Hoover Institution fellow Jon Hartley and hedge fund investor Kyle Bass discuss Kyle’s career and upbringing, the 2000s housing crisis, the 2010s European sovereign debt crisis, the rise and fall of Japan’s economy, China’s rising aggression and decoupling from the US, shifting tides in the Middle East, the sclerosis of Europe, and why the US remains the best place in the world to continue to invest as an innovation hub.
Recorded on June 13, 2025.
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Episode Transcript
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(00:00):
[MUSIC]
>> Jon Hartley (00:09):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm John Hartley, your host.
Today.My guest is Kyle Bass, who's a legendary
investor who famously predicted andbet on the housing collapse of 2008.
He's the founder and principal of HaymanCapital Management, a Dallas-based hedge
(00:31):
fund focused on global events, and thefounder of Conservation Equity Management,
a Texas-based private equity firmfocused on environmental sustainability.
Welcome, Kyle.
>> Kyle Bass (00:40):
Glad to be here, John.
>> Jon Hartley (00:42):
Cal, I wanna just start by getting into your early life.
You were born in Florida.
Your dad was a career tourism executivewho helped manage the Fountain Blue in,
in Miami Beach.
It's actually one of my favorite hotels,as well as the Dallas Convention and
Visitors Bureau.
You went to TCU where youstudied finance and real estate.
You worked at Bear Stearns,the Dallas Office.
(01:03):
In the 90s, you startedthe Legg Mason office in Texas.
How did you first get interestedinvesting, global macro and geopolitics?
>> Kyle Bass (01:11):
Boy, look on the investing side.
I was a chemistry major.
Going in,I thought I wanted to be pre med and
then I ended up taking a non majorelective in options and futures.
And I read the entire course book ina week and changed my major that week.
(01:31):
It hit me that that wasclearly what I wanted to do.
It was just a moment in time.
My junior year in undergrad,
I grew up in a family whereI had a great mom and dad.
They didn't save any capital forretirement or for school.
We were kind of callit lower middle class.
(01:53):
We were on a hotel manager salary andwhen we moved to Dallas,
we worked at the conventionbusiness bureau.
So I had a good life.
It wasn't a silver spoon, that's for sure.
And so, you know, right,right out of school, I,
I was just enthralledwith financial markets.
I was always a math and science guy.
There are those two,I guess you're probably all of them, John.
(02:15):
You probably have the, the, the,the ability to assimilate language and
reading and, and math and science.
I was always a math and science person.
So it was a natural progression.
>> Jon Hartley (02:26):
Well, it's, it's amazing.
And I know you're in my mind havingfollowed and your thinking for
a long time.
I think you're a real icon of the Dallasfinance community, which is something
that has grown a lot in just the pastfew decades and even just recent years.
I mean there's all these firmsnow that are moving from, say,
(02:46):
New York or California to Dallas,I think Toyota and so forth.
But also all these banks are settingup their second headquarters there,
Ian Goldman Sachs isbuilding a big office there.
But you were there atthe beginning of all this and
all these early shifts andmoves to Dallas early on.
(03:07):
So I commend you forbeing a staple of Dallas finance and for
not having left as well,like many people might.
I want to talk about the financialcrisis because I feel like
the financial crisis was just a definingmoment for many careers in finance and
perhaps including yours in terms of,I think, your skyrocket to fame.
(03:30):
I mean, you made these bets against thesubprime mortgage market through Hayman,
and later you testified tothe Financial Crisis Inquiry Commission.
I mean, how did you first come to startthinking that there was trouble with
the housing market inthe US in the 2000s and
that it might end up in somesort of catastrophic state?
>> Kyle Bass (03:51):
Yeah, I think that.
First of all, back to your question,
the prior question about what gotyou into the financial markets?
What do you care about?
When I was at Bear Stearns, I worked onBear, had a risk arbitrage department,
you know, where I think theywere one of the best and
call it institutional risk with mergersand acquisitions and things like that.
(04:13):
I was always a special situations analyst,meaning, you know, I was,
I was kind of a technology.
There was no verticalwhere I was an expert.
It was just trying to dig intoeach M&A situation, each spin off,
each bankruptcy,try to understand the operative parts, I.
(04:33):
Just whiteboarding these things.
So, you know, when you whiteboardsomething and you dig in,
you just have to have a deep intellectualcuriosity, which I also know you have.
And you can't teach thatin the kids into employees.
I believe they have it or they don't.
And having that deep curiosity forhow things work,
what are the proclivities of the players?
(04:55):
And then how do you handicap,you know, the potential outcomes?
I think again, on Wall street youonly need to get like 55% of those,
right, John?
So I think that as.
As we got into the launch of our firm.
So I launched my firm in January of 2006.
(05:15):
And at that time, you know,Asia was exploding,
that China just entered the WTO in 2002.
It was a big moment in time when,
when money was reallyflying into Southeast Asia.
At the same time, we all knewthat our housing markets, I mean,
everyone knew the housingmarket was overcooked.
(05:36):
Everyone knew that it wasreally easy to borrow money.
And as you know,you didn't even have to have a job.
Bartenders could have two or three loans.
I went to Abs west out in Las Vegas, and Iwas sitting in a Bellagio bar waiting for
friends to go out to dinner, andit was just me and the bartender.
(05:57):
And I said, how's it going?
She said, well, you know,it's going fine, but, you know, my,
My houses are killing me.
And I said, what do you mean, your houses?
And she said, you know, I have threehomes that I've been able to buy here in
Las Vegas, and I rent them out.
But, you know, my, my tenantsare giving me trouble, and they.
They turn over too fast, and I'm like,whoa, wait, how do you buy three houses?
And she said, well, they just ask fora loan and they just give you one.
(06:20):
And literally that happenedwhile I was sitting at the bar.
And it's much deeper than that.
But that was just an anecdotal, you know,confirmation of what, why I was there.
I'm thinking, you know, it's crazythat a bartender can have three loans.
And so the intellectual curiosity was,okay, how big is this?
(06:40):
How much capital is out there ina disassociated risk paradigm?
Because that's basically what it was.
And then you have to figure out, well, howdoes that play into leverage structures?
You know,levered hedge funds just blow up.
Well, that's fine.
That's not a really systemic problem forthe, for our.
For the US Financial system, but.
(07:01):
And what does it do to the banks?
And then once.
Once you started.
Once I started going down that rabbithole, you realize that, you know, Lehman
was 36 times levered, and they had a hugeamount of this stuff on their books.
Merrill had, you know, 50, 60 billionof this in a warehousing facility.
You know, Bear Stearns was, Was.
(07:22):
Was again, you know, 29 times levered.
But you lever yourself 30x andyou end up owning assets that lose,
you know, 40% of their value.
And you can do.
It's just a math problem.
And so, you know, it.
I came to the conclusion that the wholefinancial system was in real trouble and
went to meet with people at the Fed, wentto meet with people like Professor Rogoff
(07:46):
at Harvard, who at that time hadn'twritten his famous book, but as you know,
he was kind of the father ofsovereign balance sheet analysis.
So again, I'd go out and meet withpeople and say, talk me off the cliff.
I would say explain to me how I'm wrong,please.
I need to know this because if youremember once, once everyone became
aware of the situation, we were allwondering where money was safe.
(08:10):
We were actually wondering whereour savings were going to be safe.
If it was GONNA be safe in JP Morgan orMorgan Stanley.
Well, I guess Morgan Stanley wasn'ta bank yet, but they had to become one.
It was just this moment in timewhere intellectual curiosity and
the ability to analyze specialsituations came together.
>> Jon Hartley (08:30):
That's amazing.
And I guess you've also made somesuccessful bets too against Japan and
Greece.
Speaking of sovereign debt crises, how didyour thinking around those come about?
That's sort of aroundroughly the same time period.
>> Kyle Bass (08:46):
Think about this.
What precipitated the crisis in Europe wasof course the financial crisis in America.
And if you followed when the US decidedto bail out its banking system,
you had to follow the bad privateassets to public balance sheets.
So then the analysis was which publicbalance sheets can handle that kind of
(09:08):
movement of that many bad assets.
So the US could handle it.
We lost about 800 billion.
So our banking system had a trillion ofEquity back in 2006 we had 17 trillion
of on balance sheet assets.
If you just, just look at banking assets,not the non banks.
So we are about 1 times GDP in our banks,we had a trillion of equity.
(09:29):
We lost about $800 billion.
So we recapped our entire bankingsystem through common and
preferred equity injections.
So we actually did it right andrecapped the system and got going.
Europe couldn't recap the system and
they had a worse problem than wedid some of their banking systems.
Because of the EU, Iceland andIreland both had 10 times their system,
(09:52):
10 times their GDP intheir banking system.
So it's the same problem thatthe levered hedge funds and
Lehman and Bear had as a country.
They took on way too manybanking assets because
they were chasingdeposits all over Europe.
And so Iceland and Ireland fell inpure succession and then Greece.
And so it was kind of a logical analysisof a balance sheet that just went from
(10:16):
corporate balance sheets to sovereignbalance sheets and then from there.
How many things have you ever read inyour economic career that say so and
so ex Japan, so and so, you know,Asia ex Japan, ex Japan, ex Japan.
Because Japan blows every Gaussiandistribution you've ever seen, right?
They're like they're so far out there andthey're so far that they,
(10:39):
that if you include them in anymean it ruins the whole mean.
So they just exclude Japan.
Well, I started looking at Japan,I said, well how do they do this?
How do they, hang on,
how do they take at that time 200%sovereign debt to GDP on balance sheet?
Well, the answer was they had to taketheir rates to zero and negative and
they have to leave them there.
(11:02):
And so today Japan still hasrates pegged out to 10 years and
they're letting the 30 yearkind of flap in the wind.
But the real answer is now they're265% sovereign debt to GDP.
They can never let rates move.
They can't.
So what does that mean?
That means the currencyis the escape valve.
So when you characterize where welaunched a fund quote against Japan,
(11:23):
it's not the case.
That's kind of folklore.
What we did is I said one of two thingshas to happen here in this analysis.
Either Abenomics has to come about and
Japan's got to inflate their way out ofthis problem and try to get some growth or
they're going to be crushed under theweight of their debt in their own system.
(11:43):
That's really,they hit a fork in the road.
And so we took two thirds ofthe money in the fund and
we bought bond market optionalityright in the, in JGBs.
I took one third of the money and I betwith the bank of Japan on their ability
to weaken their currencybecause they had to do that.
So when we launched thatthe yen was 85 to the dollar.
(12:06):
Their bond market was where it was.
And then Abenomics happened,when Abenomics happened,
it took the yen from 85 to 120.
You could have done the backof the envelope math.
So we lost 2/3 of the money and
on the other third of the money wemade many multiples of that capital.
The fund ended up making, you know, 250%.
So you know, was a bet with the bank ofJapan on one side and it was a bet against
(12:30):
their ability to hang on in the bondmarket if they would ever let it go.
So it was just the righteconomic bet at the end.
>> Jon Hartley (12:40):
It's amazing, yeah,
I mean the whole story of Japan isI think a super interesting one.
You just, when you think about it, andit's something I've been reading a lot
about and saying a lot, I feel like Japanis kind of strangely ahead of the US and
the western world maybeby a few decades or so.
(13:01):
Think about.
>> Kyle Bass (13:03):
Exactly right.
