The Breakdown - ‘The Four Wars We Could Fight With China,’ Feat. Kyle Bass

Episode Date: January 27, 2021

In this episode, NLW speaks with Kyle Bass. Kyle is the founder and chief investment officer of Hayman Capital Management, a hedge fund focused on global events. He is known for correctly predicting the subprime mortgage crisis, as well as for his outspoken and critical views on China.  In this episode, he and NLW discuss:  Contrarian investing The larger macro landscape Bitcoin and crypto  How the U.S.’ relationship with China changed under former President Donald Trump How the relationship is likely to evolve under current President Joe Biden  Find our guest on Twitter: @Jkylebass -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

The West's intense desire to earn a profit off of a dollar, a euro, a pound, or a shekel. And China's desire to exert its influence globally, actually exert its influence both economically and militarily around the world. China uses our greed and our avarice as their number one carrot. That is exactly how they operate. If you can't see that, you've got to be blind. Welcome back to The Breakdown with me. NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk.

What's going on, guys? It is Tuesday, January 26th, and today I'm delighted to bring you an interview with a very special guest. Now, the breakdown may seem to you like it's about Bitcoin. Perhaps you buy my idea that it's more about macro. I just happen to think that you can't really look at macro right now without spending serious time and effort on Bitcoin. But really, it's about something even larger, which is power. Specifically, how power is shifting in the world around us. Bitcoin, as my guests and I have often argued,

is a tool for power redistribution. In many contexts, a tool for reclaiming power. I cover things like central bank digital currencies because they have massive power implications as well, although in a relatively opposite direction as Bitcoin. And there is another aspect of power that I think is essential to understand at the same time. This is the power balance between states. Anyone who seeks to understand the larger world we live in from an economic or political perspective must at least spend some time trying to understand the relationship between the U.S. and China. Today's guest is one of the

macro investors best known for his views on exactly that topic. Kyle Bass is the founder and chief investment officer of Hayman Capital Management. He gained notoriety for predicting and effectively betting against the U.S. subprime mortgage crisis. In a world where a lot of people put contrarian in their Twitter bios, Kyle is someone who actually walks the walk. In this conversation, we dig deep in his take on the U.S. macro economy. We chat a little bit about Bitcoin, but mostly we go deep on China, his grading of the Trump administration and the prospects for the new administration to come. Please enjoy this conversation with Kyle Bass. All right, Kyle, welcome to the show. I'm really excited to have you here on the breakdown. Great to be here. I wanted to do a quick introduction

for listeners who might not be familiar with you. And the way that I thought I'd do it just for fun is so the front page of Hamon Capital Management, your website, is Global Outlook Contrary and perspective. And I'm interesting on your take on what contrarian means. Obviously, and this is, a term has become almost a meme, at least in Silicon Valley, where there's an ironic herd mentality a lot of times. But I think it certainly applies to you. So I'd love for you to just introduce yourself and, uh, and maybe kind of, you know, we could jump off this, this idea of what it means to be a contrarian in today's world. Boy, that's a great opener. Look, I believe being a contrarian, for contrarian's sake is both a blessing and a curse. And

When you look at the success that we've had as a firm and I've had as an individual throughout my life, much of that success has come from betting against things as opposed to betting with things. And you learn your lessons young. You get wiped out several times because as you know, there's negative convexity to betting against things, i.e., there's no limit to how high things can go. And there is a limit to how low they can go. And so being long human innovation and short financial innovation is something that we've done over time, i.e. being short the structured securities markets during the mortgage crisis and being short Ponzi schemes and frauds throughout my life after doing enormous amounts of due diligence. Those have been our contrarian in place. Many of our great successes have also come from betting with the crowd, i.e., being long things,

being long Lehman's restructuring debt, right? Being long Argentina's pre-fetition debt before they restructured, you know, as a sovereign. You know, those seem to be contrarian bets at the time. But in reality, we were betting with the central bank, with the countries, trying to help them reorder themselves. So the term, I don't think does it self-justice. I think contrarian just means that, you know, we're not out there buying every growth story, hoping that the PE is a little lower than the growth. and, you know, betting along with the mutual fund crowd.

