Of Imminent Defaults And Self Deception. Kyle Bass Prepares For The Worst

Tyler Durden's picture

In his latest letter to LPs, Kyle Bass of Hayman Capital Management, offers his tell-tale clarity on what may lie ahead for Europe and Japan. With his over-arching thesis of debt saturation becoming more plain to see around every corner, Bass bundles the simple (and somewhat unarguable) facts of quantitative analysis with a qualitative perspective on the cruel self-deception that we all see and read every day about Europe.

Whether it is Kahneman's "availability heuristic" (wherein participants assess the probability of an event based on whether relevant examples are cognitively "available"), the Pavlovian pro-cyclicality of thought, or the extraordinary delusions of groupthink, investors in today's sovereign debt markets can't seem to envision the consequences of a default.

His Japanese scenario is no less convicted, as we have discussed a number of times, with the accelerant of this debt-bomb being the very-same European debacle and his time-frame for this is set to begin in the next few months.


(h/t The Fly)

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slewie the pi-rat's picture

bullish cruel self-deception

CPL's picture

Bass is an amazing technical writer and games master.


For those that didn't read the article;  As debt increases the frequency of the bailouts increases like a snow ball rolling down hill and we are almost at the bottom of the hill.


Does not mean go out and purchase FAZ or whichever fabricated leveraged derivative device you use.  It means wait for the opportunity to buy it.

Michael's picture

The bigger we can make the debt bubble bomb for maximum effect before it explodes the better. I say print another hundred trillion.

Pladizow's picture

Is anyone else unable to read the piece, as it looks like Greek/Giberish?

sqz's picture

"One more dollar worth of global credit market debt produces almost no additional utility via GDP growth."

Pretty much says it all. Kyle Bass certainly has a way with communicating.

Optimusprime's picture

One of the reasons Bass is so impressive is that his presentations combine sharp perception with historical insight and clear rhetoric.  In this case, he utilizes (appropriately, to be sure) the old adage of "the law of diminishing returns".


Decades ago, Albert J Nock noted that three "laws" accounted for nearly all social phenomena.  They were:


1) The law of diminishing returns.

2) Gresham's law (generalized): Bad money drives out good.  Bad anything drives out good.  Think "white flight" as a possible instance of this law.

3) "Epstean's" law: people tend to follow the path of least resistance in satisfying perceived wants and needs.


To be sure, such laws identify tendencies, and are therefore not "absolute" for all individual cases.  But social phenomena deal with the overall tendencies at work, and with this in mind, Nock seems to have nailed it. 


Nock would have loved the Cicero quote.

jomama's picture

didn't you get the memo?  you're supposed to use your lucky charms decoder ring!!

percolator's picture

I got the same problem.  I'm using Firefox 8.0.1 and you?

DollarMenu's picture

Greek/gibberish - have you set your print size to 'actual'?

percolator's picture

Just tried Safari and now I can read it.

Michael's picture

The world doesn't need any more growth, it just needs maintenance.

Michael's picture

Sometimes an idea pops into my head and it happens within the next few days. Let me just post it and see what happens.

There will be a few old fucks in congress who will die of old age pretty soon while still in office. I pray a lot of old congress critter fucks die soon. That's one way to to get rid of them.

BandGap's picture

It is written at another level but totally comprehensible in it's direction.  And that is all that is needed.

Pope Clement's picture

After 3 shots of potato vodka it cleared up...

GeezerGeek's picture

Viewing Scribd can be challenging. I, too, found the viewing difficult using Firefox 8, both in the embedded document in the ZH post and using the link http://www.scribd.com/fullscreen/74335711. Curious, I switched to Internet Explorer 8 and had a slightly different problem.

Long story short, the solution lay in changing the encoding option. In IE I switched (View -> Encoding) from Unicode (UTF-8) to Western European (ISO).  The text was perfectly readable. For the technically astute - the Geek in my name was earned the hard way - there are many ways of encoding text for transmission. Think of it as variations on an alphabet, or differences in font styles. Browsers aren't always able to automatically choose the correct one, and sometimes a human has to correct the situation.

youngman's picture

I know You said this in Jest....but when its all over...I bet 100 Trillion is not to far off

Freddie's picture

Fiat snow ball Bitchez!