>> Jon Hartley (13:04):
The sort of asset, you know, bubble some people call it, but
really Just the collapse and flat GDPper capita there that began in the 90s.
And you look at most ofthe Western world except for
the US now it's had flat GDP percapita since the early 2010s.
But even other topics,things like industrial policy,
(13:25):
that was something thatJapan is perhaps famous for.
>> Kyle Bass (13:29):
In the 80s they were doing so much lending that the Basel 1 accords
had all to do with containingthe Japanese banking system and
constraining their equityratios at that time.
>> Jon Hartley (13:44):
So it's a fascinating.
They were first at quantitative easing.
They're I think still the only centralbank that's actually bought up stocks.
So they're very interesting andinstructive I think for a lot of reasons.
First company to really go crazy ondebt to GDP in sort of recent times.
First advanced economy and250% debt to GDP and
(14:07):
now their bond yields have beenskyrocketing just recently up to the 30,
40 year bonds have been jumping in yields.
And I guess there is,I guess you could call it
this financial repression sort of issue.
Or you could call itfiscal dominance really,
(14:29):
where there's this challengewhere they can't let
interest rates rise because their netinterest costs will just totally balloon.
I mean, do you have any thoughts onJapan and like if there is some sort of
a sovereign debt crisis looming,is Japan the first to go?
And does that end up being somesort of a domino in your mind?
>> Kyle Bass (14:48):
You know, I, I don't, I think Japan's got it under control.
And I mean in a way where you have a,
if you have a population that hasa significant, you know, the.
Japan has one of the oldest populationsin the world, Japan and Italy.
And they've got a demographic crisis,right?
They've got a crisis where it's reallydifficult to grow your sovereign.
(15:10):
If your population, your call itendemic population is not growing.
And so they're not.
There's a fascinating, there'sa fascinating thought to have here and
it's one that I haven'treally discussed that much.
But when you think about fractionalreserve central banking,
which is the way we all operate andJapan is a poster child here.
(15:35):
I have a theory on why the demographiccurves are hooking down in
the US in Europe and in China and Japan.
So if you think about the way thesesystems work is they typically,
by the way,almost no sovereign ever defaults, John.
They get into a crisis, they print andprint money, expand a balance sheet,
(15:55):
but they always pay.
They rarely if ever stopped paying.
So we get into a situation whereyou look at where Japan is, and
if you engage in this type ofcentral banking activity and
you kind of lose your fiscal moral compassto where you just run huge deficits and
(16:15):
you print the balance andyou suffer inflation.
If the men in your economy,when they graduate university,
can't afford to buy a home, they live withtheir parents, they're not having sex,
they're not having kids,they're not marrying.
So when you look at the marriage rates andyou look at the fertility rates of
(16:36):
the average women across not onlythe developed world, in China,
when real estate prices rip andwages don't go with them,
you create yourself an endemicproblem in your economy.
And so Xi Jinping has figured this out.
He figured it out when he said financialsecurity is national security.
Note, he has not stimulatedhis real estate market.
(16:57):
When home prices in China gotto be 26 times median income,
the men couldn't afford homes.
So the demographers had this arcof the demographics of China,
Japan, the U.S. you know, arcing outto 2050 and heading down around 2050.
And now they're all collapsing.
The reason they're collapsing iswe just injected 50% inflation in
(17:21):
dollar terms into the world.
And that's our demographiccurve here is hooking down.
Europe's was already hooking down, Japan'swas already hooking down, and China,
China's demographic curve collapsed.
So the way that we operate our centralbanks and the way that we kind of
financially engineer, I, I heard youalmost say financial repression in Japan.
(17:43):
The way that we financially engineerour economies has consequences.
And those consequences are we, we bothknow that asset prices far exceed wages.
And soreal wages have been massively negative,
even though the Fed is not saying that.
The reason the Fed's not saying thatis because they chain weight inflation.
So if you look at it in reality,
(18:05):
asset prices have extendedthemselves to where it's not,
it's not conducive to procreation andfamilies.
It's just fascinating.
>> Jon Hartley (18:17):
And yeah, and you think about zoning too, and, and you know,
90s regulations, which is sort ofpervasive in, in most countries.
I mean, Japan being one exception,some Eastern European countries, some,
some exceptions.
But, you know,real estate has become so expensive,
prohibitively expensive around the world.
And I think, you know,that to some degree is causing, you know,
(18:39):
there's some empirical evidence thatthat has negative effects on fertility.
I mean, that's not a surprise,people can't buy their own homes.
They can', really get married andhave children.
So, you know, it's, it's amazing howquickly all this land use regulation and
how quickly real housing costs.
(19:00):
If you think about home pricesover the past 150 years,
if you look at like the case Shillerindex and you net out inflation,
that trend is like basically flatfrom like the late 19th century,
late 1800s up until like the 1970s and80s.
And it's just on a totalupward trajectory and zoning,
some people say it's other things,but you know, regardless of the cause,
(19:22):
it's hugely prohibitive, especially,you know, for young people.
So.
>> Kyle Bass (19:27):
Well, and then there's another natural progression,
if you're intellectually curious,if, if in fact that's the case.
And you look at FHFA zone index,the US government's own unchained weighted
housing index was up 50% between 2020 and2024, 50.
So wages certainly are not50 between 2020 and 2024.
(19:48):
If you follow that naturally to the,
to call it the next node on the,on the timeline.
All that does is it tears the socialfabric of both our country and the world.
So the poor state,the poor were already poor.
They didn't have any discretionary income.
So it, it makes them much poorer onanything they have to acquire to just
stay alive.
(20:09):
Call it food, rent, inflation, orgas, whatever, whatever you're doing.
And then it prices the middleclass out of being mobile.
So it immobilizes the middle class.
What does that do?
Well, it creates tension becauseit ends up in the richest hands.
And so that gap widens.
And what does that do?
Creates tension andin some places it tears.
(20:30):
And that's why we're having more wars.
So, you know, you have,
you have a scenario where the centralbankers believe that it's the answer.
The answer is just,let's just keep growing these
balance sheets andkind of just not focusing on being
(20:50):
more fiscally responsiblebecause they can.
And then what that does, though,
is the follow on effectsof what's happening here.
Our inflation,our tearing at social fabrics,
our fertility rates collapsing,and then war.
It's actually what happens andthat's what's happening now.
(21:10):
And we should expect more andmore war because there is no answer for
this equation at the moment.
>> Jon Hartley (21:19):
So I want to shift just to China now because you're very outspoken
on this.
You served on a lot of defense boards,you're very involved in the military
community, your lifetime Councilon Foreign Relations member.
And I think it's fair to say thatsome people would call China hawk and
have been critical of the Communist Partyof China for quite a while now.
(21:45):
And in particular what it's doingwith respect to Hong Kong and Taiwan.
I'm curious, what's your sortof overall thesis on China,
US decoupling andyour thoughts on the role that say,
defense tech and investors play in this?
Because I know you're,you're involved in this space as well,
(22:07):
not just as a policy expert andthinker, but also as an investor.
>> Kyle Bass (22:11):
Yeah. Well, thanks.
Look, some call it China Hawk,some call it China Realist, you know,
going to the lengths of understanding howthe architecture of their system works and
that we went from Japan toChina between 2012 and 2015.
I put my whole team on China.
(22:33):
And this starts empirically with mecalling all the Wall street firms and
saying, someone send me your primeron the Chinese banking system.
I want to understand how their domestic,since they have a closed capital account,
I want to understand how the Chinese RMBor offshore CNH and the USD interact.
I want to understandthe architecture of their system.
(22:55):
And no Wall street firm had a bankprimer for Chinese banking system.
No one had done it.
They were selling stocks, everybodywas buying and selling stocks and
vie structures and whatever they weredoing, but no one had actually sat down to
do the work to understandhow is the system built.
And so that's how I got deeply involved inunderstanding not only the architecture of
(23:16):
their system, but
invariably what that does is ittakes you into cultural preferences,
cultural norms, then that invariablytakes you down the history route.
And like, how did they get there?
What are the incentives of the players?
Why does Xi Jinping care tojust have the iron fist and
the five tools of Democratsdictatorship in one hand?
(23:38):
And then, then you understandwhat their grand strategy is.
And when you understand whattheir grand strategy is,
it is completely incompatible with ours.
And so in 2016,I came to the conclusion that we
were certainly going to be in conflictwith China at some point in time.
So it's actually easy tosee if you apply yourself.
(23:59):
And you understand.
So on the defense side, you know, we'retalking today, and I know this isn't just
for today, but this is the day that Israelattacked Iran's nuclear facilities.
You and I, John, have talked about that.
That event was going to happen.
Iran was not going to let everyoneinto their new centrifuges and
(24:20):
all of a sudden become compliantwith the rest of the world.
They're the largest state sponsorof terrorism in the world.
So this attack was obviousthat it was coming.
China has told us since 2017 that they arecertainly going to take Taiwan by force,
if not, if necessary.
They continue to send more delegationsover to the US to tell us this.
(24:42):
They continue their air defense zoneincursions into the Taiwanese air defense.
And if you chart it, you can see thatevery year it's more belligerent.
So it's coming.
And then how do we think aboutour relationship with China?
Well, you know, I was just recently in a,in an interview where someone said,
well, the CEO of Ford says if they don'trelease these, these very specific
(25:06):
rare earth magnets, then we can'tput our EV engines in our cars.
We're just going have to shut down,my God, the sky's falling.
And I say, well, it's obvious since 2017,it's been written on the Great Wall, what,
what's coming.
And you as a CEO should have seen that.
And it should be obvious to you thatyou shouldn't rely on China for
your supply chain.
(25:26):
So I have no sympathy for these people.
But when the question you'reasking is what happens?
I think you're going to seeChina invade Taiwan and
forever change the makeup of the economicrelationship between the west and China.
>> Jon Hartley (25:42):
How do you see them doing that in the sense that there's some,
I think at least maybe a couple hundredUS military personnel that are there.
They're, do you see them sortof cutting off Taiwan with some
sort of a blockade andtrying to starve them out?
(26:04):
Do you see it being some sort of a land orsome sort of an incursion,
amphibious incursion, all at once,
that sort of overwhelmingattempts to overwhelm Taiwan?
What do you think the US responsewould be in that kind of scenario?
Do you, what do you thinkthat would all look like?
>> Kyle Bass (26:23):
So I think there are three paths.
The first path is the soft path.
That is like the way that they tookHong Kong is, you know, this is going
to sound tin, tinfoil hat like, but letme, let me give you just a hypothetical.
So the Chinese Communist Party beforethey took, before they took Hong Kong.
The Hong Kong protests were at theirpeak and December 2019, the Chinese
(26:49):
current account, call it their net incomeaccount, was headed towards zero there.
They still had a positive trade balance,but
they had a lot of external capital flowsand we're going to get into that later.
But, and so they had this existentialcrisis with Hong Kong and
the legitimacy of the Chinese CommunistParty having to fight an uprising
(27:10):
in Hong Kong at the same time,a current account headed towards zero.
And what happenedmagically Covid happened,
it came at the exact perfect time forthe Chinese Communist Party.
It took their current account plus250 billion because they shut off
international travel for their populationand they dialed back the school expenses.
(27:30):
All of those are in dollars.
And they were able to take overHong Kong without firing a shot.
Everybody went home.
So the soft side of the Taiwanesesituation is, you know,
the KMT is funded by China.