I just think we like to invest in global special situations. I guess the one other question that I wanted to add, which you already got into a little bit, is, you know, so many of the folks who will know you and know your work will know you in the context of China, which is where I want to spend a lot of time today. But what are kind of broadly speaking other types of themes that you are focused on, either on a personal interest perspective or just kind of from an investment approach perspective? And you mean now. Yeah, yeah.

I mean, or even historically. how it's evolved over time. You gave kind of a little bit of the historical greatest hits, I guess. Yeah, I'm interested now, too. You know, look, back when we launched this firm that I run now, Hamon Capital launched in 2006, we were very long Asia, believe it or not, and that's across Southeast Asia, and we were short U.S. mortgage securities. And then over time, we've just kind of followed the bad assets from private balance sheets to public balance sheets and become, more of a macro investor. So if you remember post-Global financial crisis, we started trying to understand the size of post-country's banking systems in relation to their ability to cope with a,

let's say, negative move in GDP. So if you remember the European financial crisis, call it 2010, 2011, we started putting positions on in European banks and European sovereigns in 2008, believe it or not. And so you remember Iceland, Ireland, Cyprus, Greece, you remember when those sovereigns started falling like dominoes? Oh, yeah. That was just a logical move from bad private assets to public balance sheets. Those countries had to move to save the stability of their banking systems. And in doing so, it broke the countries. Then when we moved on to Japan, how many times have you read an analysis of sovereign balance sheets that read, here's the grouping of sovereign on balance sheet debt to GDP. And then in parentheses,

that would always say X Japan. And you wonder why Japan blew every bell curve. And that's just because they're 20 years ahead of us in ruining their financial system. They had their come up into their crash in their financial system in really 1988, 88, 89, right? Japan is where we're all headed. And so when we understand the Japanification of the world,

and I think that's important to note, given, let's say, the context of you providing content to CoinDask and the crypto world, We all know where we're headed. We all know that the central banks have basically decided to tell politicians that running fiscal deficits just doesn't matter anymore. The central bank's there to print at every dip in any GDP, including the Wuhan flus, massive collapse in GDP globally. So I think that has a lot to do with where crypto's gone and where it's likely to go

before you see intense regulatory and tax moves on the sovereign's part. So, you know, I've just tried to follow where the world was headed and get in front of it a little bit. And, you know, sometimes that works. Sometimes it doesn't. And here we are today. It's super interesting. I mean, in some ways, the way that you put it, I can't exactly capture the exact way you said it, which is really crisp. But it's almost like I think most people would have this perception of a global investor or kind of a global macro investor as someone who's watching the changing political context or,

geopolitical, geostrategic relationships, and then tries to work backwards from there into what the implications economically are going to be. And it almost sounds like your flow is the complete opposite. You know, you're watching money move, you're watching balance you moves, you're watching kind of assets move through the ecosystem and kind of then specking out what is likely to happen because of it in some of those dimensions that do cross into the political and social. Is that fair to say? Yeah, I think, so my own view is the economics of every situation dictate. the incentives of the participants and eventually whether it becomes a war or a hot war or a cold war, my view is it's all driven by the economics and incentives of the participants.

So if you follow the economics, you can again get in front of the geopolitics. And so, yeah, I think I use the economics as my barometer. Awesome. Well, so I guess with that in mind, let's move into China a little bit because I'm really excited to talk with you about this. First, you know, when did you start paying attention? Was it in that context of kind of watching and following the economics? Yeah, yeah. So I would say 10 years ago, I would say 2010, when we were doing our work on the global financial system, one couldn't avoid China.

And, you know, in calling around all the sell-side firms, very, very, very few sell-side firms understood or had a deep understanding of how the Chinese financial system actually operates. And so we started from the ground floor up and kind of just built a model trying to understand exactly how money flows work because you think about an economy that has a closed capital account. They pretend to be capitalists. And yet without U.S. dollars coming into China, China collapses, right? Their own currencies settles in global transactions. The R&B settles about 1.8% of global transactions. and yet that entire 1.8% is R&B converting in the HKD, Hong Kong dollars,

which of course, if you net out R&B settling in a Hong Kong dollars, it's still zero around the world. So the world doesn't trust China, doesn't trust their government, and no one accepts R&B around the world. And so what's interesting is how does China operate? The only way they operate is if they coerced or steal or basically try to find a way any way to manipulate dollars into their system, but it's like a Roach Motel, dollars in, but very few dollars could come out. And I think people are going to end up realizing that the hard way.

