Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Let's talk about this
Speaker 1: all with Hayman Capital Management founder and CIO Kyle Bass
Speaker 1: joining us. Now, Kyle, it's great to have you with us.
Speaker 1: I know that last week on a competing network, you
Speaker 1: said that I think the tariffs are thoughtful. I think
Speaker 1: they will work. With that in mind, I would love
Speaker 1: to hear your thoughts on what you make of the
Speaker 1: tariff rollout and that now this ninety day pause. Which
Speaker 1: adjectives would you use?
Speaker 2: Now I've used the same adjectives.
Speaker 3: I mean, look, you've got seventy five countries to reach
Speaker 3: out to us in two days, and they're all countries
Speaker 3: that matter minus China on a trade perspective. So you
Speaker 3: know it takes it takes ninety days to sit down
Speaker 3: with someone and iron out something that isn't simply a
Speaker 3: tariff number.
Speaker 2: There's tariffs, non tariff barriers, there's currency.
Speaker 3: There's all kinds of inputs to this equation, and so
Speaker 3: giving a ninety day reprieve while they hammer out trade
Speaker 3: deals is a good idea.
Speaker 4: Kyle.
Speaker 5: We have had a lot of big multinationals pulling their
Speaker 5: outlooks due to this uncertainty, and then small main street
Speaker 5: businesses writing in on mass and saying it's just impossible
Speaker 5: to do business in this economy.
Speaker 4: Who are these tariffs good for?
Speaker 3: I mean, it's more important to reset the trade relationships
Speaker 3: between the United States and the rest of the world.
Speaker 3: And I believe President Trump thinks that bilateral trade negotiations
Speaker 3: end up being better for the world's largest consumer, which
Speaker 3: is the United States.
Speaker 2: And so if we can.
Speaker 3: Get to a place where trade is more fair, then
Speaker 3: I think we can get to a foundation where we
Speaker 3: can build, grow, where we can grow once again and
Speaker 3: grow from a much stronger foundation. These tariffs, these non
Speaker 3: tariff barriers, the manipulation that's gone on against the United
Speaker 3: States for so long is no longer going to happen.
Speaker 3: And I think our trade relationship with China is the
Speaker 3: one that doesn't look to have any off ramps at
Speaker 3: this moment in time. But I can tell you that
Speaker 3: once all of these agreements get hammered out, the US
Speaker 3: is going to be in a much better place.
Speaker 1: Well, Kyle, to that point, I know that you're focused
Speaker 1: on China. Do you see any chance of a de escalation?
Speaker 1: I know that you said that there isn't a clear
Speaker 1: off ramp right now. But do you see any chance
Speaker 1: that things could cool down or do you think that
Speaker 1: this trade war specifically between the US and China is
Speaker 1: just getting started here?
Speaker 3: Yeah, I mean it actually got started back when China's
Speaker 3: sent of the WTO and China's been at this trade
Speaker 3: war with the United States for its entire ascension, call
Speaker 3: it twenty three years. And so the US has just
Speaker 3: figured out what China's malign intentions are. And we all know.
Speaker 3: We've seen their militaristic belligerents in the Second Thomas Show
Speaker 3: and the Philippines, We've seen it surrounding Taiwan. We've listened
Speaker 3: to the rhetoric of shijiping, and we are now in
Speaker 3: a place where we're going tit for tat on tariffs.
Speaker 3: Where I think China's made a grave error here is,
Speaker 3: as you know, we only export about one hundred and
Speaker 3: forty billion a year to China and we import call it,
Speaker 3: four hundred and fifty billion from them, And so I
Speaker 3: think that if we're doing tit for tat on tariffs,
Speaker 3: than China loses because there is no functional equivalency in
Speaker 3: the amount of goods and services moving back and forth.
Speaker 3: So we'll see what happens here. But I think it
Speaker 3: looks like we're in a game of we can call
Speaker 3: it a Chinese standoff, or we can call it a
Speaker 3: Mexican standoff.
Speaker 2: I don't see an off ramp here.
Speaker 6: Kyle, to the extent that you see escalation of this
Speaker 6: trade war with China in particular, you're looking at two
Speaker 6: whales in the ocean going at it, and you do
Speaker 6: have investors getting increasingly concerned about a weakening here of
Speaker 6: Chinese currency in order to boost their exports. How many
Speaker 6: tools does China have really in order to fight the
Speaker 6: US on this battle?
Speaker 3: Yeah, I mean you heard Treasury Secretary Besson said they're
Speaker 3: playing poker Han with a pair of twos. They've got
Speaker 3: a banking system that's three and a half times more
Speaker 3: levered than ours, and they've only been at banking roughly
Speaker 3: for twenty years, like real banking, So they've got a
Speaker 3: system that's levered to real estate, and real estate in
Speaker 3: China's down thirty to fifty percent, depending upon.
Speaker 2: Where you are.
Speaker 3: So they've got an insolvent banking system. They've got runaway
Speaker 3: unemployment amongst your youth. They've got another twelve million kids
Speaker 3: graduating their universities this year. And so you've got youth unemployment,
Speaker 3: a banking system that's insolvent, you've got.
Speaker 2: A real estate collapse.
Speaker 3: And so when you're asking me what tools China has,
Speaker 3: they've got a couple of places where they could really
Speaker 3: press us. Right one, believe it or not, we still
Speaker 3: have the majority of our active pharmaceutical ingredients for all
Speaker 3: antibiotics in the US made in the city of Wuhan.
Speaker 2: That's just a it's a sad truth.
Speaker 3: And then on the finishing side of synthetic graphite on
Speaker 3: rareth minerals, if you remember back in our trades bat
Speaker 3: in twenty nineteen, Xijingping mad made a visit to where
Speaker 3: they do the rareth metals finishings and we have seen
Speaker 3: we haven't seen g since April seventh, So you know,
Speaker 3: we'll we'll we'll see.
Speaker 2: Well, we'll see what he does.
Speaker 3: But he can he can start with holding things like
Speaker 3: antibiotics and rareth minerals.
Speaker 2: But this is something that our administration has thought through.
Speaker 1: Well, Kyle, I wanted to talk to you as an
Speaker 1: investor now too, because as Janelle mentioned, of course, China
Speaker 1: has been signaling that it will gradually let the yuan weekend,
Speaker 1: And I'm curious how you're approaching that, whether you're seeing
Speaker 1: that as a trade and betting against the offshore.
Speaker 3: You want No, I think I'm not at the moment,
Speaker 3: but I would say that it is not under China's control.
Speaker 3: When you think about go back to the to the
Speaker 3: Asian financial crisis of nineteen ninety seven and ninety eight,
Speaker 3: it wasn't it wasn't Thailand's decision to let go.
Speaker 2: It was Thailand running out of reserves. And so when
Speaker 2: you look at.
Speaker 3: China and the offshore you Wan, in the end, China's
Speaker 3: got to spend dollars to support that relationship.
Speaker 2: And China needs a strong you Wan.
Speaker 3: They buy thirteen million barrels of cruit every day, eight
Speaker 3: and a half bees of gas every day, and they
Speaker 3: buy forty percent of their food every day in dollars.
Speaker 3: So if for some reason they have to let that
Speaker 3: relationship go and the you won weekend as we saw
Speaker 3: it weekend two days ago, to its weakest level ever,
Speaker 3: we'll see if that if that relationship holds.
Speaker 2: And my view is when you look at the.
Speaker 3: Differentials and interest rates and you look at China's bond market,
Speaker 3: the one thing that can't be lying coming out of
Speaker 3: China is their bond market go where the look at
Speaker 3: the Chinese tenure, it's collapsed. So their economy is in
Speaker 3: a very different place than now. And that relationship between
Speaker 3: the one and the dollar and the Hong Kong dollar
Speaker 3: and the dollar is that's a tenuous relationship and we'll
Speaker 3: see what happens.
Speaker 5: Hey, Kyle, just quickly, what do you think the most
Speaker 5: they can allow the on to weaken is? I mean,
Speaker 5: where's the point where they have to step in and
Speaker 5: can't allow any more slippage?
Speaker 3: Yeah, I mean, I mean it's just begune. All you've
Speaker 3: seen is a move from roughly six twenty to seven
Speaker 3: forty over a period of time. So you know, typically
Speaker 3: again when countries run out of reserves, as you know,
Speaker 3: the currency flaps in the wind. So there's this concept
Speaker 3: of them quote controlling where it is. And then there's
Speaker 3: the uncontrollable moves. And what we saw in the Asian
Speaker 3: financial crisis, even with the largest player back then was
Speaker 3: South Korea, we saw some pretty notable currency moves. And
Speaker 3: I think that's coming, and you know, I just I
Speaker 3: don't know if it's coming in the next month or so,
Speaker 3: but I'll tell you the interest rate differentials, the business
Speaker 3: cycle differential are going to dictate the movements and the currency.
Speaker 3: So we do expect the Chinese currency to weaken pretty
Speaker 3: materially against the dollar.
Speaker 1: Kyle, I want to talk about the tariffs that are
Speaker 1: still in place. Of course, we got the news about
Speaker 1: the ninety day pause on certain countries yesterday, but you
Speaker 1: take a look at what still stands. You have twenty
Speaker 1: five percent on steel aluminum autos, twenty five percent on
Speaker 1: auto parts starting from May third. And I want to
Speaker 1: bring this to your home state of Texas. I know
Speaker 1: that you're a Texas guy and you think about Texas's economy.
