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Hayman Advisors 10-09

Hayman Advisors 10-09

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Published by ArcturusCapital
You cannot spend your way out of recession or borrow your way out of debt
You cannot spend your way out of recession or borrow your way out of debt

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Published by: ArcturusCapital on Oct 05, 2009
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06/02/2010

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original

 
 
October
 
2,
 
2009
 
“You
 
cannot 
 
spend 
 
your 
 
way 
 
out 
 
of 
 
recession
 
or 
 
borrow 
 
your 
 
way 
 
out 
 
of 
 
debt.” 
 
Daniel
 
Hannan,
 
Member
 
of 
 
the
 
European
 
Parliament
 
Dear
 
Investors:
 
There
 
have
 
been
 
many
 
significant
 
global
 
developments
 
since
 
our
 
March
 
letter.
 
Governments
 
around
 
the
 
world
 
are
 
running
 
fiscal
 
deficits
 
at
 
levels
 
never
 
before
 
seen,
 
while
 
central
 
banks
 
have
 
loosened
 
monetary
 
policy
 
and
 
are
 
printing
 
money
 
at
 
a
 
record
 
pace.
 
While
 
the
 
US
 
appears
 
to
 
have
 
avoided
 
a
 
systemic
 
implosion,
 
the
 
question
 
becomes
 
at
 
what
 
cost
 
 –
 
now
 
and
 
in
 
the
 
future?
 
In
 
this
 
letter,
 
we
 
address:
 
 
The
 
“good”
 
news
 
and
 
bad
 
news
 
of 
 
the
 
current
 
economic
 
situation;
 
 
Areas
 
of 
 
opportunity;
 
 
The
 
implications
 
of 
 
global
 
and
 
US
 
monetary
 
policy;
 
 
The
 
current
 
state
 
of 
 
the
 
US
 
housing
 
market
 
and
 
expectations
 
for
 
the
 
future;
 
 
The
 
International
 
Monetary
 
Fund’s
 
policy
 
prescription
 
for
 
dealing
 
with
 
troubled
 
economies;
 
 
The
 
boom
 
and
 
potential
 
bust
 
in
 
China;
 
 
The
 
looming
 
debt
 
crisis
 
in
 
Japan;
 
and
 
 
How
 
the
 
fund
 
is
 
positioned
 
to
 
capitalize
 
on
 
these
 
issues.
 
The
 
purpose
 
of 
 
this
 
letter
 
is
 
not
 
simply
 
to
 
communicate
 
how
 
the
 
fund
 
is
 
positioned,
 
but
 
also
 
 –
 
and
 
possibly
 
more
 
importantly
 
 –
 
to
 
stimulate
 
thought
 
and
 
discussion
 
about
 
the
 
“big
 
picture”
 
implications
 
of 
 
these
 
issues.
 
We
 
believe
 
that
 
we
 
are
 
in
 
the
 
midst
 
of 
 
a
 
once
in
a
lifetime
 
(literally)
 
economic
 
shift
 
that
 
has
 
affected
 
or
 
will
 
affect
 
everyone.
 
While
 
there
 
are
 
certainly
 
hardships
 
and
 
challenges
 
ahead,
 
we
 
also
 
see
 
opportunities.
 
 
 
2
 
©
 
2009
 
Hayman
 
Advisors
 
L.P.
 
The
 
“Good”
 
News?
 
The
 
“good”
 
news
 
is
 
the
 
recession
 
is
 
officially
 
over.
 
Real
 
GDP
 
dropped
 
only
 
4%
 
peak
to
trough,
 
S&P
 
500
 
revenues
 
dropped
 
only
 
18%,
 
and
 
home
 
prices
 
dropped
 
only
 
31.3%
 
nationwide.
 
Broad
based
 
unemployment
 
(including
 
the
 
underemployed)
 
reached
 
17.0%,
 
which
 
translates
 
into
 
17.4
 
million
 
Americans
 
out
 
of 
 
work
 
and
 
another
 
9.2
 
million
 
working
 
part
time
 
 jobs
 
that
 
are
 
insufficient
 
to
 
pay
 
their
 
bills.
1
 
After
 
losing
 
an
 
average
 
of 
 
578,346
 
 jobs
 
every
 
week
 
since
 
October
 
2008,
2
 
the
 
headline
 
unemployment
 
figure
 
improved
 
in
 
July
 
from
 
9.5%
 
to
 
9.4%.
 
Never
 
mind
 
that
 
in
 
August
 
the
 
Bureau
 
of 
 
Labor
 
Statistics
 
(”BLS”)
 
revised
 
their
 
prior
 
estimates,
 
and
 
a
 
portion
 
of 
 
the
 
“improvement”
 
in
 
July
 
was
 
achieved
 
by
 
adjusting
 
the
 
total
 
size
 
of 
 
the
 
labor
 
force
 
(think
 
increasing
 
the
 
denominator
 
to
 
reduce
 
the
 
percentage)
 
and
 
unemployment
 
continued
 
its
 
upward
 
trajectory
 
to
 
9.7%
 
in
 
August
 
and
 
9.8%
 
in
 
September.
 
