American Thought Leaders - Kyle Bass: Why Investors Need to Get Out of China and Implications of the Taiwan Election

Episode Date: January 16, 2024

Sponsor special: Up to $2,500 of FREE silver AND a FREE safe on qualifying orders - Call 855-862-3377 or text “AMERICAN” to 6-5-5-3-2As China grapples with a real estate and banking crisis and a demographic disaster, where is China’s economy headed? What kinds of calculations is Chinese leader Xi Jinping making vis-à-vis Taiwan?In this episode, we sit down with Kyle Bass, founder of Hayman Capital Management and a founding member of the Committee on the Present Danger: China.What are the dangers of the Chinese central bank digital currency? And what’s in store with the upcoming Taiwan election?Views expressed in this video are opinions of the host and guests, and do not necessarily reflect the views of The Epoch Times.

When you look at what created China's miracle, it's now the exact opposite. As China grapples with the real estate and banking crisis and a demographic disaster, where is China's economy headed? What kinds of calculations is Xi Jinping making vis-à-vis Taiwan? Today I sit down with Kyle Bass, founder of Hayman Capital, and a founding member of the Committee on the Present Danger, China. What are the dangers of the Chinese central bank digital currency and what's in store with the upcoming Taiwan election? We are playing the exact same tune that we played between 1919 and 1938.

We haven't learned from history. We're appeasing madmen. They were meeting with Hitler after he invaded the Rhineland, after he was moving on Europe. They just desperately wanted a peace deal. This is American Thought Leaders, and I'm Jan Jekielek. Before we start, I'd like to take a moment to thank the sponsor of our podcast, American Hartford Gold. As you all know, inflation is getting worse. The Fed raised rates for the fifth time this year, and Fed Chairman Jerome Powell is telling Americans to brace themselves for potentially more pain ahead. But there is one way to hedge against inflation. American

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Or text American to 65532. Again, that's 855-862-3377. Or text American to 65532. Kyle Bass, such a pleasure to have you back on American Thought Leaders. Great to be here, Jan. Well, it's been much too long since we've spoken, especially since we've been getting all these signals now for some time from the Chinese Communist Party run economy over in China that things are not going well. So I wanted to tap you

here and to give me a picture of what you think is going on. Okay, that's a big open-ended question, but I will attempt to answer that. I think it's important to think back to what drove the Chinese miracle or the China miracle. And if you look at how China financed itself and its GDP growth, it was almost solely due to real estate speculation. Real estate prices rising, local governments selling more real estate to fund their operating deficits. And it was a very pro-cyclical cycle of rising values, more speculation, more sales from local governments. And that created an economy where the average Chinese citizen has 70% of all of the assets in China invested in real estate. And what that miracle produced was meteoric reported GDP growth and all the concentric

circles that surround it. And, you know, you and I both know and those people that, let's say, follow China closely understand that the birth rate of the average Chinese female has dropped to 1.2, and it requires a birth rate of roughly 2.1 to sustain a population. So we're seeing a pretty significant decline in the population, and I think those two things are inextricably linked. So if home prices got to be north of 20 times median home price to median income, for instance, in the US and its subpr means the Chinese men can't afford to buy new dwellings when they come out of university. Then they're not having sex, they're not marrying, they're not having kids. So the birth rate collapsed when real estate speculation got to its zenith. So, you know, a couple of years ago, Xi Jinping said that financial security is national security. And if you note, he basically stopped real estate

speculation because he realized too late that it had created a real problem in the architecture of the Chinese economy. So every single public real estate company developer in China is in a state of bankruptcy today, or default, in most of the private ones. In the local government financing vehicle market, the market that either sold bonds or borrowed money from banks to run their operating budgets outside of real estate sales, that's a $13 trillion market, dollar equivalent market in Yuan. And the majority of that market's not paying. In fact, it got to a point in late October of 2023 where the PBOC said in our next set of bank reviews, any local government financing vehicle loans that are non-paying will be deemed to be paying and it won't affect your bank rating.