Yeah. So it's interesting. So 10 years ago, so you were kind of, I don't know, this is maybe overly simplistic, but we saw this kind of transition from the beginning to the end of the Obama administration over the course of those eight years, where at the beginning there was sort of this optimism, perhaps naive right from the get-go, that China would inevitably be drawn through the powers of markets and liberal societies into sort of the order of nations as we knew it. By the end, it was very clear that that hadn't worked, that there hadn't been enough time given. And it sounds like you were kind of coming in on the sort of beginning of the middle of that. I mean, was it clear to you at that time that the U.S.'s policies towards China was just not going

to accomplish what it wanted to? Yeah, you know, when you studied. a financial system, you end up studying the history of the financial system, the history of the country. And I would go much further back in our relationship with China. You go back to Kissinger and Nixon, right? You go back to the, you know, when we finally stepped off the gold standard in 1972 and our strategic pivot in our, in the depths of our Cold War with Russia, we decided that we were going to pivot to China. We were going to hug the panda. And we were going to. show China that if they were to ascend into a rules-based system, a world where they can,

where they act as a positive global actor and liberalize their economic system and their communistic system into something that might resemble a Western democracy over time, it would be incredibly prosperous for their people. And it would raise their GDP to staggering heights. And again, that began in the early 70s with Kissinger and Nixon. And again, we shouldn't point the finger at any, whether it's a Democrat or Republican, just doesn't matter. We embraced this philosophy from 1972 until about 2016. And then we realized that, you know, China raised their ugly head a little too soon. And we understood finally how much intellectual property they were stealing around the world. We understood by watching the activities of Huawei

and ZTE, how they bribed, cheated, and cajoled all of the emerging markets and using their equipment and using their equipment so that they could spy on all of the data on those networks. It's important to note that the world started to figure out how China's malign intent was really how their MO worked and how it worked in every different aspect of their interaction globally with either supernational institutions or bilateral agreements with various countries around the world. We now know exactly what their intent is and how they operate. And again, that took a long time to figure out. And the last administration, you know, with Obama and Kurt Campbell as the Deputy Secretary of State for Asia under Hillary,

You know, they were still basically prostrating our country to the Chinese, hoping that they would become a responsible global actor. And I think we all know now, Nathan, that they went the other way. They became more authoritarian. They became more communistic. And as evidenced by this morning, I know this is a timeless podcast. But you see that there are, you know, they took Jack Maugh and they sat him down and told them to behave just two years ago. You remember in 2018, they actually took his VIE shares in Alibaba and distributed them to five unknown individuals in China.

And they all had the same mailing address in a rural mailbox in, in the interior of China. They basically just took a bunch of his money away and said, you better behave. If you remember, he resigned immediately as CEO of Alibaba and said he's going to be, he's going to pursue his philanthropic interests. And the next thing you know, he and the other executives end up owning half of Ant Financial. They stole it. Imagine if the CEO of Microsoft came up with an idea for a business with a Microsoft. And he decided that all of the executives of Microsoft were going to own 50% of that new idea. And the shareholders could have half of it.

That's what happened with Ant Financial. You know, Jack and 18 others decided that half of it was theirs. In fact, a third of it was going to be Jacks. And I think now you're seeing China is just going to take financial and Alibaba potentially nationalize them. Those are the real risks that people run with dealing with an authoritarian regime. So I think you have to understand the way they operate to then make your decisions as to what are the average people in China?

