Kyle Bass focuses much of his commentary on what`s going on in China, and in actuality the Fed has been the biggest driver of price in this trade so far the past year.
0:06about combats is trade Co bats sticks to his guns and China its all-conference
0:12it’ll happen sooner rather than later so a lot of hedge funds that involved in
0:19China short eval tree
0:24a lot of them have left the building and he is sticking with think he has a round
0:33of doing dollars riding on China devaluation of their currencies so let’s
0:41look at some of the more details so fast these hinges and those that China’s
0:48elephantine banking system is lying about non-performing loans which
0:52officially standard 1.75% here’s a look at the check to the official numbers PwC
0:59so 1.75% non-performing loans are at the highest in 11 years but passed nearly
1:07every other china watchers predisposed to incredulity thinks this number is far
1:11larger talks about how banks rose some of their communist countries
1:17encourage that banks to roll some of their sour loans rather than dumping
1:20them in non-performing bucket this is same type of fudging the likely goes on
1:25with China’s GDP print beyond a Chinese banks care enormous amount of credit
1:30risk outside of traditional loans it’s an exception convoluted methodology but
1:35in essence the banks to have an array of vehicles they used to channel credit
1:38borrowers these deals are sometimes classified as investment receivables and
1:43don’t show up in the NPO line even if they’re bad you want to know how big an
1:48issue this practice truly is consider that just one mid tier bank industrial
1:52bank investment book is larger than the entire film
1:56banking system in math is quite simple here they’ve left their banking system
2:03grow about and percent in 10 years says it’s now thirty 4.5 trillion special
2:09mention my own city about 3 percent to be concerned that would be a trillion
2:13dollar hit the banking system the PBOC only has three trillion in reserves and
2:18it takes by the IAF IMF’s estimate to 2.7 trained to manage the economy is
2:23simply have any money left to recapitalize the banks especially
2:28considering the capital flight that’s been doing reserves most of last segment
2:32they’ll have to expand the PBOC bounty by true into training dollars bass
2:36contends they do look out below bass sees 30 to 40% devaluing the cards for
2:42the currencies so this is insider article talks about how he comes up with
2:50that 2.7 number of the financial calculation for the IMS this trade talks
2:59about how much the hedge funds back doctor China devaluation February March
3:07as they got squeezed out of this trade there have been a couple of inches short
3:12squeeze which promised sectors have spent on those who are short spots in
3:16age
3:19and so the sun’s energy left in place
3:22chiefly tail risk funds combats is considered one of those friends right
3:32about that but i wanna look at it from a different factors so called us is really
3:41country and China and it’s my contention you often get in trades and you think
3:46drivers are one thing and they’re actually turn out to be another thing
3:49and I think equally if not more important maybe their own Federal
3:53Reserve at least in the near-term about direction of this trade
3:58so this is the dollar since May
4:03and you can see they were shorting it pretty hard and I thought this is
4:10overdone I came in and got invested here but other people probably saw the same
4:15thing I did sort of forced to cover then you had fed speak come on by
4:23started spiking and people got out of that trade and then the state minutes
4:28said that the gym meanness live look at this move and the dollar and then look
4:35at China’s devalued they have to react to this they don’t want to put too much
4:41pressure on their currency said then you can see their currency goes to six point
4:48for a six-point 568 we can mean direct correlation to strengthen the USDollar
4:55as they made their currency in the juxtaposition of the two currencies so
5:02this is just a dream
5:07forecast the Chinese yuan
5:10and down here sort of
5:13I mean this is a five-day excuse me we’re down here so this last week
5:212006 for a high as 65 a purse or settling at 2655 area and you can see
5:30the USDollar and this last week we were as low as 9440 in the Fed minutes took
5:36off highs ninety 49548 here and so this is what I mean right this is the Fed
5:43minutes this is a June slide meeting and this is its effect on passes and actions
5:51he likes this and it’s more determined the Fed actions this week so
6:02June this is fed watch toward and there’s a 26 percent chance of a rate
6:12hike it flows like a percent last week the Fed minutes change that and so
6:19they’re still 26% relatively low if they actually do hike I think there’s still a
6:28lot of this price in markets and that’s even gonna be better for probably call
6:35basses position and if we look at December there’s an 80% chance of some
6:41kind of hike there’s even bet would be to ickes between now and December so I
6:50think this is just as much a driver in this trade China and its bigger china
6:57has to react to the stronger so the fed funds rate is 50 basis points that’s the
7:03target but you can see the effective fed funds rate trade much lower 37 basis
7:09points
7:09lowers 34292 you see that difference and you can see we were basically 10 basis
7:17points and we jumped up to 37 on the December a high get a June hike you can
7:24add 25 basis points to this 37 basis points and this is really going to
7:30affect the trade in my opinion working in col gases favor
7:36now we get to the three-month 624 for you can see basically round-trip 6.55
7:50but we’re definitely climbing once it broke out here in early may have 65 to
7:55trade on the three-month compared to the dollar this is that short attacked the
8:04covering sort of backup here to run on the dollar as you can see just a
8:12three-month comparison between the two charts the yuan is back up the high end
8:20of the range of the three-month where the USDollar still has a long way to go
8:24to get up to the 97 area look at six months this is where really spiked as
8:35high as 6.75 and this is where a lot of people got squeezed out of this trade
8:40and that’s right timing is everything in your pile into trades that become
8:45popular because this is just frankly an ass kicking the other way and recently
8:51it’s gotten back to just where there were but
8:57got their ass kicked on this trade right gotta get in here
9:04and anybody got in here here just been getting their ass handed to them on the
9:08straight and six month you can see we’re way up here all the way down and this is
9:20what I mean the Federal Reserve has backed off rate hikes twice when they
9:25saw the strong dollar and the effects of an emerging market currencies and
9:32economies sort of the commodity correlation so they’ve backed off rate
9:38hikes last june they did it they’re worried about the strong dollar and they
9:42talked the dollar down precipitously they didn’t end in September then they
9:47raised in December started talking of December and you can see the effects
9:52that it happened on
10:06here so you know
10:12this is after the rate hike in December and you can see the effect on Chinese
10:20yuan and so I think that’s actually more critical factor and they literally can
10:28talk the dollar down and have traders do their work for them
10:31waiting for them they did it and June
10:35dated September they didn’t do a rate hike then actually worried about turmoil
10:43out of China so then the screen in December and that’s when the shit hit
10:47the fan for this trade and then they talked down the dollar and you have this
10:53effect on this trade and recently been talking up the dollar
11:02year 2000 Chinese yuan this is where you really want to get in this trade in July
11:16before that eval this is weird huge TV we backed raced again this is your
11:22second chance and this is where they didn’t do the rate hike start talking
11:27down the dollar and this is when as we should we wrote we actually wrote an
11:32article that said hey we think this week in a row before the end of the year and
11:35we are right in this shit hit the fan so the Fed is truly moving this trade
11:40far more than anything come out China and so called best need to be focusing
11:45on the federal reserve and frankly from his perspective he should hope for
11:50higher inflation data and strong employment numbers that puts pressure on
11:54the Fed because you can see they’ll go so far we’re talking up the dollar and
11:58rate hikes name on a normalized policy but when it starts getting too hot then
12:02they start talking back the dollar down and that determines inflation rate and
12:09employment numbers in the data dependent gives them bandwidth to either talk down
12:15the dollar or not after day it is they have less room to talk down the dollar
12:20and that’s less room to use my French mess with his trade
12:26but that’s the real chairman of his trade so we look at the USDollar
12:32forecast
12:34and from basically year
12:38and we can see that basically just 95 level the sort of been in mid-term
12:47ground guys those 92 93 this is where we got really high around the 200 range and
12:57we have a lot more room to run especially if there’s only a 26 percent
13:04chance of rain from a 226 this past week of June rate hike if we actually do I
13:10think there’s still some dislocations in the market and this will probably buy a
13:1798 in the cards and so it’s probably means that the Chinese yuan will
13:26probably start to swell
13:32max the Chinese yuan you can see that this is where the congress is putting a
13:41lot of pressure on behind the scenes they were slowly appreciate their
13:50currency into strengthening and some centuries for political reasons they
13:58wanted to do it but it’s actually really hurt their economy and you can see the
14:04reversed course as the economy is showing weakness then flows have gone
14:13out as a lot of hot money has gone to China and you can see this trend we’re
14:22gonna make this next leg higher
14:27wrong it dead money so I think it depends how hot the USS daddy is Asian
14:40standpoint and then how much bandwidth the Fed has to either talk down or talk
14:47up the dollar
14:49they want to normalize policy but they want to do it without creating too hard
14:53of a dollar and pressure on the emerging market currencies so we see that the US
15:04dollar’s strength and weight is 95 level you can literally see that this trade
15:12can go a couple directions it can reverse all the way back to this 8884
15:19depending on bad approach and their policy going forward they could
15:27literally do you want high not like the results the inflation there will be
15:34pretty benign and as they talked about currency intervention
15:39Japan in this recent G-seven meeting that they’re well aware he expects a
15:52strong or weak dollar on U S corporations and our multinational
15:55corporation profits as you saw the exact earnings you set it as an excuse
16:02manufacturing data and us’ turnaround as the dollar was getting weaker and as the
16:09dollar gets stronger the us- manufacturing data it’s amazing how
16:13quick that is to react will take a downturn and very easily could give the
16:22standoff through may need to start talking down dog weaken the dollar on
16:26the next leg down so there are a couple ways and inflation gets really hot and
16:32wage inflation takes are going to bust up and it’s going to help his trade
16:36considerably and will probably make a lot of money but the strong dollar start
16:44touring the USA and the data starts getting weaker and the Fed starts
16:48talking down the dollar we could take the next down lower and he’s probably
16:52okie Dokes
16:55how prominent the federal us’ Federal Reserve is in Calabasas China short