Speaker 1: There's a lot of car dealerships, there's a lot of
Speaker 1: car companies, and of course a lot of energy there.
Speaker 1: I'm curious, you know what you think the impact on
Speaker 1: Texas might be.
Speaker 3: Yeah, I mean in the near term, the impact is
Speaker 3: going to be slightly negative, right, But when you when
Speaker 3: you think about the carve outs. First of all, you
Speaker 3: know we import about four point two trillion a year
Speaker 3: as a country.
Speaker 2: Roughly forty percent.
Speaker 3: Of those imports were already exempt from this new round
Speaker 3: of tariffs. You mentioned the two thirty two tariffs, right, steel, aluminum, autos,
Speaker 3: auto parts, things like that. But I think it's important
Speaker 3: to understand that those two thirty two tariffs, second two
Speaker 3: thir two tiarffs were put on by Trump and his
Speaker 3: in his last administration, and if you remember, Biden ran
Speaker 3: on we're going to cancel those the tariffs. In the end,
Speaker 3: what happens is when someone like China, a state actor,
Speaker 3: can act uneconomically or non economically and they can flood
Speaker 3: your market with steel or aluminum or synthetically synthetic graphite
Speaker 3: or anything like that. And why it's important is they
Speaker 3: can act for a longer period of time to put
Speaker 3: your businesses out of business, so they can take capacity
Speaker 3: utilization down enough to where they can literally turn our
Speaker 3: steel industry off, turn our aluminum industry off. So those
Speaker 3: tariffs are necessary, and those will live and they will
Speaker 3: live into the future, and they may not be high enough.
Speaker 3: We must maintain domestic production of certain things from a
Speaker 3: national security perspective, and that's why those stand where they stand.
Speaker 3: For autos, it just you know, you see China building
Speaker 3: plants in Mexico and Canada. So basically to avoid the
Speaker 3: tariffs on on their cars, and so we're our negotiations
Speaker 3: with Mexico and Canada are primarily on fentanyl, secondarily on
Speaker 3: Chinese transshipments, and we'll end up.
Speaker 6: Getting this right, Kyle, Even if you believe that the
Speaker 6: tariffs are ultimately necessary for the American economy, how much
Speaker 6: more pain do investors have to bear? Because you do
Speaker 6: still see the S and P five hundred after yesterday's rally,
Speaker 6: still down more than seven percent this year, You saw
Speaker 6: the bond market whips on wildly just this week. How
Speaker 6: much more pain is there as this transition and this
Speaker 6: negotiation proceeds.
Speaker 3: I think, so we need to separate a few things
Speaker 3: that you said. The bond market had a had to
Speaker 3: fit you know this in the selloff, and it was
Speaker 3: largely due to it wasn't a basis trade. You know,
Speaker 3: it's the it's the fixed floating swaps, and I know
Speaker 3: that gets in a world that.
Speaker 2: A lot of people don't want to talk about.
Speaker 3: But it was very simply a regulatory trade that bond
Speaker 3: traders had on expecting expecting banks' abilities to buy treasuries
Speaker 3: to increase, and then the tariff mayhem showed up and
Speaker 3: that had to unwind. I think that had a lot
Speaker 3: to do with the crazy move in the tenure. So
Speaker 3: I think things are settling down. But you know, as
Speaker 3: far as stocks are concerned, you've heard the President, you've
Speaker 3: heard the Treasury secretaries say, we have to make some
Speaker 3: difficult choices, and we must reset our trade relationships for
Speaker 3: the rest of the world. We also must narrow our
Speaker 3: fiscal deficit in the United States. And both of those
Speaker 3: things might be slightly recessionary. And if that's true, we
Speaker 3: might have to go through a brief recession in order
Speaker 3: to rebuild our foundation. And you say, how much longer
Speaker 3: can investors hold? You know, Look, the market's not up
Speaker 3: into the right, you know, every year of every decade.
Speaker 2: And I think that.
Speaker 3: This is a necessary reset so that we can grow
Speaker 3: again in the future and grow more thoughtfully.
Speaker 5: Kyle as an avowed free market capitalist, I care mostly
Speaker 5: about myself.
Speaker 4: Right.
Speaker 5: So the twenty seventeen Tax Cuts and Jobs Act, President
Speaker 5: Trump punched me in the gut with a massive tax raise,
Speaker 5: right because he takes out all of a sudden, this
Speaker 5: state and local tax deduction cap that's been in place,
Speaker 5: or it puts in a cap after we had a
Speaker 5: state and local tax deduction.
Speaker 4: For one hundred and four years.