That was a public statement the PBOC made. So when you look at what created China's miracle, it's now the exact opposite. They've got almost 400% banking leverage to GDP. They've got a scenario where they've got youth unemployment at a minimum of 25 percent. And, you know, the gray market says it's 40 to 50 percent of youth can't find jobs. And in a speech on New Year's Day, Xi Jinping actually admitted that youth unemployment is a real problem. He actually inexplicably decided to declare that China's economy is actually having problems. And he declared that publicly. And as you know, they don't normally do things like that.

So I think you have a scenario where real estate isn't going to bounce in China. It can't. Xi Jinping's got to get that ratio back down to a number that allows population growth. And again, this is the unintended consequence of allowing a market to run unchecked. And so I think you're seeing a banking crisis. You're clearly seeing a real estate crisis. Banks have a third to 45 percent of their assets in Chinese and Hong Kong real estate loans. So you've got the perfect economic storm hitting China at a point in time in which the geopolitical tensions in the world are at a multi-decade high.

So I think they're in real trouble. I definitely want to talk about the implications of that. But just before we go there, for the layperson, it may be difficult to understand how an economy could grow the way the Chinese economy has grown over the last several decades, purely on real estate speculation. I might add, there's been some significant flows from the West in terms of Western investment of a variety of sorts. But can you just encapsulate that? How did that exactly work? And how is it that at the moment, all of this is worth nothing? All these companies are in default? Yeah, I think that's a great question. When you think about China Inc., you have to think about

it in two spheres. You have to think about their domestic marketplace, where their banks are, where their capital markets are, and how it operates with the renminbi or the yuan, however you want to say it. And that market is controlled by the state. It's a state controlled operation. As you know, it's a totalitarian government and they have they have their own version of capitalism with Chinese characteristics, which we can get in. We will get into what that means. But the point being is they can control that marketplace if they control their own currency printing. Because, as you know, they still have a closed capital account with the world. We give them the benefit of the doubt of the conversion of RMB at a spot rate in the dollars. And imagine if China were to abandon its great wall around its capital and they allowed the average citizen in China to invest abroad, to travel abroad

and spend abroad. If they just opened that capital account, what would happen? Well, the RMB would drop 40 or 50 percent, and their GDP in dollar terms would actually drop 40 or 50 percent. You see what I'm saying? We're giving them the benefit of a conversion rate of a contrived number because they have a closed capital account. So when you say, how do they do it? If you allow your RMB-based marketplace to grow unchecked in real estate and you plug the holes in the banks with more RMB, you can create a significant domestic inflation number of assets,

which they did. And then when they report GDP, they take the RMB GDP number and convert it at a closed capital account spot rate into the dollar. And we give them the benefit of the doubt of that conversion. And we say, well, you know, in the last 15 years, they've grown over 500% GDP in dollar terms. Well, that's because they still have a closed capital account. And you mentioned that we've seen significant flows into China. We believe through the passive indices of the Lehman Brothers Bloomberg aggregate bond indices and the MSCI world equity indices, we believe there's $2 trillion of passive capital in dollars that has gone into China, again, at that artificial

rate. So they grew a market unchecked in a speculative frenzy of real estate and reported GDP. And then they constructed a narrative around how you have to invest in China. Look at how fast we grow. We're growing double digits every year. You'd be stupid not to invest here. And then dollars flowed in. And that was the Chinese government's, i.e., kind of their way of becoming very influential on the world stage very quickly from an economic perspective when it was somewhat of a Potemkin village. And we're seeing that now. And again, I know all of this sounds like hyperbole, but it's exactly what happened. Well, one of the things we can talk about is what do those returns of those $2 trillion through the passive indices, I mean, that's just the passive indices, right? What does that look like? I mean, that is a 505 percent growth. Who wouldn't want that? Right. Right. And, you know, we've talked in the past. If I told you that I knew that there was a country that had a capital market that you could invest in and buy stocks in that was going to grow 500 percent in the next 15 years. And I knew it for a fact, you probably

