If someone should teach finance and economics, it is definitely this guy–Kyle Bass of Hayman Capital

This short excerpt is from an interview with Kyle Bass of Hayman. For those who are uninformed, Mr. Bass made a billion during the subprime debacle (shorting subprime mortgages through his hedge fund) and is forecasting an even worst future down the rode.

Such elegance as an orator as well as someone well versed in the economics field is second to none. Below is the short interview followed by a Q&A video from AmeriCatalyst 2011. Watch and enjoy is all I can say.

Courtesy of ZeroHedge:

“On gold:

A guy sitting in an office in Dallas, Texas, making sweeping claims about the future of countries he’d hardly set foot in: how on earth could he know how a bunch of people he’d never met might behave? As he laid out his ideas I had an experience I’ve often had, while listening to people who seem perfectly certain about uncertain events. One part of me was swept away by his argument and began to worry the world was about to collapse; the other part suspected he might be nuts. “That’s great,” I said, but I was already thinking about the flight I needed to catch. “But even if you’re right, what can any normal person do about it?”

He stared at me as if he’d just seen an interesting sight: the world’s stupidest man.

“What do you tell your mother when she asks you where to put her money?” I asked.

“Guns and gold,” he said simply.

“Guns and gold,” I said. So he was nuts.

But not gold futures,” he said, paying no attention to my thoughts.

"You need physical gold.” He explained that when the next crisis struck, the gold futures market was likely to seize up, as there were more outstanding futures contracts than available gold. People who thought they owned gold would find they owned pieces of paper instead. He opened his desk drawer, hauled out a giant gold brick, and dropped it on the desk. “We’ve bought a lot of this stuff.” At this point, I was giggling nervously and glancing toward the door.
So many others were giggling along. They were giggling all the way as gold rose from $800 to $1900. Probably not giggling now...

On nickels:

He still owned stacks of gold and platinum bars that had roughly doubled in value, but he remained on the lookout for hard stores of wealth as a hedge against what he assumed was the coming debasement of fiat currency. Nickels, for instance.

“The value of the metal in a nickel is worth six point eight cents,” he said. “Did you know that?”

I didn’t.

“I just bought a million dollars’ worth of them,” he said, and then, perhaps sensing I couldn’t do the math: “twenty million nickels.”

“You bought twenty million nickels?”

“Uh-huh.”

“How do you buy twenty million nickels?”

“Actually, it’s very difficult,” he said, and then explained that he had to call his bank and talk them into ordering him twenty million nickels. The bank had finally done it, but the Federal Reserve had its own questions. “The Fed apparently called my guy at the bank,” he says. “They asked him, ‘Why do you want all these nickels?’ So he called me and asked, ‘Why do you want all these nickels?’ And I said, ‘I just like nickels.’”

He pulled out a photograph of his nickels and handed it to me. There they were, piled up on giant wooden pallets in a Brink’s vault in downtown Dallas.

“I’m telling you, in the next two years they’ll change the content of the nickel,” he said. “You really ought to call your bank and buy some now.”
And on how to prepare for what is coming and why it is coming:

We hopped into his Hummer, decorated with bumper stickers (God Bless Our Troops, Especially Our Snipers) and customized to maximize the amount of fun its owner could have in it: for instance, he could press a button and, James Bond–like, coat the road behind him in giant tacks. We roared out into the Texas hill country, where, with the fortune he’d made off the subprime crisis, Kyle Bass had purchased what amounted to a fort: a forty-thousand-square-foot ranch house on thousands of acres in the middle of nowhere, with its own water supply, and an arsenal of automatic weapons and sniper rifles and small explosives to equip a battalion. That night we tore around his property in the back of his U.S. Army jeep, firing the very latest-issue U.S. Army sniper rifles, equipped with infrared scopes, at the beavers that he felt were a menace to his waterways. “There are these explosives you can buy on the Internet,” he said, as we bounded over the yellow hills. “It’s a molecular reaction. FedEx will deliver hundreds of pounds of these things.” The few beavers that survived the initial night rifle assault would wake up to watch their dams being more or less vaporized.

“It doesn’t exactly sound like a fair fight,” I said.

“Beavers are rodents,” he said.

Whatever else he was doing, he was clearly having fun. He’d spent two and a half years watching the global financial system, and the people who ran it, confirm his dark view of them. It didn’t get him down. It thrilled him to have gotten his mind around seemingly incomprehensible events. “I’m not someone who is hell-bent on being negative his whole life,” he said. “I think this is something we need to go through. It’s atonement. It’s atonement for the sins of the past.”