Speaker 5: If I can get a discount now in my taxes
Speaker 5: because of DOGE cuts or because of revenue on tariffs,
Speaker 5: I'll be happy. And you have said you think that
Speaker 5: DOGE is going to cut six hundred billion out of
Speaker 5: government costs and that we could raise six hundred billion
Speaker 5: in revenue. Is that going to offset the tax increase
Speaker 5: that Trump handed me in twenty seventeen somehow?
Speaker 1: No?
Speaker 3: And look, let me let me begin by saying, Matt,
Speaker 3: I know you're out in things for yourself, and that's
Speaker 3: I guess what you care about. Uh That the good
Speaker 3: news is is is you and I and Wall Street
Speaker 3: are not setting trade policy for the world. Because if
Speaker 3: if if all we did was open ourselves the unrestricted
Speaker 3: free trade, we'd all be speaking Chinese tomorrow. We need
Speaker 3: to be thinking about national security in the long run.
Speaker 3: On the tax side, you know, there there are going
Speaker 3: to be some tax breaks, but there they are not
Speaker 3: going to be uh for for the for the top
Speaker 3: of the for the top of the scale. It's going
Speaker 3: to be focused more in the middle class and as
Speaker 3: far as as far as state and local deduction caps.
Speaker 3: I mean, it's interesting to see the migration in the
Speaker 3: United States. You live in a place that sounds like
Speaker 3: it has state and local taxes. One could say.
Speaker 4: That pay property taxes, right, don't you in Texas?
Speaker 2: Yeah, we do, we pay property tax.
Speaker 3: But when you think about high tax, high cost jurisdictions
Speaker 3: that some some might say or mismanaged, you see the
Speaker 3: migration in the US moving from the northeast and the
Speaker 3: west coast to the south to Florida, Tennessee, Texas, South Carolina.
Speaker 3: And that's where major businesses and people are moving. And
Speaker 3: so I think that tax arbitrage or movement is going
Speaker 3: to continue for the next call it ten years to come.
Speaker 2: And I think you're seeing people vote with their feet.
Speaker 1: And I do want to defend Matt a little bit.
Speaker 1: I know you care about more than just yourself, but
Speaker 1: people care.
Speaker 5: About in terms of the wealth of nations, right, Adam Smith.
Speaker 4: That's how capitalism works.
Speaker 5: Every man for himself, that's how it's supposed to work.
Speaker 1: Well, Kyle, with that in mind, I want to talk
Speaker 1: to you about you and your future because Bloomberg reported
Speaker 1: in January that the Trump administration was considering you for
Speaker 1: opposed to either the Treasury Department or the Defense Department,
Speaker 1: And I'm really curious here we sit in April, are
Speaker 1: you joining the administration?
Speaker 2: I mean, I'm going to go no comment there.
Speaker 3: It's it's not worth talking about unless unless there's actually
Speaker 3: a deal on the table, and there certainly is no
Speaker 3: deal on the table. My biggest regret in life is
Speaker 3: that I've never formally served our country. And if there's
Speaker 3: a place where I can serve it and it can
Speaker 3: work out in my life as well, then I'm always open.
Speaker 2: I've got open ears.
Speaker 6: I'll definitely come back if and when you do have
Speaker 6: a deal. But I also have another question, Kyle, for
Speaker 6: you about you and your portfolio. When you look at
Speaker 6: this market, how do you play this? What are the
Speaker 6: trades that you would put on right now?
Speaker 3: You know, I think that I think when the market's
Speaker 3: down twenty it's you know, year to date, which was
Speaker 3: I guess a couple of days ago. I think that's
Speaker 3: I think it's an overreaction. But when I think about
Speaker 3: the coming GDP prints, you're going to see a recessionary impulse.
Speaker 3: You're going to see a slight inflationary uptick on a
Speaker 3: couple of goods that ended up in the tariff. Melee
Speaker 3: but I believe the slight recession impulse that we're going
Speaker 3: to see over the next six months will actually bring
Speaker 3: the general price level down. I don't think you're going
Speaker 3: to see a big inflationary move or stag inflationary move.
Speaker 3: So I think six months from now, the market's going
Speaker 3: to be in a much better place.
Speaker 2: And that's with the caveat of If.
Speaker 3: China doesn't that Taiwan, if things in Iran don't get
Speaker 3: much worse, and if things in Russia Ukraine don't get
Speaker 3: much worse, I think things are gonna look better.
Speaker 2: In the next six months.
Speaker 3: If China invades Taiwan, I think I think all bets are.
Speaker 1: Off all right, Kyle, we got to leave it there.
Speaker 1: You've been very generous with your time this morning.
Speaker 4: Really appreciate it.
Speaker 1: That is Hayman Capital's Kyle Bass