put all your money there. And the interesting thing is, is you've lost a third of your money if you invested in China and the Shanghai Shenzhen 300 Index 15 years ago, you're down 30, about 33%. And, and, but, but what do you mean? I thought China had an economic miracle. It did. But it was an economic miracle with Chinese characteristics and to the benefit of the Chinese Communist Party and their leadership. So it is it is fascinating to me that you still have relatively educated folks that are fiduciaries and asset managers that have fiduciary responsibilities to their clients still allocating capital to a communist-run country, who again has a limitless partnership with the world's number one war criminal, Putin.

It's truly bizarre, but I've talked about this with a number of people in the foreign policy space, right? Once you set policies in place, it's very hard to change those policies for whatever reason. Or maybe this is just in my mind, you imagine the Titanic, you can see the iceberg down the road, you start reverse left engine, whatever, and you're trying, but the thing is just moving. So there's so much inertia there, heading in one direction. And that's indeed the case with a lot of US foreign policy towards China. Even if there's discussion of decoupling from the CCP, to my eye, what I'm seeing is the CCP decoupling on its own terms in ways that are convenient to itself. Right. And maybe you can speak to that, actually.

Yeah, some. I mean, some are convenient to itself. But what I see is a China decoupling from a position of, call it, extreme weakness over the last 15 years. They're in a very precarious position because, again, China imports 12 million barrels of crude a day. They are the largest importer of crude oil in the world. In a market of roughly 101 million barrels a day, they're the largest importer. In LNG, they import eight BCFs a day in a market that's 53 BCFs. They're the largest LNG importer in the world. They import 40% of their food. And all three of those things, all of the things that they must import on a daily basis, require dollars to purchase. Now, I'll say dollars, euros, yen, pounds, whatever, Western currency, but it's all priced in dollars. They have an insatiable need for

dollars. So if you're Xi Jinping and you are implementing new anti-spying laws, if you're implementing policies that completely restrict the macro micro level data export from mainland China to the West, you would never cut off data flows and increase your militaristic belligerence from a position of weakness unless it was your only option. And I believe that the moves that Xi Jinping has been making in the last 12 months show you that, number one, he is in real trouble. And number two, what do you think the natural place for him to move to to distract the population would be to foster a sense of nationalism? And you and I have seen these videos that the PLA has put together on the unification of China and Taiwan. You know, as we record this today, I don't know when this show will be on, but we're five days before the Taiwanese elections.

And the DPP candidate is anywhere from three or four percent ahead to 11 or 12 percent ahead, depending on all the polling you look at. But I think post-election of Taiwan, all bets are off as to what Xi Jinping is going to do. And so I think that you're going to see a lot, a number of restructurings. I think you're going to see even more economic pain. I think you're going to see Xi Jinping try to change the narrative to stay in power. And if that's the case, Taiwan's in real trouble. And if that's the case, the West's relationship with China and investment into China is in a real precarious place today. So I want to talk a little bit about the economy, but I definitely want to talk about Taiwan and I guess the implications of which way it might go. But 505% growth over 15 years and a loss of a third on average, that shouldn't make sense. It doesn't make sense, right?

That's investing with Chinese characteristics. And what that means is who got the money? The Westerners didn't get the money. In fact, some of the GDP growth was contrived, as I mentioned. The real GDP growth, did it go to investors in dividends or capital gains? I mean, there were years in which the Chinese market did well, but over a 15 year period, you've lost a third of your money. And so when I think about where the money went, it went to the government. And if it didn't go to the government, it went to the management teams who either lie, cheat, steal, bribe, or all of the above, because that,

I guess that is the modus operandi of the Chinese Communist Party. So again, when China implemented the national security law and forever took over Hong Kong, right in at the end of 19, beginning of 2020, what has Hong Kong's Hang Seng Index done since China implemented that law? It's down 40%. You've lost money in every year for the last four years if you stayed invested. Communism doesn't pay. It just doesn't. And it never has. And it never will. It will in short periods of time because everyone gets very excited about some stimulus measure that Xi Jinping might be implementing. In the long run, we in the West are the suckers and we're making sucker bets. Just as a comparison, how did the U.S. economy do over those 15 years in terms of returns as well as growth?

Or maybe pick another economy that you're familiar with that might also have grown well. I mean, look, again, the U.S. economy, the U.S. is about 4% of the world population. We're a quarter of the world's GDP and we're 40% of the world's capital markets. I think that's super interesting. I think that we have the most liquid, deepest, most trusted capital markets in the world. And I think that if you invested the same money at the same time 15 years ago in the S&P 500 instead of the Shenzhen Shanghai composite, U.S. GDP over a 15-year period has grown 72 percent and you're up 335 percent in your investment in U.S. indices, the S&P 500. So we all, I think everyone got excited in 2001 when China ascended the WTO and we gave them a pass to do it early. They didn't meet the requirements. And then as GDP was growing, there was such an excitement of investment and globalization and everybody becoming wealthier and things getting cheaper. And in the end, there wasn't a free lunch. In fact, the Chinese ate our lunch and they took

our money and you didn't make anything. And so I think it's again, it's a lesson in economics. It's a lesson in geopolitics. And sooner or later, everyone's going to figure out this lesson. Well, one of the things that I've certainly been thinking about here, of course, some people talk about de-dollarization and this BRICS emerging market. And of course, we have the Chinese central bank digital currency, digital yuan, that's out. Before I even go there, I'm thinking about, I don't know, how many trillion dollars did we add into the economy by printing? I forget.

The Fed's balance sheet expanded $5 trillion. Broad money in the US expanded 40%. I was going to say $6 trillion. It's crazy because there's a trillion. It's an unfathomable number in itself, and I can't even remember how many trillion. So that, you know, go ahead. You need to put that into context, too. From 1972 to 2008, the Fed's balance sheet expanded from roughly zero to about 940 billion. So 72 to 2008, we were prior to the global financial crisis, we were under a trillion of Fed balance sheet expansion over that time frame. From 2008 to 2019, we went from one trillion or just under a trillion to four and a half trillion. And we were able to pull about a half trillion off the balance sheet going into 2020 and COVID.

But in 2020, we went from roughly 4.1 trillion to 9 trillion. So if you look at the timeline, we've gone parabolic with our monetary policy in a very, very short period of time. Now, the de-dollarization and the rest of the world, we can get into that if you'd like to, but that's all just a CCP narrative. Well, my point is that the U.S. economy arguably is much less stable and powerful than it was, you know, before this parabolic rise that you described. I would say that that statement in itself is true, except for the rest of the world has that same convexity or worse to their economy, i.e. we are still the bellwether economy with the most strength of any economy in the world, but we are less well off or let's say less stable than we were pre-2008 and pre-2020 because we've had to react by flooding the system with money.

Could Xi Jinping be waiting for some kind of, you know, large scale crash, which is something I've been hearing a lot more about from people who I trust in economic spheres? There aren't many of them, by the way. What's your what are your what's your thinking around that? I don't think so. given their parasitic relationship with the West and given their leverage levels, the worst thing that could happen to China today is a U.S. crash. And again, let's do a quick around the world as to where the world's reserve assets might go. You have the most liquid, deepest capital markets in the world, the United States, with the rule of law. Would you just invest in Europe? Let's see.

