Kyle Bass – Letter to Investors

The founder of Hayman Capital Kyle Bass is of the opinion that central banks enable the fiscal profligacy, removing the widely-known policemen from the highway of the bond market. The balances and checks of what he calls “normal” interest rates will be eliminated altogether, if the central banks purchase everything of bond issuance which is used for financing the fiscal deficits. This phenomenon does absolutely nothing to make the body politic take its foot of the accelerator. His biggest fear is that this tendency of printing and spending money will go on and it will push inflation to manifest itself.

Friedrich von Hayek thought that all forms of economic planning and socialism led to tyranny. Kyle Bass thinks that the best in this argument is that bad things are more likely to be brought about by the influence of good people not by vicious men like Hitler or Stalin.

Bass commented that throughout the time it has become more than clear that investors possess a heavily anchored bias which has been indoctrinated to them by the help of inductive reasoning. He uses the Daniel Khaneman’s theory as an example that all people participating fall under availability heuristic and they are only able to process some kind of information using variables which are parts of recent events or data sets.

Kyle Bass believes that human being are optimistic by nature and their lives are driven by dreams and hopes for the future. Self-preservation is another factor which is very important when it comes to people’s cognitive pathways. In other words, people suffer from optimistic biases and these biases extend to economic events and choices. Bass asks himself the question whether why people’s self-interest does not advance when they hear that developed nation sovereign defaults. The answer is that many believe that the people who are under control would not allow such thing to happen. Kyle Bass has reached the conclusion that people believe that government agencies such as politicians and central banks are omnipotent because they managed to avert a financial meltdown in 2009.

As far as Bass is concerned, economists and markets alike believe that QE (quantitative easing) will be effective as long as it floods the market with costless capital. He thinks that QE does not stimulate consumption and private credit demand in an economy. He gives England as an example because the country’s GDP exceeds 300 per cent.

Kyle Bass thinks that countries which print their own currency are certainly not immune to sovereign crisis and that governments are purely dependent on credit markets to stay fiscally operational.

Bass’ friend Raoul is of the opinion that the OMT, the ESM, the IMF and the EFSF have all been designed to assume the role of optical backstop for investors all over the world. He comments that the 2 largest contributors to the IMF are just the 2 largest debtor nations in the whole world.

According to the founder of Hayman Capital, things for the future are far from rosy. He thinks that trillions of dollars connected to debt will be restructured. Moreover, he says that millions of savers will lose great amounts of money of their purchasing power. He added that the profligate nations’ social fabric will be stretched if not torn.

The hedge fund manager believes that war is the kind of manifestation of economic entropy which will play to its logical conclusion and that it is inevitable given the current circumstances.

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