"I'm going to give him $5 million."
My friend at the Value Investing Congress was impressed by hedge-fund manager Kyle Bass' speech. So much so, he's giving him $5 million to manage. Bass, with Hayman Advisors, gained notoriety after making a fortune shorting subprime mortgages. Now, he's short the entire world (the host of the conference agreed with my view that Porter could have given the same speech).
Kyle started his talk by mentioning the recently awarded Nobel Prize for economics. The folks who won the prize found increasing unemployment benefits raises unemployment. Despite this revelation, the government is still preparing to spend $1 trillion on increasing unemployment benefits.
The rest of Kyle's speech was divided into three topics – the U.S, Europe, and Japan. In short, we're all in trouble. Everyone knows the problems in the U.S... We've got too much debt. We're losing an ever-increasing amount of money each year, and we're preparing to print more money. Europe is worse. I'll get to Japan in a minute...
The world is trying to paper this problem over, but it's too late. Eventually, we'll see serial defaults across the globe. Kyle argues the central banks know it's inevitable. They're just trying to get the global economy to a point where it can handle this crisis.
On to the Federal Reserve... Kyle says the Fed is "a mental crutch for depositors." The Fed's opacity is by design. The International Monetary Fund is the same way. By charter, a European has to run the IMF, but it's in Washington, D.C. Kyle said he recently visited congressman Barney Frank and asked him why the U.S. was giving the IMF $100 billion. Frank's response: "You and I both know it's not real money. It's just a journal entry." In other words, this money will never be drawn. It's just a backstop. Kyle said the IMF granted Greece 3,000% of the money it's allowed to draw from the fund... Again, it doesn't expect this money to be repaid.
Now onto Japan... Japan has 2.5 quadrillion yen in debt. Its debt service will surpass total government revenue soon. Currently, retirement obligations and debt service costs Japan 44 trillion yen annually. The government only brings in 41 trillion yen. Japan has more people exiting the workforce every year than entering. The country can no longer fund itself internally. If Japan has to access the credit markets, its costs will increase. Kyle says it's not "if," but "when," Japan defaults. Japan's last move is to force banks to buy its debt. That will likely happen, prolonging the default. But that is Japan's last move.
Kyle is playing the Japanese default through interest-rate call options. It's like a credit default swap... He's paying a small amount of money every year to bet against Japan. When Japan starts failing, he'll make 50 to 100 times his money. Unfortunately, individual investors can't make this trade (unless your net worth is more than $100 million... then it may be possible).
David Einhorn of Greenlight Capital also presented today. Three years ago at this conference, Einhorn laid out his short case for the now-extinct Lehman Brothers. He does an enormous amount of research before entering a position. This year's idea was no different... Einhorn had a 130-page PowerPoint presentation on selling short St. Joe (JOE), the Florida real estate giant.
Einhorn says St. Joe is holding a lot of land on its books at hugely inflated values. It owns near-empty developments throughout Florida. Few landbuyers actually built homes, and many who did have since abandoned their properties. Even if JOE doesn't take any impairments, its return on development is still negative.
Einhorn says the company is "stuck." Developing more property will cause the company to lose more money. JOE has been selling rural land to fund its operations, but Einhorn believes it's already sold the saleable land. He said the company can fund 15 years of overhead by dumping land, provided it doesn't waste money on development. He says today, shares are worth $7-$10. Unless the company sells itself, he thinks it's a zero. The folks at the conference were quick to agree... The stock started a freefall as soon as Einhorn posted his first slide. Take a look at the one-day chart.
New highs: Anheuser-Busch Inbev (BUD), Forest Laboratories (FRX), DirecTV (DTV), Penn Virginia Resources (PVR), iShares Silver Trust (SLV), Enterprise Products Partners (EPD), Phillip Morris (PM).
In the mailbag, readers respond to recent Digest bullets of the power grid and bond market... Send your two cents to feedback@stansberryresearch.com.
"After reading the report on the coal-powered electric grid I have another thought to throw out. With the ruling political elite's efforts to take total control of this country (ie... communism) this all makes perfect sense. The coal-powered electric utilities are destined to fail and send the country spiraling into darkness. This step is inevitable as the game is rigged with all the rules and regulations. The government will then step in to once again 'save' the serfs and bailout utilities. Then they will control the electric production to complete the take over. All the while the government media shouting from the roof tops what 'heroes' we have running the country. We didn't win the cold war in the eighties with the collapse of the Soviet Union, they just moved the 'turf' from Russia to the USA." – Anonymous
“You asked the question incorrectly: Are bonds in general in a bubble? On average, probably, maybe not.
"Are Mike William's bonds in a bubble? No. Not yet, but if they get into a bubble, we'll be ready to sell and enjoy our good fortune. If they never reach a bubble, we'll hold them until it's time, and enjoy our good fortune.
"And if too many people start reading True Income, it will become harder to buy his recommendations at the best prices." – Paid-up subscriber Henry E.
Regards,
Sean Goldsmith
New York, New York
October 13, 2010