Kyle Bass “If Our National Security Was Left Up To The Private Sector And Wall St, We’d All Be Speaking Chinese Tomorrow”

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By Jacob Wolinsky. Originally published at ValueWalk.

Kyle Bass

Following is the unofficial transcript of a CNBC interview with Hayman Capital Management Founder and CIO Kyle Bass which aired during CNBC’s “Financial Advisor Summit: Navigating Uncertainty” event today, Wednesday, June 15.

Interview With Hayman Capital’s Kyle Bass

Becky Quick: First of all Kyle, I just want to say thank you for being here. It is great to see you today.

Kyle Bass: Great to see you too, Becky.

Quick: Let’s talk a little bit about what’s happening with globalization. Because for decades, we saw the positive side of globalization – more markets, bigger markets, more people that our companies could sell to. But in recent months, we have really seen the downside of globalization – what happens with the shutdowns in China, people not being able to get goods that are brought through the supply chain, what’s happened with the Russian invasion of Ukraine and what that has meant for energy prices. A lot of people are starting to ask is this the end of globalization? What do you think?


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Bass: You know, I think that globalization appeals to all of us. You know, having the world drop its guard and deciding to outsource things to various places where you can attain better profit margins, maybe greater efficiencies, and maybe even technological advances move faster. But as we’re seeing today, it’s really difficult to engage with partners, like China, like Russia, like Iran, like North Korea, you know, China, mostly, as you mentioned, doesn’t share the same value system that we share. And that’s to say the very least. They don’t share the same legal system that we share. We have a rule of law, they rule by law. And when it comes into periods of time in which there’s global conflict, or let’s just say, global friction, you see that globalization can lead you down a path that puts you in a very difficult position from a national security perspective, Becky, and I think that we’re realizing that it was probably a real bad idea to let 95% of the active pharmaceutical ingredients for our antibiotics, let’s say, to be made in China. And have the global chip shortage that we’ve seen really emanate from Taiwan around the world with Taiwan semi making more than 40% of the chips that we need for just about everything. So I think those globalists that were pushing globalism, let’s just say unrestricted, put us in a position where now we need to regroup. And we really need to rethink how we risk assess various industries being outsourced.

Quick: Yeah, it’s from a national security perspective on top of just the global market risk that this has taken on. It’s not an immediate situation that can be fixed immediately, I should say. This is going to take some time. What do you anticipate seeing over the next three to five years just in terms of manufacturing being brought back to the United States?

Bass: Yeah, I think as you note, we as a country realized the predicament we were in, in early 2017, late 2016. And the State Department got together with Commerce and a few others, and really expedited Taiwan semis on manufacturing moving to Arizona. And as you know, they’ve been in the midst of aggressively building a couple of wafer fabs there. And these things, Becky, take anywhere from three to five years to build. They’re $17, $18 billion a copy. Think about a building that costs $18 billion to build. And the first one is well on its way to being finished. The second one is on its way. Samsung has announced they’re going to build a wafer fab and in Taylor, Texas. That one hasn’t broken ground yet. When you think about where we are today, we’re building as fast as we can to get us to a position where we don’t have a large national security problem. The problem is there’s a duration mismatch between achieving that goal as you say and being where we are today. I still think we’re a good three to five years away today from being self-sufficient on the chip side. You know, antibiotic API’s, those aren’t rocket science, we just need to be sure of those. And we need to reshore supply chains. And you talk to the fortune 500 CEOs, they’re all doing it in some form or fashion, and they’ll get it done. The problem is it’s going to take years to get done. And in the meantime, we’ve all watched the friction increase almost daily, between the U.S. and China from a geopolitical and militaristic perspective. So when I think about it, Xi’s – the most leverage China has is now and as every day that goes by they have less and less leverage. So I’m fearful that things happen sooner rather than later. You know, the Putin invasion of Ukraine, kind of, I don’t want to say it came out of the blue, but things just happen. For a long period of time, frictions boil and then all of a sudden war happens. And If you look at the daily rhetoric coming out of these state media outlets in China, they are really pushing the Taiwan narrative. So I’m afraid that that’s going to happen sooner rather than later, Becky.

Quick: That is incredibly concerning and what you talk about how China will have less and less leverage as time goes on. That’s the same situation with Putin and Russia and the control they have over European countries that they’ve been supplying with oil and natural gas. Less and less leverage over time, so they have to take advantage of it right now. How do we withstand that? And how do you kind of think about these things? And let’s just talk about from an economic security position first, and then we’ll talk about what it means for investors.

Bass: Right. So look from economic security perspective, I always say if our national security was left up to the private sector and Wall Street, we’d all be speaking Chinese tomorrow. So I think it’s important that our leadership in DOD and in the Executive branch, decides to really put ourselves, put our country in a better position from a national security perspective. And that means reshoring some of those things. Just this week, we’re seeing, as you know, China bought Smithfield Foods back in 2013, the largest pork and chicken producer in North America. And just this week, they’ve announced they’re going to close down the entire western division of the largest pork and chicken producer in North America because prices are too high. Well, that doesn’t sound like an economic decision. That actually sounds like a geopolitical decision. And so those kinds of things need to be taken care of at the highest levels of our government. And we need more of a grand strategy and less of a revolving door. As you know, we have new presidents every four or every eight years. And we need a team that kind of transcends administrations, and we really need a better grand strategy. And I think that is being discussed, I just think that we haven’t ever implemented that as a country.