The European Union still doesn't have a central taxing authority and they don't have a unified fighting force. And it's still just a great idea. It's not. The EU has not actually been implemented into a proper union. We still have an Italian army. We still have a French navy. We still have all of these things that make no sense whatsoever. And the euro is not a place where real reserve managers are going to go. In the last 15 years, how much has the EU 27 grown? 7%. It's basically flat in 15 years. Again, not a place for exciting investment. And if you look at the construct of their economies, the state is playing a larger and larger and larger role and private enterprises playing a smaller role. It's not it's not a role model for for capitalism. So you're not going to invest your money in Europe. You're going to give it to China. We just went through there. You can't do that. Where else in the world would you go to Canada or Australia? They're both way too small of a market to do it. Would you invest in

the UK? The UK has really stagnated for the last several years. Basically, there isn't a place for real reserve money to go except for the United States. So I don't buy this de-dollarization again. I think that's a narrative pushed by China, Russia, Iran on social media. There is no other place for the money to go. You know, I mean, Bitcoin, Bitcoin is really vapor. It doesn't have anything behind it whatsoever. And it's really just a sunny place for shady people.

And that's the way it's going to stay. So, well, there's gold, right? I've seen that it's surged to record levels recently, perhaps for all the reasons we've just been describing. But if you were to add up all of the gold that's ever been mined and forget about how much of it's gone into dowries in India and things like that. Let's just assume that all the gold that's ever been mined in the world is sitting there and we can engage in a gold backed currency again, which would be a disaster. But let's assume we can. There's about eight trillion dollars worth of gold that's ever been mined in a global financial system of north of 90 trillion. It I'm just you just can't do it. So there is no functional alternative. When you think about the BRICS, are you going to allocate your capital to, I mean, just think about what you're saying, Brazil, Russia, India, China, South Africa. You'd have to be a lunatic to put your hard-earned reserve assets or your savings into the buckets run by those people. And, you know, I know that

India has actually said that they will not join a BRICS currency union. And I know that Argentina has said they're in. Now, you know, I've never met a born again Christian on their prom night. And the same goes for Argentina, right? They have taken their currency from, you know, just a few years ago, 17 pesos to the dollar to today, 500 or 1000. It's been completely wiped out. And boom, that's when Jesus, the Savior, pops up and you say, you know, we'll join that union. And so if you take India out and you add Argentina and you reorganize the letters, they're the bottom feeders, they're the crabs. I didn't even get a smile there. I didn't even get a smile. Well, no, I was going to say that these are the high-risk markets, I mean, to say it nicely, right? I mean, high-risk or authoritarian or war criminal or I don't know what you want to call it. But investing in some BRICS currency is not going to attract real reserve assets, in my opinion.

You know, getting back to China and Taiwan specifically, right? You mentioned all bets are off, you think, after the election. Do you mean that irrespective of who wins? Give me a picture of what you're imagining here. Yeah, I think when you look at Taiwan, you see China ratcheting every year, moving the goalposts closer and closer to China. And even in Xi Jinping's New Year's Day speech, he said Taiwan will be unified with China and that both the people on both sides of the Taiwanese Strait should embrace this new great rejuvenation of the Chinese race. That is code for we are going to take you peacefully or not peacefully. It's up to you. And so if you've noticed in the last 30 days, there have been 23 separate balloon incursions flying right over Taiwanese military bases. That is an effort to engage in psychological warfare, also to invade or directly invade Taiwan's airspace and to monitor Taiwan's level of readiness at their military bases. So going into the election, China has increased its

belligerence. It's increased its psychological warfare operations. And, you know, I did a presentation for the Hudson Foundation that was very detailed on what China has done to prepare for war in the last few years. And it is it is it looks like it's on a one way trip to a physical conflict. And I say post-election, all bets are off. The DPP candidate has had a lead in these elections of as high as almost 20 percent. Today, it's somewhere between four and 11 is what I can see from all the polling that I see. But, you know, when you poll the average Taiwanese person, there's an 85% polling that says they want nothing to do with Chinese rule. They just watched the movie in Hong Kong and it didn't end well. And they don't want to see a replay in Taiwan. So I think the people of Taiwan do not want authoritarian Marxist-Leninist Chinese rule.

