John Paulson Thinks The Euro Is Going To Fall Apart!

John Paulson, the founder of hedge fund Paulson & Co. which made billions on its "Big Short" of mortgage securities during the financial crisis, recently outlined his thesis on the euro in a letter to Paulson investors. The letter describes the euro as a "structurally flawed" currency and suggests that it will eventually fall apart. Bloomberg

that the letter advises investors that turmoil surrounding the currency could be triggered by a Greek default and that the market could be underestimating the effects of such an outcome. “We believe a Greek payment default could be a greater shock to the system than Lehman's failure, immediately causing global economies to contract and markets to decline,” the firm said. Paulson's outlook appears to align with a number of other bearish prognosticators such as George Soros and Hayman Capital's Kyle Bass, but the markets have started 2012 on a high note with optimism about the European debt crisis lifting asset prices. Nevertheless, Paulson is pulling back. According to Bloomberg, the hedge fund has cut its net exposure in one of its largest funds from 82 percent at the start of last year down to 32 percent at the beginning of 2012. Paulson & Co. cited the potential of a worsening situation in Greece for its risk aversion. “We believe such a default could lead to a European banking crisis on par or worse than the world suffered in 2008 when Lehman Brothers failed.” In the wake of the financial crisis, which made him a billionaire, John Paulson turned very bullish on the prospects of a strong recovery in the United States and elsewhere. Paulson aggressively positioned his hedge funds to profit from rising asset prices and a robust economic environment as the worst of the crisis was winding down. In particular, he bought up financial stocks and significantly increased his long exposure to the stock market. While his bets worked well during the second half of 2009, Paulson's heavy exposure to financial stocks such as Citigroup

and Bank of America

, along with some other missteps, caused the fund to post significant losses in 2011. At one point, some of Paulson's biggest funds were down roughly 40% for the year. While investors in Paulson & Co. lost a bundle in 2011, John Paulson continues to be among the closest watched investors in the world due to his epic mortgage trade and a solid long-term track record. One has to wonder, however, if Paulson's timing is not once again off. Is he turning bearish at the exact wrong moment, just as his underwater positions were about to turnaround? In the very near-term, at least, that appears to be the case. Paulson liquidated his entire stakes in Bank of America

and Citigroup

last quarter before the stocks began a sharp rally at the beginning of 2012. The fact that his funds also started the year with dramatically lower net long exposure to the market also appears to be a mistake in hindsight - the S&P 500 is already up 7.19% in 2012. Despite the recent missteps, Paulson's letter to investors suggests that he has conviction in his new thesis, and that should get the attention of market participants. “While we have seen a reasonable recovery in the U.S. with leading indicators in early 2012 trending positive and equity valuations well below historical norms, the European sovereign debt crisis remains the overriding risk in the markets,” the letter states.