China and Macro Impact w/ Kyle Bass (TIP396)

China and Macro Impact w/ Kyle Bass (TIP396)

Trey Lockerbie (01:31):
Welcome to The Investor’s   Podcast. I’m your host, Trey 
Lockerbie, and man oh man, today   we have an extremely special guest, and that 
is Mr. Kyle Bass. Kyle, welcome to the show. Kyle Bass (01:43):
Glad to be here, Trey. Trey Lockerbie (01:44):
I’m so excited to have you on. I’ve been following   you ever since the Michael Lewis book and reading 
about The Big Short and that early success you   had with Hayman Capital. I am really curious to 
start out here and learn a little bit more about   how you developed this passion for investing in 
these macroeconomic themes and theories.

How did   you find that that was your niche or that 
was going to be your approach to investing? Kyle Bass (02:12):  It was actually more of a logical process. When 
I launched the firm in 2006, we were actually   very interested in long Asian equities and was 
looking, if you remember back then, that’s when   housing prices had moved parabolically in 
the US, that’s when they were getting to be   rough, seven times annual income and they’d 
always hung around four and a half times. Kyle Bass (02:35):  We were looking at the housing market, knowing 
it was a bubble, trying to figure out how to   basically asymmetrically be short housing. You 
do want to be necessarily short a home builder   because a lot of them were being acquired, a lot 
of their mortgage origination businesses were   being acquired, and there were a lot of risks 

In doing the work, trying to figure out   how to really cap our downside, we got short some 
mortgage bonds, instead of mortgage originators. Kyle Bass (03:02):
That was a moment that came through due   diligence and research and searching for something 
to get short. Then to hedge, being long Asia.   I think, when you think back to the crisis, what 
central banks did and governments did is they took   the bad private assets onto the public balance 

They started guaranteeing banks, they   started investing in equity, they started taking 
on the risk of the bad assets of the market. Kyle Bass (03:27):
Something that started as micro ended up being   macro. The sovereigns were taking the bad private 
assets on the public balance sheets. That happened   here, it happened in Europe, we studied Europe, 
we studied Europe’s banking system and the size of   the call it, 20 biggest banks in Europe. The world 
moved, in my opinion, or at least in my mind, from   micro-investing to macro investing, and now macro 
really drives sentiment and investing market-wide. Kyle Bass (03:55):
I realized there   are the idiosyncrasies of companies 
like Google and Facebook and the others,   but the excess liquidity in the markets 
is what drives things. If all of a sudden   the Fed were to really aggressively taper 
today, I don’t care what company you are,   what stock you are, you’re probably not going to 
go up for a while. It just took me into a place   where things were more, I think, for me 
more logical, it was just my own view. Trey Lockerbie (04:19):
I recently heard Stan Druckenmiller talking about   how the common theme with these very successful 
investors is that they always seem to have this   concentrated position early on, this high 
conviction bet, basically.

As I understand it,   your fund, Hayman, was relatively new. I think 
you had around 33 million in assets under   management if I’m not mistaken. I’m curious, 
at what point… How high was your conviction?   Did you go all-in on this bet with the first 
fund of yours or was it a smaller allocation? Kyle Bass (04:49):
Look, our big year was 2007.   and our negative carry was 1.5%, 2%. My downside 
scenario was when you think about all in,   my downside scenario was I lost 2% a year in 
the position. My upside scenario is we made 80%,   90%, 100%. It’s hard to say that we went all 
in, but we had a meaningful position there. Kyle Bass (05:39):
Then when we also launched our mortgage   funds and our mortgage funds back then, at the end 
of ’06 is when we launched.

I designed it so that   it had about 10 times implicit leverage, and our 
negative carry was about 11% a year. Think about   the proposition to investors was, I’m going to 
lose about a third of your money over a three-year   period, or we’re going to make 10 times your 
money. It was a pretty good value proposition.   You could say that was all in, but we ended up 
making about 6X, and it was a great transaction. Trey Lockerbie (06:11):
That 2008 period, that’s when the Fed   really broke the seal, so to speak, of all of 
this currency printing that they’ve been doing   as of late.

Is anything they’re doing today give 
you any kind of deja vu from that time in 2008? Kyle Bass (06:26):
No. That’s a good   question. I don’t believe we’re in a bubble 
today, as far as ratios are concerned and   leverage in the system is a concern. We’re in a 
bubble today that I don’t think will pop because   the Fed, regardless of how many mortgages 
they’re buying, I think it’s closer to 40 billion   right now a month. But I think it’s important to 
note that we have 40% more cash abroad, money in   our system than we had two years ago, or 18 months 
ago, when the virus first emanated from Wuhan. Kyle Bass (06:58):  That’s never happened in the history of the 
United States, to have 40% more money in the   system.

I’m a monetarist at heart. I believe, 
if you increase the money supply by 40%,   you’re going to have a 40% depreciation 
in purchasing power, roughly thereabouts. Kyle Bass (07:14):
You and I both know   inflation is running, call it mid-teens, if not 
higher, and interest rates are still at zero.   The insidious negative real rates of return 
are hitting our savings in a major way,   and that’s what’s going on. When you think about 
mortgages, and housing availability, who knew that   when the virus plagued the world, that the first 
thing that would happen is people would just go…   When rates went to zero and mortgage rates 
collapsed even further, that everybody just   bought every house they could find. I wouldn’t 
have bet that actually. But that’s what happened. Kyle Bass (07:47):
Now, we’re in a scenario where the   price of everything has gone up, including 
residential housing, including commercial   real estate. While it’s much higher than it once 
was, I don’t believe we’re in a bubble because   of the amount of liquidity in the system.

Trey Lockerbie (08:02):
That raises the question for me around real   estate, how much longer do you think this whole 
run is before you consider it to be a bubble? Kyle Bass (08:12):
I will agree that I think   the amount of appreciation of real estate in the 
last two years, it’s unprecedented. It’s never   moved this far this fast. But I think that for 
it to be a bubble, it’s going to have to get to   many multiples of people’s income.

We have more 
job openings today than we have jobless people,   which is a really strange phenomenon as well. 
We’re seeing the price levels of wages move. Kyle Bass (08:40):
My answer to you is,   I think assets, including real estate, are going 
to continue to move much higher over the next   decade because I think the central banks can’t 
raise rates more than 100 basis points. We’re   not going to move the front end very much, and 
it’s going to flatten the curve when they do. I   think if we started aggressively raising rates in 
’22, I think you’re going to see the curve flatten   and maybe even invert almost immediately. That’s 
a real difficult scenario for the central banks. Trey Lockerbie (09:07):
I’ve heard this opinion, to some degree,   before, about this expectation that the Fed 
can’t raise rates upwards of say, 2%. What is   that based on exactly? I know that the interest 
on our debt, at some point becomes untenable.   Is that the theory, and is there a 
certain number that you’re basing that on? Kyle Bass (09:24):
Well, it’s not only that, it’s the   expectations of the participants.

When you look 
at corporate America, you look at individuals   in America, everyone has reset their expectations 
to borrowing around these low rates. You have to   think about the rate moves as a percentage of the 
base and not as an absolute. If rates dropped from   8% to 5%, and then we raise them 5% to 6% 
or 6% to 7%, you’re moving two off of five,   or you’re moving down three off of eight. When 
you’re moving from five to zero, and then you try   to go from zero to one, the rate increases almost 
infinitesimal meaning as a percentage of the base. Kyle Bass (10:04):
That’s what’s more   functionally relevant than the nominal change 
in rates. That’s number one. Number two,   everyone is, including the sovereign, including 
the US Central Government balance sheet, if we   move short rates, almost everything’s financed on 
the front end or the short end.

So, if we raise   rates from zero to one, and then one to two, all 
of a sudden interest on our national debt starts   costing us more than 10% of GDP and things start 
to collapse. The government can’t afford that. Kyle Bass (10:35):
This is not like the period of time in which Paul   Volcker can ride in on a white horse and raise 
rates to snuff out inflation. Think about this,   we won World War II, we deficit spent going into 
World War II. So, our national debt in 1946 was   about 106% of GDP, and we won, we eliminated 
the productive capacity of about two continents,   and we helped rebuild, with the Marshall 
Plan, Japan and part of continental Europe.   We ran a trade surplus with every 
single trading partner in 1946.

Kyle Bass (11:10):
We were able to pay off our debt from 106%   of GDP, down to the low 30s By the mid-1970s. When 
we had the embargo, and oil price spike of ’79,   and then runaway inflation in 1980, where Volcker 
showed up, we could afford to briefly raise rates. Kyle Bass (11:32):  It’s important to think about where we were 
in late 1970 when you look at our sovereign   balance sheet and corporate balance 
sheets, and where we are today. Again,   Volcker cannot ride in today and fix this. You 
can’t arrest inflation by raising short rates,   you’ll bankrupt the nation, you’ll bankrupt 
corporate America, you’ll bankrupt everything.   I’m of the opinion that a move from zero to 
1% is about all we can do on the short end.

Trey Lockerbie (12:00):  You mentioned inflation earlier, and I’ve heard 
you use a term that honestly, I hadn’t come across   before, which is chain-weighted inflation. Talk 
to us about the difference between chain-weighted   and non-chain weighted inflation metrics and what 
that means for investors and their discount rates. Kyle Bass (12:16):
It means that the government   rigs inflation. Let me give you a perfect 
example. 30 years ago, the average price of   an average car in America was about $13,000 a 
car. Today, that number is just over $40,000.   It’s up over 300% in 30 years. When you think 
about the construct of the Consumer Price Index,   or the CPI, there is an auto component to 
that construct. I’m just picking one out just   because it’s easy for us to remember how much 
cars used to cost and how much they cost now.

Kyle Bass (12:54):
Of that 300 and so percent increase,   what percentage of that do you think 
is made into the CPI? Of a plus   300 number, what do you think has been 
calculated into the CPI over that time frame? Trey Lockerbie (13:08):
100%? Kyle Bass (13:10):
Yeah, five and a half.   Here’s what chain weighting means. They say, 
“Trey, we realize that your bank account just   went down by $41,000 because you wrote a check 
for a new car. But we, the government, well,   we must compare apples to apples. In your 
new car, you have a digital speedometer,   in your old car, it was an analog speedometer, 
that was just driven by more mechanical means.   If you were to replace your digital speedometer 
with that analog speedometer from 1990,   then your speedometer wouldn’t 
cost $900, it would only cost $70.” Kyle Bass (13:47):
The chain weight every part of the car.   You have electric windows, well, maybe in 
1990, you had the roll-up windows. You have   to subtract the cost of electric windows, you 
have to subtract the cost of your GPS navigator,   you have to subtract the cost of everything, 
to try to compare an apple to an apple,   when in reality, your bank account still 
went down $40,000, and you wrote the check.

Kyle Bass (14:10):
But you have to realize   that so many things are tied to the CPI, 
especially government pension payments and   there is the cost of living 
adjustments tied to that number.   When you look at, let’s say Germany, for example, 
they don’t chain weight their inflation data.   Germany just printed year over year numbers 
of 11.7% inflation. Sounds about right to me. Kyle Bass (14:34):
It’s so fascinating when you peel   back the layers of the onion to try to understand 
what the incentives are behind the people putting   these numbers together and then what real life 

Real-life is your bank account. Real-life is   what things actually cost you, not what 
they used to cost 30 years ago because you   had analog this and roll up that, it’s what can 
you buy today? How much does your bank account   decline? They’re playing fantasy football with 
the numbers, they’re not giving you real numbers. Kyle Bass (15:01):
It’s really important to think about,   they always talk about also CPI of food and 
energy. They’re like, “Wait a minute, if you don’t   drive or eat, your bank account would have been 
okay.” It’s just crazy.

I try to look at things   in real terms, and how they affect the population 
and what your wallet’s really feeling when you go   fill your car up and what your wallet’s feeling 
when you take your wife out to dinner, and you   get the bill and think it’s in pesos, but it’s 
in dollars. It’s insane what’s been happening. Trey Lockerbie (15:30):
I’m trying to understand, how is the Fed getting   away with this, for lack of a better way to 
frame it? It seems so obvious when you have other   resources to look into and compare to.

How are 
they getting away with this? Why is it not more- Kyle Bass (15:43):
I think the alternative   was to have a much deeper recession in 
2008-2009, to have a calamitous recession   in 2020 on the outset of the virus. With those 
recessions would come more difficult hardships,   maybe more physical violence, i.e. societal 
friction, that would be difficult to get under   control.

What they choose here is smoothing, 
and the smoothing is just printing the money. Kyle Bass (16:11):
The unintended consequences of money printing are   the rich get richer because they own the 
assets, and they have leverage on those assets.   The middle class, their ability to trade up, do 
better is taken away from them. So, the negative   real rates of return really hit the middle 
class, and the poor, they hit the poor the worst. Kyle Bass (16:32):
I think the very people that   they’re trying to protect are the people they end 
up hurting the most. But it’s insidious because   it’s hard for you and me to say, well, even 
though you and I have retirement savings,   we know it’s going to buy less stuff 
than it would have bought two years ago,   but we don’t know how much less and they’re not 
actually telling us how much less. You and I just   have to figure out what the new cost of living is 
going to be in the new paradigm.

Again, I say it’s   insidious, because it’s not black and white, 
and it’s very difficult for people to measure. Trey Lockerbie (17:01):  What are your thoughts on something like a 
Bitcoin and the value it could bring to the   market in this kind of environment, 
not having Paul Volcker around? Kyle Bass (17:09):  I know Millennials love private crypto, 
and I know you’re probably a millennial,   but I know that people like to think it’s 
a perfect substitute or a great substitute   for gold and/or an inflation protector. 
I tend to think that you’re going to see   authoritarian governments and Western democracies 
alike, start to really clamp down on Bitcoin. Kyle Bass (17:30):
I know China’s first kicked the miners   out and then banned private crypto. They did that 
a year earlier than I expected them to do it.   I think next year, you’re going to see intense 
regulation come from the US Treasury and the IRS. Kyle Bass (17:43):
When I think about how to   think about discount rates, and I think where 
you’re going with that question is, how do I   protect myself from this insidious inflation? 
I think there are much better inflation hedges.   I know Bitcoin has done well, I know 
that the returns have literally been   off the charts for many, and there are many newly 
minted billionaires out there in Bitcoin land.   I think the easy money has been made, is what 
I’m telling you.

I think from here on out,   it’s going to be really 
difficult to make money there. Kyle Bass (18:14):
What I look to are things like   real assets like even rural land. Rural land, 
you can do a lot of interesting things with.   You can actually put a judicious 
amount of leverage on it, call it 50%   leverage, and stay way ahead of this insidious 
degradation of your savings. I actually launched   a private equity firm a couple of months ago, to 
engage and not only an acquisition of rural land,   because that’s where I want my money and my 
family’s money, but it’s also to engage in   mitigating environmental impacts from big 
industrial and commercial users of the land. Kyle Bass (18:49):
I’m actually a tree hugger at heart.   I love the environment. I love the outdoors, and, 
that’s where I think the best place to go is to   mitigate this. I know that’s not where you wanted 
me to go on Bitcoin, but it’s how I feel now.

Kyle Bass (19:05):
I own a couple of   private positions in big firms that are 
trading, lending against, and developing   bitcoins and NFTs and all of the digital universe 
of alphabet soup things that are out there.   I think that the blockchain, I think that 
NFTs, those things are all very much here   to stay. Private crypto, I put a question mark by 
over the long run. I’d be careful with that now. Trey Lockerbie (19:30):
When you say rural land, is that different   from something like farmland? Because I recently 
heard or saw a headline about Bill Gates, for   example, owning like 100 million-plus dollars of 
farmland and making a statement, the same thing.

Kyle Bass (19:43):
What I’m talking about is   when I think about the macro movements of the 
population today in the United States, you have a   high cost, high tax jurisdictions like New York, 
New Jersey, Connecticut, and then you have the   entire west coast of California, those people are 
all moving to places like Texas, like Tennessee,   like Florida, because they’re pro-business, 
they’re low to no tax at the state level. Kyle Bass (20:06):
I know rich people can move to Aspen   and Utah and everywhere that super-rich people 
are moving, but you can’t move entire fortune 500   companies to places like those enclaves.

When you 
think about where the pro-business environment is,   who’s going to win over the next decade, 10 to 
15 years, it’s going to be places like Texas,   Tennessee, and Florida. With that nonlinear 
population growth, comes big movements inland   within call it to two and a half hours of 
major MSAs, whatever you do on the weekend,   where you live there, you probably have a second 
home, or your parents did or your friends do.   That’s what you do, you go to a lake 
or you go to a ranch, you go to a farm. Kyle Bass (20:45):
I believe you’re going   to see those prices move faster than… Especially 
in front of those population demographic moves,   I think those are going to move 
faster than inflation will.

Trey Lockerbie (20:57):
Interesting that, inflation being where it is,   I didn’t hear you say something like 
gold. You went to farmland. Talk to us,   what’s your position or your opinion on gold, 
and has it changed at all over the years? Kyle Bass (21:10):
When private crypto came about… What’s private   crypto’s market capitalization today? Is it north 
of 2 trillion? If you think back to 2009, the   amount of gold ever mined in 2009 was 7 trillion, 
and a lot of that had been, let’s just say,   stored, lost in dowries, this and that. When you 
think about that marketplace and how much money   has basically never made it into that marketplace 
and gone into things like private crypto. Kyle Bass (21:40):
I think these people that are selling   some private crypto to buy real 
assets are actually not buying gold,   they are going to buy more real estate, more land. 
When I think about gold versus rural land, again,   I have the population demographic in my tailwind, 
and I also have something that I can drive to,   I can fish there.

I’m not a hunter, but 
if you wanted to hunt, you can hunt there,   you can take your kids swimming, hiking 
outdoors, you can’t do that on a piece of gold. Kyle Bass (22:09):  I think about the tangible benefits and both 
physical and mental benefits of being outside.   I think that’s likely to move a lot faster than 
gold does. I’d much rather own that kind of land. Trey Lockerbie (22:23):
Interesting. You did talk about   China’s ban on crypto, and we’re going to talk a 
lot about China and the different aspects of it.   The first point related to crypto here 
is the idea of China developing its   own digital currency.

What is the incentive for 
them to do that, besides, giving it yet another   surveillance tool? How would that change their 
position in the world, at least in their minds? Kyle Bass (22:48):
That would radically change China’s geopolitical,   call it belligerence. When you think about how 
offensive they’ve been, in the last few years,   first of all, in their complete botched review and 
allowance of scientists into Wuhan to figure out   where patient zero is, and where this thing came 
from, they’re not a responsible global actor. They   are a completely irresponsible global actor, they 
have a grand strategy, they’re executing it well. Kyle Bass (23:19):
We are now trying to understand,   in a much larger picture, what it means 
for them to have a CBDC of their own,   a central bank digital currency of their own. 
Again, it’s antithetical to even private crypto.   Private crypto is decentralized. The idea is, call 
it, not being under the purview of watchful eyes   of centralized governments.

I understand all 
of the libertarian ideals of private crypto,   but when you think about central bank 
digital currency is the opposite,   it’s run by the government, for the 
government in a centralized manner. They   know exactly who has it, they know your spending 
proclivities, they would know Trey Lockerbie’s   Social Security number and where you like to 
spend it, how you spend it, how much you have. Kyle Bass (24:01):
It would enable them,   not only to be you adopting the Chinese tech 
stack, you’re not just putting some digital   currency in your wallet, you’re adopting the 
entire Chinese digital tech stack, and you’re   giving them the ability to export their digital 
authoritarianism to you. The Chinese government   could bribe you directly without being under the 
watchful eye of regulators or law enforcement. Kyle Bass (24:21):
Imagine if the Chinese government has the ability   to bribe, cajole, coerce anyone anywhere in 
the world if you’re holding on to their money.   Imagine that world, that world would 
be a much worse place to live in.   I believe the rollout of their CBDC 
next year is the biggest risk to   the rules-based order in the West that 
we’ve faced in the last several decades.

Trey Lockerbie (24:46):
What would the incentive be for   people to opt into a digital currency with China? 
Is it just that our US dollar is inflating away? Kyle Bass (24:53):
No, I think what people   maybe don’t realize and maybe some do is China can 
make two moves on the chessboard on the launch.   They can say, anyone that imports and exports, 

Engages in trade with us, China Inc, you have   to settle on our currency. If you don’t like it, 
that’s okay, find somewhere else to trade. They   literally could force you into their digital 
currency, and then they could say, oh, by the way,   anyone that invests in China or has investments 
here, from now on, it all has to settle on CBDC. Kyle Bass (25:24):
You say, “No, I kind of like   the dollar. I like my dollars being invested 
there.” They say, “Sorry, it’s illegal, you   have to buy our currency with your dollars.” What 
that would do is that would bring in trillions,   literally trillions of dollars into their 
coffers at the central bank.

Then they would not   only have more dollars to exercise their global 
belligerence with, economically militaristically,   but then they would also have a stranglehold 
over you. Because if you came out, and let’s say,   you transacted a lot with China, and let’s 
say they screwed you on a transaction, and   they were supposed to pay you a million 
dollars worth of their CBDC, and only paid   you $800,000.

And you said, “No, no, our deal 
was a million.” They would say, “Sorry, tough.” Kyle Bass (26:09):
Then you go and make   a public comment on Twitter and say, 
they just screwed me out of $200,000.   Then they turn the rest of your central bank 
digital currency off because you said something   negative about the regime. Just think about 
that world. I don’t think people have thought   that all the way through. I know, the National 
Security Council, our intelligence agencies, DoD,   we as a country have thought about this deeply. 
I don’t think the press has written about it much   at all, and I don’t think there’s been 
a lot of a proper dialectic here, and   hopefully, hopefully, we will have a meaningful 
dialectic about this rollout sometime very soon. Kyle Bass (26:47):
I believe it should be banned,   outlawed, and illegal for any US corporation 
or individual to hold. That sounds hyperbolic,   but you either have cancer or you 
don’t have cancer is how I view this. Trey Lockerbie (26:59):  What do you think happens to 
oil and how does it settle? Kyle Bass (27:03):
They’ve tried really hard to   get people like MBZ and MBS to settle in RMB.

been a tough, again, the road to hoe. But I think   with the outset of a Chinese CBDC, that becomes 
fungible and tradable and transactable, and also   is potentially freely tradable in and out of 
dollars. It gives them so much more to stand   on. Today… Let me give you a hypothetical, 
if they attack Taiwan, today; bombers,   fighter jets, and an amphibious assault, we   have an economic nuclear button today, their 
entire world depends upon dollar settlement.

Kyle Bass (27:43):
If we sanction the Chinese banks,   the joint-stock banks, and the SOE banks, we 
take China off the SWIFT system and their economy   collapses overnight. We have that button today. 
We don’t have to send sailors into the South   China Sea or the Taiwan Straits and risk our brave 
men and women’s lives. We simply press a button.   If their rollout of their CBDC is successful, that 
changes the calculus of their entire geopolitical   risk game. If we lose that button, then imagine 
how belligerent China can be if they’re not   relying on us. I think, again, that calculus is 
something that we all need to be thinking about. Trey Lockerbie (28:21):  You brought up Taiwan, I’d like to touch on 
that because there’s that speculation there,   and probably with a good reason that there’s a 
potential takeover of Taiwan, maybe sometimes even   after the 2022 Olympics.

