Hayman's Bass: Europe is Screwed, Starting with Japan
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J. Kyle Bass, Managing Partner at Hayman Capital Management, (hereafter: JKBMPHCM), issued an outlook on the markets stemming from the potential impact of a cluster of sovereign defaults.
Appropriately, JKBMPHCM starts with a stinging quote from Quintus Cicero: "Men prefer a false promise to a flat refusal." Or, as Jack Nicolas once said, "You can't handle the truth!"
JKBMPHCM claims that quantitative data has been playing in such a way as to alter qualitative opinions to such a degree that it appears nothing has changed in available data to warrant a change in opinion.
Take Italy, JKBMPHCM says. Opinions changed rapidly with the available information, even to a crisis state. With the traditional debt sustainability models -- i.e. the ability to pay or service debts without needing relief or allowing arrears -- then opinions seem warranted.
But JKBMPHCM notes that his firm, HCM, focuses more on the non-liner relationship between debt and serviceability. More specifically, when debt becomes many multiples of revenue, then debt can become almost insurmountable due to the near-exponential nature at which it grows in relation to revenue, and thus the ability to service or pay down the debt.
Taking this into consideration, JKBMPHCM lays out nations his firm believes will not be sustainable in the current economic environment: Greece, Italy, Ireland, Spain, Belgium, Portugal, France, and Japan. JKBMPHCM actually alludes to Japan four times.
For the U.S., JKBMPHCM says a similar situation is avoidable with appropriate spending cuts and massive reduction in entitlements in the future (*cough, pensions*).
MCM will move a nation out of the risk-free zone when it begins spending more than 10 percent of government revenues servicing debt alone,. JKBMPHCM notes. Also, debt loads of more than five-times the responsible governments revenue is also worrisome.
So, the EFSF is supposed to come along and solve all the issues, starting with Italy. With a €600 billion loan to Italy, the country might be able to float for 12 to 18 months. However, JKBMPHCM says that the EFSF couldn't even find a buyer during a recent €3 billion auction of debt at 2 percent. What will happen when it attempts €200 billion more? Nothing, probably. The EFSF is a composition of failing countries, only as strong as their weakest link, and JKBMPHCM says the chain is crumbling.
On the IMF, JKBMPHCM says it's also a joke. The IMF was established to help third-world nations with balance-of-payment issues. It shouldn't even be making a medium-sized loan, much less aiming to bailout a nation. The IMFs website says it has about $385 billion of assets available for aid, meaning the €600 billion (about $794 billion) would exhaust that number more than twice. Including total committed capital under the IMFs New Arrangements to Borrow metric, and the number jumps to $538 billion, excluding commitments from Italy, Greece, and Ireland.
Moving forward, JKBMPHCM thinks the ECB, et al, will continue to print money, though they know capital is sparse.
With Japan, JKBMPHCM says there are more people leaving than entering, thus there are more people taking out funds. The already highly levered Japanese economy, at 229 percent of GDP, will likely then become the center stage for the next financial meltdown. JKBMPHCM says the trade balance of the current account will be negative in 2011, and personal saving will dwindle to zero by the middle of 2012. Without the European debt crisis, Japan might have a bond crisis of its own within the next two years. With the European crisis, that only accelerates.
And that sequence of events will begin with the next few months.
We might present for your investing pleasure:
Appropriately, JKBMPHCM starts with a stinging quote from Quintus Cicero: "Men prefer a false promise to a flat refusal." Or, as Jack Nicolas once said, "You can't handle the truth!"
JKBMPHCM claims that quantitative data has been playing in such a way as to alter qualitative opinions to such a degree that it appears nothing has changed in available data to warrant a change in opinion.
Take Italy, JKBMPHCM says. Opinions changed rapidly with the available information, even to a crisis state. With the traditional debt sustainability models -- i.e. the ability to pay or service debts without needing relief or allowing arrears -- then opinions seem warranted.
But JKBMPHCM notes that his firm, HCM, focuses more on the non-liner relationship between debt and serviceability. More specifically, when debt becomes many multiples of revenue, then debt can become almost insurmountable due to the near-exponential nature at which it grows in relation to revenue, and thus the ability to service or pay down the debt.
Taking this into consideration, JKBMPHCM lays out nations his firm believes will not be sustainable in the current economic environment: Greece, Italy, Ireland, Spain, Belgium, Portugal, France, and Japan. JKBMPHCM actually alludes to Japan four times.
For the U.S., JKBMPHCM says a similar situation is avoidable with appropriate spending cuts and massive reduction in entitlements in the future (*cough, pensions*).
MCM will move a nation out of the risk-free zone when it begins spending more than 10 percent of government revenues servicing debt alone,. JKBMPHCM notes. Also, debt loads of more than five-times the responsible governments revenue is also worrisome.
So, the EFSF is supposed to come along and solve all the issues, starting with Italy. With a €600 billion loan to Italy, the country might be able to float for 12 to 18 months. However, JKBMPHCM says that the EFSF couldn't even find a buyer during a recent €3 billion auction of debt at 2 percent. What will happen when it attempts €200 billion more? Nothing, probably. The EFSF is a composition of failing countries, only as strong as their weakest link, and JKBMPHCM says the chain is crumbling.
On the IMF, JKBMPHCM says it's also a joke. The IMF was established to help third-world nations with balance-of-payment issues. It shouldn't even be making a medium-sized loan, much less aiming to bailout a nation. The IMFs website says it has about $385 billion of assets available for aid, meaning the €600 billion (about $794 billion) would exhaust that number more than twice. Including total committed capital under the IMFs New Arrangements to Borrow metric, and the number jumps to $538 billion, excluding commitments from Italy, Greece, and Ireland.
Moving forward, JKBMPHCM thinks the ECB, et al, will continue to print money, though they know capital is sparse.
With Japan, JKBMPHCM says there are more people leaving than entering, thus there are more people taking out funds. The already highly levered Japanese economy, at 229 percent of GDP, will likely then become the center stage for the next financial meltdown. JKBMPHCM says the trade balance of the current account will be negative in 2011, and personal saving will dwindle to zero by the middle of 2012. Without the European debt crisis, Japan might have a bond crisis of its own within the next two years. With the European crisis, that only accelerates.
And that sequence of events will begin with the next few months.
We might present for your investing pleasure:
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