Quick: Kyle, I hear your point. And I think it’s a valid one. Let me just push back a little bit on Smithfield pork. I mean, I know of other business leaders who are considering shutting down because prices are too high, not because they can’t get great prices for their products, but because it’s not enough, given the inflation they’re facing on their input costs – whether that be energy, labor, the raw materials and commodities that they’re facing. But I hear your point that the idea that we could be left in a very bad position, and it may have more to do within just economic decisions, and they may be decisions that the U.S. government won’t have as much control over if it’s being operated by a foreign company.

Bass: Right. Look, I know, one of the big topics today is whether or not there should be a repeal of the tariffs that we put on China for steel and aluminum. And if you go back and you read the back and forth, and the rationale for why we put those tariffs on China in the first place, and the reason that President Biden has left them on is really important. Because let’s just say for example, aluminum, the Chinese state actors were basically giving free electricity to the aluminum smelters in China to undercut price in America. That took our capacity utilization of our aluminum smelters here from call it high 80s to 70 in one year. And when you drop below 80% capacity utilization, you end up losing money as an industry. So we put those tariffs in place, not because we were looking to put extra or levy extra duties on China, it was because they were acting in an uneconomic fashion to try to put our industry out of business so we would have a further reliance on their ability to produce aluminum. And as you know, aluminum has many strategic values for the military, and for our industrial sector. So the reason we put those tariffs on is lost in mass media today. And it’s the reason they haven’t come off. And, you know, then when you have people like Janet Yellen say, Hey, you could really save eight basis points of inflation if you took those tariffs off. You know, again, God bless her, but she doesn’t have a national security bone in her body. We need people thinking long term here and not short term for the headlines.

Quick: Okay, let’s talk about the market implications for this and what investors should be thinking about with all of these concerns you just laid out. What would you tell somebody who’s trying to figure out where they put their money, by the way, given this backdrop of the market collapse that we’re watching, too?

Bass: Yeah, so I have bad news for you there. My view is so far you have 30 trillion of global stock market wealth has evaporated since the higher inflation prints and the aggressive Fed speak, as you know, talking about aggressively raising rates concurrently with shrinking the balance sheet. Well, Becky, they’re just beginning to shrink the balance sheet now. They’re going to take 100 billion of risk assets out of the market each month from now on. Just think about the implications of more aggressive hikes concurrent with $100 billion worth of risk assets being removed from the market for months to come. I can tell you this, the stock market will not go up in that timeframe. Right? So I think the investors and financial advisors need to not be buying dips right now. I think that you need to let this play out. I don’t know how much lower the market’s going to go. But my own inkling, or belief, is that you’re not going to – the Fed’s not going to be able to pull $1 trillion out of risk assets. Even though their balance sheet is north of 8 trillion, I don’t think they can pull, call it – I don’t think they can go 10 months at 100 billion a month or 11 months before the stock market is down another 30, 40% from here. So I think –

Quick: 30 or 40% from here? that is a really big drop. I mean – wow.

Bass: Imagine if they – as they hike, you know, this week, they hike next month, they hike in November, and in all at the same time, they’re pulling 100 billion a month of risk out – of risk assets out, Becky, the market is going to absolutely convulse when that happens. And I think the Fed is laser focused on arresting the inflation problem and they’re not necessarily concerned with what’s happening to the stock market. And I think that has a lot to do with what happens as we go into November. So Becky, I think between now and November, things are going to materially worsen. And so when I think about where to put money today, I would wait. Until you see the Fed start to use the word pause more often. and say, you know, maybe the markets dropped enough, maybe 30 trillion coming out of investors’ pockets is going to have a severe chilling effect on global markets, which it will, it just takes time. So I think that a lot of their job is actually already done. I think inflation is going – I think you’re going to see food and energy prices continue to head higher unless we have a massive recession. And I think we’re going to have in North America or the U.S., I think we’re going to have a brief recession or a shallow one. Europe is going to be a little deeper, just because they have such a problem with their energy supply chain. And so and China is having its own problem. So I think you’re going to see markets go a lot lower going into November.

Quick: You know, it’s really interesting that you kind of go back to the Fed’s idea that they have, like stopping inflation as priority number one. You know that’s the case, you know it’s going to take a lot to do it. But there are plenty of market participants who I’ve spoken with recently who have said, the bad thing would be if they didn’t take those aggressive steps. It’s almost damned if they do, damned if they don’t. Do you not see any way out of this without really putting further dents in the market?

