This week, investors were treated to interviews and investor letters from two hedge fund titans who both warn of the pending European banking crisis. Kyle Bass and Michael Platt hit the airwaves this week voicing their concern and frustration for a lack of credible solution out of European leaders.
Investors should take heed of Bass’ and Platt’s view, as both have had success calling recent macro trades.
Kyle Bass of Hayman Capital expects depositors in weaker periphery countries to withdraw money from banks in the coming months (investor letter and CNBC interview). Hayman released a must read investor letter this week, outlining the fragility of the European banking system and underlying deposit base of the periphery.
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Ultimately, Bass believes central banks will take the nuclear option and print money-- but not until after debt defaults occur.
Michael Platt of BlueCrest Capital said most of the banks in Europe are insolvent and the situation will worsen in 2012, as the region’s debt crisis accelerates (Platt on Bloomberg’s Inside Track). Platt believes that 2012 will be worse than 2008, and investors should focus on avoiding credit and counterparty risk and should seek only the most liquid trades.
Platt’s view is that austerity measures will be pro-cyclical, and would only lead to failing GDP and government revenues. BlueCrest’s view is simple in that the situation in Europe is “completely unstable” because economies are shrinking at the same time as governments are paying higher yields to service debt. Platt views it as unsustainable for countries to have to roll their debt at 5% while GDP is declining. BlueCrest believes investors should wait on the sidelines as illiquid assets will be thrown in the street, much like in 2008, and that volatility will rise dramatically.
Investors should seeking investments and trades that will benefit from future dislocation.
- Gold and silver will likely perform well in an environment of currency debasement.
- Short Euro trades with FXE
- Long VIX with VXX (market dislocations will lead to rising volatility)
- Short U.S. equities (short SPY or long SH)