I think they want to continue its status quo, but Xi Jinping is not going to have that. He said that his life's mission is the reunification of China and Taiwan. He's just over 70 years old, and his life doesn't have that much more time in it. He's told his military forces to be ready by 2027. That's less than two years from now. And I'm not sure how you guys think about this, but he is not going to tell you when he's going to invade Taiwan. He's not going to give us a fair warning. It's just going to happen all at once. And if I tell you at some time between now and 2027, that's still a terrible outcome for the world. So the answer is yes. I think it's inevitable.

If the KMT candidate wins, I think that gives China a little bit more breathing room to engage in a soft takeover instead of a hard takeover. So we'll see what happens there. But I still think the DPP candidate will run away with this election. Well, that indeed is the PSYOP, isn't it? It's inevitable. Look at all the Chinese aggression. We wouldn't want that anyway. Might as well accept our fate on better terms for us. I mean, this is all that they're hoping for, I suppose. Yeah. What's interesting, though, is the Taiwanese people understand, A, what's at stake, and B, what Chinese psychological operations are. And they all, when polled, they all say that they want nothing to do with Chinese rule. It's only the old wealthy Taiwanese people that have such strong ties

to China that say, oh, yeah, you know, we want Hou Yi for president. We want the KMT. We want China's Beijing's preferred candidate to win. So I think the population writ large is going to have William Lai win this election. And I'll just mention this. In Taiwan, I think that we in the West very often take freedom for granted. And for a lot of Taiwanese, this is not an academic question anymore, right? Yeah. And, you know, they know this because you look at, for instance, in Q3 and Q4 of last year, self-defense classes in Taiwan have been sold out and they keep expanding the number of classes and the people

are, people wonder whether they're ready to fight. And the world was really surprised at the Ukrainians' resilience and how they've stood up to Putin and his war machine. And I think, I think the world is discounting the Taiwanese people, I think a little too much right now. I mentioned the digital UN. It's effectively a system of next level tyrannical control over the Chinese population. It's functioning today as we speak. Maybe you want to speak to that a little bit, but I want to mention that it seems like the wheels are in motion to implement CBDCs in the West as well. Some people say it's something that has to happen. But what should we be learning here, I guess, is my question. I think as it relates to China's central bank digital currency, it's a digital Trojan horse.

It's a way of China exporting its digital authoritarianism to the world. If you and I agree to accept some sort of digital yuan for goods or services that we provide to someone in China, and you and I go on to a show like this and we say things that Xi Jinping doesn't like and they just turn your wallet off. Well, you know, you'll learn not to say anything negative about him if it costs you money. So I think it's a digital cancer and I think it should be outlawed in the West. Now, internally, it's just to your to your to your point, you had a great adjective next level totalitarianism, you know, that we've already seen them implement this. If you say something wrong or look the wrong way or even sing a song that might be deemed to be a national security threat in China, they can ding your social credit score so that you can't buy food, so that you can't ride on the train, and then you're not allowed to fly in an

airplane until your credit score comes up. Now, I've also seen that you can buy your credit score back up by giving the government money. So they've created this dystopic system with the CBDC. And I think that, again, it's a digital Trojan horse for anyone that accepts it. But it is a real problem. And look, the West and Western intelligence and Western financial market participants have wargamed this for the last few years. And I think everyone comes to the conclusion that I've just come to. So the question is, how are we going to get that legislated? Like what exactly legislated? Pardon me. I think we need to outlaw the Chinese central bank digital currency for both public and private use in the United States.

Well, I have to ask this because this is the obvious corollary. We saw not a few years ago in Canada bank accounts being turned off for people for political reasons. For the truck drivers. Right, exactly. So my point is, are CBDCs a foregone conclusion in the West and how to prevent the same thing happening here? Well, look, I don't believe that going to a cashless society is a positive thing for society writ large. I think that just puts all of our trust, our health and our economic welfare in the hands of some elected officials and some unelected officials. Remember, there are 18 people at the Fed that are unelected that set monetary policy for the entire world,

