 4% (annually). So what do you expect when you have a pillar of the world community, the European Union, entering a prolonged stage of deleveraging. The rest of the world in the absence of private credit demand isn’t going to grow.”
“The bottom line is the bill is due today. The bill is due in Europe today, in Japan tomorrow, it’s due in the U.S. the next day. And those days are separated by years of course. And no one wants to admit it.”
“For those of you that think a 50 cent default on the private sector is going to fix Greece, you’ve lost your mind. It is a full writedown of what the Troika doesn’t own….if you just do that math you’ll realize it is a full wipeout.”
Bass thinks December 19th is a critical date for the Greeks since they require another tranche of money to finance their debts on that date.
“There’s a divide between reality and belief in Europe that is going to sink Europe before we sink.”
“We haven’t had a developed western sovereign restructure (it’s debt) since WWII….as soon as they do, you have to think about the qualitative analysis of the participants changing. If it just changes on the margin, for countries like Japan or Italy, then the dominoes start falling….I’ve never seen an orderly default process, I think it’s going to be a forest fire….it’s not the end of the world, it just means a lot of people are going to lose a lot of money.”
“What this means is a very difficult time for the world. This is not a cyclical rebound from a crisis we had two years ago and you should be buying stocks because a P/E ratio is low comparatively speaking with the rest of the S&P years. Because the E is wrong. And we’re going to see declines, and people don’t know how to position themselves for declines.”
“If you’re an individual you need to be much more conservative then you even think you need to be. Return of capital is much more important in the next few years than return on capital.”
“In the environment we’re talking about here, the U.S. dollar should be fine in the short to medium term, if we’re right about Europe and Japan….I think you should be more in cash, and hanging onto productive assets and less invested in financial assets.”
Bass says productive assets could still experience losses but they should provide a better inflation hedge.
Bass discusses why he took physical delivery of gold, and it had to do with the fractional reserve nature of the COMEX. He alluded to the idea that the COMEX wouldn’t be able to handle a large request for gold delivery because they only actually hold a small percentage of the gold traded on the exchange in physical form.
“What’s going to happen in Europe is going to happen very soon.”
Bass thinks the 30-year bond rate in the U.S. could go lower than 2% if money starts running to the U.S. during the upcoming European sovereign crisis.
Bass doesn’t believe collective participants in the market fully appreciate how negatively the debt crisis will affect the markets.
“I don’t get paid to be an optimist or a pessimist, I get paid to be a realist. Being a realist in this scenario is pretty negative.”
“Don’t believe these governments, when they tell you that everything is going to be fine….think about Mexico in 1994….if you remember the crisis, the day before the government devalued 60% they said they wouldn’t devalue. The government can never tell you what they are about to do….the key takeaway is develop your own opinion.”
More Kyle Bass interviews: