Kyle Bass: “We’re not short Chinese equities per se, but we are very invested in the Chinese currency”

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Kyle Bass, Ricky Sanders On Wall Street Week

0:06i’m Gary Kaminsky welcome to Wall Street week the shot record for long-term
0:11investor Carl bass and ricky sailor a part of the new class of Wall Street
0:16Titans they take big risks to create big rewards scary movie today we’re going to
0:24learn more from our market moving money managers with new commentary from Kyle
0:28Bass on emerging markets and what it takes to make a great investor
0:42has never been solely about investment we’ve talked about anything that
0:46affected people and their money
0:53from Times Square in New York City
1:00there are many past a wall street for Ricky sailor it was about to furthering
1:05his acceptance to law school for Cal Bears it was about dropping out of the
1:10pre med program both share with us now that aha moment and how it led to their
1:15careers to take you back to your your up brings you born in Miami but you got
1:21raised in Texas that’s right when is your family movie taxes I was in miami
1:25about ten years and so you went to public school your school I didn’t want
1:30to put public grade school I left there I think about the fourth grade and then
1:34doubt in Dallas in Arlington went to high school and we didn’t go to college
1:40Texas Christian what was your first job coming out at Texas Christian working at
1:44Prudential base securities I went into their global training program for retail
1:50FAA’s and spent about two and a half years there and then left to go to Bear
1:56Stearns shortly thereafter did you make the transition do all that to him and
2:00capital my goal was to build a certain este are not worth over time running
2:05these Wall Street firms till I could have enough capital to invest a giant
2:09portion of my net worth and also have enough capital to live on until things
2:13worked or shout something I always planned on I just had to get to a
2:17certain day and I got to that day and I kind of December 2005 some of the people
2:22on Wall Street that you looked up with people that thought if either other than
2:26Gary Kaminsky the other than you thought to yourself that’s great success in the
2:31industry that swell when again I was fascinated by the psychology of it all
2:34actually and I read shredders books you know the Market Wizards I read every
2:39book this sort of several routes and since have been able to meet george and
2:45and his son and
2:46become more familiar with them so it’s been a spinoff of come full circle
2:52bringing you come from a family of money managers
2:55a break he grew up in South Shore Long Island in a town called Woodmere went to
3:00the same high school as Gary Hill High School just a little bit younger than
3:03Gary you can say a lot younger and my dad was in the money management business
3:12he was an analyst at Goldman Sachs went out to start a hedge fund in nineteen
3:16eighty to one of the early hedge fund guys in my brother went into the
3:20business as well you know I’d say I say we didn’t we didn’t grow up by talking
3:25about PE ratios in GDP at the dinner table little more about that five counts
3:29and that the goings on a little league but you know it was always in my blood I
3:34didn’t think I wanted to go into it and then after I decided to defer my law
3:38school acceptance cause I talk to people who are lawyers who really didn’t like
3:42what they did
3:43came into the business and went to work for an amorous mark and absolutely loved
3:48it from the midwest so let’s go another legendary analyst and a great hedge fund
3:52manager Morris market was an analyst at Goldman away you go back a little before
3:56the show you went to university Wisconsin which studied accounting and
4:00finance which i think are the two hundred paintings for an investment
4:04career at least 44 analytical work in 44 money management so when it did they’ll
4:10go on sale my god I’m gonna follow in my dad but you know it was it was it was
4:15really at this moment where I I decided to defer going to law school and sort of
4:21see what it was like to really work for a while and I got into the business
4:24world and just loved it from the moment I got in there I I actually work for a
4:31guy Wisconsin and David herro who was a great friend and a mentor to me who’s
4:36now a money manager at oakmark international and he and Frank Morris
4:40Marc frankly shaped sort of what I become an investor richard talked about
4:44the beginning of a minute capital you have six and a half billion on the
4:47management now you started that from philosophy around the farm culture etc
4:52short so when are seventeenth year we started with investment philosophy that
4:58I call quality value
4:59joining good businesses and growing businesses but wanting to pay value
5:03price and I think that goes back to the two people I mentioned before David
5:06Harold kind of a classic value investor contrarian and then mark mark was more
5:12of a high quality business deep research and growth investor and I kinda like the
5:16intersection of those two things are sometimes you can pay too much for for a
5:20great growing business and sometimes you know stocks are cheap cheap for a good
5:23reason I wanted us to be not only investing in high-quality businesses but
5:28the organization that had a great reputation and so we have a pretty
5:31terrific culture them inside great people that work for me
5:34we got our our research team has an average tenure been nine years which in
5:39this businesses is really impressive and go to work every day so what motivated
5:47now I like to win and having having any losses on your card drives you even more
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6:18hightower is the new blueprint for financial advice by the fiduciary
6:24standard a legal pledged to put our clients interests first
6:29not because the douchey area is the latest too bad but because it’s what we
6:32were built to do I used to dread getting up and going to work was done I was
6:41tired being a thriving arts and I started looking around for business and
6:44I believed in and I kinda wanna do something little more green or mentor
6:48first helping create a business plan and help me and they’ve really taught me how
6:54to think for help
6:56unimaginable possible for free I’m here because I’m here because of school or
7:03get your free business majority
7:07drive passion purpose just a few of the characteristics of what makes a great
7:11investor according to hedge fund manager Kyle Bass now two of wall street’s best
7:16that’s and Sandler are going to teach you about their investing philosophy
7:21numbers show the last summer months talked about the difference between
7:26fundamental research and technical analysis your fundamental research guy
7:31do you think about technicals at all when you make an investment you watch
7:36the trading in the equities the dead currencies we do I think
7:42and the various selloff that you’ve seen in in some of these different asset
7:46classes whether it be farmer whether it be the MLPs upstream midstream MLPs you
7:52can do all the fundamental analysis you want to do but you have to have views on
7:56what the future prospects are gonna be you also have to have used on the
8:01behavior of the participants because economics assumes that all participants
8:06are rational and we all know that there aren’t that many rational participants
8:11in any anywhere anywhere in the world
8:13Santana result of investor told the losing money out of position with a
8:18short-term losses this toward the change of behavior we we always say that
8:22definition of a long-term investment as a short-term trade that went past so
8:28what motivated now is it is it money
8:31actual exercise the social good I think its intellectual growth the social good
8:38as has been really fun to be on the right side up and then winning you know
8:43I still I I like to win and having having any losses on your card drivers
8:48you even more I get that believe me so ten years and I mean I’ll never saw
8:54right now just in what context what what will the structure look like thoughts or
9:00they will be managing money you found a profession that yourself actualizing in
9:04so you will be managing money for years ago for sure what type of people make
9:08good investors in your mind
9:10socially inclined people financially inclined people I think so I think I
9:17always say when thinking about this in talking about it with the people I
9:22admire most that the people that tend to do well over long periods of time have
9:26something that’s that tonight and that’s this I called a constancy of purpose you
9:31know these people that get up every day and no matter what’s going on in their
9:35life no matter what’s going on in the world they get up they work hard they
9:38have that constancy of purpose and they don’t let anything get in their way and
9:42you and I both know many of these people and you can’t teach that and you can’t
9:47lose that when you have it and I actually think that’s the note it’s
9:52basically being driven and that drive is what gets people to the finish line
9:56want to go back to value investment approach and a growth stock investment
10:02approach so on the value side you’re you’re buying low p/e names are
10:06undervalued intrinsically on the roadside you’re willing to pay up a
10:10little bit for that could you believe that the company’s going to outpace
10:13itself with its earnings but you’re saying that you’re at the intersection
10:16of that which some people call growth at a reasonable price
10:20yes so explain to us why you like that the most so look to me
10:25growth in value are actually on the same track because a growing business can
10:30grow into a value stock and by the same token a value stock may be statistically
10:36cheap today but the business is performing in a certain way it may be
10:39more expensive tomorrow and so you know our view is that that growth in value
10:45sort of work together and as an investor in good businesses and growing
10:49businesses have the opportunity to benefit from sort of growth of intrinsic
10:53value and so it may not be statistically shit today but within a reasonable
10:58period of time it should be statistically cheap I think that the
11:01differences and what we try to take advantage of these traditional growth
11:05and value investors actually create the opportunity for us so growth investors
11:09want to own growing traditional growth investors one on growing businesses
11:12businesses that are growing at a certain rate growth is accelerating and they
11:16don’t really care very much about the price they pay and so that presents an
11:20opportunity for us where stocks get over price
11:23or where we buy something that turns into a traditional growth stock and then
11:29they take it to a level that’s beyond what we think is fair and creates a
11:31laboratory for us and that is what sometimes commonly called momentum
11:34investing just plain growth top-line revenue growth not necessarily focus on
11:39what that value is in terms of long-term earnings exactly what what what what
11:43their earnings power is in in there for what price you will pay on the flip side
11:47of value investor is looking at statistically cheap stocks based on a
11:52number of characteristics price-to-earnings book value free cash
11:56flow they tend to care less about whether businesses going in three years
12:00and so they can get tripped up on a business that i think is growing slowly
12:03or appears to be growing slowly looks cheap but what’s happening is the
12:07difference between a business that is growing at a low single-digit rate and a
12:11business starts to decline is very meaningful particularly when this
12:14leverage involved and so a number of our short opportunities actually come from
12:18and what we would call value traps or businesses with secular pressure where
12:22the guy on the other side is saying this is a cheap storage solutions explained
12:25that saw a value trap is it looks great on a fundamental basis book value
12:30analysis PE analysis but it’s not growing enough for it to really have a
12:35stock price appreciation of its ranking and so it looks like it’s 10 times
12:39earnings today but with a little bit of of top-line declined from operating
12:43leverage financial leverage its gonna be twenty times earnings in three years but
12:47would it be fair to say that eminences shorting value traps and getting long
12:52growth at a reasonable price I think we have I would have said I would say we
12:57own high-quality businesses that we think are underpriced in the market for
13:02a given reason it could be a business that we think is gonna grow more than
13:05the market thinks it could be a business that is a growth business that stripped
13:09and people are very focused on the short term and so we think it will regain that
13:13or it could be a slower growing but high quality business with the market is
13:16misunderstanding some piece of it on the short side we tend to look for either a
13:22business that could disappoint wall street expectations so this could be a
13:25high growth stock that is going to disappoint or a stock that faces secular
13:30pressure where it could appear to be cheaper at a value trap and we also tend
13:35to short
13:35related business shorts where we think the market is is looking at statistical
13:40numbers that are completely false or or aggressive rikki we’re in general you
13:45get your investment ideas where they originated so you know i think i think
13:48im alongside it tends to be from our guys paying attention to what’s
13:52happening within their sectors it tends to be you know where is that whereas
13:57growth occurring words marketshare shifting which stocks within this sector
14:01might have a short-term problem but a promising long-term outlook on the short
14:04side you tend to have to go fishing a little bit deeper we do a fair amount of
14:08screen is companies where the counting is is all messed up and and free cash
14:14flow and earnings are going in opposite directions when you’re investing in
14:18absolute absolute return strategies like eminence it’s not the relative
14:22performance it’s what the absolute return is because as we used to always
14:26say you can’t buy groceries at the supermarket or relative performance best
14:30way to explain why I think I think that’s right and I think investors who
14:34who short stocks need need to realize that the wind is blowing against you and
14:39so you’re right benchmark is is not whether you making monies were you doing
14:46i’m carl icahn I’m going for Barry Rosenstein Larry Summers David
14:53Rubenstein Andre Agassi job smoothly cooperman I’m Dave Petraeus on drug and
14:57Cheetos ironweed I’m watching Wall Street week I’m watching LOST i watch
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15:46water on the road that’s completely unacceptable to me and that is why I’m
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15:56taking too polluted water we already have and providing technologies to put
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16:43random thoughts now from Kyle Bass on opportunities he sees in Argentina and
16:49the emerging market selloff
16:52talked about opportunities in Argentina a country that’s in obviously the
16:56missing geopolitical change tell us a little bit Argentino what you think
17:00they’re now you know the good news is there’s new leadership I think my career
17:06as a pro he’s very pro-business I think he’s going to end up engaging with these
17:12vulture funds that have held them up for the last ten years plus and I think that
17:20they’re going to get to some sort of settlement now there’s a lot of these
17:25hedge funds and other funds that have bought debt and are sticking these guys
17:29in bankruptcy courts over that debt that’s right the prior administration
17:32was resistant to dealing with them and you believe now that president Mark we
17:36will deal with them that’s right so I was in for the debt of the debt that
17:41restructured or that when Argentina it stopped paying its debts in the early
17:45two thousands roughly 93 percent of that debt exchange into new debt seven
17:51percent of its
17:52we’re not going to exchange we’re going to hold them that their country ransom
17:56essentially they’re going to hold it hostage and they want 100 cents on the
18:00dollar plus accrued plus penalties and that’s been the standoff between kind of
18:05the hedge fund vulture universe and how do you think that reconciles don’t come
18:10up they’ll come up to a number that somewhere somewhere in the middle
18:13once they do that then Argentina Argentina been locked out the global
18:16capital markets from a sovereign perspective for over a decade imagine if
18:20the us- couldn’t sell bonds because we couldn’t access to come I don’t want to
18:25imagine that day that will never happen I don’t think but got a much brighter
18:31future ahead of it that has Kyle after 2008 after the correction a lot of
18:37advisers advised clients to look to the emerging markets what advice do you give
18:42to viewers who may on some of these assets he’s emerging mortgage rate funds
18:47these equity funds these headphones I think they’re gonna see a lot more pain
18:51for things are ok
18:53you mentioned BRIC Brazil Russia India and China so you look at Brazil and the
18:59scandal goes all the way to the president the carwash scanner is always
19:03the president and it is a complete disaster with corruption and chill day
19:08till they root out all of the corruption and fix Brazil Brazil’s gonna keep going
19:12south russia couple of things have to change global chess moves in and being
19:18sanctioned for then you get India’s the one bright spot in the bricks and then
19:22China which i think is the big one that’s gonna have a non-performing loans
19:27cycles so if you ask me which anymore and then in the AM selloff I think we’re
19:31probably in the mid 5th inning maybe maybe entering the six but we still have
19:38three tough innings to go when you look at opportunities right now what’s the
19:44greatest opportunity if you had to say to the viewer we saw what was happening
19:48subprime USA and this is what we see now even our views on credit contraction in
19:53Asia and China particularly going through a let’s say they’re gonna
19:56banking law cycle like we like we went through the GFC there’s one thing has
20:00happened china’s gonna have to dramatically devalue its currency now
20:04that’s not something the readership can really get your arms around it but it’s
20:09really tough to invest as a non professional investors you you know what
20:13I mean so I don’t think valuation because of its interconnectivity with
20:18the rest of the world economy is going to also upset the world economy is going
20:22to cause a slower growth dynamics for everybody that’s right so also has
20:26implications on the USDollar so why you can’t necessarily play the China
20:31devaluation its
20:33what does it mean it means a stronger dollar for many many years China many
20:39years ago
20:40attach their currency to the dollar because I I think they had their wagon
20:46to our star very smartly back then because our goal of the united states
20:51was did appreciate our callers through inflation so we issued debt to the rest
20:56of the world we’d appreciate our dollar and we actually end up paying off
21:00getting monetizing the debt to pay the debt that with dollars are worth less
21:06than the ones that you borrow it exactly right and so now the real problem is
21:10china has hitched their wagon our star and their currency is effectively
21:15appreciated about 60 percent versus the rest of the world since 2002 let it go
21:20and it’s going to be the beneficiary let’s explain to viewers why it’s
21:26killing them and so what’s happening is as their currencies appreciating their
21:30goods and services that are being produced in China and sold around the
21:33world have become more expensive as a result of that appreciating currency