What are the good people of China going to do with their money? And that probably has a lot to do with Bitcoin mining and crypto assets. because if you're Chinese and you want to preserve any purchasing power and you want to move out one day and get out from under the evil regime, you're going to have to monetize your assets one way or the other, right? So, again, I think it's very germane to this discussion. Yeah, I completely agree. And it's certainly something that we spend a lot of time looking at here. I also definitely want to talk more about Jack Ma and just sort of what the potential symbolism of that prospective nationalization would mean in terms of international players. But I guess one more question, kind of when we're on the historical bent, is whether you think this was inevitable kind of based on the way that the system is structured and the CCP is structured versus how much it had to do with the particulars of President Xi and his consolidation of power.

No, I mean, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I mean, I, I, I, I, I, I, I, I, is, I, is a a lot of, uh, totalitarian system for the leadership. And the other one is a democratic system, uh, uh, uh, that respects human rights and responsible global acting. And those fundamentally aren't compatible with one another. The only thing that I see, the only thread of compatibility that you see between those systems is the West intense desire to earn a profit off of a dollar, a euro, a pound, or a shekel. and China's desire to kind of exert its influence globally and actually exert its influence both economically and militarily around the world. And China uses our greed and our avarice as our, as their number one carrot, right? That is exactly how they operate.

They corrupt a few to becoming evangelical about the great Chinese miracle. and then they stick it to the rest. And again, if you can't see that, you've got to be blind. Let's talk about the shift then in U.S. policy with regard to China. One of the interesting things that I've observed over the last four years is that I feel like if you were to ask a survey, a set of people who are kind of informed, you know, about economic and geopolitical issues, who really didn't like President Trump. what they were going to give him credit for on one thing, it would be changing the tone with China. But I guess I'm interested in your take now that we're kind of wrapping up this administration. When it comes to the trade war, what worked, what didn't, I mean, how do you grade this shift in perspective or approach?

Whether you love Trump or hate him, everything that he did can't be put into the bad bucket. he has so many deficiencies as a person and as a global leader. But, you know, the one place where he let his team act, I wouldn't say unrestricted, but he let the National Security Council, the State Department, the Commerce Department, and as trade rep Leithizer, he let them do their jobs. And they did a hell of a job in kind of rewriting this narrative and actually delivering. the facts, just delivering the facts of the situation. You know, and even DOD with its written writing its CIUX report on intellectual property theft,

which was kind of a famous 2016 and then 2017 follow-up report. If you haven't read it, I suggest you read it. You know, those kinds of things brought our country into kind of understanding the malign intent to the Chinese Communist Party. And if you remember four years ago, you know, China could do no wrong. They were our friend. And all the asset management firms and, you know, the Ray Dalio's and the Steve Schwartzmans couldn't wait to invest more money in China at the same time espousing some ESG policies, right? Again, think about the fundamental and compatibility of investing in a regime that is committing ethnic and cultural genocide and has millions of religious prisoners in concentration camps. I mean, in this day and age, it's hard to, it's actually hard to think about those two things existing in the same sentence.

And yet they still do. But if you think about the press, the narrative in the press over the last four years has changed dramatically. In fact, the most recent Pew poll has China polling as negatively as hedge fund managers and congressman. And so I think, again, that even though we sit, I think we exist in a post-truth. world and whoever puts together the best narrative today wins. China spends four billion a year putting together their own narratives or more. We don't have a narrative department. We just have various departments trying to do their job in the United States. So, you know, when you ask about, quote, the trade war, the way that I see it is a lot of people refer to it as Trump's trade war.

But China's been fighting a trade war with the United States since we let them ascend into the WTO in 2001, albeit entirely too early, under specific. promises of compliance and a responsible global activity. And yet, we just started fighting that war in 2016. So it's not Trump's trade war. This is China's trade war. And we're just catching up. And I think that the tariffs should absolutely stay in place. And for those that don't understand tariffs, you should understand very specifically. Just pick one sector. Pick steel. Pick aluminum. China can act as with non-economic means as a state actor. And you think about our aluminum business, for example.

