Kyle Bass Shares The "Stunning" Thing A Central Banker Once Told Him

If you ever wanted to get a look inside the mind of Kyle Bass, founder and CIO of Hayman Capital Management, here is your chance. In a wide-ranging discussion with Grant Williams, author of Things that Make You Go Hmm and co-founder of Real Vision TV, he shared his thoughts on position-sizing, China, the appeal of holding gold, central banking, interest rates – and much, much more.

Predictably, the one topic that got the most attention was China, where as widely known Bass has made his next "career" wager, expecting a substantial devaluation of the currency, a process which had stalled out in recent months but has once again picked up speed.

Looking at recent data, and specifically something we pointed out two weeks ago, Bass said the country’s $3 trillion corporate bond market is “freezing up” amid rising defaults and canceled debt sales. “We’re starting to see the beginning of the Chinese machine literally break down.” 

Bass reiterated that China’s lending binge in recent years is unsustainable and it is only a matter of time before this bubble, bigger than the US bubble of 2005/2006 which brought Bass fame and fortune, bursts. He expects bank losses of $3 trillion to trigger a bailout, with the central bank slashing reserve requirements, cutting the deposit rate to zero and expanding its balance sheet - all of which will weigh on the yuan, and lead to a dramatic devaluation.

“They’re going to do everything the U.S. did in our crisis,” said Bass, who has gone public with his China views since at least October. “Every single thing the Chinese central bank and central planners have to do is currency negative for them.”He added that the Chinese government wants a devaluation, but “they just want to do it on their terms." By this he is of course referring to the vast exodus of domestic capital as the local population sees the endgame and is scrambling to park its funds offshore (mostly in UK, US and Canadian real estate as well as US M&A, and more recently, in bitcoin), something Beijing is terrified of and is doing all in its power to prevent.

An interesting theme here was Kyle Bass's devaluation thesis as a contrast to Hugh Hendry's recent Chinese optimistic euphoria. This is what Bass told Williams:

Williams: China is something else that you've been very vocal about recently. You and this gang of nefarious Texas hedge fund managers who are trying to take down the People's Bank of China. And again, it's another, in my reckoning, very well argued case for the devaluation of the yuan. And Hugh Hendry was on talking to Raoul, said, "It'll never happen. The world's over if it happens." And I can see where he's coming from, but it seems to me that the people that debate on the "they won't devalue" side are assuming it's going to be a voluntary devaluation, something that they choose to do, rather than they have to do.

Kyle: That's a perfect point, perfect point.

Grant: Because that seems to me, they're going to have to do it to recap the banks. There's going to be a reason for them to do it, not a choice.

Kyle: Well, it's going to happen to them. And again, even in your soliloquy there, you say, "They're going to have to do it." They're going to have to allow it to happen. It's going to happen. I love Hugh, we've had a number of debates throughout history, and he's a fantastic individual and a brilliant mind. But if the reason that it's not going to happen is because "it can't happen, because the rest of the world's going to have so much trouble with it," that doesn't give me any solace whatsoever. In fact, you look back to the U.S. financial crisis when I would go meet with various heads of investment banks or investors, and I would say, "This is what's going to happen, and this is why, and this is how the structures are structured." And some would look at me and say, "Well, that means Fannie and Freddie will be out of business. And so therefore, the government will never let that happen." I said, "Well, the government doesn't have a choice here. It's too late." The credit excesses had already been built. And in China, the credit excesses are already built. They've got, we can go into numbers, but they have asset-liability mismatches in their system, in the wealth management products, that are more than 10% of their system. And our asset-liability mismatches were two and a half percent of our system, and you know what they did. So their excesses are already, they're already so far ahead of the world's excesses in prior crises that we're facing the largest macro imbalance in world history. And to this day, I can't figure out why people don't see it for what it is.

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