21:37right so as we all know there was out there was a labor arbitrage between us-
21:42labor rates in chinese labor rates and the open the free and open global
21:47economy college free trade enabled arbitrage to to normalize itself and
21:52this phenomenon help normalize it quicker so China’s effective exchange
21:57rate moving up versus the rest of the world made their goods and services
22:01little bit more expensive each year and now it’s kind of that labor arbitrage is
22:05gone that labor arbitrage to go on and they they’re banking system is expanded
22:09400% seven years without a non-performing loans cycle my view is
22:15that we’re gonna see non-performing loans
22:16janice was on the show few months back very negative on china because of many
22:21of the things that you’re saying are you short China well so we’re not short
22:25Chinese equities per se but we are we’re very invested in the Chinese currency
22:30given this thesis we think you’re going to see a pretty materials evaluation
22:36and we think it’s going to be in the next 12 to 18 hillary’s really tough
22:46although I might think she might be the most
22:49feeling good about Pfizer Johnson and Johnson for Amgen there are components
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23:23do you need a problem solving skills are a phone or computer
23:31no college degree though not yet but life stop me a lot and I’m ready for
23:36well your company could be missing out on the candidates in Leeds most
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24:23Stanley where capital creates change
24:27now it’s time to get personal and learn a little more about Kyle Bass and Ricky
24:32sailor from football the spear phishing there’s more to these guys and just
24:36money management support anybody in the upcoming election and and will the
24:41election have any impact on the markets elections always have impact on markets
24:46I think the macro forces are going to overcome that of any potential election
24:52outcomes I’m not supporting anyone I think we have I think we have a little
24:57bit of a of a of a hollywood you know crew on that on the republican side and
25:03on the democratic side I really just think it’s Hillary I think that to elect
25:07hillary’s can be really tough although I might think she might be the most fit to
25:12govern the country given her experience we’d like to finish up with a little bit
25:16of word associations say a couple words and when you get your reaction to see
25:21their favorite book I really enjoyed this post
25:25Michael Warren wrote our faith and fantasy about 10 years ago about the
25:30Middle East historical reference in Middle East and how the Middle East and
25:33the conflict with the United States really began at the at the when our
25:38founding fathers alright texas big states the second amendment two members
25:44of the follow-up to that there are plenty of things wrong with the gun laws
25:48in my opinion for anyone to be able to go buy a fifty caliber rifle that can
25:54take down airplanes today you can walk into a gun store you can buy something
25:58the bullet about that big that big around and said at the end of the runway
26:02and take a plane now maybe we should reconsider that as far as the right to
26:07bear arms I think that every single person that buys a gun shy after
26:10register with the state government that’s not a crazy idea and that’s
26:15something that the gun lobby which is fighting until let’s switch abruptly
26:20favorite vacation spot
26:24what’s a day off I mean I love i love reading and spearfishing as the TV and
26:31hanging out in the country
26:34ok what about Michael Lewis I think Michael Lewis right some interesting
26:40books and I think that in my interactions with him what I’ve noticed
26:45is hyperbole tends to sell books he does great stories and he’s a great
26:50investigative journalist and he adds a little hyperbole in there and then the
26:55book takes off gonna play word association get your favorite sport is
27:00football to watch my favorite sport is probably football to play my favorite
27:04sport is tense favorite book I like in Sicilia I like the animals that was just
27:13a book that just spoke to me okay so your favorite vacation spot and
27:17harassment of that activity bike and hike in wisconsin football man I I love
27:27Wisconsin everything I’m a crazy fan the person you admire the most you know I
27:33think I think Bill Gates has been one of these entrepreneurial visionaries built
27:39a business to something unbelievable sort of defied the odds of what he did
27:43then turned his life to charity and make the world a better place
27:49allocated his philanthropy capital to Bill Gates just told you about what
27:54people think of
27:57you want to thank I’ll bass and ricky sailor for joining us today on wall
28:01street we that’s it for today you can check in with us all week and Wall
28:05Street week dot com until next Sunday prospers
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