Seven minutes with Kyle Bass

IMVHO it is in your best interest to watch and understand this short seven minute interview of Kyle Bass:

http://www.youtube.com/watch?v=t7Si3XTl6zQ&feature=player_embedded

Couldn’t make 7 minutes for it but still curious?  Here are the main take-aways:

• He saw Euroland tumbling in advance.  He called the massive collapse in Greek debt.
• Total global credit market debt to total GDP is 350%.  That’s 200 trillion of debt vs. global GDP of 62 trillion.  In other words, un-payable levels of debt.
• It is a given that some major players will default.
• Forget about the last decade or 2 decades, this is a seventy year debt “super cycle” that’s coming to an end.  That’s fancy talk for “debt Ponzi in collapse”.  This one is going to leave a mark for sure.
• He expects bond yields to continue to fall over the next 12-18 months (a fancy way of “they are being manipulated down by governments”).  He believes that negative real interest rates are possible.

o   You sort of have to know a little bit about economics to understand the implications here.  Basically, people hold gold as money when real interest rates are negative.  Real interest rate is what you receive when you loan money to a government or a corporation MINUS the rate of inflation.

• Negative interest rates mean that even though you are taking the risk of investing you are guaranteed to lose purchasing power by doing it.  Risk is supposed to imply the potential for reward.  When there is only risk and no reward, people stop gambling (AKA investing).  That’s the reason everyone will eventually run into gold, probably in a panic if history is any guide.  Some people refer to this as a “currency event”.

o   It sounds like crazy talk for him to predict this so he uses elite-speak like “the fact that there’s any chance it could happen makes it worthy of paying attention to”.  I guess that sounds better than “If it happens you will damned well wish you had paid more attention to it”.

• Japan has “crossed the Rubicon” regarding its coming economic demise.  The fact that they have become a net importer and that there is a return to nationalism are the warning signs.  They “have to change the manner in which they deal with their currency”.   That’s elite speak for “they will try to inflate their way of the mess”.  Bass goes on to say that “Japan is entering the final checkmate phase of the chess game.”

• When politicians take over control of the money supply, hyperinflation is not far off.     Bass predicted Japan's Abe would win (and Abe did win).  Abe is calling for doing everything in his power to create 3% inflation and Bass tell us “he [referring to Japanese Prime Minister Abe] doesn’t even know what he wishes for because if he gets there he detonates his debt bomb”.  

                I simply must add that I am very tired of hearing that politicians "don't know what they are getting into" or that "they are so stupid".   I ask you: if a con man and a patsy are standing side by side, who is the stupid one?  Is it the one getting ripped off or the thief who is doing the stealing that is the idiot in the relationship?  In short, Abe knows exactly what he is getting into.  I can see it in his eyes when he speaks.  He will do ANYTHING to retain power after having been made to resign from this same position a few years ago (under false pretenses of stomach problems which he seems to have magically gotten over since then...).  

               Abe will justify anything, including war.  He will tell the people that the odds were stacked against Japan, that they have been abused economically since WW2 ended and that they need to break out of their economic chains (some of which is true).  He will tell proud Japanese people that their culture, their children's futures, everything that Japan has stood for over the course of thousands of years is on the line (more than a little of which is true).  And they will eat it up with a stick because they will want an excuse to do the wrong thing in the name of something good.  Abe will use their herding instincts against his own people, just like leaders have done the world over for thousands of years already.  Bottom line: Abe's no fool.  He knows what he's getting into, he just likes the thought of being at the helm of a war ship more than the thought of captaining a sinking ship.

              And now back to Bass' point about Abe detonating a debt bomb: increased inflation will require higher interest rates on Japanese debt.  If the rates get up to just 2.5%, ALL Japanese tax income will be used to service the debt.  The only recourse will be to continue to print money to keep the country afloat and if the world becomes convinced that this is going to happen then it will not want to hold Japanese debt or Japanese currency.  In other words, massive inflation will hit Japan, perhaps even hyperinflation.  In other words, they will experience what I have been saying all governments will experience to some degree before this Debt Ponzi collapse is done.  Japan is a marginal player compared to the US and so the carnage will hit them the first and the worst. 

OK, say some or all of this plays out like I know it must.  Say the math doesn’t lie as well as a greedy politician can.  So what??  Who cares about Japan anyway, right?  We still have ours so who cares?

I know a lot if not most people think like that.  All I can say to those people is wake the Hell up and stop being so ridiculously naive and self centered.  Together the governments of this planet make up one big intertwined ball of lies, financial scams and corruption.  Period.  There is not going to be any isolated collapse of Japan.  We will all feel it.  Their exports to us will collapse right along with their economy.  Our exports to them will collapse.  We are indeed all Greece now.  It’s just that the bigger players haven’t been made to admit it yet.  I say again, Japan is not going to roll over in a vacuum. 

There will at the very least be collateral economic damage.   That’s the low end of the Gaussian distribution, the bottom 10-15%.  In the fat 70-80% region of the curve we find so called “contagion”.  This is by far the most likely outcome – massive defaults the world over and massive loss of fake paper wealth that people thought they had but in truth never did.  At the high end of the G-distribution we have something else: war.  Perhaps civil, perhaps regional, perhaps global.   

Keep in mind that just a few short quarters ago Japan was the #2 economic power.  They see it slipping away.  They either go quietly into the night (taking the Japanese culture and their very way of life down the tubes with them) or they try to get out of this mess the only way that has worked in the past: military conquest.  On many occasions I've referred to it as the "go Roman option".  If you think the timing of the Senkaku Islands dispute heating up is just coincidence, think again.  This is corrupt government whipping up nationalism and creating the will to go to war.  This is a weapon of mass distraction from the collapse of the debt Ponzi.  This is redirecting the anger that belongs with the moneymen to point instead to historical enemies.  It’s an old trick and a predictable one.  In fact, I have brought up this very notion on many occasion in past articles within these very pages.

The debt super cycle is going bust.  That’s the plain simple truth.  It is up to each of us to figure out the potential implications of this and to prepare (think of it as an insurance policy) ourselves in whatever way makes sense to each of us.  I suggest that people consider acquiring a 3-6 month store of nonperishable goods for their family, some way of ensuring access to potable water, the means to defend oneself from any potential armed threat (you are not the only one who will have a gun/guns…), some way of keeping your refrigerator running, and gold and silver coins with which you can barter for the things you forgot.  Global economic collapse WILL cause product shortages.  Wars and skirmishes will do the same.  Lack of work might mean there are products but you have no means to buy.  If you are expecting a government safety net at a time when the government itself is in shambles and ineffectual, think again.  Take responsibility for your own health, safety and welfare because it’s in times like these that people find out the hard way that life does not owe them a living.