Kyle Bass

For an unexpected dose of holiday humor, and a surprisingly spot-on prediction of the future of Europe's monetary system, we go to none other than unelected head of Europe, Herman van Rompuy himself.

There was some hope that today's European summit would provide some more clarity for something else than just the local caterer's 2012 tax payment. It wont. Per Reuters: "Germany does not believe that jointly issued euro zone bonds offer a solution to the bloc's debt crisis and will not change its stance despite calls from France and other countries to consider such a step, a senior German official said on Tuesday. "That's a firm conviction which will not change in June," the official said at a German government briefing before an informal summit of EU leaders on Wednesday. A second summit will be held at the end of June. The official, requesting anonymity, also said he saw no need for leaders to discuss a loosening of deficit goals for struggling euro zone countries like Greece or Spain, nor to explore new ways for recapitalise vulnerable banks at Wednesday's meeting." In other words absolutely the same as in August 2011 when Europe came, saw, and did nothing. Yes, yes, deja vu. Bottom line: just as Citi predicted, until the bottom falls out of the market, nothing will change. They were right. As for the summit, just recycle the Einhorn chart from below. Elsewhere, the OECD slashed world growth forecasts and now officially sees Europe contracting, something everyone else has known for months. "In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development forecast that global growth would ease to 3.4 percent this year from 3.6 percent in 2011, before accelerating to 4.2 percent in 2013, in line with its last estimates from late November... The OECD forecast that the 17-member euro zone economy would shrink 0.1 percent this year before posting growth of 0.9 percent in 2013, though regional powerhouse Germany would chalk up growth of 1.2 percent in 2012 and 2.0 percent in 2013." Concluding the overnight news was a meaningless auction of €2.5 billion in 3 and 6 month bills (recall, Bill issuance in LTRO Europe is completely meaningless) in which borrowing rates rose, and a very meaningful downgrade of Japan to A+ from AA, outlook negative, by Fitch which lowered Japan's long-term foreign currency rating to A plus from AA, the local currency rating to A plus from AA minus, and to the country ceiling rating to AA+ from AAA. Yes, Kyle Bass is right. Just a matter of time. Just like with subprime.

How does one get a Harvard Business School case study made after them? Why by being constantly ahead of the curve, with the right trade, and being mocked by the same "access journalism and excel free" mainstream media which pushed subprime toxic grenades to anyone who listened, only to be proven correct time after time. In other words, by being Kyle Bass: the same Kyle Bass who lost money month after month on his Subprime short (full slide deck here), only to see it all made back, and then some... quite a bit of some. Because it is not by following the herd that one makes the killer trades: it is by standing against it and by waiting for conventional wisdom (in this case that Japan's debt load is somehow sustainable - it isn't, but the kneejerk response still is one to treat JGB's as a flight to safety - this only works until it no longer does and the same math that had doomed the euro over a decade ago is finally grasped by all). Yes: he has lost 60% on his Japanese short fund since inception: so what? All it takes is one millisecond of Malcom Gladwellian insight and the formerly offerless market goes bidless. And that -60% is transformed to +XXXX.YY. Either way, below is the complete Harvard Business School presentation on Kyle Bass, on Heyman Capital and on the Japan Short ber, which we hope will put to rest some of the prevalent disinformation floating around.

Here are some of the things that David Einhorn likes and does not like, having just started his speech at the Ira Sohn Conference:

• Martin Marietta - stock plunges 10% and triggers circuit breaker.
• France - "a french default is not out of the question" - France not limit down yet. He says that a return to the Franc is not out of the question.
• Einhorn likes GJF.NO - "Norway is the only country which can finance itself."
• Einhorn likes Cairn Energy as it trades at discount to assets in just Britain and India.
• Says China is misunderstood and is not an investment opportunity: not enough money to feed the economy and banks aare becoming illquid; money is leaving the country
• Also does not like Japan for all the usual Kyle Bass and Andy Xie reasons. The Yen will continue strengthening.
• Einhorn likes AMZN, calls it "elephant in the room", but questions profit growth.
• Einhorn likes Dena Co, and Gree Inc in Japan
• Einhorn is short DKS
• Einhorn, who is long about $870MM AAPL as per last night's 13F, likes AAPL. Stunner.

All you need to read and some more.

Charlie Munger: "gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939 but civilized people don't buy gold"

...and yet:

David Einhorn: "I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls

Kyle Bass: "Buying Gold Is Just Buying A Put Against The Idiocy Of The Political Cycle. It's That Simple!"

The uncivilized people have spoken, and the winner is...

David Einhorn who crushed it this week with huge profits on his short positions in both Herbalife and Green Mountain, finally takes on the ultimate competitor: the Federal Reserve, likening its "strategy" to a Jelly Donut policy, and explains what everyone who has been reading Zero Hedge for the past 3 years knows too well: "I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls." Or, as Kyle Bass said last year, "Buying Gold Is Just Buying A Put Against The Idiocy Of The Political Cycle. It's That Simple!" Not surprisingly, it is only the idiots out there who still don't get what these two investing luminaries are warning about.