China is hoping they canget the KMT in there.
They really hoped this last time,but William Lai won.
(27:51):
So the question is, what happens in 2028?
Does the KMT win anddoes Xi jinping Wait until 2028?
I believe he can't.
There are those in the US that believehe's going to wait to see if they can take
it over with soft poweras opposed to hard power.
So the three options are softwith the KMT winning in 28,
(28:12):
the two other options are blockade,as you mentioned, or all out assault.
One would think that a blockade would,would actually force the US to
block the bl to unblock the blockade sothat China could claim to be the victim.
Right?They are.
They, they have a PhD in victimologyin the Chinese Communist Party and
(28:34):
they're the best in the world at being theaggressor and claiming to be the victim.
So in a blockade scenario they wouldjust blockade the west coast of Taiwan.
And as you know, Taiwan's very muchlike Japan was in World War II.
They have no natural resources, sothey've got two weeks of energy on island.
They have to import their energy andtheir food every day.
(28:57):
So they're very dependent upon those portsand especially the southernmost port.
So a blockade is not goingto be that difficult.
It's going to require us to unblock it.
And I think we will unblock it.
And then, then we're in,then we're in a kinetic conflict.
The question is, and then again,option three is just the all out
(29:19):
assault of the Taiwanese islandwith an aerosol amphibious assault.
And it's it's difficult.
You know they're,I'm sure you know the terrain.
There are, there are 22 foot tidal surgesin the Taiwan Straits 110 miles wide,
the largest amphibious assault inthe history of the world was D Day,
which we just had the 81st anniversaryof about what seven days ago or so.
(29:42):
So this is a much, this is a muchmore difficult amphibious situation.
The tides being 22ft andchanging title surges in that Taiwan,
Taiwan straight lends that lends it onlyto be somewhat amenable to an amphibious
invasion three months out of the year.
And so there'd have to be precision andtiming as to when they go.
(30:06):
There would have to be precision andtiming on their on island position, but
then on island, as you probably know thereare two giant mountain passes, there's
a thermopylae problem and so there'sall kinds of problems with an assault.
So I think they'd rathertake it on the soft side or
through a blockade insteadof an all out assault.
But the US we have plans for all of that.
(30:27):
We don't have a great plan for
the soft power takeoverthe either of the hard options.
We have the most capable and best kineticmilitary in the world to this day and
we have plans.
So you know, it's,let's hope it doesn't get there, but
it sure looks like it'sgoing to get there.
>> Jon Hartley (30:44):
I want to talk I guess just a little
bit about US China relations andhow it's evolving,
particularly with respect to economics,trade, finance.
And when I think about likesay go back 10 years ago,
the mid 2010s, you know,we had on the trade side all the western
(31:07):
powers in Japan were I thinktrying to get China into the TPP.
This is prior to the 2016election cycle where
Hillary Clinton was forced torecant her support for the tpp.
This trade, Asia Pacific trade deal,multilateral trade deal and
(31:28):
those largely broughton by Bernie Sanders,
his candidacy obviouslyDonald Trump is president.
Trump has totally changed thinkingon trade in the Republican Party.
Both parties have really shiftedon trade broadly speaking.
But I think there's beenalso just this massive shift
in thinking about China in general.
(31:51):
And I think a lot of this hadto do with in the mid-20s.
I remember sort of mywake up call to China, or
at least a big part of it was seeingthese videos of the Uyghurs and
how they were being treated and thesevery, very serious human rights abuses.
And I think that really,
(32:12):
I think woke a lot of people upto what was going on in China,
that it wasn't this sort of peaceful,friendly,
inconveniently dictatorial kind ofnation with archaic communist system,
but was very friendly economics wise.
(32:35):
And then Xi Jinping wastransformational in that shift as well,
taking things on a verydifferent track from Huintao,
who's in power in most of the 2000s.
But now we've seen China's reallybacking off on the one China,
two systems idea to sign a British jointdeclaration where China agreed to allow
(32:57):
Hong Kong to keep its executive judiciallegislative autonomy until at least 2047.
As you mentioned,China moved on Hong Kong during COVID I'm
curious what your view is on allthis in the sense that I remember
in the 2010s in the BRIC economies,that was really one of
(33:18):
the biggest investment themesin emerging markets and the.
And China was a huge part of that, I thinkif you're investing today, if you invest
in China from that time to today,we'd be maybe flat or something like that.
Certainly in Hong Kong, there are allthese things that China connect and
all these things, all these thingstrying to get people to invest in China.
(33:42):
I'm curious, in your mind now,
there's issues around rareearth metals and so forth.
Where do you see all the sort of U.S.china economic relations going?
Obviously tariffs have been a, a verybig story in the past few years as well.
But I'm curious, where do you see the U.S.economic, U.S.
china economic relations goingon all these sorts of avenues?
>> Kyle Bass (34:04):
Yeah, I look, our systems are fundamentally incompatible.
Our values, we, we don't share the samevalues as the Chinese Communist Party.
In fact, ours are diametrically opposed.
We want to empower the individual.
We have basic property rights.
We have free.
There's a joke in free in China.
There's free speech in China,but after you freely speak,
(34:25):
you won't be free any longer.
Right.So there's the,
there's the value system that hasa complete lack of compatibility.
And we all want to say, well,they'll learn, they'll learn to open up.
They'll learn that when you look atthe bright shining star of Taiwan,
think about Taiwan just ideologically,why does it bother Xi Jinping so much?
Taiwan is like a Chinese democracythat's embraced western capitalism.
(34:50):
Taiwan's GDP per capitais 300% what China's is.
So Taiwan is what China could beif it embraced Western values and
Western capitalism.
You and I both know you wantto see meteoric growth.
You get China to open up and you getChina to have an open capital account and
embrace Western values and,and stop lying,
(35:12):
cheating, stealing,cajoling your way through the world.
That's just, that's the way they operate.
So you, you said you kind of had your,your Sputnik moment on China was,
you know, it sounds likethe images of the Uyghurs and
understanding what was happeningover there in East Turkestan.
That was one part of,of my awakening in 2015, 2016.
(35:34):
But the other one that really, you know,
I don't know if you've read UnrestrictedWarfare, once that got printed in English,
you know, that was written by twoChinese generals, that was written for
the Chinese military andit made its way into the popular,
not really popular, butinto the policy circles and think tanks.
(35:55):
People got a hold of that book.
But Diu wrote a piece in 2016,the Defense Innovation Unit, and
it was written by Mike Brown.
And for me,that was my holy shit moment, pardon me,
I don't know if you're allowed to dothat on your podcast, but you read this,
you read this 2016 Diu report and you'rethinking, I like, I knew it was bad.
(36:15):
I didn't realize it was that bad.
It talks about how they steal 300billion ish of IP from us every year and
earn a return on it.
It shows you how they infiltrate theventure capital companies in Palo Alto and
on Sand Hill Road andhow they intentionally make investments in
information technology companiesthat hope to sell their
(36:37):
wares to the largest informationbuyer in the world, which is the CIA.
But if they're Chinese investors in there,it basically takes them off the map.
So if you, I don't know if you've readthat report, it's a phenomenal report.
Then there's a follow up report fromDIU but it's a very comprehensive,
specific analysis of Chineseeconomic statecraft in America.
(37:01):
And that did it for me.
Trying to, after understandingtheir system, after understanding
their basic complete refusal to,to embrace human rights of any kind.
And then you understand the way thatthey're operating their economic
statecraft.
And they are our mortal enemy, John.
They are not a competitor,they are not a trading partner.
(37:23):
These most recent negotiations that wejust had, how many times did you hear,
well, they have these rare earthmetals that we really need and
they have these rare earth magnetsthat are needed in every single ev.
And I mean,we kind of have to deal with them.
And I kind of jokinglysaid a couple of days ago,
I said this is not a trade negotiation,this is a hostage negotiation.
(37:44):
We need to bring in hostage negotiatorsbecause that's what we're negotiating
with China.
And that is not a positiveeconomic relationship.
We're not talking about, hey,
you charge us this tariff onagriculture and we charge this on cars,
why don't we just like find a greatplace to be and, and move forward?
That's a trade negotiation.
What we just had wasa hostage negotiation.
(38:05):
And how can that bepositive going forward?
So I think we're going to seeXi Jinping move in the next two or
three years on Taiwan.
I think we're going tobe kinetically involved.
I hope it doesn't involve nuclear,a nuclear transition transaction with
either tactical nukes orsomething like that.
We're two nuclear powers, the world seemsto believe that we could just fight in
(38:29):
the Taiwan Strait andnot take it to the Chinese mainland.
I think that is,I think that's short term thinking.
I think that you and I both know out ofFujan they're going to launch surface to
air missiles, surface to surface missiles,and then we're going to have to attack
military installationsin Fujan if it happens.
So if you believe thatthat's even a possibility.
(38:50):
And you asked about investing,first of all,
investing in communism has neverworked in the long run ever.
Number two,if you believe that China is our enemy and
that we might be at a kinetic conflictwith China in the coming years,
why on earth would you investdollars in anything Chinese?
>> Jon Hartley (39:13):
You know, it's, it's, it's fascinating.
Just, you know, when I was in my timeworking at Goldman Sachs in China was
still a theme and you know,things like China a share and you know,
each year, all this, all these sort ofvehicles to get exposure to China and
all this excitement about it in thatsort of 2000s, even early 2010s period.
>> Kyle Bass (39:35):
It was a good, it was a good bet back then, John,
because teaching them that Westernizationand embracing some of these
values would grow their productivity andtheir GDP per capita.
It was a great bet back then.
At some point in time it becamea bad bet and we must admit it.
And now we must explain to the worldthat they are our mortal enemy.
>> Jon Hartley (39:56):
I mean, Milton Friedman, I think, famously made,
in part it was a prediction,and he recanted it later on.
But those that countries with economicfreedom will inevitably develop political
freedom.
And yeah, I think it's fair tosay that since Dong Xiaoping,
China's certainly become moreof a capitalist economy now.
(40:20):
There's a lot of caveats to that andthere's a lot of state control in all
over, all over its economy,its banking system elsewhere.
But I guess in your mind, do you thinkthere's any way that somehow there's
political uprisings in China in ourlifetimes that we see, and obviously this
is something that's always on the mindsof the Communist Party of China,
(40:45):
but it's such a large country,it's a fairly decentralized government.
There's lots of different regions andlots of different peoples as well,
and some various ethnicities as well.
I'm curious, see, in our lifetimes couldthere be some sort of an uprising in
China orsome sort of regime change in your mind?
>> Kyle Bass (41:08):
Yeah, I think it's likely to happen.
And I think again, logically,if you understand their grand strategy,
understand the composition,architecture of their system.
They built their system.
Their system was flawed from day one.
Their banking system is 320% of their GDP.
(41:30):
There are two Chinese banks thathave more assets than JP Morgan.
You know, the US economy is 26% ofthe world economy, the Chinese economy,
so we run about a $30 trillion economy.
They say theirs is around 18 trillion.
It's about a little bitmore than half of ours.
And yet they have two banks larger thanthe biggest, best bank in the world.
(41:50):
I find that to be interesting.
So I think you get to a point where if,if the architecture is flawed,
if their leadership is hell bent onstaying with a closed capital account and
being belligerent withthe rest of the world and
partnering with the axisof authoritarians, right?
You've got China with a limitlesspartnership with the war criminal in
(42:12):
Russia.
