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Hedge fund Hayman Advisors has a morbid outlook on the economy. Kyle Bass, the manager of Hayman, is betting on a massive wave of state bankruptcies and restructurings, particularly in Europe. At first glance this may seem far-fetched. But, you have to consider Bass and Hayman's track record thus far. Hayman was up 340% since inception according to its investor letter in March of this year. It was also up 6% in 2008, a year that saw the S&P drop by massive double figures. Bass collected nearly half a billion dollars from his bets against subprime. Much like John Paulson of hedge fund Paulson & Co, Bass also predicted the crisis. His next prediction is even more extreme.

Bass has gone as far to say that he thinks there will be massive sovereign defaults. We initially cited his dreary outlook in our piece, 'Ranting, Raving, & Contrarian Signals' back on March 8th, 2009. And, we did so because such extreme pessimism is usually a sign of short-term tops or bottoms. And, right on cue, the market is up over 30% since we highlighted that short-term contrarian signal. Contrarianism aside, Bass does command respect. After all, he profited handsomely by predicting the crisis and the collapse of subprime. While such extreme pessimism may be a catalyst for a short-term rally, we should be quite concerned if Bass' next set of predictions come true, as they would undoubtedly affect the long-term.

Bass has specifically turned his focus to Europe, where he sees a large cloud of denial and leverage. While he sees problems throughout the world, he claims that Europe is in the eye of the storm. A quick example of this is the fact that American banks have written down around 50% of their losses. European banks, on the other hand, have only written down around 17%. Bass says that,

"The crux of the problem is not sub-prime, or Alt-A mortgage loans, or this or that bank. Governments around the world allowed their banking systems to grow unchecked, in some cases growing into an untenable liability for the host country ... We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking ... There could be a cluster of defaults over the next three years, possibly sooner."

Bass' hedge fund thinks that the hazard of default stems from a combination of both out-of-control public debt and liabilities from specific banks (like Fortis, RBS (RBS), etc) that now prominently appear on sovereign balance sheets. He seems to flirt dangerously with the phrase, 'economic depression.' He is also careful to point out that he is not Dr. Doom. He has simply studied the housing market and sovereign balance sheets to the point where he is telling it like he sees it.

Countries have largely fought off the crisis by printing money and rolling over their debt. And, here in the United States, quantitative easing has already begun. As Ambrose Evans-Pritchard points out in his Telegraph piece, "spasms of default" occur every few generations according to research by former IMF chief economist Ken Rogoff. Such data highlights that in both the 1830's and the 1930's, half of the world was essentially torpedoed. Are we in for another generational fragmentation? Kyle Bass is clearly not ruling out that possibility.

Background on Kyle Bass & Hayman Advisors: Kyle attended Trinity Christian University (TCU) in Fort Worth, TX and now plies his trade at his Dallas-based Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. Then, he eventually turned over $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit and has also headed an office of Legg Mason (LM). His first major prediction (and victory) focused on over-leverage. We'll have to see if his second leverage-based prediction plays out.

If you haven't quite had your daily dose of pessimism yet, then check out Hayman's March letter. It will probably fill you right up.


Read more: "Hayman Capital's Kyle Bass Predicts Sovereign Defaults ~ market folly" -

Source: Subprime Winner Bets on Coming Sovereign Defaults