and they have no real checks and balances. So if in fact, let's just say, look back over the last 10 years, if you and I had money in the bank and they told you and I that the new interest rate on your bank balances is minus two and a half percent, meaning we were going to pay them to hold our money. We would say, okay, well, we'll just take the money out. Well, if you're in a full digital currency world, you can't. You have to sit there and take it, right? It's like a donkey in a hailstorm. You just have to stand there and take it. And I don't think that's a good idea. I think it gives the academic elite too much power over our lives. They already have enough power, given the fact that they set and maintain kind of insane or crazy

monetary policy every now and then, like they just did. But you and I still have the ability to vote with our feet if it's not a cashless society. If it's a cashless society, again, you're captive and you're basically in a prison. And I If it's a cashless society, again, you're captive and you're basically in a prison. And I think that's a terrible thing. I want to go back to voting with their feet. And we've talked about this, Kyle, over the years multiple times. When are these, we can even call them bloodlines to China. You described it as a parasitic economy. Of course, I wholly agree with you. I see it as the single biggest problem, in a sense, is essentially the West's funding of the Chinese regime, which continues. I

think it's gotten a little bit less recently as people have observed Chinese leaders' belligerence and so forth. But it's still going strong and these passive indices are still putting money into Chinese military companies, as far as I can tell. So what is it going to take for this weird system and this weird voting with the feet that doesn't seem to actually be beneficial to stop? Well, there seems to be some sort of Stockholm syndrome with Chinese characteristics, right? I mean, again, we've talked about losing money for 15 years, losing money in the last four post-implementation of a national security law, and yet we continue to allocate capital to China. At some point in time, you know,

there's that old saying, the beatings will continue until morale improves. At some point in time, you know, we're going to have to cut these pipes off. Those people that put the pipes in, the Henry Hernandez's at MSCI and the Bloomberg bond industry folks, you know, they get paid fees. They get paid huge fees for their index, their indices and their passive flows. And they really don't care that much about being a fiduciary, but they set the gold standard for fiduciaries

by fiduciaries that must index their returns. And so I think that you're seeing you mentioned things have changed, but the passive money, passive money is still flowing net net. We actually saw an exodus of capital in the fourth quarter of last year. And I don't know what it is so far this year, only about eight days in. But that is pretty spectacular and a spectacular reversal to see a net net capital outflow. Imagine if you are a U.S. venture capital firm with money in Chinese venture capital. Good luck ever getting that money out, especially given the new paradigm that we're investing under today with the increased economic and geopolitical belligerence of the Communist Party. So I think the losses will change those capital flows forever. But I do think that this requires leadership, Jan, right? This is, again, I jokingly say at our firm that if U.S. national security was left up to the private sector, we'll all be speaking Chinese

tomorrow. So this requires leadership to say, these are the things that we will allow and these are the things that we won't allow. If you're on the Director of National Intelligence's report in threats to U.S. national security in the top five, how about we don't invest capital in your economy? How about we don't invest capital in state-run entities that are potentially building a war machine to potentially fight us in the future like the U.S. and Britain did post-World War I. We are playing the exact same tune that we played between 1919 and 1938. And it's just crazy to me that we haven't learned from history and yet here we are again. We're appeasing madmen. We have a woke ideology. We have the appeasement caucus running our country and several other countries, just like we did when you had, you know, Neville Chamberlain and Lord Halifax running the UK.

They were meeting with Hitler after he invaded the Rhineland, after he was moving on Europe. They just desperately wanted a peace deal. Well, we all want peace. And yet appeasing dictators has never worked. And it's not it's never it's not going to work now. And that's where we are. So I guess there's a long way of saying conflict will continue to increase. The gap between the wealthy and the poor continues to widen because of inflation. It's an insidious thing that disproportionately affects the poor and the middle class. And that creates friction and conflict. And all that's going to do is fuel the geopolitical fire that was already smoldering.