You know, when you look at our factories, our factories were operating, aluminum factories were operating 80, 85% to capacity. And the Chinese government decided that they wanted to put our aluminum business out of business so that we would rely on them for all of our structural and tactical. aluminum. So they started selling aluminum at way below the cost to produce it globally. So in one year's time, our capacity utilization in our factories went from 85% to 42% to where they were all hemorrhaging money. And if they effectively put our aluminum smelters out of business, we'd have to rely on them. Well, think about how much aluminum goes into our military,

How much structural aluminum goes into things that protect U.S. national security. We can't possibly allow that to happen. So for those people that say all tariffs are bad, they actually don't understand how they work and how the Chinese government can act without economics in mind. They can act strategically. So I think we did a great job in pushing back on the Chinese, and I think we have a hell of a lot more work to do. I just hope the new administration, I hope the Biden-Harris administration,

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and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income, simple. Get started at nexo.io. You have these two things that converged over the course of the last year, at least for some, which was on the one hand a broader discussion of the trade-offs that were made. You know, as people tried to diagnose the surprise Trump victory in 2016, one of the things they pointed back to was things like the accession of China into the World Trade Organization in 2001 what it meant for jobs in the Rust Belt, exactly the people who flipped for Trump.

So you have that kind of the whole like larger, you know, economic context that had been brewing for a generation. But then when in the wake of economic shutdowns, you had massive, massive shortages of PPE and medical equipment. It was like a trigger for some who, for whatever reason, just hadn't thought about it this way before, maybe things like domestic manufacturing capacity were, you know, as opposed to kind of just in time, were actual strategic issues, not just kind of economic issues that you could let the relentless

forces of efficiency turn over. I feel like there was kind of a wake-up moment. And by the time you had the actual elections, right, this is one era. It was really wasn't like who's going to be tougher on. Well, there was actually ads flying back about who was going to be tougher on China and what the best strategy for being tough on. China was. That's right. I guess the question is, so going back to kind of just pick up, pick up where you left off, what are your assessment of prospects for a Biden administration? You know, I mean, do you think, are you optimistic? Are you, are you nervous? Kind of, you know, and if so, what's specifically are things where you kind of think that they might outperform

versus underperform? Well, I'll start by saying I haven't met Jake Sullivan or. more Tony Blinken yet. And I think those are two key cabinet level positions that are going to be dealing with the China threat and how we engage with China. And you asked if I'm optimistic or if I'm apprehensive or frightened, I'm all of the above. And my optimism from Heng found just a couple

of public comments that each has made. You know, Jake Sullivan has said publicly that the Biden administration will never trade human rights for a trade deal. Now, one place that Trump would never go is he would never go to the forced live organ harvesting and the concentration camps of the religious prisoners, the Uyghurs, the Tibetans, and the Mongolians, where we have literally millions of people. Our intelligence agencies have time series photographs of the concentration camps of the crematoria they're building at these concentration camps. It's literally

oust wits all over again. And the only reason the world is not up in arms about is the Chinese won't let cameras in there. And so I think that if Jake Sullivan holds true to his word and says the new administration is going to prioritize the respecting of human rights in our trading counterparties, well, then China is actually going to is in for a worse ride than they were with Trump administration. So I'm cautiously optimistic that Jake Sullivan's going to end up being a man of his word. Recently, Tony Blinken, who will be the new Secretary of State, tweeted that he stands with the people of Hong Kong and he is 100% against the arrests of the 53 or so odd pro-democracy lawmakers arbitrarily from their homes in the last few weeks.

So, again, I'm cautiously optimistic based upon a couple of the things I've seen that these two key and pivotal members of the Biden administration will be focusing on going forward. You kind of presage my next question, which is what you see as the major fault lines. Obviously, there's so many. There's Hong Kong. There's the Uyghurs. There's this question of infectious disease in that relationship. There's technology and privacy, which you kind of intimated at. there's currency infrastructure. I'm not sure how much you've been paying attention to the DSEP and

Digital Yuan project. And then, of course, there's Taiwan, which we just got a major update from Secretary Pompeo just about, it might have even been today or yesterday or something like that, the last couple days changing the way that the sort of self-imposed restrictions on how the U.S. Executive Branch interacts with them. You know, of these, is there, is it just all one big belange of issues, or do you see specific issues more likely to become the source or flashpoint of consternation more quickly? Yeah, that's a great question. Look, the way I organize these things in my mind is there are four wars that we can be fighting

with China. And again, compartmentalize them for a minute. Number one, we can be fighting a kinetic war where we actually go to a physical war. with China, where the U.S. has the number one war department in the world, and we're amongst the best in the world at this type of conflict. No one wants to engage in that type of conflict, and thank God we're not currently in one. We're prepared for that, though. The second kind of war we can fight with them is a cyber war. We've been fighting a cyber war with China for the last 20 years, plus and it's only intensified.