You have China,China partnering with Iran,
you have China partneringwith North Korea.
So all four of the big authoritariangovernments called the axis of
evil are all working together this time.
So at some point in time, what's goingto happen is when they go kinetic, John,
we hold all of the cards.
(42:33):
We have their ticket intothe world financial system.
They have four joint stock, they havefour SOE banks, 12 joint stock banks.
They have an Achilles heel or two,and we know exactly where they are.
And I can tell you whenthey move on Taiwan,
sending carrier strike groups in theTaiwan Strait is one thing we may do, but
we will certainly hobble them financially.
(42:56):
And when we hobble them financially,it's going to be hard for Xi to hang on.
>> Jon Hartley (43:01):
So- >> Kyle Bass
change question.
Like that's, that's likely the progressionof that regime's exit when, if and
when he goes kinetic.
Yes, so I guess speaking of other sort of non-democracies and
forming alliances with some of them.
(43:22):
I think the Middle East andsome of the recent foreign
policy positioningcertainly with the US and
growing closer to various Sunni nations,
thinking Saudi Arabia, UAE.
And thinking about the Abraham Accords and
(43:44):
building bridges between Israel andsome of these Sunni nations.
And just recently Israel beganthis campaign against Iran,
taking out many of its nuclear facilities.
I think you and I are both surprisedthat they didn't do this earlier.
(44:05):
In your mind, I guess should one of theprimary goals of Western allied powers be
to stop other countries,especially poorly behaved ones,
from obtaining nuclear weapons?
I feel like this was sort ofsomething that was talked a lot about
North Korea for a long time, long ago,and now that ship has sailed and
obviously China plays a sortof a critical role there.
(44:28):
But I imagine that's always beenthe reasoning in my mind why
there's this ultimate danger ofIran obtaining nuclear weapons.
Something that, you know, they were doing,you know, spinning centrifuges,
you know, attempting to do fora long time,
all these sort of failed attemptsat various deals and so forth.
(44:49):
I'm curious what you think about that.
And also just really the changing role orrelationship between the US and
various countries in the Middle East.
The sort of warmth, I guess, in the USrelations with UAE and Saudi, I think.
Something that kind of almost wasn't evennecessarily imaginable 20 years ago.
(45:11):
And certainly Israel making friendswith the Sunni nations as well,
trying to find partners that are alsosort of allied against Iran as well.
I'm curious what you think about.
The Middle east has kind of evolved andthe US's role in that.
And obviously there's an economiccomponent of that as well.
(45:32):
You know, Saudi, Saudi Aramco being ipo,
there's the UAE is trying toattract a lot of investment.
They've developed common law courts,you know, and basically imported Western
judges from Hong Kong and Australia andelsewhere because they want business
courts, because they want to do businesslike the rest of the Western world does.
(45:54):
I think Saudi to somedegree wants this as well.
I'm curious how in your mindthe Middle east is, is,
is being transformed in that sense too.
>> Kyle Bass (46:02):
Yeah, I think.
That'S a great question.
Look, we made a,the Biden administration made a,
a huge blunder with the turning ourback on Saudi Arabia and embracing Iran.
I mean that was one of the craziestpolicy moves I've ever seen, right?
Whether it was Jamal Khashoggi andthe botched,
(46:23):
call it kidnapping,which turned into a murder by the Saudis.
You know, look, no, no,sovereign's perfect.
I don't think they set out to kill him.
I think he got over sedated and died.
But that is also not one, one life isnot the reason to turn your back on
your number one ally in the region.
(46:44):
And so Saudi has been aligned with us fora very long time and
they are our principal ally over there.
And now the UAE as you know,had embraced China.
They were dancing both sideslike the Qataris were, or are.
And as of Q1 of 2024,you saw the UAE decide to
(47:06):
align themselves with the US andwalk away from China.
And you can look back to Sheikh Tanun,who's NBC's brother and he's in
charge of all the sovereign wealth and allthe AI and hit their AI conglomerate G42.
And they said, you know what,we're just going to rip Huawei out and
we're going to go withAmerica on this one.
(47:28):
Hopefully we see thatfollow through in the uae.
So imagine if we have our alliesin the UAE who as you said,
are Westernizing tothe extent that they can.
They have a,they do have a very religious community.
So does Saudi.
And the strange bedfellows with theAbraham Accords, you know, the Jews and
(47:50):
the Arabs getting together, the Jews andthe Sunnis coming together for
these accords.
That's a very positive development inthe Middle East, let's hope it continues.
Of course, Iran and their proxies,they don't want the Abrahamic courts.
My view on October 7th is that wasto disrupt the Abraham Accords
from moving forward.
(48:10):
I still think the Abraham Accordswill move forward.
But you have a scenario where poor,you said poor nations, but poor crazy,
rogue, insane nations shouldcertainly not have nuclear weapons.
You know how we contain rocket man,Kim Jong Un?
I, I'm not sure.
I think China contains him.
(48:31):
You know, he's like, he's like a,a rabid rottweiler in a cage, right.
They just kind of feed him every now andthen and keep him hungry.
And, and so as we move forward,now that Israel has, has acted on Iran's
nuclear capabilities, I think the Middleeast can be a much better place.
That is all with the caveatthough of saying the world's
(48:53):
architecture of the financialsystem is broken.
And especially in many ofthose Middle Eastern nations.
The world's priced in dollars, John.
We just pushed 50% dollar inflation tothe world in a four year period and
they have a negative convexity to us.
They meaning any countrythat's not self sustaining.
So I don't think there's gonna be anydetent or any denouement anytime soon.
(49:16):
I think that things are going toescalate before they de escalate and
unfortunately I just think there's a lotmore kinetic conflict coming because of
the architecture ofthe world being broken.
But in the Middle east,focusing on our relationship with the uae,
our relationship with Saudi is a very,very good thing in my opinion.
>> Jon Hartley (49:36):
I just want to close,
I guess one last question on sort oflegacy and investing, long term investing.
And I think for a long time we think theUS has been sort of the only game in town.
If you just look at sortof world equity markets,
the US is the one place thatcontinues to really just crush it.
(49:57):
And a lot of this has to do with the techsector, A lot of it now has to do with AI.
But you have these major tech companiesthat just don't exist in Europe or
Canada or Japan.
And it's a big part ofwhy GDP per capita and
the US keeps growing while it remains flatin the rest of the Western world in Japan.
(50:18):
And you know, for many years, you know,you were on the board of directors
of the University of Texas and Texas A andM investment management company utimco.
Endowments have very long horizons.
I'm just curious like whatyour thoughts are and
what you would tell sort of endowments andvery long term investors?
(50:40):
Are you sort of in from sort of a globalmacro perspective in your mind,
is the US still the only game in town interms of long run, very positive expected
returns, the place where innovationhappens for the foreseeable future?
Or do you see other countries starting toparticipate with this more in the future?
(51:01):
Obviously the EU I think steps on its owntoes with a lot of this tech regulation,
making it very difficult fortech companies to exist there.
But I think if you were to strip outall these tech companies from the us,
the US would probably look prettymuch like the rest of the West.
But that's the one thing that I thinkmakes the US economy so unique.
(51:22):
I'm curious what you think aboutthe US as a long term asset
class in general onthe equity side of things?
>> Kyle Bass (51:31):
You've set it up perfectly.
My short answer is yes.
I think the US is the best place foryour capital allocation.
We are 4% of the world's population.
We're 26% of the world's GDP.
We are 60% of the world's capital markets,so why?
Because people vote with their money.
We have the most liquid, best,deepest capital markets in the world.
(51:55):
We have American exceptionalism in ourschooling and in our entrepreneurship.
To your point on Europe with GDPR and someof the foot their own goals that Europe
scores on themselves, you know, andthen they continue to like double down on
the instant replay after theyjust watch the bad movie.
You know, like after they see the play andthey know how it's going to play out,
(52:17):
they just do more of it.
It makes no sense at allto me what Europe's doing.
And then, you know,we are the place to be.
I have looked andstudied the history of the world and
I can't find an economy that wasbigger than 26% of the world economy.
Maybe there was one in the past,it just wasn't recorded properly.
(52:38):
But we, we are still the best economyin the world with the best prospects,
with the best system.
Now we have our, we have our challengesand the frictions are growing and
that that gap between the wealthy,the middle class and the poor continues to
grow because we're going to keep running$1.8 trillion deficits going forward.
So that's the caveat, John.
(52:59):
But if you're investing your money,
I can't imagine anywherebetter than the US to invest.
And I'll give you oneone last thought here.
If, if I told you as a very smartyoung economist and I said,
John, I know today I have a crystalball 20 years from today,
I know of an economy that will growits GDP 500% over 20 years and
(53:23):
they will become the world'ssecond largest economy.
And they have a public index.
How much of your money wouldyou put in that index?
You'd say, well, I don't want to putwords in your mouth, but would you say,
I'll invest some in that index?
>> Jon Hartley (53:38):
Absolutely.
>> Kyle Bass (53:40):
So if you invested in the Shenzhen Shanghai 320 years ago and
China has reportedly grown their GDPnow 505%, it's actually 18 years ago.
Let's just go 18.
You've lost a third of your money andthey've grown their economy 505%.
What else do you need to know?
(54:01):
The, you're the patsy.
The Westerner is notgoing to make the money.
The Westerner is gonna get left holdingthe bag in a communistic economy.
Now, could you have traded andmade money along the way?
Of course you could.
But I'm not interested in pickingup dimes in front of bulldozers.
I'm interested in making longer terminvestments in companies that we know can
succeed.
(54:22):
And the US is alwaysgoing to be that place.
Europe again.
If you parachuted a capableperson into managing the eu,
you would get rid of gdpr, you wouldencourage entrepreneurship, you would
give tax incentives to move companiesover there and you could revive Europe.
(54:42):
If you think about the architecture,you mentioned Milton Friedman and
you know what he said rightbefore he passed away?
When the world hits a speed bump,
it's going to kill Europe becausethey don't have a real union.
They have, think about this.
They still have,they have no fiscal union,
they have no central taxing authority.
They have,they don't have a unified fighting force.
There's still a French navy, there's stilla German army, there's still a Spanish air
(55:06):
force, and there's no depositguarantee scheme across Europe.
Europe's not actually a union,it's just an idea.
And soif I'm thinking about investing capital,
are there some interesting Europeancompanies here and there Maybe.
Mean they make great leather goods, right.
LMDH is worth a trillion bucks.
But you know,branded luxury is what Europe's good at.
(55:28):
Europe is a retirement community forthe world.
It's where the world's rich go tohang out because it's beautiful and
has a lot of history.
But the US is the place where allof the growth is going to be and
it's where all the other innovation is.
>> Jon Hartley (55:40):
Absolutely and it's amazing too when you think about over
time, all these forecast premonitions,you know, the, the all these people that
have predicted that, you know, the USSRwas going to eclipse the US in growth,
and then it was Japan in the 1980s andthen China in the 2000s.
And it's amazing how all thosepredictions have failed.
(56:04):
Paul Samuelson famously had, I think itwas in his 1960s textbook that the USSR
would eventually eclipse the US and,yeah, all those predictions have failed.
So it's amazing how it's sucha terrible strategy to bet
against the US in many ways.
Kyle, I really want to thank you forcoming on.
This has been a reallyamazing conversation.