Carlyle Groupie's picture

Does not mean go out and purchase FAZ or whichever fabricated leveraged derivative device you use. It means wait for the opportunity to buy it.

I have great respect for those who consume this info and have the capacity to understand it.

Have you ever seen a cat in the field stalking her prey. At some point in time she hunkers down, her tail whipping back and forth. Low to the ground. Anticipating. Instincts piqued, bleeding.

Wait for it.

Thank you CPL.

tekhneek's picture

Yet you're waiting to buy gold til it doubles in price again?

...either way. Look at the 1 month on FAZ. If it prints sub-$40 I'm a buyer. They'll most definitely bail each other out in their fiat debt-circle jerk a few more times and that might throw another 400-500+ points on the DOW and send FAZ down another 10% but in this environment I call that a discount. If you like FAZ at $45 then you definitely like it at $25... in this environment IMHO.

Raskolnikoff's picture

those things are death traps, someone should go to jail for the creation of these funds alone. saying this as a former investor of SRS and FAS...have made a few bucks shorting SDS & TZA this week as a small hedge against some short positions, wish I could short UNG...but, one lucky day...this strategy won't work, I do believe the doomsayers

ltsgt1's picture

I started messing with FAZ this August, was up almost 40% in October, then down 17% in early November, then up 30% until last Friday and down 12% after the last 2 days. FAZ is like my ex-girlfriend, she gave me the best and worst time of my life.

I think the central banks wil not allow Europe to implode, dragging down the world economy. What they did yesterday is indicative of where we are heading. I think the course is set for an inflationary explosion rather than an deflationary implosion. I no longer expect the S&P will be in the sub 1,000 territory.



mkkby's picture

You just got your 40 print, geek girl.  Hope you like it.

BandGap's picture

Exponential growth like that seen in the graphs is always a reason to quetion what is going on.  In reference to debt it cannot be a good thing.

Iwanttoknow's picture

Carlyle gruopie,

you made a good point about peter schiff.anyone who doubts 911 is not credible in my eyes.

Sunset chaser's picture

Other key points for those not reading the full article.

"We are reaching the point at which the amount of funds required to continue delaying the inevitable is simply becoming too large. As more countries require aid and are thus unable to provide aid, the burden on the remaining contributing nations grows."

"Money printing will only start after hard sovereign defaults (are allowed to happen) as printing beforehand without addressing the toxic debt problem would rewind the clocks back to the days of Von Havenstein and then you-know-who."

The second paragraph seems to be particularly worthy of respectful consideration because, as we all know, Germany holds most of the European cards, and would presumably be hypersensitive to the possibility of recapitulating Weimar and WWII via the printing press.

ltsgt1's picture

I thought money printing will start after hard sovereign defaults until yesterday. I think the central banks have a death wish of returning to the days of Von Havenstein. I think I am going to stop messing with FAZ and TZA and start buying gold and silver.

Rip van Wrinkle's picture

Excuse the dumb question.


What's FAZ?

ltsgt1's picture

Direxion Financial Bear 3X 

1000pips's picture

K Bass, must own a piece of ZH; always using his script on this site.  

The problem is-HE IS WRONG !  In a perfect world he might be correct, but the one element he does not discuss is corruption of the global 1% to keep this scam game called the stock market, the currency market and the bond markets forever in play.  Japan-one of the most ruthless cultures of all time; China-complete criminal state; Russia-complete organized crime 'gov't'; USA-biggest imperialistic organization ever to roam and steal the natural resourses of this planet.  
These are not 'Nations'; they are all criminal enterprises.  There are no rules, math does not apply except to confuse the honest.  K Bass is a good writer and speaker, yet only with theory, not in real world commerce and usuary.  

Do you not realize that the markets are only a series of 'Ups' and 'Downs'; there will never be an 'End Game'.  

Why? Because, the markets steal and trick the 'suckers' out of their money through fear and hope.  Over and over and over and over.  

How much money have you really made since 2008 shorting the market?  Not much if any, if your a full time trader you know the real money is made on the Long.  

K Bass just bought 20,000,000 US Nickles because he says they are worth 6.34 cents, but you can't melt them down (against the law also) and process them for that amount (6.34 cents), so who will he sell them to for a profit of 20%? Nobody, that's who.  Because if this method produced profit, there would be NO Nickles in circulation the minute it was possible to make 20% off of them!!!  Right?!

