Kyle Bass’s recent investor letter was released where he updated his thoughts on the Euro Zone.
Bass has long been bearish on European credit. As a matter of fact, Bass has proven himself by recognizing and profiting from the U.S. mortgage bubble.
Here are the highlights:
debt has grown at 11% CAGR for the last decade while GDP has grown at 4%. The reason why the Western world is in a debt spiral is due to a decade of out of control spending. Bass’ analysis begs the question – if debt growth is reduced to 4%, what would happen to real GDP?
“there is no magical pool of capital to stave off this unfortunate conclusion to the global debt super cycle
Bass thinks that Italian and Spanish bond yields are suggesting that Euro has already broken up
Bass reiterated that the leveraged EFSF CDO idea is collapsing because a guarantor of debt (Italy) is now a recipient of aid. In other words Italy went from being a creditor to a debtor
forget about the IMF bailing out Euro debt. The IMF was designed to bail out small third world nations not to fund profiligate spending by countries like Italy
Bass attacks the widespread notion that the ECB would eventually “print away the problems.” Bass thinks that National Central Banks will print post-default in order to recapitalize their banking systems.
Bass thinks that investors have become complacent that there would always be a bailout and thus cannot even conceive of the possibility of a wave of defaults.
Bass thinks that Japan’s debt problems will be front page news once the market is not fixated on Europe anymore