accounting protocols

How should investors 
think about that, position themselves for?   If that’s a concern and a risk, how do we 
factor it into our investment approach? Kyle Bass (28:43):
They’re not thinking about   it. There’s a Taiwan ETF that’s at an all-time 
high today. Either people don’t believe it, they   don’t believe China will do it. If they listen 
carefully to X Jinping’s October 9th speech,   he basically raised the bar on Taiwan. 
He said that he is trying to achieve   the great rejuvenation of the “Chinese race,” and 
he is intent on achieving the “Chinese dream.” Kyle Bass (29:14):
Those are two really   important phrases because what he is saying is… 
He says that peaceful reunification of Taiwan   is a foregone conclusion, it’s inevitable.

fact, they reiterated it again with their foreign   ministry spokesperson yesterday, Wang Yi 
said that yesterday. But back to October 9,   today is November 4th, call it back a little bit 
less than a month ago. What Xi said in that speech   was, if you don’t surrender peacefully, 
we’re going to take you forcefully. Kyle Bass (29:45):
His success as Premier and an Emperor for life   is contingent upon that reunification. If 
he doesn’t achieve the Chinese dream of the   great rejuvenation of the Chinese people, then 
he has failed and he’ll no longer run China.   That’s literally what he said, October 9, if you 
read carefully what he said. He’s banging the   war drums a little harder. I don’t know if you’ve 
seen just today, Trey, but for the first time   in Chinese media, what I’m seeing all over China 
is they’re talking about how they’re fortifying   positions in the region in which 
they’re going to attack Taiwan from. Kyle Bass (30:24):
There are propaganda videos   showing missile silos getting carried down 
the streets of China, that are all camoed up,   and trains with tanks on 
them headed to the region,   military planes landing there, and they’re 
pushing these videos all over China for the   people of China to prepare for battle.

I haven’t 
seen that level of rhetoric in China to date,   but it seems to me like things are speeding 
up at a quantum speed, at an incredible pace. Kyle Bass (30:57):
Whether they wait for the Olympics or not,   I can tell you the conversations that President 
Biden has had with Xi surrounding Taiwan. We have   a big national security problem with Taiwan. 
Taiwan Semi is very, very, very important to   the US, to the US military, to our well being and 
it’s literally 100 miles from the Chinese border.

Kyle Bass (31:21):
The problem is, it normally takes about five   years to build a wafer fab, we’re about a year 
and a half into the Taiwan Semi fabs being built   in Arizona, and let’s say it takes three or 
four years instead of five, we still have a   duration mismatch if they move now. If you’re 
thinking about their calculus, moving sooner,   rather than later is in their best interest. 
However, they haven’t rolled out their CBDC yet. Kyle Bass (31:44):
Again, this is my   calculus and who am I, I’m some financial 
guy in Dallas. But if I were to bet when   something’s likely to happen, I would bet 
the second half of next year or sooner. Trey Lockerbie (31:56):
You brought up Taiwan   Semiconductor, and I’m curious about that one, 
especially. Because if you’re someone who’s   like me, and bullish on semiconductors long term, 
and it’s a seemingly great company in the space,   it’s a $600 billion market cap.

Does a Chinese 
takeover of Taiwan affect that company or at least   the prospect of it as a good business? Or does 
it change your outlook on the business at all? Kyle Bass (32:22):
Well, it changes my opinion of Taiwan   Semi’s business overnight. Yeah, absolutely. 
If it’s under the centralized control of the   Chinese Communist Party, then you have an entire 
myriad of new problems to think about.

Immediately   if the Chinese are running Taiwan Semi, our 
government… And then they take it forcefully,   they take Taiwan forcibly, our government’s 
likely to ban all products from China. Kyle Bass (32:47):
We’re going to have to   alternatively source, we’re going to have to go 
to a different supplier. We, as a country realized   what kind of position we were in, and that we 
had let the frog boil without our knowledge.   It was actually under the Trump administration’s 
last two years, the Security Council tasked   a former Naval Intelligence Director 
to help usher in and get these deals   done for Taiwan Semi to build these… Imagine 
spending $17 billion on one building, Trey.   Imagine what that building is going to 
look like. Those are being built today. Kyle Bass (33:31):
We have Samsung about to break ground in Taylor,   Texas. We have Taiwan Semi building its first and 
I think its second wafer fabs in Arizona, broken   ground. But again, those periods of time and the 
capital it takes to build those are enormous. Trey Lockerbie (33:47):  Speaking of buildings, I’m curious about 
the real estate in China. You have this   theory around Xi’s intent. I’ve heard you say, 
especially around Evergrande, I’ve heard you   express that he’s intentionally detonating the 
real estate market.

What do you mean by that? Kyle Bass (34:02):
I think that an unintended   consequence of central bank largesse has been 
asset prices have gotten out of hand. In China,   when we talk about how housing is priced here   at call it five to seven times our annual income, 
four and a half to seven times our annual income.   In China in tier-one cities, housing is now at 
30 times the average annual income. It’s at a   level that’s so high that when you look at 
the birth rate of the average Chinese woman,   it’s 1.2 children per woman.

To just sustain a 
population, that number has to be 2.1. It’s 1.2. Kyle Bass (34:39):  You’re having a major population decline starting 
in China and the reason being is the Chinese men   can’t afford once they get to be adult age, 
they can’t afford to have a job and buy a house.   So, they’re living with their parents in 
their basement. None of the men want to marry   a woman because the woman won’t marry 
him and live in the parent’s basement. Kyle Bass (35:01):
They’re not getting married,   they’re not procreating. They’re not having 

Xi realized this is a structural   nightmare for him as a central planner. So,   they eliminated the one-child policy and 
said, “How about three?” Well, guess what,   it didn’t work, people aren’t having three, 
because they can’t afford to have three. Kyle Bass (35:20):
Real estate is a third of China’s economy.   In the US, it’s about 18% of our economy. The real 
estate prices are so high and so out of reach,   and the average Chinese person owns 2.3 
apartments. It’s where they’ve just been   plowing their money in a speculative fervor. Now, 
what Xi’s doing is introducing property taxes,   which [inaudible 00:35:40] didn’t exist. Imagine 
if you didn’t have a negative carry, well,   you could go speculate in real estate. 
Imagine if you had to pay 2% a year,   you wouldn’t speculate that 
much in real estate, right? Kyle Bass (35:51):
In a speech just a few days ago,   he talked about further moving property taxes 
higher in the midst of a real estate crunch.