We
 
are
 
left
 
wondering
 
how
 
broad
 
based
 
unemployment
 
went
 
from
 
its
 
most
 
recent
 
trough
 
of 
 
7.9%
 
in
 
December
 
2006
 
to
 
17.0%
 
currently,
 
while
 
total
 
retail
 
sales
 
declined
 
only
 
3.6%
 
over
 
the
 
same
 
time
 
period.
3
 
Source:
 
Mike
 
Keefe,
 
The
 
Denver
 
Post.
 
Reprinted
 
with
 
permission.
 
Bernanke
 
and
 
crew
 
have
 
done
 
a
 
masterful
 
 job
 
of 
 
pulling
 
out
 
all
 
of 
 
the
 
stops
 
(and
 
then
 
some)
 
to
 
save
 
the
 
US
 
and
 
world
 
banking
 
system
 
from
 
collapse.
 
Having
 
gone
 
from
 
potential
 
collapse
 
to
 
valuations
 
well
 
above
 
the
 
10
year
 
averages,
 
the
 
S&P
 
500
 
now
 
trades
 
at
 
2x
 
book
 
value
 
and
 
20x
 
EPS
 
and
 
credit
 
spreads
 
relative
 
to
 
Treasuries
 
are
 
back
 
to
 
pre
Lehman
 
levels.
 
Where
 
We
 
are
 
Bullish
 
There
 
are
 
great
 
businesses
 
which
 
have
 
too
 
much
 
leverage,
 
which
 
are
 
being
 
or
 
will
 
be
 
recapitalized
 
through
 
consensual
 
restructurings
 
or
 
Chapter
 
11
 
bankruptcies.
 
These
 
“capital
 
transformation
 
investments”
 
usually
 
involve
 
buying
 
senior
 
debt
 
and
 
working
 
with
 
the
 
company’s
 
stakeholders
 
and
 
management
 
to
 
craft
 
a
 
plausible
 
1
 
According
 
to
 
the
 
latest
 
data
 
available
 
from
 
the
 
BLS,
 
15.142
 
million
 
Americans
 
are
 
included
 
in
 
the
 
labor
 
force
 
and
 
are
 
classified
 
as
 
“unemployed.”
 
Another
 
2.219
 
million
 
would
 
like
 
to
 
work,
 
but
 
have
 
not
 
searched
 
for
 
a
 
 job
 
in
 
the
 
last
 
four
 
weeks.
 
An
 
additional
 
9.179
 
million
 
are
 
classified
 
as
 
“part
time
 
for
 
economic
 
reasons,”
 
meaning
 
currently
 
employed
 
part
time
 
as
 
an
 
alternative
 
to
 
not
 
working
 
at
 
all.
 
2
 
Average
 
Initial
 
Jobless
 
Claims
 
since
 
the
 
first
 
week
 
of 
 
October,
 
as
 
published
 
by
 
the
 
Department
 
of 
 
Labor.
 
3
 
Source:
 
Bloomberg.
 
 
 
3
 
©
 
2009
 
Hayman
 
Advisors
 
L.P.
 
capital
 
structure
 
to
 
return
 
the
 
entity
 
to
 
health
 
and
 
growth.
 
As
 
the
 
capital
 
markets
 
have
 
recovered,
 
money
 
is
 
flowing
 
and
 
many
 
private
 
equity
 
players
 
are
 
prepared
 
to
 
invest
 
in
 
their
 
existing
 
portfolio
 
companies
 
after
 
or
 
in
 
conjunction
 
with
 
a
 
debt
 
restructuring.
 
It
 
is
 
in
 
these
 
types
 
of 
 
situations
 
that
 
we
 
see
 
great
 
opportunity.
 
Our
 
investments
 
are
 
focused
 
on
 
asset
heavy
 
businesses
 
where
 
we
 
can
 
buy
 
into
 
the
 
right
 
portion
 
of 
 
the
 
capital
 
structure
 
in
 
advance
 
of 
 
the
 
restructuring.
 
On
 
the
 
back
 
end,
 
we
 
will
 
likely
 
end
 
up
 
owning
 
some
 
amount
 
of 
 
senior
 
debt
 
with
 
attractive
 
current
 
pay
 
characteristics
 
and
 
in
 
certain
 
circumstances
 
end
 
up
 
holding
 
equity
 
in
 
the
 
company
 
for
 
little,
 
if 
 
any,
 
real
 
cost.
 
This
 
is
 
one
 
area
 
where
 
we
 
are
 
acutely
 
focused
 
and
 
we
 
believe
 
presents
 
the
 
most
 
asymmetric
 
returns
 
for
 
being
 
invested
 
on
 
the
 
long
 
side.
 
