Saturday, November 19, 2011

Kyle Bass is even more foolish than I thought..

This weekend, the EU and the IMF effectively went all?in with a bad hand in the highest stakes game of financial poker ever played with the world. We believe the agreement released was nothing more than a Potemkin agreement in order to placate bond investors. In the end (and there will be a reckoning for many countries) nations, including the United States, need to dramatically cut spending and get their fiscal balances in order. Unfortunately, our elected officials are on the hamster wheel of electoral cycles and are not able to make tough decisions like this as they would likely not be re?elected without a “sea change” in public opinion towards government spending and deficits. We are therefore on the path to significant currency devaluation around the world that will likely result in significant inflation. We increased our holdings of gold on Monday morning as well as taking other steps to position ourselves for the most likely outcome over the next few years. Interestingly enough, based upon the market reaction in the last 36 hours, it seems the law of diminishing returns applies to bailouts as well. - Kyle Bass 
"Buying gold is just buying a put on the idiocy of the political cycle. ... Capitalism without failure is like Christianity without Hell. You have to have atonement for ridiculous levels of spending both the US and Europe have gone through. The spending idiocy of the world is going to catch up to itself. And that's where we are today.” - Kyle Bass
Yes, VERY smart people can be quite foolish...

When someone misunderstands so fundamentally the rules of the game that they think they are able to rationally and intentionally position themselves precisely 100% in the wrong orientation with regard to a trade - it is truly spectacular. The ability for smart peopel to position themselves in this manner is usually attributable to a fundemental misunderstanding or incorrect premise. This does not mean all their trades will be wrong…hoever, if the fundemental understanding can be so signifcant - as is the case with Eric Sprott for example, the whole outcome and their process is likely to be effected. The situation has not materially changed over recent history…Silver is down not far from 50% from its highs while gold is up a little bit over the same timeframe and both are about to get toasted…fundemental misunderstandings have led to pyramiding and what will likely turn into catastophic bets on Silver and a just plain very bad ones (not to mention extremely popular) on gold. The reality right now is that people see hedges everywhere, but NONE of those hedges should be trusted…the safest trade is the risk trade…shorting Japan while being long tons of silver and gold is not my idea of a great hedge...

Kyle Bass has topped the impression that I had…while he clearly has some knowledge and facts behind his thesis, he seems definately seems to be in an egoist trade and more importantly misunderstands the results of the outcome. He obviously is in control of the world and has made his billions (many of which he is likely to lose by the way) and, it seems to me, has lost his passion for truth and integrity. Passion, truth and integrity might have actually had something to do with the reasons he was able to pull off his first success. Look, I see the same thing in my own activity, I am most likely to suffer volatility or losses after a very strong performance. In August and September, I made higher returns that most managers make in a few years or even a career…and that kind of success sets you up for complacency and in many cases failure. This is something, that as a manager, you have to be highly scared of. Money is powerful, it is a mirror and it can compel you do the exact wrong thing at the exact wrong time - simply because you think you have it to do it with and complacency to back it up. Kyle is coming off a massive and long-term trade in which the complacency high takes very long to dissipate. Paulson was too. As a manager, I am always the most scared after huge successes because that’s exactly when you can not and should not trust yourself…its at those times you need to be prepared for exactly the opposite of what your superficial emotions and ego tell you should and will happen. I can tell you now - these guys are immature, fickle and unprepared. Their trading books and reputations will be the victims of their ego and complacency.

Kyle may not have the commitment to hold his trade for the length of time required to make it profitable - which very well may be never but more than likely 5 to 6 years of devastating violence against it. During this time, his investors will abandon him, his followers will go from praising him to hating him and his AUM will follow a similar fate. The good news for Kyle is that some of his money will likely be held in some accounts somewhere that he will be able to squirrel away. I suspect, however, that Kyle will be one of those rags to riches to rags story's we see in the movies. He has married this trade and will hold it until its too late to liquidate…then he will hold until he is forced to let go - probably losing most of his fortune as he scrambled to double down. What is funny is that Tyler Durden of Zerohedge is so impressed with Kyles ridiculous and merit less anlaysis…Kyle is flat out wrong. If he is right about a few of the ideas that he speaks about,  should then be obvious that the result of less bailouts and more debt will be more and more aggressive asset sales. I am sorry to point out to all the Eric Sprott’s and Kyle Bass that Gold and Silver are a primarily holding of large banks and sovereign’s - they are assets and will be sold with abandon to cover margin calls…My long-term target for Silver remains in the single digits and when this comes to pass, as it most certainly will - the results of superficial and egoistic analysis will become apparent in many forms - sadly in the purchasing power of the investors that Mr. Bass trades and in the reputations of those who bet the farm on a stupid concept that everyone believes so publicly must go the way that it seems superficially it should go. We saw this recently with our Wall Street Journal Triangles and we continue to see it in huge malinvestments and misunderstandings like Kyle’s, Sprott’s, Paulson’s and many others.
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