Do you think the US will always and forever be able to pay for our over-bloated military-industrial complex and our wars of choice? Do you think the federal housing agencies will always and forever be able to subsidize the real estate industry with money losing, non-economic mortgage loans? Do you think the government will always and forever be able to pay on the promises they've made regarding Social Security, Medicare and Medicade? Do you think the government will always and forever be able to extend debt-enslaving, subsidized student loans to anyone with a pulse? Do you think the fiat ponzi central planners at the Fed will always and forever be able to manipulate the Treasury curve to whatever levels the Oracles of Delphi decide? If you answer yes to the above, ask yourself this: how would all of these things be affected if the average interest rate paid by the US was to rise to 5%? At today's debt level of $15.6 trillion, the interest expense would be approximately $780 billion or about 35% of total government revenues. Welcome to the United States of Greece. Next stop, bankruptcy.

It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning's tungsten brick road. Yet in the aftermath of last month's stunning surge in the country's trade deficit, this, and much more may soon be finally ending. Because as Caixin's Andy Xie writes "The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then." As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: "Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market." It gets worse: "Of course, the government will collapse with the JGB market." And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world's rapidly declining 3rd largest economy to take precautions for when this day comes... soon.

In this day and age of pervasive momentum trading, herd-following and unfathomable and sheer "investing" stupidity, it is refreshing to now and then run across forward looking pieces of research that were not only spot on, but ran completely counter to conventional wisdom and groupthink. Such as the following analysis from Kyle Bass' Heyman Capital, which was also the pitchbook for the fund's Subprime fund, which showed, in plain language why Subrpime was not only the class to short, but the implications for the broader market. As a reminder, the fact that Bass made a killing by being one of the first to short subprime, is because the vast majority of the market was dumb enough not to see what he saw. Because it was inconceivable that the Fed could be wrong. After all, throughout 2006 it was none other than the Fed that told everyone who was stupid enough to listen that housing issues were "contained." Ironically, all those same people who lost an arm and a leg believing the Fed are back again, telling everyone to never get in the way of the Fed.

In his latest piece on popular delusions, SocGen's Dylan Grice conducts a much needed advance thought experiment looking at two specific things: on one hand he isolates the next inevitable social tension: that between "everyone" and the central bankers. Because if there is one specific reason why OccupyX never truly got off the ground is that deep down, the population knows that while bankers are to be despised for their "contributions" to society, they would never have the opportunity to do what they do absent the enabling stance of the "democratically" elected politicians, and more importantly, the deeds of those few academics stuck in a dark room, who daily decide the nominal fate of the world courtesy of money printing. Which means that in the inevitable progression of "marginalizing-then-brutalizing", when society finally cuts through all the noise and focuses on the one source of all that is wrong in the world, it will not be those residing at 200 West, but the tenants at the Marriner Eccles building: "Politicians can and will take back what they have previously given if and when it is deemed in their interests to do so. One way they do this is by using the time-tested political strategy known as “marginalise-then-brutalise”. Politicians start by identifying the obstacle to their objectives. For a government short of funds the objective is to raise more funds, and the obstacle is any group/sector which has them." Thus Mugabe “marginalised then brutalised” white farmers, while Hugo Chavez set his sights on private sector “profiteers” … for Hitler it was the Jews, for Philip IV of France it was the Knights Templar, for Diocletian it was the Christians, etc. How long before it is the central banks?" How long indeed? And whether it is with or without political prodding, once the central planning experiment fails, as it will, we would certainly not want to be in Bernanke's shoes...

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

While much of the focus has been on Paulson & Co., the hedge fund founded by billionaire John Paulson, cutting its stake in the SPDR Gold Trust by 15% in the fourth quarter, possibly of more importance is the fact that PIMCO, the Texas Teacher Retirement System and George Soros all increased their holdings of the biggest exchange-traded product backed by gold. Paulson cut his gold ETF bullion holdings by about 600 million dollars in Q4, a reduction that was likely driven by client redemption needs as he and his fund remain upbeat on gold – primarily due to inflation concerns.  Paulson’s reduction in SPDR was offset by other important buyers such as PIMCO, which oversees $1.36 trillion and is home to the world's biggest bond fund and significant institutional buying from the likes of the Texas Teacher Retirement System and billionaire investor George Soros. ‘Bond King’, Bill Gross recently wrote about gold as a “store of value” and PIMCO’s allocation to GLD may be ongoing as they seek to diversify their portfolios and hedge against inflation. Soros, who once suggested gold was or would be "the ultimate asset bubble," raised his stake in the SPDR Gold Trust (GLD), a gold-backed exchanged-traded fund, to 85,450 shares, up from 48,350 shares in the period. Soros, who had disclosed call and put options on the gold fund in the prior period, reported no such investments in the fourth quarter. Soros’ GLD position is worth a mere $13 million, however it suggests that he is not as bearish on gold as portrayed and that he sees further upside for gold.

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."

A strong yen strikes again.