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Kyle Bass: No Lehman Moment On China

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In an interview to appear on FOX Business Network’s (FBN) Wall Street Week Friday, April 15 at 8PM/ET host Gary Kaminsky and fill in host Maria Bartiromo speak with Hayman Capital Management Founder and Principal Kyle Bass about his thoughts on the economy and 2016 presidential election. Bass said, “there’s a  40, 50 percent chance in the next year” we may have a “brief, minor recession.” When asked what presidential candidate he thinks is best for the markets Kass said, “I think it’s Hillary” and that “I think she’s the most sane actor of them all.” Kass also commented on China’s economy saying, “the interesting thing is it’s not the end of the world.  You know, we’re not going to have a Lehman moment on China.”

Kyle Bass on whether we should be worried about negative interest rates in the United States:

“I think this is where the academics are kind of, clashing with the practitioners.  I think on paper, negative rates make a lot of sense, if you’re running academic models.  But in the world, in reality, they make no sense. And so having $7 trillion or $8 trillion in debt, um, trading at negative rates, having 30-Year JGBs, uh, trading at 50 basis points is absolutely ludicrous. And so this experiment that’s going on, we all know will end poorly at some point in time.  I just don’t know when that time is.”

Kyle Bass on whether people should consider taking money out of banks because soon they may be having to pay the banks to leave the money there:

“I think one of the fears that they have is a run on cash, right.  If they told you and I that they’re going to tax your deposits by 100 basis points, well, it’s better to put it in a safe or under your mattress than it is a — and that’s why you see a resurgence in gold.  The more they move to negative rates, the more gold is going to take off, because there’s no carrying cost.”

Kyle Bass on whether he thinks Donald Trump is right that we might have a recession:

“Well, Donald Trump may be right for the wrong reasons.  Right, from the perspective of what’s going on in Asia, Asia has a giant credit bubble that they’ve been building for the last 10 years, or longer, that, has kind of reached its atrophy level and it’s going to happen over the next two or three years. So whether that causes the U.S. to have a brief, minor recession, I think it’s kind of 40, 50 percent chance in the next year, personally. Um, but the —  it doesn’t mean that slow global growth is going to lead to persistent recessions in the United States.  I don’t buy that. But I also don’t buy this — this idea that monetary policy can generate true organic growth.  It can help us out of a crisis and it’s proven it can do so, but, um, listen, we’ve had eight years of full out, excessive monetary and fiscal policy cyclically adjusted and here we are today. And so when Lagarde goes to the G-20 and says we all need to work together, we’ve been working together…Everybody has been on easing monetary policy.  We’ve pulled all the demand forward that we can.  And now we’re stuck with kind of stagnation and excess capacity and a lot of debt.”

Kyle Bass on who the best person for President would be for the equity markets:

“So I’ll give a crazy answer.  I mean I think it’s Hillary. “

Kyle Bass on Hillary Clinton:

“Yes.  I think she’s the most sane actor of them all.  And again, if they – might seek a — economics advice from me.  It’s a good thing that no one seeks political advice from me.  I — you know, I’m a weekend warrior, an armchair quarterback as far as policy is concerned.”

Kyle Bass on whether Hillary Clinton policies will hurt the market:

“Well, so on drug prices, you know, how can you not say that we should rein in drug prices when they’ve been — been able to freely charge whatever they want to charge annually? You know, in the last 12 months, that narrative has changed dramatically.  And that’s for the better for our country.  It’s for the worst for a few drug companies.  It’s for the better for everyone, uh, both you and I and — and anyone that buys prescription drugs, it’s better. So when I think about the three policies that you just discussed, um, raising taxes, I mean I — one thing you have to think about is this divide between the haves and the have-nots.  The one unintended consequence of Fed easy monetary policy has been this distributive nature of, um, of their policies, right, a distributive nature where it made the rich richer. How many rich people do you know today that are worse off than they were at the peak of 2006’s greatness in the United States? I don’t know one…Minus some of the Lehman people, you know, I don’t know one. And so what happened is we went to this policy where, uh, we went through — to, go to QE.  QE, what that did was raise asset prices.  Well, the only people with assets are rich people, in general.  So they became much more rich. So that divide widened.  So now we have this unintended consequence of — call it a liberal Fed — is they made that, that divide larger.  And so — so I think it’s a big — I think this is a big issue. So when you talk about raising tax, I mean it’s inevitable, I think, that we’re going to have to raise personal income tax.  I think we’ve got to cut corporate tax if we’re going to compete on a global scale.”