And let's argue that one could argue that we have top, we're one of the top two cyber war specialists in the world. We have a great ward department. The other two wars we can fight with them are an economic war, which China's been fighting with us since 2001. And we don't have an economic war department, right? We deal with China's economic moves more on an ad hoc flyball basis, whether it's the U.S. trade rep's office, whether it's the Commerce Department, the State Department, or even

DOD, and even the executive branch, we deal with economic war issues, again, on a one-off basis a la carte. I think it's important that the United States must stand up kind of an economic war department. And I think, hopefully we'll get there. And China has been fighting that war with us for 20 years. And we're not doing a great job, but we're just starting to push back in the areas that we need to be pushing back. And the last place that we can be having war with them is propaganda slash data. And China has a propaganda department that fights at war every single day. And we don't have one. And so when I think about compartmentalizing a conflict, I think about those four compartments and where we need to do better,

on the economic warfront and the propaganda warfront. And I hope the Biden administration starts thinking in those terms. Media content creators, we all love plumbing for historical analogy by way of explanation. And one of the big questions has been, are we in already a Cold War with China? I mean, it sounds to me from your answer to that last question that that's the wrong question to ask, but just what are we, you know, I guess is the question. Well, I mean, however you define Cold War or Hot War, we are fighting three of four wars with China. They are not our friend.

They are not a responsible global actor. They are a parasitic relationship with regard to the U.S. dollar in our relationship with them. They employ slave labor. They steal $300 to $600 billion of our intellectual property. every year. They lie, they cheat, they bribe, they steal all over the world. And yet we still interface with them for one reason and one reason only. Grieve and avarice. We can't wait to figure out how to sell 1.4 billion people in China something that we can make or invest in Chinese enterprises

that we hope we can make an R&B slash dollar in. There is actually, if you look at this empirically, If you just look at the data and the facts, there is actually not a reason for us to engage with this country. Do you think that, well, so one, I guess I'm interested in, you know, we've talked a little bit about the changing attitudes in America on kind of a broad consumer level towards China. Do you see a similar shift in the business-to-business relationship, a recalcitrance of companies to defend China and sort of, you know, China global markets like they used to? And I guess kind of let's pair that question with same question but for other allies like Europe. I guess where does both inside the country and the rest of the world stand as the Biden administration does go into this? You know, I was in the unique position of chief of the risk management committee for the largest public endowment in the country. Just a couple of years ago, I had the risk committee for the University of Texas Endowment.

We have, you know, a little over $50 billion. And I was in charge of thinking about policy as it relates to investing in these, in China and other regimes that, let's just say, are on many of the restricted lists at Commerce and State and DRD. But the way that I think institutional capital thinks about investing, in China has changed dramatically over the last two years. And as this administration has, as you probably saw, leaked the names of 50-plus institutions that are Chinese military institutions or do business with the Chinese military, we have essentially blacklisted them from investment in the U.S.

And rightly so. Secondarily, when you think about Europe, the problem that the Biden administration is going to have with their approach. to China, you've probably seen this in the press, is they say, we are going to look to our allies to develop a multilateral approach to the relationship with China. Well, the problem with multilateral dealings is you're only as strong as your weakest link. And what China's so good at is corrupting leadership in some of the nations that we deem to be our allies. When I did that analysis for University of Texas, we did a deep, deep dive into both

corporate and government dealings with regimes like Cuba, China, Venezuela, and again, North Korea. And what I found was Germany is the single worst offender in the world as far as the amount of business being done by German companies or the German government with the Chinese government, with the Cuban government, with the Iranian government. It was shocking to me to find one of our top allies being the number one offender. So if we're going to have to look to Germany to form some sort of consensus on how we're going to deal with China, then we are in big trouble. All of the engines that propel the Chinese nuclear submarines are made in Germany.