If 
 
the
 
story
 
could
 
 just
 
finish
 
here
 
with
 
such
 
a
 
happy
 
ending
 
 –
 
unfortunately,
 
here
 
is
 
where
 
the
 
really
 
bad
 
news
 
begins.
 
Never
 
Before
 
and
 
Hopefully
 
Never
 
Again
 
Western
 
democracies,
 
communistic
 
capitalists,
 
and
 
Japanese
 
deflationists
 
are
 
concurrently
 
engaging
 
in
 
what
 
may
 
be
 
the
 
largest,
 
global
 
financial
 
experiment
 
in
 
history.
 
Everywhere
 
you
 
turn,
 
governments
 
are
 
running
 
enormous
 
fiscal
 
deficits
 
financed
 
by
 
printing
 
money.
 
The
 
greatest
 
risk
 
of 
 
these
 
policies
 
is
 
that
 
the
 
quantitative
 
easing
 
will
 
persist
 
until
 
the
 
value
 
of 
 
the
 
currency
 
equals
 
the
 
actual
 
cost
 
of 
 
printing
 
the
 
currency
 
(which
 
is
 
 just
 
slightly
 
above
 
zero).
 
There
 
have
 
been
 
28
 
episodes
 
of 
 
hyperinflation
 
of 
 
national
 
economies
 
in
 
the
 
20th
 
century,
 
with
 
20
 
occurring
 
after
 
1980.
 
Peter
 
Bernholz
 
(Professor
 
Emeritus
 
of 
 
Economics
 
in
 
the
 
Center
 
for
 
Economics
 
and
 
Business
 
(WWZ)
 
at
 
the
 
University
 
of 
 
Basel,
 
Switzerland)
 
has
 
spent
 
his
 
career
 
examining
 
the
 
intertwined
 
worlds
 
of 
 
politics
 
and
 
economics
 
with
 
special
 
attention
 
given
 
to
 
money.
 
In
 
his
 
most
 
recent
 
book,
 
Monetary
 
Regimes
 
and
 
Inflation:
 
History,
 
Economic
 
and
 
Political
 
Relationships,
 
Bernholz
 
analyzes
 
the
 
12
 
largest
 
episodes
 
of 
 
hyperinflations
 
 –
 
all
 
of 
 
which
 
were
 
caused
 
by
 
financing
 
huge
 
public
 
budget
 
deficits
 
through
 
money
 
creation.
 
His
 
conclusion:
 
the
 
tipping
 
point
 
for
 
hyperinflation
 
occurs
 
when
 
the
 
government’s
 
deficit
 
exceed
 
40%
 
of 
 
its
 
expenditures.
 
According
 
to
 
the
 
current
 
Office
 
of 
 
Management
 
and
 
Budget
 
(“OMB”)
 
projections,
 
US
 
federal
 
expenditures
 
are
 
projected
 
to
 
be
 
$3.653
 
trillion
 
in
 
FY
 
2009
 
and
 
$3.766
 
trillion
 
in
 
FY
 
2010
 
with
 
unified
 
deficits
 
of 
 
$1.580
 
trillion
 
and
 
$1.502
 
trillion,
 
respectively.
 
These
 
projections
 
imply
 
that
 
the
 
US
 
will
 
run
 
deficits
 
equal
 
to
 
43.3%
 
and
 
39.9%
 
of 
 
expenditures
 
in
 
2009
 
and
 
2010,
 
respectively.
 
To
 
put
 
it
 
simply,
 
roughly
 
40%
 
of 
 
what
 
our
 
government
 
is
 
spending
 
has
 
to
 
be
 
borrowed.
 
One
 
has
 
to
 
ask
 
whether
 
the
 
US
 
reached
 
the
 
critical
 
tipping
 
point?
 
Beyond
 
the
 
quantitative
 
measurements
 
associated
 
with
 
government
 
deficits
 
and
 
money
 
creation,
 
there
 
exists
 
a
 
qualitative
 
aspect
 
to
 
such
 
a
 
scenario
 
that
 
may
 
be
 
far
 
more
 
important.
 
The
 
qualitative
 
perceptions
 
of 
 
fiscal
 
and
 
monetary
 
policies
 
are
 
impossible
 
to
 
control
 
once
 
confidence
 
is
 
lost.
 
In
 
fact,
 
recent
 
price
 
action
 
in
 
metals,
 
the
 
dollar
 
and
 
commodities
 
suggests
 
that
 
the
 
market
 
is
 
already
 
anticipating
 
the
 
future.
 
M1
 
money
 
supply
 
is
 
the
 
most
 
liquid
 
measure
 
of 
 
money
 
outside
 
of 
 
tangible
 
currency.
 
The
 
chart
 
below
 
illustrates
 
M1
 
growth
 
of 
 
the
 
world’s
 
major
 
currencies
 
since
 
2007.
 

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