If you do not have inside information, the markets are going to beat you until you are busted, or so paranoid you become anti-social and hoard PM's beside your guns and ammo...don't listen to anyone who makes their market information public for free, especially if they say what you agree with.  

The world is never going to end, it never has, it only evolves new methods to steal from the suckers (99%ers).  

The game is rigged guys, just thought you needed to know.  That my friends is a true 'Flat Refusal'.     

VyseLegendaire's picture

The world has ended before, stop telling yourself these feel good normalcy bias tales. 

1000pips's picture

Really?  When did the world 'end'?  We know it began 4.5 Billion years ago approx.  Yet, we have yet to record when the World has ended?  Please enlighten us with this secret you speak of...oh, that's right, you cannot.  So, instead of blindly assuring yourself that you know the 'inside track', open your mind up to the truth and save yourself alot of money, if you have any left...

mick_richfield's picture

When the Visigoths finally started to come across the Rhine in the north, they didn't even have to fight.  They just had to walk.  They didn't fight an actual battle for weeks, and then against some starving remnant of a legion that crumbled in an hour.  More than half of the troops probably just defected, being Germanic themselves, and starving.

Every denarius the troops were paid with by that time was copper dipped in silver.  Nobody took them seriously but Septimus and the Senate.

LMAO's picture


I'm trying very hard to grasp what you are saying here:

"K Bass just bought 20,000,000 US Nickles because he says they are worth 6.34 cents, but you can't melt them down (against the law also) and process them for that amount (6.34 cents), so who will he sell them to for a profit of 20%? Nobody, that's who."

I've heard about people buying Gold American $ 50 denominated Eagles for as much as $ 1800 - $ 1900. There are even people buying Silver Dollars for $ 40.

According to your thesis these people are idiots.

And you were saying......

but you can't melt them down (against the law also) and process them for that amount

so who will he sell them to for a profit of 20%......

jcaz's picture

Here's the problem with Kyle's nickel plan-

He can't melt down those nickels for free.

Factor in the cost to smelt those nickels, let's see what his real profit will be.

Oh- and then factor in what it cost him to store them.


Looked better on paper.

LMAO's picture

Technically Kyle is not allowed to melt down these nickels because he would be destroying legal tender (at least for the time being). Somehow I think he knows this. The same "problem" applies to those who are holding Gold and Silver Eagles.

The argument was made by Pips that atm there is no 20% profit in selling this and maybe even suggesting that there is never going to be a market for these nickels.

It kinda makes you wonder why people would buy Silver and Gold Legal tender ($1 and $50 coins) at prices vastly exceeding their nominal value.

I can't truly say that Pips thesis is supported by reality and I don't think it's a far stretch at all to imagine when Weimar hits the system and a coffee costs $100 in worthless printed fiatscos Kyle might very well be able to buy his coffee with 5 pre-Weimar nickels, by then no longer used as legal tender because of its' nominal value but dare I say it, intrinsic value.

I think storage fees is the least of his problems, he probably has them on skids in a shed on his ranch.

donis's picture

rome, alexadria, ussr......   the world as people know it is constanly ending.

Ponzi Unit's picture

You may be missing the point, Pips. Bass says the numbers involved are too big for the ponzi, that guarantors are bust-outs, that rescuers are puny in size and strength. Now, maybe the fed can pony up $18Trn to float the Euro periphery, but what are the implications of that?

1000pips's picture

Your point is with merit.  


Yet, in a derivative macro environment, liquidity can literally be created out of thin air (FED RESERVE).  

So $18T is easily possible, immediately.  

That is really what happened today, it was announced that NOTHING is going to destroy the Euro.  

Again, the game is rigged, it is a huge Bear trap this time, last time it was a Bull trap (2008).  

Over and over and over--the scam will never end, and the world has never ended before, except for the 99%er's.  The 1% are never broken. 

buyingsterling's picture

I think you have the right analysis, but wrong ultimate conclusion.