All the quiet diesel engines are sold to China as, quote, recreational engines. and they put them on Chinese submarines and Germany knows it. And so until we root out all of the corruption that China has infected our world's partners with, then looking to multilateral institutions for us to develop our policy is going to be a failure. And I hope that doesn't happen. I guess as an asset manager, this gets into a little bit about what you were just saying, how do you invest against these sort of macro themes, you know?

you clearly have a very strong position that's informed by a ton of research and just digging into these issues. How does that translate into the decisions you make from a financial perspective? So it's a good question. In the past, it was a lot easier. And what I mean by that is today, you and I both know that the world's central banks have printed more money in the last 12 months than they have ever printed in a 12-month period. And that, that, that, stands for China and the rest of the G7 and all the rest of the world's central banks that can expand are balance sheets at will. And so there's so much money moving around the world. Look at what's happening to commodities today. I don't know how much attention you pay to corn,

wheat, soybeans. The price of everything is skyrocketing. And literally in the last few months, we're going to get to a point where the vaccine is going to be effective. and it will develop some herd immunity, and I think it will happen in mid-2020. I think you'll see hospitalizations collapse in February. And so in that world, you really don't want to bet against much, right? What you want to do is figure out how to avoid negative real rates, which that's what's going to happen. And I think that's, again, one of the reasons why the crypto markets are surging is the millennials look to crypto because they believe, scarcity equals value. I don't believe that. But I do think that all assets, including crypto,

will trade higher over the next 12, 24 months. And I think finding the assets that have the least amount of volatility and the most predictable returns is the challenge. Yeah, absolutely. I think it's fascinating. It was having a conversation with someone earlier where one of the reasons that Bitcoin is such an interesting asset to so many is that it, it, It sort of has this benefit where positioned as an inflation has because of the scarcity of supply, it fits in that. But then when everything is just surging, too, it functions as a risk asset because it has so much more to grow to mature.

So it kind of has this fascinating dual profile that I think a lot of people are latching onto right now. That's right. So I guess, you know, you again kind of already started to answer this a little bit. But I want to just ask, what are the other major major? macro themes outside of China that you're watching paying attention to into the new year. I mean, it sounds like the mega context is certainly just the sort of everything rally in the context of a negative interest rate world. Yeah, I mean, I think that is the key. I think you're

going to see just assets themselves altogether. You're going to see real estate prices move higher. You're going to see prices of equities move higher. And the question is, what's your real rate of return, right? I.E., what's the inflation rate versus the rate of return that you're getting? You know, if the new, if the Democratic administration is successful and, let's say, in let's say pushing a $15 minimum wage across the United States, you know, get ready for $14 Big Macs because it's going to happen right away. And if we're successful in giving everybody a free $2,000 check, well, you probably saw this, that autos in the U.S. had to 13% year-over-year increase in sales in December alone. Well, you know, we're in the midst of a really

tough recession and yet things are flying off the shelves. You can't buy certain things because everybody has so much cash the trillions of dollars in extra new deposits in banks in the U.S. That's why banks are doing so well. The yield curve is deepening and all of a sudden you're going to see inflation. So I think trying to understand what an inflationary environment looks like is something today's millennials. And truly, you know, today's investors that are 50, 60, 70 years old probably don't remember what happened in 1978, 79, 80, 81, right? Those are worlds that are really difficult to navigate. The crypto world is focused on the right issues. I think they need to be thinking more about diversification. Now, all I'm saying is you shouldn't put 100% of your assets in

crypto because you think it's the home run of all home runs. I think you should be having a small percentage of your assets in crypto and larger percentages and other things. I think most of the crypto world is certainly at a stage for many people where it's less about a concerted investment strategy and more about almost this gateway drug to learning about these issues, you know, which is I think a powerful thing. But part of what I try to do with this show, at least as, you know, help bring on people who can help set the context with these larger kind of global issues. I guess as you look into 2021, what do you think as a whole, we're not paying enough attention to that we should be paying more attention to?

