WEBVTT - Kyle Bass Talks Tariffs and US Recession Odds

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Let's talk about this

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<v Speaker 1>all with Hayman Capital Management founder and CIO Kyle Bass

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<v Speaker 1>joining us. Now, Kyle, it's great to have you with us.

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<v Speaker 1>I know that last week on a competing network, you

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<v Speaker 1>said that I think the tariffs are thoughtful. I think

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<v Speaker 1>they will work. With that in mind, I would love

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<v Speaker 1>to hear your thoughts on what you make of the

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<v Speaker 1>tariff rollout and that now this ninety day pause. Which

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<v Speaker 1>adjectives would you use?

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<v Speaker 2>Now I've used the same adjectives.

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<v Speaker 3>I mean, look, you've got seventy five countries to reach

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<v Speaker 3>out to us in two days, and they're all countries

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<v Speaker 3>that matter minus China on a trade perspective. So you

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<v Speaker 3>know it takes it takes ninety days to sit down

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<v Speaker 3>with someone and iron out something that isn't simply a

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<v Speaker 3>tariff number.

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<v Speaker 2>There's tariffs, non tariff barriers, there's currency.

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<v Speaker 3>There's all kinds of inputs to this equation, and so

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<v Speaker 3>giving a ninety day reprieve while they hammer out trade

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<v Speaker 3>deals is a good idea.

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<v Speaker 4>Kyle.

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<v Speaker 5>We have had a lot of big multinationals pulling their

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<v Speaker 5>outlooks due to this uncertainty, and then small main street

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<v Speaker 5>businesses writing in on mass and saying it's just impossible

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<v Speaker 5>to do business in this economy.

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<v Speaker 4>Who are these tariffs good for?

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<v Speaker 3>I mean, it's more important to reset the trade relationships

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<v Speaker 3>between the United States and the rest of the world.

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<v Speaker 3>And I believe President Trump thinks that bilateral trade negotiations

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<v Speaker 3>end up being better for the world's largest consumer, which

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<v Speaker 3>is the United States.

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<v Speaker 2>And so if we can.

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<v Speaker 3>Get to a place where trade is more fair, then

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<v Speaker 3>I think we can get to a foundation where we

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<v Speaker 3>can build, grow, where we can grow once again and

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<v Speaker 3>grow from a much stronger foundation. These tariffs, these non

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<v Speaker 3>tariff barriers, the manipulation that's gone on against the United

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<v Speaker 3>States for so long is no longer going to happen.

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<v Speaker 3>And I think our trade relationship with China is the

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<v Speaker 3>one that doesn't look to have any off ramps at

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<v Speaker 3>this moment in time. But I can tell you that

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<v Speaker 3>once all of these agreements get hammered out, the US

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<v Speaker 3>is going to be in a much better place.

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<v Speaker 1>Well, Kyle, to that point, I know that you're focused

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<v Speaker 1>on China. Do you see any chance of a de escalation?

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<v Speaker 1>I know that you said that there isn't a clear

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<v Speaker 1>off ramp right now. But do you see any chance

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<v Speaker 1>that things could cool down or do you think that

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<v Speaker 1>this trade war specifically between the US and China is

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<v Speaker 1>just getting started here?

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<v Speaker 3>Yeah, I mean it actually got started back when China's

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<v Speaker 3>sent of the WTO and China's been at this trade

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<v Speaker 3>war with the United States for its entire ascension, call

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<v Speaker 3>it twenty three years. And so the US has just

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<v Speaker 3>figured out what China's malign intentions are. And we all know.

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<v Speaker 3>We've seen their militaristic belligerents in the Second Thomas Show

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<v Speaker 3>and the Philippines, We've seen it surrounding Taiwan. We've listened

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<v Speaker 3>to the rhetoric of shijiping, and we are now in

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<v Speaker 3>a place where we're going tit for tat on tariffs.

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<v Speaker 3>Where I think China's made a grave error here is,

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<v Speaker 3>as you know, we only export about one hundred and

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<v Speaker 3>forty billion a year to China and we import call it,

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<v Speaker 3>four hundred and fifty billion from them, And so I

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<v Speaker 3>think that if we're doing tit for tat on tariffs,

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<v Speaker 3>than China loses because there is no functional equivalency in

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<v Speaker 3>the amount of goods and services moving back and forth.