>> Kyle Bass (56:25):
It's a pleasure, thanks, John.
>> Jon Hartley (56:27):
This is the Capitalism and Freedom the 21st Century podcast,
an official podcast ofthe Hoover Economic Policy Working Group,
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host,thanks so much for joining us.
[MUSIC]
>> Jon Hartley (00:09):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm John Hartley, your host.
Today.My guest is Kyle Bass, who's a legendary
investor who famously predicted andbet on the housing collapse of 2008.
He's the founder and principal of HaymanCapital Management, a Dallas-based hedge
(00:31):
fund focused on global events, and thefounder of Conservation Equity Management,
a Texas-based private equity firmfocused on environmental sustainability.
Welcome, Kyle.
>> Kyle Bass (00:40):
Glad to be here, John.
>> Jon Hartley (00:42):
Cal, I wanna just start by getting into your early life.
You were born in Florida.
Your dad was a career tourism executivewho helped manage the Fountain Blue in,
in Miami Beach.
It's actually one of my favorite hotels,as well as the Dallas Convention and
Visitors Bureau.
You went to TCU where youstudied finance and real estate.
You worked at Bear Stearns,the Dallas Office.
(01:03):
In the 90s, you startedthe Legg Mason office in Texas.
How did you first get interestedinvesting, global macro and geopolitics?
>> Kyle Bass (01:11):
Boy, look on the investing side.
I was a chemistry major.
Going in,I thought I wanted to be pre med and
then I ended up taking a non majorelective in options and futures.
And I read the entire course book ina week and changed my major that week.
(01:31):
It hit me that that wasclearly what I wanted to do.
It was just a moment in time.
My junior year in undergrad,
I grew up in a family whereI had a great mom and dad.
They didn't save any capital forretirement or for school.
We were kind of callit lower middle class.
(01:53):
We were on a hotel manager salary andwhen we moved to Dallas,
we worked at the conventionbusiness bureau.
So I had a good life.
It wasn't a silver spoon, that's for sure.
And so, you know, right,right out of school, I,
I was just enthralledwith financial markets.
I was always a math and science guy.
There are those two,I guess you're probably all of them, John.
(02:15):
You probably have the, the, the,the ability to assimilate language and
reading and, and math and science.
I was always a math and science person.
So it was a natural progression.
>> Jon Hartley (02:26):
Well, it's, it's amazing.
And I know you're in my mind havingfollowed and your thinking for
a long time.
I think you're a real icon of the Dallasfinance community, which is something
that has grown a lot in just the pastfew decades and even just recent years.
I mean there's all these firmsnow that are moving from, say,
(02:46):
New York or California to Dallas,I think Toyota and so forth.
But also all these banks are settingup their second headquarters there,
Ian Goldman Sachs isbuilding a big office there.
But you were there atthe beginning of all this and
all these early shifts andmoves to Dallas early on.
(03:07):
So I commend you forbeing a staple of Dallas finance and for
not having left as well,like many people might.
I want to talk about the financialcrisis because I feel like
the financial crisis was just a definingmoment for many careers in finance and
perhaps including yours in terms of,I think, your skyrocket to fame.
(03:30):
I mean, you made these bets against thesubprime mortgage market through Hayman,
and later you testified tothe Financial Crisis Inquiry Commission.
I mean, how did you first come to startthinking that there was trouble with
the housing market inthe US in the 2000s and
that it might end up in somesort of catastrophic state?
>> Kyle Bass (03:51):
Yeah, I think that.
First of all, back to your question,
the prior question about what gotyou into the financial markets?
What do you care about?
When I was at Bear Stearns, I worked onBear, had a risk arbitrage department,
you know, where I think theywere one of the best and
call it institutional risk with mergersand acquisitions and things like that.
(04:13):
I was always a special situations analyst,meaning, you know, I was,
I was kind of a technology.
There was no verticalwhere I was an expert.
It was just trying to dig intoeach M&A situation, each spin off,
each bankruptcy,try to understand the operative parts, I.
(04:33):
Just whiteboarding these things.
So, you know, when you whiteboardsomething and you dig in,
you just have to have a deep intellectualcuriosity, which I also know you have.
And you can't teach thatin the kids into employees.
I believe they have it or they don't.
And having that deep curiosity forhow things work,
what are the proclivities of the players?
(04:55):
And then how do you handicap,you know, the potential outcomes?
I think again, on Wall street youonly need to get like 55% of those,
right, John?
So I think that as.
As we got into the launch of our firm.
So I launched my firm in January of 2006.
(05:15):
And at that time, you know,Asia was exploding,
that China just entered the WTO in 2002.
It was a big moment in time when,
when money was reallyflying into Southeast Asia.
At the same time, we all knewthat our housing markets, I mean,
everyone knew the housingmarket was overcooked.
(05:36):
Everyone knew that it wasreally easy to borrow money.
And as you know,you didn't even have to have a job.
Bartenders could have two or three loans.
I went to Abs west out in Las Vegas, and Iwas sitting in a Bellagio bar waiting for
friends to go out to dinner, andit was just me and the bartender.
(05:57):
And I said, how's it going?
She said, well, you know,it's going fine, but, you know, my,
My houses are killing me.
And I said, what do you mean, your houses?
And she said, you know, I have threehomes that I've been able to buy here in
Las Vegas, and I rent them out.
But, you know, my, my tenantsare giving me trouble, and they.
They turn over too fast, and I'm like,whoa, wait, how do you buy three houses?
And she said, well, they just ask fora loan and they just give you one.
(06:20):
And literally that happenedwhile I was sitting at the bar.
And it's much deeper than that.
But that was just an anecdotal, you know,confirmation of what, why I was there.
I'm thinking, you know, it's crazythat a bartender can have three loans.
And so the intellectual curiosity was,okay, how big is this?
(06:40):
How much capital is out there ina disassociated risk paradigm?
Because that's basically what it was.
And then you have to figure out, well, howdoes that play into leverage structures?
You know,levered hedge funds just blow up.
Well, that's fine.
That's not a really systemic problem forthe, for our.
For the US Financial system, but.
(07:01):
And what does it do to the banks?
And then once.
Once you started.
Once I started going down that rabbithole, you realize that, you know, Lehman
was 36 times levered, and they had a hugeamount of this stuff on their books.
Merrill had, you know, 50, 60 billionof this in a warehousing facility.
You know, Bear Stearns was, Was.
(07:22):
Was again, you know, 29 times levered.
But you lever yourself 30x andyou end up owning assets that lose,
you know, 40% of their value.
And you can do.
It's just a math problem.
And so, you know, it.
I came to the conclusion that the wholefinancial system was in real trouble and
went to meet with people at the Fed, wentto meet with people like Professor Rogoff
(07:46):
at Harvard, who at that time hadn'twritten his famous book, but as you know,
he was kind of the father ofsovereign balance sheet analysis.
So again, I'd go out and meet withpeople and say, talk me off the cliff.
I would say explain to me how I'm wrong,please.
I need to know this because if youremember once, once everyone became
aware of the situation, we were allwondering where money was safe.
(08:10):
We were actually wondering whereour savings were going to be safe.
If it was GONNA be safe in JP Morgan orMorgan Stanley.
Well, I guess Morgan Stanley wasn'ta bank yet, but they had to become one.
It was just this moment in timewhere intellectual curiosity and
the ability to analyze specialsituations came together.
>> Jon Hartley (08:30):
That's amazing.
And I guess you've also made somesuccessful bets too against Japan and
Greece.
Speaking of sovereign debt crises, how didyour thinking around those come about?
That's sort of aroundroughly the same time period.
>> Kyle Bass (08:46):
Think about this.
What precipitated the crisis in Europe wasof course the financial crisis in America.
And if you followed when the US decidedto bail out its banking system,
you had to follow the bad privateassets to public balance sheets.
So then the analysis was which publicbalance sheets can handle that kind of
(09:08):
movement of that many bad assets.
So the US could handle it.
We lost about 800 billion.
So our banking system had a trillion ofEquity back in 2006 we had 17 trillion
of on balance sheet assets.
If you just, just look at banking assets,not the non banks.
So we are about 1 times GDP in our banks,we had a trillion of equity.
(09:29):
We lost about $800 billion.
So we recapped our entire bankingsystem through common and
preferred equity injections.
So we actually did it right andrecapped the system and got going.
Europe couldn't recap the system and
they had a worse problem than wedid some of their banking systems.
Because of the EU, Iceland andIreland both had 10 times their system,
(09:52):
10 times their GDP intheir banking system.
So it's the same problem thatthe levered hedge funds and
Lehman and Bear had as a country.
They took on way too manybanking assets because
they were chasingdeposits all over Europe.
And so Iceland and Ireland fell inpure succession and then Greece.
And so it was kind of a logical analysisof a balance sheet that just went from
(10:16):
corporate balance sheets to sovereignbalance sheets and then from there.
How many things have you ever read inyour economic career that say so and
so ex Japan, so and so, you know,Asia ex Japan, ex Japan, ex Japan.
Because Japan blows every Gaussiandistribution you've ever seen, right?
They're like they're so far out there andthey're so far that they,
(10:39):
that if you include them in anymean it ruins the whole mean.
So they just exclude Japan.
Well, I started looking at Japan,I said, well how do they do this?
How do they, hang on,
how do they take at that time 200%sovereign debt to GDP on balance sheet?
Well, the answer was they had to taketheir rates to zero and negative and
they have to leave them there.
(11:02):
And so today Japan still hasrates pegged out to 10 years and
they're letting the 30 yearkind of flap in the wind.
But the real answer is now they're265% sovereign debt to GDP.
They can never let rates move.
They can't.
So what does that mean?
That means the currencyis the escape valve.
So when you characterize where welaunched a fund quote against Japan,
(11:23):
it's not the case.
That's kind of folklore.
What we did is I said one of two thingshas to happen here in this analysis.
Either Abenomics has to come about and
Japan's got to inflate their way out ofthis problem and try to get some growth or
they're going to be crushed under theweight of their debt in their own system.
(11:43):
That's really,they hit a fork in the road.
And so we took two thirds ofthe money in the fund and
we bought bond market optionalityright in the, in JGBs.
I took one third of the money and I betwith the bank of Japan on their ability
to weaken their currencybecause they had to do that.
So when we launched thatthe yen was 85 to the dollar.
(12:06):
Their bond market was where it was.
And then Abenomics happened,when Abenomics happened,
it took the yen from 85 to 120.
You could have done the backof the envelope math.
So we lost 2/3 of the money and
on the other third of the money wemade many multiples of that capital.
The fund ended up making, you know, 250%.
So you know, was a bet with the bank ofJapan on one side and it was a bet against
(12:30):
their ability to hang on in the bondmarket if they would ever let it go.
So it was just the righteconomic bet at the end.
>> Jon Hartley (12:40):
It's amazing, yeah,
I mean the whole story of Japan isI think a super interesting one.
You just, when you think about it, andit's something I've been reading a lot
about and saying a lot, I feel like Japanis kind of strangely ahead of the US and
the western world maybeby a few decades or so.
(13:01):
Think about.
>> Kyle Bass (13:03):
Exactly right.
>> Jon Hartley (13:04):
The sort of asset, you know, bubble some people call it, but
really Just the collapse and flat GDPper capita there that began in the 90s.
And you look at most ofthe Western world except for
the US now it's had flat GDP percapita since the early 2010s.