I think that there is money to be made where you can make positive real rates of return even given inflation. If you focus on population dynamics and immigration, integration dynamics just within the U.S. And you understand that there are people moving from the coast, moving away from high tax, mismanaged jurisdictions into low tax, much better managed jurisdictions, whether you're talking about Tennessee or Florida or Texas or Colorado as destinations for those moving from New York and all of California. There are many things that you can do to get in front of this wave of people.

that is going to come across the United States here in the next decade or so. And you can do it in a way where you own real assets and you're creating value yourself and doing things, maybe things that are environmentally positive while you make money. And sometimes in your life you kind of make those life changes and life choices. And it's something that I'm very excited about because I think these population demographics and dynamics are only going intensify over the next decade. I think you've only seen the first wave of things to come. So that's kind of the beauty of the United States and the American dream is you can go pursue these things, you know, if you see them. And so it's something that's exciting.

It's a new frontier. And it's something very much like crypto, where it became a new frontier, what, I would say, as far as eight or nine years ago. Yeah, I mean, it's really fascinating. And one of the things that I talk about with, you know, almost everyone on the show eventually is kind of what of the shifts that we've experienced over the course of the last year are, uh, are likely long term, right? Not coming back even when we hit some sort of herd immunity or vaccines rolled out. And this shift, the, the opening of, uh, people moving and their jobs not really being willing to or able to say that they shouldn't just log in from their computers is, is so significant. in a way that's not just about how the corporation functions, but has second order and third order effects for the entire way people structure their lives, how they prioritize different things. I mean, and we're starting to see, the thing that's crazy is how fast we're seeing

those second order effects kick in. The cost of lumber going back to things that are screaming up, for example, because of the massive amount of construction, the introduction of, I mean, how many pitches have come across your desk for companies that want to go buy houses, and have them, you know, suburban rentals, right? Or, you know, rural rentals even, you know, so people can live in houses, you know, that they can afford, but that are rented rather than buying because the mortgage process is all jacking. You know, like there are these just things that are happening so quickly and it's just probably

scratching the surface of these larger issues. Combine that with exactly what you said, the opportunity, you know, people, I think scoff a lot at the idea of individuals moving for tax mobility when it comes to leaving the country, right? a lot of people in crypto, it's probably one of the most dynamic sets when it comes to people who would actually pick up and move to, you know, some other jurisdiction. Still, when it comes to actually leaving the U.S., it's such a huge cost, whereas going from New York to Florida, to your point, is orders of matitude, less, or easier for some people to countenance, you know. So I think it's a really interesting space to play. There's going to be a lot of room to kind of observe,

also get out ahead of things in that in that domain. So that's good really exciting to see. It'll be fun to see what you do there. Thank you. I appreciate it. And I wish you the best in this podcast. And there we'll probably be talking more about crypto in the future. Awesome. Well, let's let's make sure to check back in in a few months when you're when you're up and running with everything and your new observations. But until then, Kyle is awesome to have you on the show. Really appreciate your perspective and the way you look at things. So thanks again. And we'll talk to you soon. Absolutely. Good luck. So a few quick reflections on the show. As you can tell, Kyle has a very distinct and very clear perspective on China. There are many in the business world who disagree.

There remain huge advocates like Ray Dalio. For me, I think we have to be willing to grapple with the fact that after two decades of deeper integration, China has not validated the thesis, held by many that full integration into the global financial order would necessarily bring with it an emergent liberalism and political opening. Now what the right strategy to deal with this is is up for debate. But we have to have this card conversation. It has to be new and contextual to the facts and evidence we actually see, not what we wish were true. For a different perspective on China, I recommend you go back to my episode with Graham Webster. Graham is the editor-in-chief at the Digi-China project at Stanford, and as someone who I know thinks intensely about these issues,

often coming to different conclusions than Kyle. That episode is more of a primer how we got here in terms of this bilateral relationship, and so it might be a good place to start. Either way, I hope you enjoyed this conversation. I hope you learned something. I hope it provokes some new thought. I certainly know I did. Until tomorrow, guys, be safe and take care of each other. Peace.