Sunday, October 16, 2011

Kyle Bass - following in John Paulson’s foot steps

“The value of the metal in a nickel is worth six point eight cents,” he said. “Did you know that?” 
“I just bought a million dollars’ worth of them,” he said, and then, perhaps sensing I couldn’t do the math: “twenty million nickels.” 
“Actually, it’s very difficult,” he said, and then explained that he had to call his bank and talk them into ordering him twenty million nickels. The bank had finally done it, but the Federal Reserve had its own questions. “The Fed apparently called my guy at the bank,” he says. 
“They asked him, ‘Why do you want all these nickels?’ So he called me and asked, ‘Why do you want all these nickels?’ And I said, ‘I just like nickels.’” “I’m telling you, in the next two years they’ll change the content of the nickel,” he said. “You really ought to call your bank and buy some now.” - quotes from Kyle Bass
This is the funny thing…Paulson made an historic trade, his psychology of success cost him his values and granted him complacency - so, he forgot the most important rule…when you have a success and confidence you are sure to need self doubt and humility…

Reading Bass’s quotes, it is apparent that he believes in his view so much that he is capable of marrying ridiculous analyses and obtuse risks…this one is ridiculous, however, theoretically its reasonable risk trade. NOT because of the silver content - but because the Nickle happens to be legal tender and due to the potential of its buying power increasing due to the “paper in it” and while the very silver he so desperately wish to have declines precipitously…and this despite Bass’s totally superficial analysis and understanding of the monetary system…The reality is that HE has to store all those coins, that is not cheap and it WILL significantly impair the risk/reward on the trade…Bass will be lucky to break even on it over the next several years…though I am not so optimistic about some of his other risk trades.

It takes people betting the farm on ridiculous trades and popular consensus views (the debasement and real asset hedge is VERY VERY popular) to make market moves that have conviction.
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