Kyle Bass on whether he thinks the Chinese market will slow down:

“You know, for those that say China isn’t having a hard landing we printed, in the fourth quarter, they printed 5.8 percent nominal GDP growth.  That’s the lowest quarter — the lowest GDP growth in nom — nominal terms in 41 years, OK.  They had a reverse migration for the first time in 30 years.  They — 5.8 million Chinese went from urban back to rural areas last year. So I don’t know what metrics or how you define hard landing, but they’re already right in the middle of a hard landing. Uh, and so when you look at what’s causing this hard landing, it’s analogous to what happened in the U.S., right.  In the U.S., in 2001, we traded the dot-com bust for the housing boom.  Greenspan lowered rates to 1 percent.  And then by 2004, we started raising rates, but then we had 100 percent LTD lending and subprime lending, and everything that went on during that — that pre-dated our financial crisis happened. The exact same thing is happening in China.  China has grown its banking system 1,000 percent in 10 years.  It has over $34 trillion of assets in the banking system, though it has only $10 trillion of GDP, $10 trillion or $11 trillion. So what’s happening today is they’ve just, in the last year, they went to 100 percent LTD lending through the peer-to-peer market and the real estate market.  And so you saw in Shenzhen and Beijing and the tier one cities, real estate went up another 70 percent, uh, in Shenzhen less than Beijing. The point being is they’re going to have a crisis similar to what we had.  Now, not the interconnectedness, not of all the problems that the U.S. had with Europe.  But it’s just a cycle.  They’re in a very different place in the world than we are, uh, as far as cycles are concerned.  And I think the world is not focused enough on what the cause of the problem is in China.  They’re focused on the symptoms.”

Kyle Bass on whether the China crash is worse than what we saw in the United States in 2008:

“You know, well, the interesting thing is it’s not the end of the world.  You know, we’re not going to have a Lehman moment on China. What’s going to happen is they’re going to have to recapitalize their banks.  In 2001, at the back of the Asian financial crisis, China had to recap their banks.  And it cost them 30 percent of GDP, if you read the Bank of International Settlements kind of report on what happened. What they – I won’t get into how they did it, but, they recapped their banks.  So basically that means they had to come up with the equity. So you think about the U.S., we had $1 trillion of equity in our banking system pre-crisis.  We had, call it $17 trillion of assets, on balance sheet, and then with Fannie and Freddie, we had some more off balance sheet.  but during the crisis, we pumped in about $700 billion into bank equity. So for all intents and purposes, we lost 70 percent of all bank equity in the United States. They have $34.5 trillion.  I’m just converting renminbi to dollars of assets in their banks and they only have $2 trillion of equity. So I think they’re going to lose $2 trillion or $3 trillion of equity, which is OK.”

Kyle Bass on having money in Asia:

“Right, so, it’s just a bit of a misnomer.  So we have all of our focus on Asia.  We don’t have any money invested in Asia.  What we have is, we’re long the dollar, the U.S. dollar.  And we’re betting against the Chinese currency, i.e.  If we’re right about the banking crisis and we’re right about the fact that they’re going to do everything that it takes to fix themselves, which they will.  They’ll recap their banks.  They’ll reform, everything they can do on the spending side.  They’ll re— they’ll do everything they have to do, you and I would do, if you parachuted us in to run the Chinese financial situation. What that means, their currency is going to have a massive devaluation.”

Kyle Bass on whether the story about his role in Bear Stearns crisis is true:

“Yes.”

Kyle Bass on whether he made a presentation to Bear Stearns executive committee pre-2008 on exactly what he saw they were holding:

“Yes.  In November 2006, I met with Bear Stearns’ entire risk management committee and I walked them through the entire presentation.”

Kyle Bass on exactly what happened in the meeting in 2006:

“Oh, hey, look, when you look at their balance sheet, you know, Lehman was levered almost 40 times to one.  Bear was levered 33 to one.  You lose 3 percent of your assets, you’re out of business…if you’re 33 times levered, right.  We kind of go — that — that’s just simple numbers. Uh, when we got to the conclusion that we came to about kind of what mortgage losses were going to be, again, this predates anything that happened in kind of the financial press, or disclosed, but when you look at, November 2006, you already saw early payment defaults rising.  You had losses in these trusts were starting to spike from low levels, very similar to what’s happening in the Chinese banking system today, by the way.  Losses are spiking from very low levels. But in that case, I was so worried.  Look, all of my friends were at Bear Stearns.  I had many, many, many friends there.  My prime brokerage account for my fund was at Bear Stearns.  I care very much about those people.”

Kyle Bass on whether he was impacted:

“Yes.  I mean the last thing I wanted was for them to go down… so in November of 2006, I went in and met with the risk management committee headed up by Bobby Steinberg.  And we had a room full of Bear Stearns’ execs.  Now, jimmy wasn’t in that room and Ace wasn’t in that room.  Uh, but I went through, for about 90 minutes, I went through my own view of how this was going, how this was going to go. And by the way, I am a small — at that point in time, I was a very small fund manager in Dallas, Texas that they were just taking in a data point.”

Kyle Bass on what happened at the end of the meeting:

“So at the end of the meeting, Bobby Steinberg put his arm around me and he said, Kyle, that’s a very compelling presentation and god, I hope you’re wrong.”

Kyle Bass on whether he see any risks today in the U.S. that compare to what he correctly identified back in 2006:

“I don’t.”

Kyle Bass on whether there is going to be a Lehman moment for the banks of Europe:

“What I mean by Lehman moment, very particularly — very specifically, is the interconnected nature of Lehman’s failure and everyone worrying about, derivative contracts failing…and in the end, if you remember, every single derivative trade settled perfectly in Lehman.  I personally think the world is better off,  the — seeing how a bank can fail…rather than us saving every one and everything.  And I know that — that will be controversial, but I just think it is better.”

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