But even other topics,things like industrial policy,
(13:25):
that was something thatJapan is perhaps famous for.
>> Kyle Bass (13:29):
In the 80s they were doing so much lending that the Basel 1 accords
had all to do with containingthe Japanese banking system and
constraining their equityratios at that time.
>> Jon Hartley (13:44):
So it's a fascinating.
They were first at quantitative easing.
They're I think still the only centralbank that's actually bought up stocks.
So they're very interesting andinstructive I think for a lot of reasons.
First company to really go crazy ondebt to GDP in sort of recent times.
First advanced economy and250% debt to GDP and
(14:07):
now their bond yields have beenskyrocketing just recently up to the 30,
40 year bonds have been jumping in yields.
And I guess there is,I guess you could call it
this financial repression sort of issue.
Or you could call itfiscal dominance really,
(14:29):
where there's this challengewhere they can't let
interest rates rise because their netinterest costs will just totally balloon.
I mean, do you have any thoughts onJapan and like if there is some sort of
a sovereign debt crisis looming,is Japan the first to go?
And does that end up being somesort of a domino in your mind?
>> Kyle Bass (14:48):
You know, I, I don't, I think Japan's got it under control.
And I mean in a way where you have a,
if you have a population that hasa significant, you know, the.
Japan has one of the oldest populationsin the world, Japan and Italy.
And they've got a demographic crisis,right?
They've got a crisis where it's reallydifficult to grow your sovereign.
(15:10):
If your population, your call itendemic population is not growing.
And so they're not.
There's a fascinating, there'sa fascinating thought to have here and
it's one that I haven'treally discussed that much.
But when you think about fractionalreserve central banking,
which is the way we all operate andJapan is a poster child here.
(15:35):
I have a theory on why the demographiccurves are hooking down in
the US in Europe and in China and Japan.
So if you think about the way thesesystems work is they typically,
by the way,almost no sovereign ever defaults, John.
They get into a crisis, they print andprint money, expand a balance sheet,
(15:55):
but they always pay.
They rarely if ever stopped paying.
So we get into a situation whereyou look at where Japan is, and
if you engage in this type ofcentral banking activity and
you kind of lose your fiscal moral compassto where you just run huge deficits and
(16:15):
you print the balance andyou suffer inflation.
If the men in your economy,when they graduate university,
can't afford to buy a home, they live withtheir parents, they're not having sex,
they're not having kids,they're not marrying.
So when you look at the marriage rates andyou look at the fertility rates of
(16:36):
the average women across not onlythe developed world, in China,
when real estate prices rip andwages don't go with them,
you create yourself an endemicproblem in your economy.
And so Xi Jinping has figured this out.
He figured it out when he said financialsecurity is national security.
Note, he has not stimulatedhis real estate market.
(16:57):
When home prices in China gotto be 26 times median income,
the men couldn't afford homes.
So the demographers had this arcof the demographics of China,
Japan, the U.S. you know, arcing outto 2050 and heading down around 2050.
And now they're all collapsing.
The reason they're collapsing iswe just injected 50% inflation in
(17:21):
dollar terms into the world.
And that's our demographiccurve here is hooking down.
Europe's was already hooking down, Japan'swas already hooking down, and China,
China's demographic curve collapsed.
So the way that we operate our centralbanks and the way that we kind of
financially engineer, I, I heard youalmost say financial repression in Japan.
(17:43):
The way that we financially engineerour economies has consequences.
And those consequences are we, we bothknow that asset prices far exceed wages.
And soreal wages have been massively negative,
even though the Fed is not saying that.
The reason the Fed's not saying thatis because they chain weight inflation.
So if you look at it in reality,
(18:05):
asset prices have extendedthemselves to where it's not,
it's not conducive to procreation andfamilies.
It's just fascinating.
>> Jon Hartley (18:17):
And yeah, and you think about zoning too, and, and you know,
90s regulations, which is sort ofpervasive in, in most countries.
I mean, Japan being one exception,some Eastern European countries, some,
some exceptions.
But, you know,real estate has become so expensive,
prohibitively expensive around the world.
And I think, you know,that to some degree is causing, you know,
(18:39):
there's some empirical evidence thatthat has negative effects on fertility.
I mean, that's not a surprise,people can't buy their own homes.
They can', really get married andhave children.
So, you know, it's, it's amazing howquickly all this land use regulation and
how quickly real housing costs.
(19:00):
If you think about home pricesover the past 150 years,
if you look at like the case Shillerindex and you net out inflation,
that trend is like basically flatfrom like the late 19th century,
late 1800s up until like the 1970s and80s.
And it's just on a totalupward trajectory and zoning,
some people say it's other things,but you know, regardless of the cause,
(19:22):
it's hugely prohibitive, especially,you know, for young people.
So.
>> Kyle Bass (19:27):
Well, and then there's another natural progression,
if you're intellectually curious,if, if in fact that's the case.
And you look at FHFA zone index,the US government's own unchained weighted
housing index was up 50% between 2020 and2024, 50.
So wages certainly are not50 between 2020 and 2024.
(19:48):
If you follow that naturally to the,
to call it the next node on the,on the timeline.
All that does is it tears the socialfabric of both our country and the world.
So the poor state,the poor were already poor.
They didn't have any discretionary income.
So it, it makes them much poorer onanything they have to acquire to just
stay alive.
(20:09):
Call it food, rent, inflation, orgas, whatever, whatever you're doing.
And then it prices the middleclass out of being mobile.
So it immobilizes the middle class.
What does that do?
Well, it creates tension becauseit ends up in the richest hands.
And so that gap widens.
And what does that do?
Creates tension andin some places it tears.
(20:30):
And that's why we're having more wars.
So, you know, you have,
you have a scenario where the centralbankers believe that it's the answer.
The answer is just,let's just keep growing these
balance sheets andkind of just not focusing on being
(20:50):
more fiscally responsiblebecause they can.
And then what that does, though,
is the follow on effectsof what's happening here.
Our inflation,our tearing at social fabrics,
our fertility rates collapsing,and then war.
It's actually what happens andthat's what's happening now.
(21:10):
And we should expect more andmore war because there is no answer for
this equation at the moment.
>> Jon Hartley (21:19):
So I want to shift just to China now because you're very outspoken
on this.
You served on a lot of defense boards,you're very involved in the military
community, your lifetime Councilon Foreign Relations member.
And I think it's fair to say thatsome people would call China hawk and
have been critical of the Communist Partyof China for quite a while now.
(21:45):
And in particular what it's doingwith respect to Hong Kong and Taiwan.
I'm curious, what's your sortof overall thesis on China,
US decoupling andyour thoughts on the role that say,
defense tech and investors play in this?
Because I know you're,you're involved in this space as well,
(22:07):
not just as a policy expert andthinker, but also as an investor.
>> Kyle Bass (22:11):
Yeah. Well, thanks.
Look, some call it China Hawk,some call it China Realist, you know,
going to the lengths of understanding howthe architecture of their system works and
that we went from Japan toChina between 2012 and 2015.
I put my whole team on China.
(22:33):
And this starts empirically with mecalling all the Wall street firms and
saying, someone send me your primeron the Chinese banking system.
I want to understand how their domestic,since they have a closed capital account,
I want to understand how the Chinese RMBor offshore CNH and the USD interact.
I want to understandthe architecture of their system.
(22:55):
And no Wall street firm had a bankprimer for Chinese banking system.
No one had done it.
They were selling stocks, everybodywas buying and selling stocks and
vie structures and whatever they weredoing, but no one had actually sat down to
do the work to understandhow is the system built.
And so that's how I got deeply involved inunderstanding not only the architecture of
(23:16):
their system, but
invariably what that does is ittakes you into cultural preferences,
cultural norms, then that invariablytakes you down the history route.
And like, how did they get there?
What are the incentives of the players?
Why does Xi Jinping care tojust have the iron fist and
the five tools of Democratsdictatorship in one hand?
(23:38):
And then, then you understandwhat their grand strategy is.
And when you understand whattheir grand strategy is,
it is completely incompatible with ours.
And so in 2016,I came to the conclusion that we
were certainly going to be in conflictwith China at some point in time.
So it's actually easy tosee if you apply yourself.
(23:59):
And you understand.
So on the defense side, you know, we'retalking today, and I know this isn't just
for today, but this is the day that Israelattacked Iran's nuclear facilities.
You and I, John, have talked about that.
That event was going to happen.
Iran was not going to let everyoneinto their new centrifuges and
(24:20):
all of a sudden become compliantwith the rest of the world.
They're the largest state sponsorof terrorism in the world.
So this attack was obviousthat it was coming.
China has told us since 2017 that they arecertainly going to take Taiwan by force,
if not, if necessary.
They continue to send more delegationsover to the US to tell us this.
(24:42):
They continue their air defense zoneincursions into the Taiwanese air defense.
And if you chart it, you can see thatevery year it's more belligerent.
So it's coming.
And then how do we think aboutour relationship with China?
Well, you know, I was just recently in a,in an interview where someone said,
well, the CEO of Ford says if they don'trelease these, these very specific
(25:06):
rare earth magnets, then we can'tput our EV engines in our cars.
We're just going have to shut down,my God, the sky's falling.
And I say, well, it's obvious since 2017,it's been written on the Great Wall, what,
what's coming.
And you as a CEO should have seen that.
And it should be obvious to you thatyou shouldn't rely on China for
your supply chain.
(25:26):
So I have no sympathy for these people.
But when the question you'reasking is what happens?
I think you're going to seeChina invade Taiwan and
forever change the makeup of the economicrelationship between the west and China.
>> Jon Hartley (25:42):
How do you see them doing that in the sense that there's some,
I think at least maybe a couple hundredUS military personnel that are there.
They're, do you see them sortof cutting off Taiwan with some
sort of a blockade andtrying to starve them out?
(26:04):
Do you see it being some sort of a land orsome sort of an incursion,
amphibious incursion, all at once,
that sort of overwhelmingattempts to overwhelm Taiwan?
What do you think the US responsewould be in that kind of scenario?
Do you, what do you thinkthat would all look like?
>> Kyle Bass (26:23):
So I think there are three paths.
The first path is the soft path.
That is like the way that they tookHong Kong is, you know, this is going
to sound tin, tinfoil hat like, but letme, let me give you just a hypothetical.
So the Chinese Communist Party beforethey took, before they took Hong Kong.
The Hong Kong protests were at theirpeak and December 2019, the Chinese
(26:49):
current account, call it their net incomeaccount, was headed towards zero there.
They still had a positive trade balance,but
they had a lot of external capital flowsand we're going to get into that later.
But, and so they had this existentialcrisis with Hong Kong and
the legitimacy of the Chinese CommunistParty having to fight an uprising
(27:10):
in Hong Kong at the same time,a current account headed towards zero.
And what happenedmagically Covid happened,
it came at the exact perfect time forthe Chinese Communist Party.
It took their current account plus250 billion because they shut off
international travel for their populationand they dialed back the school expenses.
(27:30):
All of those are in dollars.
And they were able to take overHong Kong without firing a shot.
Everybody went home.
So the soft side of the Taiwanesesituation is, you know,
the KMT is funded by China.
China is hoping they canget the KMT in there.
They really hoped this last time,but William Lai won.
(27:51):
So the question is, what happens in 2028?
Does the KMT win anddoes Xi jinping Wait until 2028?
I believe he can't.
