Hayman Advisors Letter

This is a very good letter from Hayman Advisors. Hayman is a firm managed by Kyle Bass. They made huge gains in 2007 using similar trades to Paulson in the mortgage market. What I took away as important highlights:

*In the past, I have stated my belief that there is not enough money in the world to soak up the tens of trillions of dollars of deleveraging that must occur over the next few years. This could not be truer than it is today. While I do not have a solution (and maybe it does not exist) to the problems facing us today, what I do know is that attempting to re‐lever a massively over‐leveraged system is clearly NOT the answer.

*If the U.S. were a public company, not even Ken Lewis would consider purchasing us (at a premium no doubt).

*The silver lining in our research is that the U.S. is one of the least levered countries in the world! Just saying that puts a bit of fear into me, but it is true. The U.S. is less levered and less exposed to radical economic deterioration than Western Europe. It is also far less dependent than East Asia on worldwide trade that is a byproduct of the net aggregate demand that previously emanated from the U.S. and other parts of the developed world. East Asia is quickly catching up to Central and Eastern Europe as the most afflicted region of the global economy.

*To be clear, we believe that the U.S. (and in fact, the world) is in an ongoing debt deflationary spiral that will likely continue for some time (possibly years). The rampant printing of currencies around the globe is not, in our opinion, likely to be immediately “inflationary” (in the common understanding of the term) as leverage comes out of the private sector and asset values continue to decline. The greater concern is the potential inflationary time bomb that grows as governments continue to borrow, print and “stimulate.” What happens to inflation when the velocity of money goes from zero to 100?

*Given all of the above, we are very confident in two predictions: 1. The U.S. is in relatively better shape than the rest of the world, and the dollar will be a safer currency than virtually any other (and yes, that includes the Yen). 2. Uncertainty and fear are rampant. Confidence in governmental and central bank leadership (are the two really that separate?) is plummeting worldwide. As a result, we believe people will look to “old-fashioned” stores of value – those which represented money long before green pieces of paper backed by a promise existed. Indeed, investors have already begun moving into precious metals. We expect this will continue.

*Once you have a deep understanding of how the U.S. and world banking systems work, it gives you a sense of how bad things really are and may become. So far, the Federal Reserve and the Treasury's “best and brightest” have decided that the best way to get through this is to add more leverage to an over-levered economy. The TALF program is attempting to re‐start the securitization market. Wait a minute! Did we not just get here through the disintermediation of risk? Shouldn't institutions that are actually making loans be required to keep some or all of those loans on their balance sheets? It looks like we are trying to head right back to where we just came from. The problem is that they have already taken all of the “suckers'” money in the securitization marketplace. Re‐levering will not work, in my opinion. We need to let the weak fail and the strong survive. Bernanke needs to take some cues from Von Mises and the Austrians.

*For your wealth, you must think about the enormity of this problem around the world, and what the likely governmental responses will be. I believe they only have two paths to walk down eventually. One is to print money in an attempt to paper over their losses (pardon the pun). This path can only lead to massive debasement of the fiat currency in our wallets and bank accounts, which is akin to them stealing it from savers. The second path is to move all of the “bad” private assets to the government or public balance sheets and then default on their sovereign debt. The world needs a “do‐over” and this would be the cleanest way to rebuilding the world's financial system. As much as I would like to think there is another path to salvation that does not include enormous pain, there is just no other way when you look at all of the numbers.


Hayman Capital

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