I think you can make the argument that these people don't know what the hell they are doing, and are forced to make up much of this as they go along. Would it not have been better to bring all of this in slowly, if they can adjust things as you say? They do great when things are rolling along relatively smoothly. They do better picking up the pieces after collapse, but you'd think they'd want to milk us for all we're worth before pushing us off the milking table. Now we're pretty much milked out, much of the private equity is out of the market, and it's getting too costly to food, clothe, and medicate all of the dependents.The latter requires real resources to be dug up and fashioned into things of real value. That's the rub, in the end. You can print all you want, but it doesn't produce any more yield of real necessities at some point. And competing interests produce many of those necessities.

So either they are incompetent and this mess is not what they intended, or this is all planned. If the latter, that's certainly much scarier. It means that we'll likely be left hanging until things are so bad that people erupt, or the population is begging and totally controllable. Either outcome is a disaster and the end of the world, at least as we've known it.

Ghordius's picture

+1000, 1000pips

I like your little reminder that the world is not going to end

mick_richfield's picture

"The world will never end" is one of a class of statements that the speaker never has to apologize for.  Similar to, and as clever as "I will never die."

Do you think that ZHers believe that the Earth is about to split in two?

Maybe "paradigm shift" would be easier to understand than "world ending."  But the latter phrase is more accurate, in that it better prepares you emotionally for the magnitude of the event.



Ghordius's picture

sure - what I sometimes wonder is how many people appreciate the fact that we had subtle paradigm shifts every decade since the 1780's.

The US has been somewhat insulated from some of the last, though. I just wonder if ZH is not part of this awareness.

I lived and worked in Italy during a time where it was not that clear cut if the communists would not win a general election, for example.

Or traveled quite a lot (for business) in the ex-sovjet satellites after the Fall of the Berlin Wall. Makes me both more cynic and optimistic.

Citxmech's picture

Except the next paradigm shift will be a global contraction coupled with shortages.  100pips needs to watch that Chris Martenson vid again.

pelagivore's picture

Pips, I do subscribe to your view in the sense that the status quo economic system will be forced to be sustained; in fact it may take some extraneous factor to push meaningful and necessary change (war, environmental shock, disease, etc).. at this point I just look at Japan since the late 80's, their unwillingness to address fundamental imbalances has meant a lost generation, which is what the rest of the world faces. Like you I have no confidence in the 1%; and as we see currently, the populace has no stomach to force change... they sit at home. 

I like Hugh Hendry's view of the world... that paradox is a key investment theme going forward. 

dr.charlemagne's picture


the process whereby currency which is officially undervalued and disappears from circulation has occurred repeatedly in monetary history, so often in fact that it has a name. Gresham's Law. also the process whereby TPTB miscalculate and loose control of everything has happened just about as often. read up, sir

1000pips's picture

Perhaps your education may have examined 'Thiers Law' also, 'Dr.'.  Which is, as I recall is the reverse of Gresham's Law.  The fact is, that people will be driven to except the currency they believe the most redemable and stable (USD).  

It is (as of the Fed announcement yesterday), the USD which will back the Euro, therefore insuring Europe's currency survives and even inflates in value.  

Perhaps you, sir, may want ot 'read up', before you stake your IQ on a mis-statement of what Gresham's Law actually is, "that good and bad coin cannot circulate together"; but 2 bad coins can circulate together endlessly--as we see today.  Hence it is all a scam...

view the Tiger Lillies


mick_richfield's picture

And Weimar Germany is alive and well, the Soviet Union never fell, and your social security check is in the mail.

A complex system cannot be controlled centrally, it can only be gradually ruined -- and the ruination gaining exponentially. 

You can tell how close to the end we are by how many bailouts and grand rescues are announced each week, by how many desperate people on TV and on the internet proclaim that All is Well and Our System Is Eternal, and by how viciously they attack the prophets of doom.

Saying "this game will never end" is mouthing a meaningless prayer in an evil religion.

Ghordius's picture

but only because a system as a whole is not sustainable it does not mean that parts of it won't survive...

Germany and Russia are quite good examples for this, Mexico, Brazil, Argentina come to mind

lots of parts. If you devalue your currency by half, for example, all your debts are halved. Do it enough and suddently, voilà! Ze Problem iz Zolved. So that we can go on as before! Straight from the new book: "Dreams of Mr. Bernanke".