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<v Speaker 3>So we'll see what happens here. But I think it

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<v Speaker 3>looks like we're in a game of we can call

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<v Speaker 3>it a Chinese standoff, or we can call it a

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<v Speaker 3>Mexican standoff.

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<v Speaker 2>I don't see an off ramp here.

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<v Speaker 6>Kyle, to the extent that you see escalation of this

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<v Speaker 6>trade war with China in particular, you're looking at two

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<v Speaker 6>whales in the ocean going at it, and you do

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<v Speaker 6>have investors getting increasingly concerned about a weakening here of

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<v Speaker 6>Chinese currency in order to boost their exports. How many

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<v Speaker 6>tools does China have really in order to fight the

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<v Speaker 6>US on this battle?

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<v Speaker 3>Yeah, I mean you heard Treasury Secretary Besson said they're

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<v Speaker 3>playing poker Han with a pair of twos. They've got

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<v Speaker 3>a banking system that's three and a half times more

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<v Speaker 3>levered than ours, and they've only been at banking roughly

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<v Speaker 3>for twenty years, like real banking, So they've got a

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<v Speaker 3>system that's levered to real estate, and real estate in

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<v Speaker 3>China's down thirty to fifty percent, depending upon.

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<v Speaker 2>Where you are.

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<v Speaker 3>So they've got an insolvent banking system. They've got runaway

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<v Speaker 3>unemployment amongst your youth. They've got another twelve million kids

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<v Speaker 3>graduating their universities this year. And so you've got youth unemployment,

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<v Speaker 3>a banking system that's insolvent, you've got.

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<v Speaker 2>A real estate collapse.

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<v Speaker 3>And so when you're asking me what tools China has,

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<v Speaker 3>they've got a couple of places where they could really

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<v Speaker 3>press us. Right one, believe it or not, we still

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<v Speaker 3>have the majority of our active pharmaceutical ingredients for all

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<v Speaker 3>antibiotics in the US made in the city of Wuhan.

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<v Speaker 2>That's just a it's a sad truth.

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<v Speaker 3>And then on the finishing side of synthetic graphite on

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<v Speaker 3>rareth minerals, if you remember back in our trades bat

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<v Speaker 3>in twenty nineteen, Xijingping mad made a visit to where

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<v Speaker 3>they do the rareth metals finishings and we have seen

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<v Speaker 3>we haven't seen g since April seventh, So you know,

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<v Speaker 3>we'll we'll we'll see.

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<v Speaker 2>Well, we'll see what he does.

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<v Speaker 3>But he can he can start with holding things like

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<v Speaker 3>antibiotics and rareth minerals.

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<v Speaker 2>But this is something that our administration has thought through.

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<v Speaker 1>Well, Kyle, I wanted to talk to you as an

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<v Speaker 1>investor now too, because as Janelle mentioned, of course, China

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<v Speaker 1>has been signaling that it will gradually let the yuan weekend,

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<v Speaker 1>And I'm curious how you're approaching that, whether you're seeing

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<v Speaker 1>that as a trade and betting against the offshore.

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<v Speaker 3>You want No, I think I'm not at the moment,

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<v Speaker 3>but I would say that it is not under China's control.

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<v Speaker 3>When you think about go back to the to the

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<v Speaker 3>Asian financial crisis of nineteen ninety seven and ninety eight,

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<v Speaker 3>it wasn't it wasn't Thailand's decision to let go.

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<v Speaker 2>It was Thailand running out of reserves. And so when

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<v Speaker 2>you look at.

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<v Speaker 3>China and the offshore you Wan, in the end, China's

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<v Speaker 3>got to spend dollars to support that relationship.

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<v Speaker 2>And China needs a strong you Wan.

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<v Speaker 3>They buy thirteen million barrels of cruit every day, eight

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<v Speaker 3>and a half bees of gas every day, and they

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<v Speaker 3>buy forty percent of their food every day in dollars.

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<v Speaker 3>So if for some reason they have to let that

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<v Speaker 3>relationship go and the you won weekend as we saw

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<v Speaker 3>it weekend two days ago, to its weakest level ever,

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<v Speaker 3>we'll see if that if that relationship holds.

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<v Speaker 2>And my view is when you look at the.

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<v Speaker 3>Differentials and interest rates and you look at China's bond market,

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<v Speaker 3>the one thing that can't be lying coming out of

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<v Speaker 3>China is their bond market go where the look at

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<v Speaker 3>the Chinese tenure, it's collapsed. So their economy is in

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<v Speaker 3>a very different place than now. And that relationship between

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<v Speaker 3>the one and the dollar and the Hong Kong dollar

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<v Speaker 3>and the dollar is that's a tenuous relationship and we'll

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<v Speaker 3>see what happens.

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<v Speaker 5>Hey, Kyle, just quickly, what do you think the most

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<v Speaker 5>they can allow the on to weaken is? I mean,

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<v Speaker 5>where's the point where they have to step in and

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<v Speaker 5>can't allow any more slippage?

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<v Speaker 3>Yeah, I mean, I mean it's just begune. All you've

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<v Speaker 3>seen is a move from roughly six twenty to seven

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<v Speaker 3>forty over a period of time. So you know, typically

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<v Speaker 3>again when countries run out of reserves, as you know,

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<v Speaker 3>the currency flaps in the wind. So there's this concept

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<v Speaker 3>of them quote controlling where it is. And then there's

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<v Speaker 3>the uncontrollable moves. And what we saw in the Asian

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<v Speaker 3>financial crisis, even with the largest player back then was

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<v Speaker 3>South Korea, we saw some pretty notable currency moves. And

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<v Speaker 3>I think that's coming, and you know, I just I

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<v Speaker 3>don't know if it's coming in the next month or so,

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<v Speaker 3>but I'll tell you the interest rate differentials, the business

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<v Speaker 3>cycle differential are going to dictate the movements and the currency.

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<v Speaker 3>So we do expect the Chinese currency to weaken pretty

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<v Speaker 3>materially against the dollar.

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<v Speaker 1>Kyle, I want to talk about the tariffs that are

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<v Speaker 1>still in place. Of course, we got the news about

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<v Speaker 1>the ninety day pause on certain countries yesterday, but you

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<v Speaker 1>take a look at what still stands. You have twenty

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<v Speaker 1>five percent on steel aluminum autos, twenty five percent on

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<v Speaker 1>auto parts starting from May third. And I want to

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<v Speaker 1>bring this to your home state of Texas. I know

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<v Speaker 1>that you're a Texas guy and you think about Texas's economy.

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<v Speaker 1>There's a lot of car dealerships, there's a lot of

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<v Speaker 1>car companies, and of course a lot of energy there.

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<v Speaker 1>I'm curious, you know what you think the impact on

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<v Speaker 1>Texas might be.

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<v Speaker 3>Yeah, I mean in the near term, the impact is

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<v Speaker 3>going to be slightly negative, right, But when you when

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<v Speaker 3>you think about the carve outs. First of all, you

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<v Speaker 3>know we import about four point two trillion a year

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<v Speaker 3>as a country.

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<v Speaker 2>Roughly forty percent.

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<v Speaker 3>Of those imports were already exempt from this new round

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<v Speaker 3>of tariffs. You mentioned the two thirty two tariffs, right, steel, aluminum, autos,

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<v Speaker 3>auto parts, things like that. But I think it's important

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<v Speaker 3>to understand that those two thirty two tariffs, second two

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<v Speaker 3>thir two tiarffs were put on by Trump and his

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<v Speaker 3>in his last administration, and if you remember, Biden ran

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<v Speaker 3>on we're going to cancel those the tariffs. In the end,

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<v Speaker 3>what happens is when someone like China, a state actor,

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<v Speaker 3>can act uneconomically or non economically and they can flood

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<v Speaker 3>your market with steel or aluminum or synthetically synthetic graphite

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<v Speaker 3>or anything like that. And why it's important is they

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<v Speaker 3>can act for a longer period of time to put

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<v Speaker 3>your businesses out of business, so they can take capacity

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<v Speaker 3>utilization down enough to where they can literally turn our

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<v Speaker 3>steel industry off, turn our aluminum industry off. So those

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<v Speaker 3>tariffs are necessary, and those will live and they will

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<v Speaker 3>live into the future, and they may not be high enough.

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<v Speaker 3>We must maintain domestic production of certain things from a

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<v Speaker 3>national security perspective, and that's why those stand where they stand.

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<v Speaker 3>For autos, it just you know, you see China building

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<v Speaker 3>plants in Mexico and Canada. So basically to avoid the

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<v Speaker 3>tariffs on on their cars, and so we're our negotiations

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<v Speaker 3>with Mexico and Canada are primarily on fentanyl, secondarily on

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<v Speaker 3>Chinese transshipments, and we'll end up.

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<v Speaker 6>Getting this right, Kyle, Even if you believe that the

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<v Speaker 6>tariffs are ultimately necessary for the American economy, how much

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<v Speaker 6>more pain do investors have to bear? Because you do

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<v Speaker 6>still see the S and P five hundred after yesterday's rally,

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<v Speaker 6>still down more than seven percent this year, You saw

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<v Speaker 6>the bond market whips on wildly just this week. How

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<v Speaker 6>much more pain is there as this transition and this

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<v Speaker 6>negotiation proceeds.

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<v Speaker 3>I think, so we need to separate a few things

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<v Speaker 3>that you said. The bond market had a had to

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<v Speaker 3>fit you know this in the selloff, and it was

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<v Speaker 3>largely due to it wasn't a basis trade. You know,

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<v Speaker 3>it's the it's the fixed floating swaps, and I know

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<v Speaker 3>that gets in a world that.

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<v Speaker 2>A lot of people don't want to talk about.

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<v Speaker 3>But it was very simply a regulatory trade that bond

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<v Speaker 3>traders had on expecting expecting banks' abilities to buy treasuries

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<v Speaker 3>to increase, and then the tariff mayhem showed up and

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<v Speaker 3>that had to unwind. I think that had a lot

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<v Speaker 3>to do with the crazy move in the tenure. So

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<v Speaker 3>I think things are settling down. But you know, as

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<v Speaker 3>far as stocks are concerned, you've heard the President, you've

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<v Speaker 3>heard the Treasury secretaries say, we have to make some

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<v Speaker 3>difficult choices, and we must reset our trade relationships for

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<v Speaker 3>the rest of the world. We also must narrow our

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<v Speaker 3>fiscal deficit in the United States. And both of those

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<v Speaker 3>things might be slightly recessionary. And if that's true, we

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<v Speaker 3>might have to go through a brief recession in order

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<v Speaker 3>to rebuild our foundation. And you say, how much longer

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<v Speaker 3>can investors hold? You know, Look, the market's not up

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<v Speaker 3>into the right, you know, every year of every decade.

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<v Speaker 2>And I think that.

0:11:58.040 --> 0:12:01.199
<v Speaker 3>This is a necessary reset so that we can grow

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<v Speaker 3>again in the future and grow more thoughtfully.

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<v Speaker 5>Kyle as an avowed free market capitalist, I care mostly

0:12:10.400 --> 0:12:11.120
<v Speaker 5>about myself.

0:12:11.200 --> 0:12:11.400
<v Speaker 4>Right.

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<v Speaker 5>So the twenty seventeen Tax Cuts and Jobs Act, President

0:12:15.679 --> 0:12:19.880
<v Speaker 5>Trump punched me in the gut with a massive tax raise,

0:12:20.000 --> 0:12:22.360
<v Speaker 5>right because he takes out all of a sudden, this

0:12:22.600 --> 0:12:24.880
<v Speaker 5>state and local tax deduction cap that's been in place,

0:12:25.200 --> 0:12:28.160
<v Speaker 5>or it puts in a cap after we had a

0:12:28.160 --> 0:12:29.640
<v Speaker 5>state and local tax deduction.

0:12:29.360 --> 0:12:30.760
<v Speaker 4>For one hundred and four years.

0:12:31.800 --> 0:12:34.680
<v Speaker 5>If I can get a discount now in my taxes

0:12:34.760 --> 0:12:40.480
<v Speaker 5>because of DOGE cuts or because of revenue on tariffs,

0:12:40.520 --> 0:12:42.679
<v Speaker 5>I'll be happy. And you have said you think that

0:12:42.720 --> 0:12:45.000
<v Speaker 5>DOGE is going to cut six hundred billion out of

0:12:45.040 --> 0:12:47.280
<v Speaker 5>government costs and that we could raise six hundred billion

0:12:47.320 --> 0:12:50.520
<v Speaker 5>in revenue. Is that going to offset the tax increase

0:12:50.559 --> 0:12:53.160
<v Speaker 5>that Trump handed me in twenty seventeen somehow?