He   is going to bring down real estate prices, and 
they’re going to stay down. That is the common   prosperity of the people, that’s his goal and 
companies. There are eight developers now in   default, Evergrande is… All these bonds are 
going to get wiped out, that’s the bottom line. Kyle Bass (36:13):
Westerners are going to do a lot poorer   than domestic Chinese, they’ll give domestic 
Chinese a few pennies on the dollar, and they’ll   tell Westerners, “Sorry, thanks for playing.” If 
you’ve noticed the Chinese high yield bond market,   at its worst, two months, ever, in the 
last two months, basically dropped from par   to way below 70 in the entire high yield 
marketplace has probably gone a lot lower. Kyle Bass (36:33):
You’ve got a scenario,   you’re going to see real estate come down and stay 
down because it’s driven by Xi Jinping. It’s not   just going to bounce back and everything’s 
going back to puppies and rainbows at some   point in time. He realized that he made a 
major mistake in letting the central bank   print as much Chinese money as they did and 
allow the rampant speculation that he allowed.

Kyle Bass (36:54):
This crackdown is   not because Jack Ma is super-rich, it’s 
not because the property developers are   too flashy with their jets and cars and things 
like that. That might have something to do with   it, but it’s really core to the central 
planning of the Chinese Communist Party. Trey Lockerbie (37:10):
Does that have any   systemic risk? If there was speculation that 
Evergrande was the next Lehman there for a minute,   it doesn’t sound like you share that 
opinion. But these bonds getting wiped out,   does it have a rippling effect across the globe? Kyle Bass (37:24):
I don’t think so. Well, let me rephrase that.   I believe that if you’ve seen Goldman Sach’s most 
recent report and expectations for Chinese GDP,   they’ve taken it to zero. That’s a pretty 
big statement. But if a third of your economy   is going to go pretty significantly negative, 
and the other two-thirds of your economy   is slightly positive, you could get to a zero 
number. God forbid, China only grows at zero. Kyle Bass (37:45):
But I think if China has a 0% growth in   GDP for a year or two, that just means global GDP 
won’t grow anywhere near where anyone’s expecting.   So, the globe will slow down a bit.

When you think 
about the systemic nature of what’s going on,   we all know Evergrande has 
about 300 billion in debt.   200 billion, call it internal Chinese debt 
and 100 billion external maybe dollar bonds.   Those bonds are not levered 10 to one 
in foreign financial institutions. Kyle Bass (38:15):
Lehman was interconnected   to both the US banks and the European 
banks with massive derivatives risk.   No one signed is their agreements with Chinese 
banks, because Chinese banks demanded to have   the jurisdiction be Beijing law, and of course, 
there’s no such thing as Beijing law. None of the   either domestic US or European banks 
have major counterparty risk there. Kyle Bass (38:38):
The question becomes internal.   Are the Chinese banks going to get wiped out? 
For sure, they will.

They’ll have huge holes   in their balance sheets. But will the Chinese 
government back depositors? Without a doubt.   I think that tree is going to fall in the woods, 
I don’t think many are going to hear it. I think   there’ll be some people that are super-wealthy 
over there that end up losing everything. Kyle Bass (39:00):
But I don’t think a default   crisis will go global here, I think that they 
will take real estate down, hold it down.   The Chinese property developers are all going to 
be massacred, and because there will be no bounce,   and they’re all hyper-levered to price. Then 
the banks are all going to have huge holes   in their balance sheets and their banking 
system’s three and a half times their GDP.   They will print enough RMB internally to save 
the Chinese people from jumping off a cliff,   but I don’t see a global 
contingent into western banks.

Trey Lockerbie (39:33):  Got it. You mentioned Jack Ma a little bit ago, 
and Alibaba is down around 50% or so from where   it was a year ago. Your typical value investor 
might take a look at that and say, that looks   interesting. I can gauge that you’re probably not 
investing in many Chinese stocks. But I’m curious,   does something like Alibaba 
at its current price level   intrigue you at all or is there some kind of just 
Chinese accounting suspicion that keeps you away? Kyle Bass (40:00):
Have you really peeled back   the layers of the onion and looked at Alibaba’s 
earnings? Alibaba’s earnings come from markups   of their private investment positions, and they 
run it through their income statement.

Alibaba   is the biggest house of cards I’ve ever seen. 
I have no idea what their real financials are,   and neither do you and neither does 
Charlie Munger, for that matter. Kyle Bass (40:23):
They have never submitted themselves to a   real Western audit. Now, you have Xi Jinping risk. 
Trey, what discount rate do you put on a company   that doesn’t submit itself to real audits and has 
Xi Jinping risk? I think, if you’re a fiduciary,   whether you’re a fiduciary to your household, your 
kids, or as a real market fiduciary, you should   lose your job if you buy Chinese stocks that 
are unaudited, which are all of them right now. Trey Lockerbie (40:49):
That markup   aspect is interesting. Give us one example of 
their accounting issues, I guess, is for lack   of a better word that comes up with something like 
Alibaba and how they’re putting it in the stock.

Kyle Bass (40:59):
You look at their markup of Ant Financial in their   own income statement, and it was representing 
like a third of their earnings for 2020. When   Ant Financial goes away or gets revalued lower, 
they don’t run it through the income statement.   You know what, I don’t know. Think about how 
Ant Financial happened. Imagine if you and I   were running Alibaba, and we’re like, hey, let’s 
start this consumer finance platform. How about   you and I and 15 other people, we 
split it off. How about we take   50% of the company and let the 
shareholders of Alibaba have   the other half? Does that sound like a 
good deal? Oh, yeah, that sounds great.

