Hayman Capital

"China’s direct contribution to global growth is enormous, but perhaps equally as important is its role in generating growth in developed and emerging economies. A slowdown, whether significant or extreme, in the Chinese economy heralds very bad news for asset prices around the world. A growth crisis centered in Asia will further exacerbate the instability and volatility in Japan and have a devastating impact on second derivative marketplaces such as Australia, Brazil and developing markets in South East Asia. The combination of rich valuations and further threats to growth has led us to dramatically reduce risk in the portfolio and actively position ourselves to withstand the uncertainty and instability ahead"

In what may be the most important story of the day, or maybe year, for a world in which there already is an $11 trillion shortfall in high-quality collateral (and declining every day courtesy of Ben's monetization of Treasury paper) so needed to support the deposit-free liability structures of the shadow banking system (as most recently explained here), Bloomberg has just reported that Europe may begin a crackdown on that most important credit money conduit: the $80 trillion+ global shadow banking system, by effectively collapsing collateral chains, and by making wanton asset rehypothecation a thing of the past, permitted only with express prior permission, which obviously will never come: who in their right mind would allow a bank to repledge an asset which may be lost as part of the counterparty carnage should said bank pull a Lehman. The result of this, should it be taken to completion, would be pervasive liquidations as countless collateral chain margin calls spread, counterparty risk soars all over again, and as the scramble to obtain the true underlying assets finally begins.

It’s amazing what people can trick themselves into believing and even shout about when you tell them exactly what they want to hear. It was disappointing to see Brad DeLong’s latest defense of Fed policy, which was published this past weekend and trumpeted far and wide by like-minded bloggers. If you take DeLong’s word for it, you would think that the only policy risk that concerns hedge fund managers is a return to full employment. He suggests that these managers criticize existing policy only because they’ve made bad bets that are losing money, while they naively expect the Fed’s “political masters” to bail them out. Well, every one of these claims is blatantly false. DeLong’s story is irresponsible and arrogant, really. And since he flouts the truth in his worst articles and ignores half the picture in much of the rest, we’ll take a stab here at a more balanced summary of the pros and cons of the Fed’s current policies. We’ll try to capture the discussion that’s occurring within the investment community that DeLong ridicules. Firstly, the benefits of existing policies are well understood. Monetary stimulus has certainly contributed to the meager growth of recent years. And jobs that are preserved in the near-term have helped to mitigate the rise in long-term unemployment, which can weigh on the economy for years to come. These are the primary benefits of monetary stimulus, and we don’t recall any hedge fund managers disputing them. But the ultimate success or failure of today’s policies won’t be determined by these benefits alone – there are many delayed effects and unintended consequences. Here are seven long-term risks that aren’t mentioned in DeLong’s article...

As the global economic slump continues central bankers, such as Mario Draghi, and politicians have vowed “to do whatever it takes” to get economies back on track. Such policies while having near term benefits are considered extremely risky in the longer run by many commentators as they could beckon runaway inflation or stagflation, with ruinous results.

Shinzo Abe unleashed his plan with the blessing of the Bank of Japan to begin aggressive government bond purchases. This has led to a massive growth of 60% on the Nikkei and is deflating the yen and boosting their exports.

"The stress is beginning to show," Kyle Bass warns during a wide-ranging interview with Bloomberg TV. "The beginning of the end," is here for Japanese government bonds as he notes that while quantitiavely it is clear they are insolvent, "the qualitative perception of participants is changing." But away from Japan specifically, there is a lot more on the Texan's mind. "Things go from perfectly stable to completely unstable," very quickly; even more so after 20 years of exponential debt build-up and Keynesian cover-ups; and it is this that he warns complacent investors that it is "really important to think about the capital at risk in your strategy." For this reason he prefers to hold gold rather than Treasuries, as, "when you think about the largest central banks in the world, they have all moved to unlimited printing ideology. Monetary policy happens to be the only game in town. I am perplexed as to why gold is as low as it is. I don't have a great answer for you other than you should maintain a position." His discussion varies from housing's recovery to structured credit liquidity "money is being misallocated by the printing press" and the future of the GSEs, concluding with the rather ominous, "at some point in time, I would much rather would own gold than paper. I just don't know when that time is."

• John Kerry just got happier: Berkshire Hathaway, 3G Buying Heinz for $72.50 a Share, or $28 Billion - ~20% premium to last price (CNBC)
• US Airways, AMR to Merge (WSJ) - can thousands of workers spell "synergies"?
• Draghi, Carney show ascent of "whatever it takes" central bankers (BBG) ... to preserve the Goldman way of life
• Euro zone economy falls deeper than expected into recession (Reuters)
• Soros has made $1 billion betting against the Japanese Yen (WSJ)
• Ex-Analyst at SAC Felt Pressured for Tips  (WSJ)
• Desalination Seen Booming at 15% a Year as World Water Dries Up (BBG)
• China's 'Wall' Hits Business (WSJ)
• Israel publishes some details as Australian spy mystery deepens (Reuters)
• Tata Motors Profit Falls 52% (WSJ)
• AB InBev Will Sell Corona Unit to Salvage Modelo Takeover (BBG)
• "Blade Runner" Pistorius charged with murdering girlfriend (Reuters)
• In Ohio and beyond, Obama sees model for manufacturing revival (Reuters)

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

In our first installment of this series we explored the concept of stock to flow in the gold markets being the key driver of supply/demand dynamics, and ultimately its price. Today we are going to explore the paper markets and, importantly, to what degree they distort upwardly the “flow” of the physical gold market. We believe the very existence of paper gold creates the illusion of physical gold flow that does not and physically cannot exist. After all, if flow determines price – and if paper flow simulates physical metal movement to a degree much larger than is possible – doesn’t it then suggest that paper flow creates an artificially low price?
Leveraged systems are based on confidence – confidence in efficient exchanges, confidence in reputable counterparties, and confidence in the rule of law. As we have learned (or should have learned) with the failures of Long Term Capital Management, Lehman Brothers, AIG, Fannie & Freddie, and MF Global – the unwind from a highly leveraged system can be sudden and chaotic. These systems function…until they don’t. CDOs were AAA... until they weren’t. Paper Gold is just like allocated, unambiguously owned physical bullion... until it’s not.

In a recent article at the NYT entitled 'Incredible Credibility', Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government's debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs. Krugman compounds his error by asserting that there is an 'absence of default risk' in the rest of the developed world (on the basis of low interest rates and completely missing point of a 'default' by devaluation). We are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (e.g. the idea that one can consume oneself to economic wealth).

No really, WTF!?

A lesson to be learnt from the individuals who continue to buy European Debt

The mainstream media seem willing to sound the all-clear and bring us back from Defcon-3 on the back of what can generously be described by realists willing to look at the actual data as a 'murky' NFP print. The market's reaction seems modestly QE-off (with rates up decently) but the only modest drop in Gold appears to fit with a lack of conviction in the data (especially given the EUR sell-off on Papademos chatter). It seems, as Bloomberg reports, Kyle Bass is right to take the longer-view when he notes today "I'm against selling any of the gold" in UTIMCO's portfolio, pointing out the mounting risks from government deficits in US and Europe, "as every day goes by, I see deflation in the things you own and inflation in the things you need." Summing up the reality of our global situation, one of Bass's colleagues adds "This is a grand experiment and they typically never end well."