Thursday, October 13, 2011

Exit John Paulson: Enter Kyle Bass

The mainstream press has picked up again on the story of John Paulson, only it is the exact opposite story that streamed the headlines during 2009.

Paulson was one of only about 15 individuals in the world to utilize the Credit Default Swap as a way of betting against subprime mortgages before they collapsed in price.  His name is the most popular because he used the most money to bet against mortgages and subsequently came away with the largest prize.  It is estimated that his personal take home in 2008 was over $4 billion. (The top CEO's of the largest corporations make about $100 million on a great year)

While he was mostly unknown during 2008, when word got out of his foresight on the crisis money flooded into his hedge funds from around the world.  He now runs one of the largest operations globally in terms of capital under management.

Paulson took this capital back in 2009 and bet on two main investments:

1. A recovery in America and stocks that would benefit
2. Gold

During the rebound in the markets that began in 2009 he once again looked like a genius.  He upped his bets on the recovery and put a tremendous amount of money into bank stocks.  This again continued to look impressive until about 6 months ago when things began to come unraveled.  Banks stocks have rolled over and are now at prices seen at the March 2009 lows.  The stock market has taken a major leg down, and all economic indicators point to a global slowdown and further weakness. 

His name is now the topic of failure and money is exiting his funds at rapid pace.  I only find the topic interesting because I have tracked Paulson closely since his epic rise, and I could not understand why I agreed so much on his gold bet, but I completely disagreed with his bet on an American economic recovery.

This thought was triggered again last night as I was reading the opening chapter of Michael Lewis' new book; "Boomerang."  Lewis is the best selling author of "The Big Short," which was a study of the small group of men that bet against subprime using Credit Default Swaps.

The opening chapter discusses his time not with Paulson, but another financial superstar: Kyle Bass.  Bass in 2008 closed his Credit Default Swaps positions and opened up another trade; something that he told Lewis at the time would be chapter 2 of a crisis that was only just beginning.

He began to purchase insurance on the debt of Greece.  He bought insurance on Greek debt at the same price he paid for subprime debt back in 2006.  This kind of stuff gives me the goosebumps with excitement. 

After purchasing insurance on Greece, he began to buy some for Portugal and Italy, countries that are now imploding as I write this.  If I told you his percentage return he has made on these trades you wouldn't believe me.

The average investor cannot purchase insurance on a country using Credit Default Swaps. (CDS are a derivative that can only be purchased by banks and hedge funds)  After learning this, Michael Lewis asked Bass back in 2008 what the average investor could do to profit on how the world will unfold over the next few years.

His response?  "Buy Gold"

Bass sees the sovereign debt crisis spreading like a virus through Europe and then moving to Japan, then the UK, and finishing with the United States.  He feels that his order may be wrong, but that the ultimate endgame will play out the same.

I could not agree with him more, and I will do my best to provide any interview, paper, or appearance Kyle Bass provides the world moving forward.  With Paulson slipping into the shadows, he is now the gold standard in financial greatness.

1 comment:

  1. of course, it's smart to buy insurance on a house that is already smoking. However the question arises, who would sell insurance on a house that is already smoking? Such opportunities occur infrequently. And buying gold is not such an opportunity.

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