Kyle Bass (41:36):
They literally stole half the company.   Imagine if that happened here, 
you’d be behind bars in 10 seconds.   But we just nod our head and say, well, 
I guess that’s the way the Chinese do it.   Because they’re running the company, they get to 
keep half of it. But that’s not the way it goes. Kyle Bass (41:54):  People just look the other way, because they 
have FOMO, they have Chinese FOMO. They can’t   wait to get to the end of that 1.4 billion 
person rainbow of riches in Eldorado and   somehow leveraging the Chinese people when in 
the end, the Westerners never make the money. Trey Lockerbie (42:11):
I want to shift gears a little bit and talk about   oil because I’ve heard the theory of yours that I 
found fascinating around our lack of investment of   hydrocarbons, and how that might actually lead to 
even inflation or higher inflation in food prices   and others.

What’s your current take on oil 
and walk us through that theory, a little bit. Kyle Bass (42:31):
Yeah, it’s oil and gas.   Seven years ago, the public markets, 
when we had the fracking decline,   and we became energy independent, six or 
seven years ago when we were fracking and   drilling at such a high rate when 
oil was $120 a barrel, call it 2014.   Then we had an abundance of oil, and we’re the 
Saudi Arabia of natural gas, and we had a ton of   natural gas. So, oil prices dropped in the low 
30s, and natural gas prices went below $2 an M. Kyle Bass (43:03):
Then we started virtue   signaling. We said you know what, it’s time. 
It’s time to go to alternative energy, we have   global warming happening and climate change, and 
it’s all well-intentioned. Don’t get me wrong,   I believe that global warming is 
here, and the numbers suggest it’s   here. Whether it’s secular or cyclical, 
it’ll be left to science over the decades. Kyle Bass (43:24):
I’m a big believer in saving the environment   and doing what we can to be responsible stewards 
of both the environment and our lands.

But you   have to take a major step towards sustainable 
power, meaning we blew it when we stopped   engaging in nuclear power plant building. 
We could have solved this many, many,   many years ago, we could have solved global 
warming. The same people screaming global   warming and climate problems today are the 
same protesters that protested nuclear power   after Three Mile Island, after Chernobyl, 
and then maybe even after Fukushima. Kyle Bass (44:01):
Imagine if we just stopped flying airplanes after   two of them crashed? The technologies are so much 
better, it’s so sustainable, it’s the cleanest,   it’s the best way to power things.

But what we 
did is we stopped spending on hydrocarbon seven   years ago. Public market analysts said you 
can’t spend outside of your EBITDA anymore   on the hydrocarbon industry. Then 
you started seeing over-the-top   virtue signaling from corporate 
investors and corporate boards. Kyle Bass (44:30):
You’ve seen a mass   exodus of funding in the capital markets for 
anything hydrocarbon-based, it takes decades,   many decades to move from one fuel source to 

It did for coal, it did for natural gas,   and it’s going to for alternative power, but 
even with alternative power, we need a much   better storage matrix. Right now, it’s just 
a great idea. Wind and solar are amazing, but   they’re not powering any kind of major percentage 
of the grid, and they can’t be baseload power. Kyle Bass (44:59):
If we mothballed the coal plants, we won’t   lend to natural gas, and we won’t lend to oil. In 
fact, now private equity is having trouble raising   money in hydrocarbons. Now, we have a scenario 
where demand is inelastic. Do you know how many   cars are in the world, driving around? Cars 
and trucks? They’re 1.2 billion cars and trucks   driving around. How many electric vehicles are on 
the road today? I think it’s around 30 million.   1.2 billion combustion engines, 30 million, 
it’s amazing, they’re 30 million electric cars. Kyle Bass (45:34):
When you think about it in   the grand scheme of things, we still, the 
world still use 100 million barrels of oil   every single day. If we stopped spending seven 
years ago, and we’re not drilling for more now,   and there’s the long-rated decline 
curve of production is about 7%.   So, we lose 7% of production every year if we’re 
not drilling.

In the next 20 years, we’ll have   one and a half billion cars on the road that are 
combustion engines, and we’ll have 100 million   electric vehicles. 100 million, amazing, out 
of one and a half billion combustion engines. Kyle Bass (46:13):
Demand for hydrocarbons   is inelastic, it’s going to keep growing, 
and we’re not spending the money to find   it. What I believe is going to happen, 
if we have a cold winter, this winter,   you’re going to see numbers you’ve never seen 
before. Because remember when oil went below zero? Trey Lockerbie (46:28):
Yep. Kyle Bass (46:29):
In the front end, there was a   problem, there was nowhere to put it. The exact 
opposite is about to happen. On the front end,   demand might tick up from 100 million 
barrels a day to 105, as the world opens,   and there isn’t 105 of production. By the way, for 
seven years, we’ve been under CapExed production,   we can’t just flip the switch. You see Biden 
at OPEC, begging them for more production. Kyle Bass (46:53):
At the same time, he’s saying,   no more interstate pipelines, no more drilling 
federal lands.

I get what he’s saying,   and the people that are running Biden’s energy and 
climate team are actually good friends of mine,   believe that or not, but you can’t turn something 
off in an absolutist fashion overnight, and flip a   switch and think you can change energy sources, 
because you believe it’s a good idea. It is a   good idea, but the incrementalist approach, 
over decades, it’s what it’s going to take. Kyle Bass (47:20):
What’s going to end up happening is,   I’m going to predict something, you’re going 
to see prices you’ve never seen before,   for hydrocarbons in the next six months, 
and maybe six months to two years.   Those prices will unseat the current leadership 
because you’re going to see energy prices and   food prices ripping because of underinvestment 
and because of excess capital in the system.

Kyle Bass (47:45):
I think that’s the grave mistake   that virtue signaling is going 
to… That’s what’s going to happen,   you’re going to see these things happen. 
By the way, the front end, at the immediate   delivery month of crude and natural gas, can 
go anywhere. Whatever that marginal cost is,   our marginal barrel, what someone’s willing 
to pay for it, someone’s going to pay it. Kyle Bass (48:08):
I’m not saying the   whole curve out of 30 years is 
going to move to 150 or 200.   But what I’m saying is, the front end of 
crude oil and the front end of natural gas,   you could see numbers you’re going to need a 
slide rule to calculate if I’m right about this.

