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When J. Kyle Bass Talks…People Listen

Those of us playing in the over forty league, no doubt remember the iconic commercials from the 70’s for brokerage firm E.F. Hutton.  Two executives discussing the stock market, as the world goes on around them.  Invariably one of them delivers the payoff line:  “My broker is E.F. Hutton, and E.F. Hutton says…” at which point the entire surroundings come to a complete stop, as everyone listens in to hear what E.F. Hutton has to say.

E.F. Hutton is no longer with us, but the E.F. Hutton effect lives on.

Kyle Bass is a hedge fund manager and the founder of Hayman Capital Advisors.  He has risen to prominence after betting against sub-prime and being among the early and loudest voices in warning of the European Debt Crisis. He is profiled in the Michael Lewis book Boomerang and  according to an introduction for the AmeriCatalyst Conference (at which Bass appeared) on November 7th,  “for several years Bass has warned that a global secular change-powerful long term directional moves that happen once every 100 years is underway.”

Let there be no doubt, when Kyle Bass talks…people listen.  Any time he makes a media appearance you will quickly see any number of related news stories and blog postings, and for good reason.  You can agree or disagree with his assessment(s) but there is no denying that he does not pull any punches.

The latest Bass feeding frenzy in blogosphere follows the recent video posting to YouTube of his AmeriCatalyst presentation.   If you have an hour to spare, it is highly recommended viewing.

If not, in paraphrased form and cliff notes style, here is the “World According to Bass:”

The U.S. has three to five years to get its fiscal house in order, not the ten or so than many policy makers believe.

The psychology of this environment is more important than the quantitative analysis.  Investors need to understand the politics and psychology behind policy alternatives.  

We have been conditioned to believe that there is always a savior out there, but now the optics of that backstop are coming into question.  There isn’t money there, just promises to lend and borrow.

The gap between what we want to believe is going to happen and what will happen is enormous (again think of the Lehman situation).

We have permanent job loss in the Unites States.  Unabated free trade is problematic for the country that has the highest nominal wages and highest standard of living in the world.

European banks are three times more leveraged than U.S. banks.

This is not a cyclical rebound from the crisis we had two years ago, and you should (not) be buying stocks because the P/E ratio is low…the E is wrong and we are going to see declines and people don’t know how to position themselves.

We are high fiving ourselves over TARP, but if you print enough money anyone can make TARP work.  We pay ourselves back with the money we print.

This isn’t the end of the world, it just means a lot of people are going to lose a lot of money and it is your job to not be one of them.

Don’t believe these governments when they tell you that everything is going to be fine, that they are going to solve these problems.

Clearly each of the points listed above are worthy of lengthy discussion in their own right.

In my opinion the most important insight Mr. Bass provides, is the observation in regards to the importance of psychology.  The herd mentality seems to be that while things may be tough, they can’t get that bad, and as Bass states there is a belief that there will always be a savior that will sweep in and save the day.

The unfortunate reality is that there is no policy that can erase mis-allocation of economic resources and bad investments.  With no one who can step in and save the day (regardless of how hard they try) the public at large has little concept how drastically things could change.  Whether that change comes about via the process of inflation or deflation remains to be seen.

What should be quite clear however is that we are facing structural, not cyclical issues and the world as we know it, will be quite different when all is said and done.

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DISCLAIMER: Nothing in this article should  be construed as a personal recommendation or investment advice.  Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security.   Investors should conduct their own due diligence and seek the advice of a financial and/or investment  professional before making any investment decisions.

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