Overnight the Spanish government bond auction was a complete disaster sending their rates rocketing up to 6.6% and closing in on Italian bonds which were 7% overnight. The European Central Bank (Their Federal Reserve) stepped in with force this morning to purchase bonds in both countries to try and stop the bleeding. Unfortunately, right next door France is collapsing as well.
We have a clear understanding now that the European Union is finished. This is the here and now and you can find the headlines on every paper or article around the world. With the EU burning, we can now take a moment and try to determine what (or who) comes next. In order to do that it is always helpful to look to someone who both predicted the current crisis and also has an opinion on what is coming in the future.
Fortunately, we have that in Kyle Bass. When the story of this global credit crisis is complete years from now, Kyle's name will be one of the very small group that saw the complete picture (and profited massively every step of the way).
To re-cap briefly, Kyle was one of the handful of investors that saw the housing crisis coming and purchased insurance against the debt (CDS). In 2008 when everyone rushed to purchase CDS contracts on US mortgages, he sold his contracts and purchased insurance on a country called Greece. During that time, Greece's debt essentially traded for the same price as Germany's - risk free, just as subprime debt traded at risk free prices in 2006.
Fast forward 3 years later and Kyle has sold his Greece insurance to investors rushing in to buy. In Michael Lewis' book Boomerange he described the payout back in 2008 if he was correct about Greece: every $1,000 invested would turn out to be $700,000 in profit. The question is where is he looking now? The answer?
Japan's debt currently trades at risk free prices. Their bonds are at close to all time record lows. Kyle feels that Japan's government balance sheet is the most toxic in the world. (They have a debt to GDP ratio of over 220%) They have a declining population, which Bass refers to as "the trigger to end the ponzi scheme." A staggering statistic from Bass:
Half of Japan's annual debt payment goes exclusively toward interest payments. If their bond yields were to rise only 2%, they could not even cover the annual interest payments on their debt.
This week, Kyle Bass provided the investment world with a must watch 24 minute interview with the BBC.