0:12:54.240 --> 0:12:54.440
<v Speaker 1>No?

0:12:54.679 --> 0:12:56.839
<v Speaker 3>And look, let me let me begin by saying, Matt,

0:12:57.120 --> 0:12:59.600
<v Speaker 3>I know you're out in things for yourself, and that's

0:12:59.679 --> 0:13:02.240
<v Speaker 3>I guess what you care about. Uh That the good

0:13:02.280 --> 0:13:04.880
<v Speaker 3>news is is is you and I and Wall Street

0:13:04.880 --> 0:13:08.160
<v Speaker 3>are not setting trade policy for the world. Because if

0:13:08.320 --> 0:13:11.560
<v Speaker 3>if if all we did was open ourselves the unrestricted

0:13:11.559 --> 0:13:14.040
<v Speaker 3>free trade, we'd all be speaking Chinese tomorrow. We need

0:13:14.080 --> 0:13:16.880
<v Speaker 3>to be thinking about national security in the long run.

0:13:17.400 --> 0:13:20.600
<v Speaker 3>On the tax side, you know, there there are going

0:13:20.679 --> 0:13:22.480
<v Speaker 3>to be some tax breaks, but there they are not

0:13:22.600 --> 0:13:25.560
<v Speaker 3>going to be uh for for the for the top

0:13:25.600 --> 0:13:27.520
<v Speaker 3>of the for the top of the scale. It's going

0:13:27.559 --> 0:13:30.280
<v Speaker 3>to be focused more in the middle class and as

0:13:30.280 --> 0:13:35.000
<v Speaker 3>far as as far as state and local deduction caps.

0:13:35.040 --> 0:13:37.320
<v Speaker 3>I mean, it's interesting to see the migration in the

0:13:37.400 --> 0:13:40.360
<v Speaker 3>United States. You live in a place that sounds like

0:13:40.400 --> 0:13:44.280
<v Speaker 3>it has state and local taxes. One could say.

0:13:44.240 --> 0:13:46.480
<v Speaker 4>That pay property taxes, right, don't you in Texas?

0:13:47.200 --> 0:13:48.800
<v Speaker 2>Yeah, we do, we pay property tax.

0:13:49.120 --> 0:13:52.920
<v Speaker 3>But when you think about high tax, high cost jurisdictions

0:13:52.920 --> 0:13:55.680
<v Speaker 3>that some some might say or mismanaged, you see the

0:13:55.720 --> 0:13:57.920
<v Speaker 3>migration in the US moving from the northeast and the

0:13:57.960 --> 0:14:02.360
<v Speaker 3>west coast to the south to Florida, Tennessee, Texas, South Carolina.

0:14:02.720 --> 0:14:05.400
<v Speaker 3>And that's where major businesses and people are moving. And

0:14:05.440 --> 0:14:09.400
<v Speaker 3>so I think that tax arbitrage or movement is going

0:14:09.440 --> 0:14:12.080
<v Speaker 3>to continue for the next call it ten years to come.

0:14:12.440 --> 0:14:14.640
<v Speaker 2>And I think you're seeing people vote with their feet.

0:14:14.880 --> 0:14:16.480
<v Speaker 1>And I do want to defend Matt a little bit.

0:14:16.520 --> 0:14:18.560
<v Speaker 1>I know you care about more than just yourself, but

0:14:18.720 --> 0:14:19.320
<v Speaker 1>people care.

0:14:19.240 --> 0:14:22.280
<v Speaker 5>About in terms of the wealth of nations, right, Adam Smith.

0:14:22.360 --> 0:14:23.800
<v Speaker 4>That's how capitalism works.

0:14:23.920 --> 0:14:26.840
<v Speaker 5>Every man for himself, that's how it's supposed to work.

