Michael Platt, CEO and founder of BlueCrest Capital, a $30 billion hedge fund, states the case in an interview on Bloomberg for being totally on the sidelines in short-term US Treasuries and German Bonds.

Link if video does not play: Euro Crisis – Hedge Fund CEO Mike Platt – Bloomberg 15-12-2011

The video is 15 minutes long and well-worth watching. Platt is not a permabear by any means. He caught the rebound nicely in 2009 but now believes the prudent thing to do is completely avoid risk for the time being as better opportunities will come down the road for those who stay liquid.

Partial Transcript

Michael Platt: We distill it down to one really essential fact. If you look at the debt of Italy at 120% of GDP, which is increasing at a real rate of 5% where they have to fund these days, and if you look at GDP which is now forecast to be declining at 1.5%, arithmetically that debt is going to blow up. We don’t see anything that is happening at the policy level that gives us any indication that there’s going to be anything to convert this situation from where it is now to a much more substantial and real crisis in the future.

If Italy and Spain are forced to roll their debt over which this year is going to be on the order of 600 billion euros, if they have to pay rates between 5 and 7 percent, then the situation in Europe is unsustainable.

We are not going to have any Eurobond. We are not going to have a full political and fiscal union where the transfers can take place. It seems that what we are going to have is an attempt to control the European situation through continued austerity which is a process that is pro-cyclical. More austerity creates more slowdown. To raise more capital we are looking for a three trillion take-down in European balance sheets. There is nowhere I can see to get any growth from.

Bloomberg: It’s all about economics and not a cultural and political divide?

Michael Platt: Absolutely it’s about a cultural and political divide. The reality is there is no willingness within the Eurozone to share wealth.

I want to make something very clear, the market price says the probability of a eurozone breakup is distinctly non-zero,  despite what the politicians say.

Bloomberg: Is it going to get worse?

Michael Platt: We are going into 2012 and the problem is going to get worse.

The actual process that this has been unfolding under as been extremely gradual and there has been a lot of optimism in the markets that some kind of solution will be found. But unfortunately, the process of bond markets selling off, driving funding costs higher, has been absolutely continual and now as debt rates go up to 7% it becomes a self-fulfilling prophesy.

Bloomberg: Most of the banks in Europe are insolvent now?

Michael Platt: repeating … If banks were hedge funds and you marked them to market properly, I would say most most of them are insolvent.

Bloomberg: How do you feel about banks as counterparties?

Michael Platt: I do not take any exposure to banks at all if I can avoid it. All the money at BlueCrest Capital is in 2-year US government debt or 2-year German debt. We have segregated accounts with all our counterparties. We are absolutely, radically concerned about the credit quality of our counterparties.

Bloomberg: Are you afraid of taking risk right now?

Michael Platt: Absolutely. We are not interested in taking any peripheral debt risk at all.

Bloomberg: You are looking for all of the potential opportunities out there in the world, not to perform.

Michael Platt: The most important thing to remember about crises is: you don’t make your money going into the crisis. Because when you go into a crisis like 2008, markets trade against positions. People have positions on. People need to get risk off. All the things that people thought were a good idea, start going into reverse.

The big money is made in the aftermath of the crisis.

Bloomberg: Are you looking at opportunities in illiquid assets? A lot of hedge funds are saying man, there is a lot of yield to be had in some of these illiquid products.

Michael Platt: I would not touch illiquid assets. We are going into an environment in which banks are going to delever. Illiquid assets are going to be coming out on the street everywhere. The price of liquidity is going to go up.

Bloomberg: You’re not temped? Just as were hearing, banks are shedding assets, we are hearing from many investors this stuff is too cheap to ignore.

Michael Platt: It would have been the end of my business in 2008 if I had done such a thing. Ayone that had illiquid positions in their hedge funds, there were runs on those hedge funds because people wanted to get the cash out. In 2008 I paid out $9.5 billion to the street. I was up a lot and completely liquid.

Bloomberg: Do you expect we are going to see a repeat of 2008? There’s going to be something akin to a credit crunch and anybody holding illiquid assets is going to get crushed the same way they were three years ago?

Michael Platt: That’s what I think. Yeah. What’s going on now is significantly worse than 2008.

End Transcript

That is one of the best interviews I have heard in a while. Platt stated his position very well and I am in essential agreement with the overall message about risk.

Those who avoid risk now will be rewarded later. Those who take risk now will regret it.

Upside is limited, and global economic fundamentals are horrendous. Better opportunities will come for those who are patient.

 Mike “Mish” Shedlock
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