Europe’s political and monetary union has not got long left, according to Kyle Bass. The Hayman Capital founder made the comments today on CNBC’s Squawk on the Street. The network’s report on the interview can be found here. A video of the interview can be seen here.
During this Summer, we questioned Bass’ future on the basis that his bet on Japan’s default was not playing out as quickly as he might have hoped. Comparing his prospects to John Paulson’s may have been premature, but his unique perspective on macroeconomics often draws criticism.
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Bass, who was made famous by his bet against sub-prime mortgages in 2008, thinks the debt accumulation across the world, which he calls “the largest peacetime accumulation of debt in history”, is making it very difficult to make good investment decisions.
The most obvious manifestation of the global debt problem is, of course, in Europe. Bass thinks the continent’s political and monetary union is only “perceived to be staying together”. To highlight his point, he concentrates on the 90% of bond value that has been lost by investors in Greek debt.
Bass also points to European history as support for the inevitability of the continent’s downfall. He suggests that countries known for tearing themselves apart with war for hundreds of years, are unlikely to simply hand sovereignty to some higher power, the European Union, or more cynically Germany.
The logjam caused by mistrust will weaken Europe going forward, and will inevitably result in a collapse of some form on the continent. Bass’ projection is one of the most pessimistic out there, and it leaves investors with very few places to put their money with confidence.
Similar problems are rampant in the United States. The confidence investors appear to have in the federal government is unwarranted, according to Kyle Bass. He sees any success in sealing the large budget deficit and the increasing debt burden as unlikely.
Neither party, if given complete control, would be able to solve the problems in the United States budget. Bass admits having taken a pencil to the budget, and discloses that the changes he had to make to balance would make anyone un-electable.
Because of the volatility he sees coming in future, Bass has been looking for safe investments, guarded from European problems, or the global debt crisis. Bass’ solution to the problem is Mortgage Backed Securities. Despite making his name from shorting the assets, Bass believes they are now relatively safe in the long run.
Half of the maven’s portfolios are made up of Mortgage Backed Securities, and he holds about 1% of the entire market in the assets. Despite his confidence in the asset, Bass doesn’t see the housing market giving great returns any time soon. The important thing for him is that he does not see the market declining again for some time either.
In the grand scheme of things, Bass calls safe any assets that are productive. Those that actually create a product in demand. Examples include natural gas and oil wells, and rented properties.
Gold is relatively safe according to Kyle Bass, but only because it forms a sort of secondary currency. It has no true value in and of itself, but confidence in it appears to be self sustaining, for the time being.
Bass is also confident that inflation is due to come creeping up in the future. He asserted that the initial rounds of money printing by the Federal Reserve, and other central banks around the world, only made up for the losses suffered in money supply during the crisis. The money printing, currently underway, will cause inflation, but it will take time.
Bass does not paint an optimistic picture of the world’s future. If anything, it is one of the most pessimistic portraits from anyone in the investment sector. Bass is betting on disaster.
In summary, Europe will collapse, the United States will not be able to solve its own debt crisis, inflation will hit sometime in the future, and debt problems will continue to plague the world for a long time to come.
In the atmosphere Bass projects, it is a wonder he is investing in anything but reinforced concrete bunkers and automatic weapons. He does have some ideas on what to go for in a doomsday scenario, and as one of the only public investors out there following this type of long term disaster strategy, his picks are certainly worth a look.
Bass has been projecting this sort of disaster for a while now, and, like his Japan picks, it may be less important that something is going to happen, than it is, when it is going to happen. If an investor locks themselves into a low returns but safe from the Apocalypse model, its difficult to choose a time to get out.
Watch the interview in full to get a real understanding of the future according to Bass. It’s a fascinating outlook, though betting on the apocalypse seems silly.