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Thursday, October 14, 2010

The View From the Big Money Guys

There is no doubt in my mind that the current activity by the Federal Reserve is unsustainable and will end badly, that is why it is important to learn how to trade a bear market...

From Porter Stansberry

"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). "

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