Bass: Yeah, I mean, I’m a monetarist at heart. When you print 40% more M2 or more money in circulation, you’re going to get about 40% inflation. You know, of course, there’ll be some kind of a Gaussian curve there where some things go more, some things go less. But on average, you and I both know that the price of just about everything that we engage with on a daily basis has gone up a lot more than the CPI prints have set. And so when you have a scenario where they went to the gas pedal much too hard during the Covid Scare, and now they’re having to deal with trying to pull that out. And Becky that’s coupled with really, really poorly thought through energy transition policy, right? If you remember, and again, not getting political, let’s just say as a country, what we’ve done is we’ve made the wrong choices. I’m 100%, for as much alternative energy as we can transfer to as fast as we can get there. The problem is these energy transitions take 40 to 50 years when they happen. We have been all in on solar and wind and hydro, and it represents less than 3% of the contribution to power. So it’s going to take decades to get there. And turning off hydrocarbon exploration – if you think about our refineries, we haven’t invested in a new refinery since the early 1970s. When you engage in major workovers and major cat-backs, refineries, these are 30 year cycles. If what the administration is telling you is we’re turning off hydrocarbons and turning on alternative energy, you’re not going to get that capex spent. You’re not going to get new pipelines built. We need new pipelines built. And we need a lot more drilling right now in order to transition properly. So we’ve got a monetary problem on just the amount of currency in circulation and money that was printed because of Covid coupled with really poorly thought through energy policy. So it doesn’t matter how much the Fed acts with its own tools, they can’t change a supply problem on hydrocarbons. And that supply problem turns into much higher labor costs, much higher fuel costs, much higher food. Next year, you’re going to see a giant food price spike, and you’re going to have a problem with food scarcity. We’re going right through these levels that we saw in the Arab Spring, and I think you’re going to see real problems with food and emerging markets in the next 12 months.

Quick: Kyle, let’s just focus a little more on energy. You come from Texas, you know the industry well, and while it might be tricky to try and get companies to invest more capex because of what they’re seeing with the writing on the wall, that, you know, clearly governments don’t necessarily want this stuff around. They’re promising to get rid of it and that’s not where investors tend to throw money. It got a little hairier last week when President Biden kind of threw down on ExxonMobil. Said they made more money than God, and that they should start paying taxes and that they should start being a little more concerned about what’s happened with that. I mean, I think Exxon would argue that they have paid taxes. But when you have something like that taking place, how difficult is it going to be to convince companies and or investors to spend more on capital expenditures to get more, another refinery to get more drilling taking place – any of those things?

Bass: Yeah, I mean, if you just look at the panic that’s going on in the administration today, we are begging Saudi Arabia to pump more at the same time we are trying to remove the Iranian Republican Guard as terrorists along with the Houthi rebels. You can’t even make up policy like that. And what’s really interesting is we are releasing tight restrictions on Venezuela, and the Maduro administration, who we know is a global terrorist, who funds terror networks, who is definitely, let’s say, part of the axis of evil and the authoritarians. We’re releasing those restrictions on Venezuela, asking them to send us some more crude at the same time that we’re killing the Keystone Pipeline, which would carry heavy crude from our ally, and our partner and our neighbor, Canada, in our refineries that can refine heavy crude. What we’ve got to do is be more thoughtful about our policy. And right now, we’re making panic decisions and vilifying big oil after telling big oil that we’re going to turn them off. And when oil was below zero, no one had any sympathy for the big oil companies. When they were losing money, no one cared. And now that they actually have a profit margin on what they’re doing, because of bad and thoughtless policy, it’s easy to make them the witch in the witch hunt. And that’s what you’re going to see. But guess what? If what you do is you install windfall profits, taxes on these companies, or you set artificial price levels, all you’re saying is, pricing is going a lot higher. It’s how high do you want it? If what you do is encourage them to drill and you get behind them and you realize that we as a country are the largest energy producer in the world, Becky, we are far and ahead of the number two producer, which happens to be Russia. And so the U.S. is in a great strategic position if we can stop fat shaming oil companies and start realizing that we need a policy that’s a long term, great policy transitioning from hydrocarbons to alternatives. And we’ll figure out nuclear soon. But again, that duration mismatch is too long. The first small, small modular nuclear plant in America won’t open for seven years. But it’ll open in in Wyoming. And we’ll see – I think that’s the answer. But we’re still a decade away.

Quick: So we are just about out of time. I’ve got about 45 seconds left. For the financial advisors who are listening, is that at least a screaming buy to put money into energy stocks?

Bass: It depends how deep the recession gets. But I think this is the golden age for private capital investment in hydrocarbons for the next call it 10, 15 years because of everything I just talked to you about. Demand is inelastic and growing globally for hydrocarbons, and there’s no amount of alternative energy that can possibly get there in time. And by the way, there aren’t enough extracted minerals that are required to go into these giant wind turbines and these networks for all EVs. There aren’t enough minerals around the world to extract to hit our 2030 goals, much less our 2040 goals. So I think that investing in energy is a great place to be for the next 10 plus years.

Quick: Yeah, whether you’re a globalist or not. This is a global market, especially when it comes to energy and other commodities. And Kyle, we want to thank you very much for your time today.

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