0:14:26.880 --> 0:14:28.520
<v Speaker 1>Well, Kyle, with that in mind, I want to talk

0:14:28.560 --> 0:14:31.720
<v Speaker 1>to you about you and your future because Bloomberg reported

0:14:31.760 --> 0:14:34.640
<v Speaker 1>in January that the Trump administration was considering you for

0:14:34.720 --> 0:14:37.760
<v Speaker 1>opposed to either the Treasury Department or the Defense Department,

0:14:37.880 --> 0:14:40.720
<v Speaker 1>And I'm really curious here we sit in April, are

0:14:40.760 --> 0:14:41.960
<v Speaker 1>you joining the administration?

0:14:43.520 --> 0:14:45.400
<v Speaker 2>I mean, I'm going to go no comment there.

0:14:46.000 --> 0:14:50.000
<v Speaker 3>It's it's not worth talking about unless unless there's actually

0:14:50.040 --> 0:14:51.640
<v Speaker 3>a deal on the table, and there certainly is no

0:14:51.720 --> 0:14:54.880
<v Speaker 3>deal on the table. My biggest regret in life is

0:14:54.920 --> 0:14:58.200
<v Speaker 3>that I've never formally served our country. And if there's

0:14:58.240 --> 0:14:59.960
<v Speaker 3>a place where I can serve it and it can

0:15:00.080 --> 0:15:03.960
<v Speaker 3>work out in my life as well, then I'm always open.

0:15:04.320 --> 0:15:05.280
<v Speaker 2>I've got open ears.

0:15:05.440 --> 0:15:08.240
<v Speaker 6>I'll definitely come back if and when you do have

0:15:08.240 --> 0:15:10.600
<v Speaker 6>a deal. But I also have another question, Kyle, for

0:15:10.640 --> 0:15:13.680
<v Speaker 6>you about you and your portfolio. When you look at

0:15:13.680 --> 0:15:16.320
<v Speaker 6>this market, how do you play this? What are the

0:15:16.360 --> 0:15:17.880
<v Speaker 6>trades that you would put on right now?

0:15:18.840 --> 0:15:21.200
<v Speaker 3>You know, I think that I think when the market's

0:15:21.280 --> 0:15:24.520
<v Speaker 3>down twenty it's you know, year to date, which was

0:15:24.640 --> 0:15:27.680
<v Speaker 3>I guess a couple of days ago. I think that's

0:15:27.760 --> 0:15:30.560
<v Speaker 3>I think it's an overreaction. But when I think about

0:15:30.600 --> 0:15:34.560
<v Speaker 3>the coming GDP prints, you're going to see a recessionary impulse.

0:15:34.560 --> 0:15:37.160
<v Speaker 3>You're going to see a slight inflationary uptick on a

0:15:37.160 --> 0:15:40.160
<v Speaker 3>couple of goods that ended up in the tariff. Melee

0:15:40.280 --> 0:15:43.520
<v Speaker 3>but I believe the slight recession impulse that we're going

0:15:43.520 --> 0:15:46.560
<v Speaker 3>to see over the next six months will actually bring

0:15:46.880 --> 0:15:49.680
<v Speaker 3>the general price level down. I don't think you're going

0:15:49.720 --> 0:15:52.400
<v Speaker 3>to see a big inflationary move or stag inflationary move.

0:15:52.480 --> 0:15:55.800
<v Speaker 3>So I think six months from now, the market's going

0:15:55.840 --> 0:15:56.920
<v Speaker 3>to be in a much better place.

0:15:56.960 --> 0:15:59.160
<v Speaker 2>And that's with the caveat of If.

0:15:59.120 --> 0:16:02.600
<v Speaker 3>China doesn't that Taiwan, if things in Iran don't get

0:16:02.680 --> 0:16:04.960
<v Speaker 3>much worse, and if things in Russia Ukraine don't get

0:16:05.040 --> 0:16:08.400
<v Speaker 3>much worse, I think things are gonna look better.

0:16:08.200 --> 0:16:09.280
<v Speaker 2>In the next six months.

0:16:09.520 --> 0:16:12.720
<v Speaker 3>If China invades Taiwan, I think I think all bets are.

0:16:12.640 --> 0:16:14.480
<v Speaker 1>Off all right, Kyle, we got to leave it there.

0:16:14.600 --> 0:16:16.600
<v Speaker 1>You've been very generous with your time this morning.

0:16:16.680 --> 0:16:17.920
<v Speaker 4>Really appreciate it.

0:16:17.960 --> 0:16:19.840
<v Speaker 1>That is Hayman Capital's Kyle Bass