There are those in the US that believehe's going to wait to see if they can take
it over with soft poweras opposed to hard power.
So the three options are softwith the KMT winning in 28,
(28:12):
the two other options are blockade,as you mentioned, or all out assault.
One would think that a blockade would,would actually force the US to
block the bl to unblock the blockade sothat China could claim to be the victim.
Right?They are.
They, they have a PhD in victimologyin the Chinese Communist Party and
(28:34):
they're the best in the world at being theaggressor and claiming to be the victim.
So in a blockade scenario they wouldjust blockade the west coast of Taiwan.
And as you know, Taiwan's very muchlike Japan was in World War II.
They have no natural resources, sothey've got two weeks of energy on island.
They have to import their energy andtheir food every day.
(28:57):
So they're very dependent upon those portsand especially the southernmost port.
So a blockade is not goingto be that difficult.
It's going to require us to unblock it.
And I think we will unblock it.
And then, then we're in,then we're in a kinetic conflict.
The question is, and then again,option three is just the all out
(29:19):
assault of the Taiwanese islandwith an aerosol amphibious assault.
And it's it's difficult.
You know they're,I'm sure you know the terrain.
There are, there are 22 foot tidal surgesin the Taiwan Straits 110 miles wide,
the largest amphibious assault inthe history of the world was D Day,
which we just had the 81st anniversaryof about what seven days ago or so.
(29:42):
So this is a much, this is a muchmore difficult amphibious situation.
The tides being 22ft andchanging title surges in that Taiwan,
Taiwan straight lends that lends it onlyto be somewhat amenable to an amphibious
invasion three months out of the year.
And so there'd have to be precision andtiming as to when they go.
(30:06):
There would have to be precision andtiming on their on island position, but
then on island, as you probably know thereare two giant mountain passes, there's
a thermopylae problem and so there'sall kinds of problems with an assault.
So I think they'd rathertake it on the soft side or
through a blockade insteadof an all out assault.
But the US we have plans for all of that.
(30:27):
We don't have a great plan for
the soft power takeoverthe either of the hard options.
We have the most capable and best kineticmilitary in the world to this day and
we have plans.
So you know, it's,let's hope it doesn't get there, but
it sure looks like it'sgoing to get there.
>> Jon Hartley (30:44):
I want to talk I guess just a little
bit about US China relations andhow it's evolving,
particularly with respect to economics,trade, finance.
And when I think about likesay go back 10 years ago,
the mid 2010s, you know,we had on the trade side all the western
(31:07):
powers in Japan were I thinktrying to get China into the TPP.
This is prior to the 2016election cycle where
Hillary Clinton was forced torecant her support for the tpp.
This trade, Asia Pacific trade deal,multilateral trade deal and
(31:28):
those largely broughton by Bernie Sanders,
his candidacy obviouslyDonald Trump is president.
Trump has totally changed thinkingon trade in the Republican Party.
Both parties have really shiftedon trade broadly speaking.
But I think there's beenalso just this massive shift
in thinking about China in general.
(31:51):
And I think a lot of this hadto do with in the mid-20s.
I remember sort of mywake up call to China, or
at least a big part of it was seeingthese videos of the Uyghurs and
how they were being treated and thesevery, very serious human rights abuses.
And I think that really,
(32:12):
I think woke a lot of people upto what was going on in China,
that it wasn't this sort of peaceful,friendly,
inconveniently dictatorial kind ofnation with archaic communist system,
but was very friendly economics wise.
(32:35):
And then Xi Jinping wastransformational in that shift as well,
taking things on a verydifferent track from Huintao,
who's in power in most of the 2000s.
But now we've seen China's reallybacking off on the one China,
two systems idea to sign a British jointdeclaration where China agreed to allow
(32:57):
Hong Kong to keep its executive judiciallegislative autonomy until at least 2047.
As you mentioned,China moved on Hong Kong during COVID I'm
curious what your view is on allthis in the sense that I remember
in the 2010s in the BRIC economies,that was really one of
(33:18):
the biggest investment themesin emerging markets and the.
And China was a huge part of that, I thinkif you're investing today, if you invest
in China from that time to today,we'd be maybe flat or something like that.
Certainly in Hong Kong, there are allthese things that China connect and
all these things, all these thingstrying to get people to invest in China.
(33:42):
I'm curious, in your mind now,
there's issues around rareearth metals and so forth.
Where do you see all the sort of U.S.china economic relations going?
Obviously tariffs have been a, a verybig story in the past few years as well.
But I'm curious, where do you see the U.S.economic, U.S.
china economic relations goingon all these sorts of avenues?
>> Kyle Bass (34:04):
Yeah, I look, our systems are fundamentally incompatible.
Our values, we, we don't share the samevalues as the Chinese Communist Party.
In fact, ours are diametrically opposed.
We want to empower the individual.
We have basic property rights.
We have free.
There's a joke in free in China.
There's free speech in China,but after you freely speak,
(34:25):
you won't be free any longer.
Right.So there's the,
there's the value system that hasa complete lack of compatibility.
And we all want to say, well,they'll learn, they'll learn to open up.
They'll learn that when you look atthe bright shining star of Taiwan,
think about Taiwan just ideologically,why does it bother Xi Jinping so much?
Taiwan is like a Chinese democracythat's embraced western capitalism.
(34:50):
Taiwan's GDP per capitais 300% what China's is.
So Taiwan is what China could beif it embraced Western values and
Western capitalism.
You and I both know you wantto see meteoric growth.
You get China to open up and you getChina to have an open capital account and
embrace Western values and,and stop lying,
(35:12):
cheating, stealing,cajoling your way through the world.
That's just, that's the way they operate.
So you, you said you kind of had your,your Sputnik moment on China was,
you know, it sounds likethe images of the Uyghurs and
understanding what was happeningover there in East Turkestan.
That was one part of,of my awakening in 2015, 2016.
(35:34):
But the other one that really, you know,
I don't know if you've read UnrestrictedWarfare, once that got printed in English,
you know, that was written by twoChinese generals, that was written for
the Chinese military andit made its way into the popular,
not really popular, butinto the policy circles and think tanks.
(35:55):
People got a hold of that book.
But Diu wrote a piece in 2016,the Defense Innovation Unit, and
it was written by Mike Brown.
And for me,that was my holy shit moment, pardon me,
I don't know if you're allowed to dothat on your podcast, but you read this,
you read this 2016 Diu report and you'rethinking, I like, I knew it was bad.
(36:15):
I didn't realize it was that bad.
It talks about how they steal 300billion ish of IP from us every year and
earn a return on it.
It shows you how they infiltrate theventure capital companies in Palo Alto and
on Sand Hill Road andhow they intentionally make investments in
information technology companiesthat hope to sell their
(36:37):
wares to the largest informationbuyer in the world, which is the CIA.
But if they're Chinese investors in there,it basically takes them off the map.
So if you, I don't know if you've readthat report, it's a phenomenal report.
Then there's a follow up report fromDIU but it's a very comprehensive,
specific analysis of Chineseeconomic statecraft in America.
(37:01):
And that did it for me.
Trying to, after understandingtheir system, after understanding
their basic complete refusal to,to embrace human rights of any kind.
And then you understand the way thatthey're operating their economic
statecraft.
And they are our mortal enemy, John.
They are not a competitor,they are not a trading partner.
(37:23):
These most recent negotiations that wejust had, how many times did you hear,
well, they have these rare earthmetals that we really need and
they have these rare earth magnetsthat are needed in every single ev.
And I mean,we kind of have to deal with them.
And I kind of jokinglysaid a couple of days ago,
I said this is not a trade negotiation,this is a hostage negotiation.
(37:44):
We need to bring in hostage negotiatorsbecause that's what we're negotiating
with China.
And that is not a positiveeconomic relationship.
We're not talking about, hey,
you charge us this tariff onagriculture and we charge this on cars,
why don't we just like find a greatplace to be and, and move forward?
That's a trade negotiation.
What we just had wasa hostage negotiation.
(38:05):
And how can that bepositive going forward?
So I think we're going to seeXi Jinping move in the next two or
three years on Taiwan.
I think we're going tobe kinetically involved.
I hope it doesn't involve nuclear,a nuclear transition transaction with
either tactical nukes orsomething like that.
We're two nuclear powers, the world seemsto believe that we could just fight in
(38:29):
the Taiwan Strait andnot take it to the Chinese mainland.
I think that is,I think that's short term thinking.
I think that you and I both know out ofFujan they're going to launch surface to
air missiles, surface to surface missiles,and then we're going to have to attack
military installationsin Fujan if it happens.
So if you believe thatthat's even a possibility.
(38:50):
And you asked about investing,first of all,
investing in communism has neverworked in the long run ever.
Number two,if you believe that China is our enemy and
that we might be at a kinetic conflictwith China in the coming years,
why on earth would you investdollars in anything Chinese?
>> Jon Hartley (39:13):
You know, it's, it's, it's fascinating.
Just, you know, when I was in my timeworking at Goldman Sachs in China was
still a theme and you know,things like China a share and you know,
each year, all this, all these sort ofvehicles to get exposure to China and
all this excitement about it in thatsort of 2000s, even early 2010s period.
>> Kyle Bass (39:35):
It was a good, it was a good bet back then, John,
because teaching them that Westernizationand embracing some of these
values would grow their productivity andtheir GDP per capita.
It was a great bet back then.
At some point in time it becamea bad bet and we must admit it.
And now we must explain to the worldthat they are our mortal enemy.
>> Jon Hartley (39:56):
I mean, Milton Friedman, I think, famously made,
in part it was a prediction,and he recanted it later on.
But those that countries with economicfreedom will inevitably develop political
freedom.
And yeah, I think it's fair tosay that since Dong Xiaoping,
China's certainly become moreof a capitalist economy now.
(40:20):
There's a lot of caveats to that andthere's a lot of state control in all
over, all over its economy,its banking system elsewhere.
But I guess in your mind, do you thinkthere's any way that somehow there's
political uprisings in China in ourlifetimes that we see, and obviously this
is something that's always on the mindsof the Communist Party of China,
(40:45):
but it's such a large country,it's a fairly decentralized government.
There's lots of different regions andlots of different peoples as well,
and some various ethnicities as well.
I'm curious, see, in our lifetimes couldthere be some sort of an uprising in
China orsome sort of regime change in your mind?
>> Kyle Bass (41:08):
Yeah, I think it's likely to happen.
And I think again, logically,if you understand their grand strategy,
understand the composition,architecture of their system.
They built their system.
Their system was flawed from day one.
Their banking system is 320% of their GDP.
(41:30):
There are two Chinese banks thathave more assets than JP Morgan.
You know, the US economy is 26% ofthe world economy, the Chinese economy,
so we run about a $30 trillion economy.
They say theirs is around 18 trillion.
It's about a little bitmore than half of ours.
And yet they have two banks larger thanthe biggest, best bank in the world.
(41:50):
I find that to be interesting.
So I think you get to a point where if,if the architecture is flawed,
if their leadership is hell bent onstaying with a closed capital account and
being belligerent withthe rest of the world and
partnering with the axisof authoritarians, right?
You've got China with a limitlesspartnership with the war criminal in
(42:12):
Russia.
You have China,China partnering with Iran,
you have China partneringwith North Korea.
So all four of the big authoritariangovernments called the axis of
evil are all working together this time.
So at some point in time, what's goingto happen is when they go kinetic, John,
we hold all of the cards.