I want to touch on one more thing as we draw to a close here. And that's transfer of incredibly potent technology with national security implications. For example, EcoHealth funding gain-of-function research at the Wuhan Institute of Virology, as we've been increasingly discovering how deep that relationship went and how full-throated it was. Or some of our biggest companies that are invested in AI literally going to China and building R&D centers for AI over there. What about that? I think that we should have a vetting system here in this economy. Again, not to be xenophobic or racist, because we have very close partners in Asia. You know, the Chinese are very good. The Chinese government is amazing on the world stage at playing the race card when they have nowhere else to turn. But, you know, we have

a deep, longstanding relationship with the Philippines. We have a phenomenal relationship with Japan and a very close relationship with many other Southeast Asian economies. But we should be running a vetting process for anyone that is receiving U.S. government money from the National Institutes of Health or any of these special grant loan programs going to fund insane, potentially, bioweapon research. Right. I mean, we I've seen I've read all of the FOIA emails between Fauci and Collins. I can't believe what I've read. I mean, it's it's it's it's shocking to see the level of corruption in that system early on. And then the denial of the truth all the way through, or that the truth could be a different truth was the denial. So I agree with you.

I think we've got to stop funding any... Look, when you understand the way the system works, if Alibaba was a pure private Chinese enterprise that she never did anything with or infringed upon or we could prove its servers were in the US, whatever you want to do. If it were that entity and we were to buy shares in a secondary offering in Hong Kong, those dollars go into the Chinese banking system and the Chinese government can use those dollars at its own will, i.e. the dollars are fungible once they're going into their system. So it actually, it matters, but it doesn't really matter to a certain extent which companies we're funding and which companies we aren't funding. The fact that the net capital flow is an inflow of dollars is a real problem. So I think I am a proponent of a full decoupling.

It will never happen before a physical conflict happens. So I think that's already happening. We won't get out fully before the bullets start flying. And let's hope they don't fly. But it seems to me like it's a foregone conclusion in Xi Jinping's mind that it's going to happen. Well, and I can't help but be reminded that one of the top advisors to, I guess, the top of the Politburo talked about this idea of keeping the U.S. distracted with other wars, some of them terrorist-type entities. Right now, we're somewhat invested in at least two very serious conflicts, if not more, actually, with a lot

of various terrorist activity on the rise in the Middle East and so forth. This doesn't seem like a good time to have to deal with a Taiwan question. That's exactly right. And so we're going into an election year. Sorry, we're in an election year. I know we're eight days in. I am a person that believes you need to lead with strength and not lead with weakness. And we've been leading with weakness, which is a really poor signal to the world. Absolutely. Everybody I speak with tells me this is going to be an incredibly eventful year, that they really have no idea what's actually going to happen. There's a lot of, I guess, a lot of unknowns. The people that usually like to predict things are afraid to predict things, is what I'm experiencing. So as we finish up, a final thought?

Yeah. I think that 2024 has the highest probability that we've seen in our lifetimes of China invading Taiwan. And I don't think the markets are priced for that right now. If China invades Taiwan, the big question will be, what do we do about it? What does the West do? How do we support Taiwan? You know, you've heard Japan say publicly, they will immediately be in the fight on Taiwan's side. Well, that has global implications if Japan is not bluffing. So again, I don't believe the world's ready for a conflict of that scale. Clearly, I'm not ready either. outcomes, but also potential penalties to China. We need to be socializing the concept

of pulling China off the SWIFT system altogether. When you think about what we did with Russia, those sanctions were not really effective. We sanctioned 10% of the oligarchs, big deal. We left all the Russian banks on the SWIFT system. We let the blood continue to flow to the tumor in Russia because we were afraid of having gasoline prices too high. We have an administration that is not, they're not able to press the hard button. They can only press an easy button. Well, the hard button might get pressed for us in that invasion and we'll see what happens. Well, Kyle Bass, it's such a pleasure to have had you on. Glad to be here, Jan. It's a pleasure to see you.

Thank you all for joining Kyle Bass and me on this episode of American Thought Leaders. I'm your host, Jan Jekielek.