The importance of conservative accounting

 

It has been stated that monetary calculation is one of the great achievements of the human mind and that double entry bookkeeping is what differentiates the system of free enterprise from one of command and control. It is true that without the elegant superimposition that accounting has on the daily activities of the firm, economic relations between actors in the general economy wouldn’t be possible.

However, there is always a word of caution, especially when accounting standards are concerned. Since there are more than one standard, the businessman-entrepreneur is faced with a distinct possibility of obfuscating his internal documents in favor of modern balance sheet “window dressing”.

In this short excerpt, I will only delve into one issue; accounting of long lived tangible assets.

As there are two prominent standard setting bodies in the accounting sphere. One is the FASB and the other the IASB. As things go, one is American, and the other is European. One set of rules are dubbed GAAP and the other IFRS. Both standard setting bodies encourage the use of their accounting rules, but IFRS is predominant in Europe, while US GAAP in America.

As you guessed, both have rules governing the accounting procedures of bookkeeping involving long lived tangible assets. According to both standards, an asset is booked on the balance sheet if there are expected future benefits deriving from this asset (not to confused with revenues which require a constant economic flow of benefits to the firm). If the asset doesn’t fulfill its role as an asset class it should be written down (taken from the balance sheet and placed in the income statement as a loss.

Under US GAAP assets are acquired through the course of regular business activity and they are kept as an ongoing balance sheet item until disposal; abandoned; held for sale etc. They sit on the balance sheet at carrying value and any costs affiliated with bringing the asset to its current state is capitalized. This includes transportation of parts, costs of bringing it into full operational use, interest that is used, if the asset is bought with debt. This is the conservative approach. The other approach is the revaluation approach (only under IFRS) at which the asset isn’t depreciated, but as it is tested for impairment, the asset may be revalued or written down to its fair market value.

What happens when the economy is in a stage of an inflationary credit cycle? If the credit flows into certain asset classes, then, under the revaluation model, the asset will experience monetary gains which bypass the income statement and enter the statement of changes in equity under revaluation surplus. This gain is then reported as part of net income which may be consumed in the normal operational function of the firm.

But, these are fictional gains which are only there because credit demand has pushed up the price of this asset class. This growth in value induces the firm to take on more debt as it is comfortable to do so. In the event of a default, it can pay down its debt with the overly recognized asset. This is of critical importance. Knowledge of balance sheet movements is only one part of the equation.

Understanding the economic consequences of balance sheet changes is a completely different thing, especially in today’s fiat world of frequent expansions and contractions.

What I mean by hazardous government rhetoric

You got to love Croatia’s new government. It seems that the individuals in the ruling party really cherish the benefits of working in government. The following statement was made on Facebook as an answer to the question, why don’t government officials lower their paycheck? It is argued that they would still have “enough” even with the cuts. This is the governments response:

“If we further reduce salaries of MPs, we would have to  decrease the other state official's salaries, that the Prime Minister and ministers, and judicial official's salaries, means judges, the Attorney General the his deputies. By reducing their wages we would have to reduce the salaries of Assistant Ministers and other professional people who work in public administration, and this would lead to the fact that they would go out to systems in the private sector and the state administration would run out of those who need to help the state work well.”

So, instead that these people actually get a real job in the private sector, and not live of the government teat, the government is keeping the wage rate for these individuals at a artificially inflated level. So, what do you get in any price fixing scheme? Shortages or surpluses. In this case, we get a surplus. A surplus of government officials, or to look it differently, a shortage of private sector jobs. 

We can assume that the crossover price elasticity of demand is negative, which means that for every increase in the price of labor in the private sector (wage increase), their wouldn’t be any such change in quantity demanded for it coming from people in government. Because the government is keeping the price of labor above this point of market equilibrium, people in government aren’t so enthusiastic of leaving their positions.

ε_x= (∆Q_DA) ⁄ (∆P_B ) < 0

I wish somebody would really do empiric research for this, by choosing for example the Finance Ministry as the price of labor in government and then use a set of jobs in the financial industry for quantity demanded and see the cross price elasticity of demand and the income elasticity of demand.

This rule may apply for income elasticity of demand as well. If income elasticity of demand was greater than one, any fall in wages in the government sector, would be followed by an increase in the number of individuals in the private sector. To keep things simple, we may assume homogenous workplaces in government and in the private sector. This would mean that these goods are categorized as normal goods, not inferior goods, as they are now.

This simple analysis doesn’t deter us from the fact that for people in government to survive, they are indebted to the individuals in the private sector, because government doesn’t have any wealth, just a redistribution scheme.

Couple that with an unlimited refinancing deceive (central bank, national banks), it is no wonder why so many people think that a government job is somewhat more noble or prestigious than one in the private sector.