(42:33):
We have their ticket intothe world financial system.
They have four joint stock, they havefour SOE banks, 12 joint stock banks.
They have an Achilles heel or two,and we know exactly where they are.
And I can tell you whenthey move on Taiwan,
sending carrier strike groups in theTaiwan Strait is one thing we may do, but
we will certainly hobble them financially.
(42:56):
And when we hobble them financially,it's going to be hard for Xi to hang on.
>> Jon Hartley (43:01):
So- >> Kyle Bass
change question.
Like that's, that's likely the progressionof that regime's exit when, if and
when he goes kinetic.
Yes, so I guess speaking of other sort of non-democracies and
forming alliances with some of them.
(43:22):
I think the Middle East andsome of the recent foreign
policy positioningcertainly with the US and
growing closer to various Sunni nations,
thinking Saudi Arabia, UAE.
And thinking about the Abraham Accords and
(43:44):
building bridges between Israel andsome of these Sunni nations.
And just recently Israel beganthis campaign against Iran,
taking out many of its nuclear facilities.
I think you and I are both surprisedthat they didn't do this earlier.
(44:05):
In your mind, I guess should one of theprimary goals of Western allied powers be
to stop other countries,especially poorly behaved ones,
from obtaining nuclear weapons?
I feel like this was sort ofsomething that was talked a lot about
North Korea for a long time, long ago,and now that ship has sailed and
obviously China plays a sortof a critical role there.
(44:28):
But I imagine that's always beenthe reasoning in my mind why
there's this ultimate danger ofIran obtaining nuclear weapons.
Something that, you know, they were doing,you know, spinning centrifuges,
you know, attempting to do fora long time,
all these sort of failed attemptsat various deals and so forth.
(44:49):
I'm curious what you think about that.
And also just really the changing role orrelationship between the US and
various countries in the Middle East.
The sort of warmth, I guess, in the USrelations with UAE and Saudi, I think.
Something that kind of almost wasn't evennecessarily imaginable 20 years ago.
(45:11):
And certainly Israel making friendswith the Sunni nations as well,
trying to find partners that are alsosort of allied against Iran as well.
I'm curious what you think about.
The Middle east has kind of evolved andthe US's role in that.
And obviously there's an economiccomponent of that as well.
(45:32):
You know, Saudi, Saudi Aramco being ipo,
there's the UAE is trying toattract a lot of investment.
They've developed common law courts,you know, and basically imported Western
judges from Hong Kong and Australia andelsewhere because they want business
courts, because they want to do businesslike the rest of the Western world does.
(45:54):
I think Saudi to somedegree wants this as well.
I'm curious how in your mindthe Middle east is, is,
is being transformed in that sense too.
>> Kyle Bass (46:02):
Yeah, I think.
That'S a great question.
Look, we made a,the Biden administration made a,
a huge blunder with the turning ourback on Saudi Arabia and embracing Iran.
I mean that was one of the craziestpolicy moves I've ever seen, right?
Whether it was Jamal Khashoggi andthe botched,
(46:23):
call it kidnapping,which turned into a murder by the Saudis.
You know, look, no, no,sovereign's perfect.
I don't think they set out to kill him.
I think he got over sedated and died.
But that is also not one, one life isnot the reason to turn your back on
your number one ally in the region.
(46:44):
And so Saudi has been aligned with us fora very long time and
they are our principal ally over there.
And now the UAE as you know,had embraced China.
They were dancing both sideslike the Qataris were, or are.
And as of Q1 of 2024,you saw the UAE decide to
(47:06):
align themselves with the US andwalk away from China.
And you can look back to Sheikh Tanun,who's NBC's brother and he's in
charge of all the sovereign wealth and allthe AI and hit their AI conglomerate G42.
And they said, you know what,we're just going to rip Huawei out and
we're going to go withAmerica on this one.
(47:28):
Hopefully we see thatfollow through in the uae.
So imagine if we have our alliesin the UAE who as you said,
are Westernizing tothe extent that they can.
They have a,they do have a very religious community.
So does Saudi.
And the strange bedfellows with theAbraham Accords, you know, the Jews and
(47:50):
the Arabs getting together, the Jews andthe Sunnis coming together for
these accords.
That's a very positive development inthe Middle East, let's hope it continues.
Of course, Iran and their proxies,they don't want the Abrahamic courts.
My view on October 7th is that wasto disrupt the Abraham Accords
from moving forward.
(48:10):
I still think the Abraham Accordswill move forward.
But you have a scenario where poor,you said poor nations, but poor crazy,
rogue, insane nations shouldcertainly not have nuclear weapons.
You know how we contain rocket man,Kim Jong Un?
I, I'm not sure.
I think China contains him.
(48:31):
You know, he's like, he's like a,a rabid rottweiler in a cage, right.
They just kind of feed him every now andthen and keep him hungry.
And, and so as we move forward,now that Israel has, has acted on Iran's
nuclear capabilities, I think the Middleeast can be a much better place.
That is all with the caveatthough of saying the world's
(48:53):
architecture of the financialsystem is broken.
And especially in many ofthose Middle Eastern nations.
The world's priced in dollars, John.
We just pushed 50% dollar inflation tothe world in a four year period and
they have a negative convexity to us.
They meaning any countrythat's not self sustaining.
So I don't think there's gonna be anydetent or any denouement anytime soon.
(49:16):
I think that things are going toescalate before they de escalate and
unfortunately I just think there's a lotmore kinetic conflict coming because of
the architecture ofthe world being broken.
But in the Middle east,focusing on our relationship with the uae,
our relationship with Saudi is a very,very good thing in my opinion.
>> Jon Hartley (49:36):
I just want to close,
I guess one last question on sort oflegacy and investing, long term investing.
And I think for a long time we think theUS has been sort of the only game in town.
If you just look at sortof world equity markets,
the US is the one place thatcontinues to really just crush it.
(49:57):
And a lot of this has to do with the techsector, A lot of it now has to do with AI.
But you have these major tech companiesthat just don't exist in Europe or
Canada or Japan.
And it's a big part ofwhy GDP per capita and
the US keeps growing while it remains flatin the rest of the Western world in Japan.
(50:18):
And you know, for many years, you know,you were on the board of directors
of the University of Texas and Texas A andM investment management company utimco.
Endowments have very long horizons.
I'm just curious like whatyour thoughts are and
what you would tell sort of endowments andvery long term investors?
(50:40):
Are you sort of in from sort of a globalmacro perspective in your mind,
is the US still the only game in town interms of long run, very positive expected
returns, the place where innovationhappens for the foreseeable future?
Or do you see other countries starting toparticipate with this more in the future?
(51:01):
Obviously the EU I think steps on its owntoes with a lot of this tech regulation,
making it very difficult fortech companies to exist there.
But I think if you were to strip outall these tech companies from the us,
the US would probably look prettymuch like the rest of the West.
But that's the one thing that I thinkmakes the US economy so unique.
(51:22):
I'm curious what you think aboutthe US as a long term asset
class in general onthe equity side of things?
>> Kyle Bass (51:31):
You've set it up perfectly.
My short answer is yes.
I think the US is the best place foryour capital allocation.
We are 4% of the world's population.
We're 26% of the world's GDP.
We are 60% of the world's capital markets,so why?
Because people vote with their money.
We have the most liquid, best,deepest capital markets in the world.
(51:55):
We have American exceptionalism in ourschooling and in our entrepreneurship.
To your point on Europe with GDPR and someof the foot their own goals that Europe
scores on themselves, you know, andthen they continue to like double down on
the instant replay after theyjust watch the bad movie.
You know, like after they see the play andthey know how it's going to play out,
(52:17):
they just do more of it.
It makes no sense at allto me what Europe's doing.
And then, you know,we are the place to be.
I have looked andstudied the history of the world and
I can't find an economy that wasbigger than 26% of the world economy.
Maybe there was one in the past,it just wasn't recorded properly.
(52:38):
But we, we are still the best economyin the world with the best prospects,
with the best system.
Now we have our, we have our challengesand the frictions are growing and
that that gap between the wealthy,the middle class and the poor continues to
grow because we're going to keep running$1.8 trillion deficits going forward.
So that's the caveat, John.
(52:59):
But if you're investing your money,
I can't imagine anywherebetter than the US to invest.
And I'll give you oneone last thought here.
If, if I told you as a very smartyoung economist and I said,
John, I know today I have a crystalball 20 years from today,
I know of an economy that will growits GDP 500% over 20 years and
(53:23):
they will become the world'ssecond largest economy.
And they have a public index.
How much of your money wouldyou put in that index?
You'd say, well, I don't want to putwords in your mouth, but would you say,
I'll invest some in that index?
>> Jon Hartley (53:38):
Absolutely.
>> Kyle Bass (53:40):
So if you invested in the Shenzhen Shanghai 320 years ago and
China has reportedly grown their GDPnow 505%, it's actually 18 years ago.
Let's just go 18.
You've lost a third of your money andthey've grown their economy 505%.
What else do you need to know?
(54:01):
The, you're the patsy.
The Westerner is notgoing to make the money.
The Westerner is gonna get left holdingthe bag in a communistic economy.
Now, could you have traded andmade money along the way?
Of course you could.
But I'm not interested in pickingup dimes in front of bulldozers.
I'm interested in making longer terminvestments in companies that we know can
succeed.
(54:22):
And the US is alwaysgoing to be that place.
Europe again.
If you parachuted a capableperson into managing the eu,
you would get rid of gdpr, you wouldencourage entrepreneurship, you would
give tax incentives to move companiesover there and you could revive Europe.
(54:42):
If you think about the architecture,you mentioned Milton Friedman and
you know what he said rightbefore he passed away?
When the world hits a speed bump,
it's going to kill Europe becausethey don't have a real union.
They have, think about this.
They still have,they have no fiscal union,
they have no central taxing authority.
They have,they don't have a unified fighting force.
There's still a French navy, there's stilla German army, there's still a Spanish air
(55:06):
force, and there's no depositguarantee scheme across Europe.
Europe's not actually a union,it's just an idea.
And soif I'm thinking about investing capital,
are there some interesting Europeancompanies here and there Maybe.
Mean they make great leather goods, right.
LMDH is worth a trillion bucks.
But you know,branded luxury is what Europe's good at.
(55:28):
Europe is a retirement community forthe world.
It's where the world's rich go tohang out because it's beautiful and
has a lot of history.
But the US is the place where allof the growth is going to be and
it's where all the other innovation is.
>> Jon Hartley (55:40):
Absolutely and it's amazing too when you think about over
time, all these forecast premonitions,you know, the, the all these people that
have predicted that, you know, the USSRwas going to eclipse the US in growth,
and then it was Japan in the 1980s andthen China in the 2000s.
And it's amazing how all thosepredictions have failed.
(56:04):
Paul Samuelson famously had, I think itwas in his 1960s textbook that the USSR
would eventually eclipse the US and,yeah, all those predictions have failed.
So it's amazing how it's sucha terrible strategy to bet
against the US in many ways.
Kyle, I really want to thank you forcoming on.
This has been a reallyamazing conversation.
>> Kyle Bass (56:25):
It's a pleasure, thanks, John.
>> Jon Hartley (56:27):
This is the Capitalism and Freedom the 21st Century podcast,
an official podcast ofthe Hoover Economic Policy Working Group,
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host,thanks so much for joining us.
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