Europe has announced a number of policy changes to try to "kick the can down the road" to buy them more time. Kyle Bass, in an extended interview with AmeriCatalyst points out that financial markets don't do a good job of signaling how long the road is. When they get fed up with giving you road, they take it away rapidly at the end – just like they did with Greece. The end comes quickly.

Using the Lehman Brothers default as an example, Bass explains how we have been conditioned to believe there is always a backstop or savior out there. Countries can't default.  They believe that the IMF, ECB or Fed will save them.

Kyle Bass earned millions betting against the subprime crisis during the last credit crunch and has made large bets this time that the PIIGS will default. He believes that the default of Greece will be the initial trigger of a domino effect of defaults among the most highly indebted nations. He believes that Greece, Portugal, Ireland, Italy and Spain will default and that we are moving closer to what appears to be the beginning of a global financial crisis of epic proportions.

He also believes that Japan will default and that it is going to be the biggest problem the world faces.

 

Kyle comments:

The consensus is low/slow GDP growth – no recession, the US is better than Europe, Europe mild recession, muddle through, go all in to emerging markets as that's where the convexity is. The consensus is never going to be right. I don't get paid to be an optimist or a pessimist.   I get paid to be a realist and the realist is negative currently.

Don't believe these governments when they tell you everything is going to be fine. The day before Mexico devalued by 60% they denied that they would ever devalue. They can and will never tell you the truth. Find your own numbers.

The best analogy I can come up for investing right now is that it is similar to picking up nickels in front of a steam roller. You may get lucky and end the year with 8% to 10% returns.  However, you could end the year with 15% to 20% losses or worse if things get out of control like they did in 2008.

Even if Kyle Bass is wrong and we avoid sovereign defaults except for Greece, austerity in Europe combined with slowing growth in China and higher oil and gas prices due to Middle East tensions are going to hurt US earnings and growth. The U.S. is not going to decouple. It is likely we will see at least a moderate recession that will pull earnings and stock prices down.

Unless we see major money printing in Europe to bail out the PIIGS and stop the contagion or Eurobonds, I am not sure I would want to be on the other side of the bet from Kyle Bass with much of my money until we see how this plays out.  Return of capital is more important than return on capital.

Thanks,

Lisa