Trey Lockerbie (48:20):
Do you have a gallon of gas prediction in Dallas? Kyle Bass (48:25):
Yeah, you could easily see   all-time highs for gallons of gas. 
You could see $6 gasoline, easily. Trey Lockerbie (48:34):
Do you think that then creates   more demand for the electric vehicle market 
and maybe accelerates that adoption a bit more? Kyle Bass (48:42):  Trey, how do we produce the electricity 
to plug the gosh damn vehicles in?   We burn natural gas, we burn natural 
gas. That’s our alternative power source.   You can’t spin enough windmills and have enough 
solar to power the additional electric cars,   you have to put electricity into the grid. People 
just haven’t thought this all the way through.

Trey Lockerbie (49:05):
China is making a big move into   nuclear in the near term. Do you think that will 
give us any more confidence in doing the same? Kyle Bass (49:15):  There are places like France that have 70% of 
their grid is nuclear. There are some people   that have it figured out. China is currently 
building more coal-fired power plants today   than the entire coal-fired installed base of 
Europe. They’re building that much this year.   They want to say they’re building nuclear, 
they’re building coal, they’re building whatever   they can build because their entire system is so 
broke and their grid is massively underserved.

Kyle Bass (49:43):
They’re telling their   bread and butter manufacturers that they can 
only manufacture every other week now because   they have rolling brownouts. They’re having a 
real problem. Hydrocarbon demand is inelastic,   and it’s growing at an ever-increasing pace. 
Whether China’s building nuclear or coal,   when you think about Chinese electric 
cars, the way you need to think about   them is they’re coal-burning cars, because 
the entire Chinese grid is powered by coal. Kyle Bass (50:08):
When you’re feeling good about seeing   electric cars on the road, just remember that coal 
is what made the electricity that’s in the car.   The entire idea of getting Earth to a better 
place is really dependent upon only about   eight countries, and China’s the number one 

Whatever they do with their emissions,   so goes the world. Clearly, they’re not 
even engaging in emissions conversation,   they’re telling us oh, they’ll be 
carbon neutral by 2050. Give me a break,   you and I could say whatever you 
want to say about 2050. It’s a joke. Kyle Bass (50:36):
But in the meantime, they are massively increasing   their carbon footprint, and they’re doing it with 
coal. When we think about hydrocarbon pricing,   going forward, I think you’re going to see prices 
that really shock people, and I think that’s   actually going to empower some regime change in a 
number of countries, potentially, including China. Kyle Bass (50:57):
The worst thing an authoritarian   leader can see is skyrocketing food and 
energy prices because it hits the billion   or so Chinese that are already dirt poor.

my prediction, much higher hydrocarbon prices. Trey Lockerbie (51:11):
Circling back to what we spoke about a little bit   earlier around inflation, and if we’re predicting 
that it’s 12%, and without tapering, it seems   like it’s not going to be very transitory. For the 
retail investor, who can probably only expect, on   average, historically 7%, 8% from the S&P, which, 
in my opinion, has become the default savings   account for the retail investor, is that the best 
they can do, if they can’t afford rural land,   or whatever, if their dollar-cost averaging into 
their IRAs, 401(k)s is that the best they’ve got? Kyle Bass (51:47):
I guess our conversation today has been on the   fact that we’re entering a stagflationary period. 
We’re going to see nominal numbers continue to   move higher, we’re going to see real rates of 
return negative because the difference between   nominal and real is inflation.

Stocks typically 
keep up with about 80% to 85% of that move. You’ll   feel kind of good about it, but you’ll still 
be losing purchasing power, I think over time. Kyle Bass (52:14):
Again, I started this private   equity firm called Conservation 
Equity Management to do exactly   what I would do, which I’m doing, to 
try to stay ahead of that insidious,   negative real rates of return. If people 
want to talk about it, they should call me. Trey Lockerbie (52:30):
Summing up, given the   fact that the Fed can’t taper, what is   the endgame, in your opinion to right the ship 
and keep US dominance as per the US dollar? Kyle Bass (52:43):
I think they will taper.

I’m   not saying they can’t. What I’m saying is, when 
they do, and if they start raising short rates,   you’re going to see a curve flattening, 
and it’ll be recessionary. It’ll snuff   out economic growth in the United States. For 
us to maintain our global hegemonic position,   we should outlaw the Chinese Central Bank Digital 
Currency, we should make it illegal. We should   enforce the rules-based order within our own 
borders, we should try to become less partisan,   and have the centrist run things and not the 
progressives and the radicals on either side. Kyle Bass (53:18):
The problem is, I’m not   hopeful about that. I think we’re more divisive 
than we’ve ever been, and that’s largely due to   the gap between the haves and have nots widening. 
I think that continues to widen.

I think you and   I when we think about protecting what we’ve worked 
so hard to save, you’ve got to be thinking in ways   that people that are alive today, most people 
that are alive today didn’t really live through,   invest through the late ’70s and early ’80s, when 
you think about the core of the investment corpus   today in America, and that was a period of 
time in which the government could do something   about it. Here, I think they’re going to be 
walking a tightrope of raising short rates,   flattening the curve, trying to figure out how 
to stimulate again, they’ll have to come back and   inject more capital in the markets and, 
again, grow the central bank balance sheets.

Kyle Bass (54:10):
Look, you’ve seen   Japan do it, you’ve seen Europe do it. We’re just 
behind the… If you think about it on a timeline,   we’re third in time, but everybody’s 
doing it, whether you’re the UK,   whether you’re the Bank of England, the PBOC, the 
BOJ, the Fed, everyone’s doing it, and they’ll   keep doing it. I think it’s important to just 
think about how to defend yourselves from that. Trey Lockerbie (54:30):
Kyle Bass, this has been an incredible honor   to have you on our show. I really enjoyed it, I 
learned a ton. I would like to before I let you   go, give you the opportunity to hand off to our 
listeners, any other resources you want to share.

Kyle Bass (54:43):
No, I don’t have any   other resources. But I appreciate 
it, Trey. Thanks for your time. Trey Lockerbie (54:47):
I hope we can do it again soon. Kyle Bass (54:49):
Yeah, it’s a pleasure meeting you..

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