The Munk Debates Podcast - Munk Dialogue with Kyle Bass: Financial consequences of the conflict between the US and China over Taiwan

Episode Date: November 21, 2022

As Xi Jinping enters an unprecedented third term as general secretary of China's Communist Party, many geopolitical experts believe his desire to strengthen China’s influence and power in the region will soon lead to a military invasion of Taiwan. The US, however, has made clear its intention to prevent that from happening. How could a conflict between the two superpowers play out, and how will it impact the global economy and foreign investment? What could happen to assets invested in China should the dispute intensify? American investor and founder of Conservation Equity Management Kyle Bass joins us for a candid discussion about the global financial consequences of a war between China and Taiwan and what investors should be thinking about in terms of the risks its poses to the North American economy.   The host of the Munk Debates is Rudyard Griffiths - @rudyardg.   Tweet your comments about this episode to @munkdebate or comment on our Facebook page https://www.facebook.com/munkdebates/ To sign up for a weekly email reminder for this podcast, send an email to [e-mail].   To support civil and substantive debate on the big questions of the day, consider becoming a Munk Member at https://munkdebates.com/membership Members receive access to our 10+ year library of great debates in HD video, a free Munk Debates book, newsletter and ticketing privileges at our live events. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue - https://munkdebates.com/   Senior Producer: Ricki Gurwitz Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

These statues have to come down. It's always been a pandemic of the unvaccinated. The problem now is it's a pandemic of the willfully unvaccinated. Falling birth rates are good. They're good for our planet. They're good for our societies. We're not responsible for the escalation with Russia. We're not the ones who invaded Ukraine.

I don't think it's fair to portray people of color as victims. It is a very dangerous time in American politics. Hello, among the listeners. Rudyard Griffiths here. and moderator, welcome to this, the latest in our continuing conversations, called The Monk Dialogues. These are in-depth Q&As with some of the world's sharpest minds and brightest thinkers. We're going to go deep into the big issues that are transforming our world. Hopefully leave you with some new original analysis and insights.

On this edition of the Monk Dialogues, we're going to unpack the risks, the potential disruptions of a conflict between the United States and China over Thai. Taiwan. This we know there is increasing tensions between these two great superpowers over the future, the fate of this tiny independent island nation. That conflict could have a military dimension. It could also, though, have an economic one, a big consequence for a global economy that's already struggling with high inflation and the effects of the war in the Ukraine. So what does this all mean? What could happen in terms of the potential of a conflict between China and the United States over Taiwan in the months and the next few years to come,

and how is that likely to play out again along economic lines in terms of its impact on the global economy and the economy here in North America? To dig into these issues, we are fortunate to have on the program, Kyle Bass, the CEO of Conservation Equity Management. Kyle is well known to listeners as a person with outspoken views on China. He's the recipient of the 2019 Foreign Policy Medal in no small part because of his engagement on the China file. He's a life member of the Council on Foreign Relations and a founding member of the Committee on the Present Danger, China. Kyle Bass joined me for an in-depth conversation on just how the conflict between these two superpowers could play out,

its effects on global markets and the economy, and a warning to investors to be very careful about what could happen to the assets that they've invested in in China should this conflict emerge. He joins us from Dallas, Texas. Kyle Bass, welcome to the Monk Dialogues. Glad to be here, Reddard. Let's dive right in and get your assessment of this unique geopolitical moment that we're in. And I want to begin with China and Beijing. We've seen the ascension of Xi to an unprecedented third term as China's supreme leader.

What do you gauge as the risk in and in what time period could China move against Taiwan? Give us a sense of your threat assessment of the moment that we're in right now. I think it's vitally important to basically try to understand the architecture of both the standing committee, the Politburo, the Politburo itself and the Central Committee, and call it Chinese military operators in the day-to-day operations of the country. It's important to note that in the 20th Party Congress, which, as you know, just concluded, there were some amendments made on the final closing ceremonies that were, let's say, took things from Xi Jinping being the central ruler and cementing a third term to being extreme she and trying to elevate himself over kind of Mao

or at least get him to Mao's stature. And I think that just imagine for a minute if you and I woke up today and President Biden had removed Janet Yellen from the Treasury, Gary Gensler from the SEC, and removed the Powell from the Fed. Imagine if we woke up and those. three people were gone, out of the blue. That's what happened on that amended day. The market technocrats, the people that were in control of running the CSRC, China's SEC, he's gone. He gang, the person in charge of the Chinese central bank, he's gone.

The Chinese finance minister's gone. And Li Hua, who is really the global interface, as we all know, between the regime and finance ministers around the world, he's gone. gone and again think about who he replaced those people with and he added for the first time in the history of China the head of the Ministry of State Security i.e. China CIA is now a member of both the Politburo and the Central Commission. That's never happened before in the history of China. They added the head of the Chinese country or state police to the Central Commission. That's never happened before. They took the General

in charge of their nuclear weapons program and added him to the Politburo. They took the provincial head that was in charge of their weapons production and their weapons company and added him to the Politburo. Basically, she said, and then, as you know, he unceremoniously humiliated Hujentau in the closing ceremonies, ripped him out, and then basically ripped out anyone that was an ally of his and the Politburo or anyone that was a member of the Chinese Youth League, Communist Youth League, which was the reformers and the openers, they're gone. So it's so easy to see the writing on the wall that he just installed a war cabinet

and he just set aside any cooperation with the West or market functionality with the West. So I think the press missed that. I don't think they characterize what happened with the amended working papers and what the final result was, and something that Matt Pottinger, the former head of the National Security Council for China in the Middle East, caught because he speaks fluent Mandarin. The fascinating thing was when they made those amendments to the documents in the final weekend, they inserted the term great struggle in Chinese into the documents. China did something fascinating when they released the English language version of what they put in

Chinese, they intentionally mis-translated great struggle into words like hard work. And you and I both know the nuances between a great struggle and some hard work or two different things. And so the press missed that too. So when you ask kind of where we are, I think this is the final piece of the puzzle that gets China ready to invade Taiwan. And I mean that without, this is something that you don't want, I don't want, the world doesn't want any more conflict, but I can tell you, just this morning, another admiral in charge of U.S. Strategic Command, Admiral Charles Richard, said the U.S. has to anticipate and prepare for a protracted conflict with China in the very near future. You have Admiral Gilday, the chief of U.S. naval operations, just a week ago, saying that

Xi Jinping is much more willing than previously thought to cease Taiwan. These aren't slips by U.S. admirals, right? If you slip and you weren't authorized to say something publicly, you know what happens to you. So we are preparing for war. China is definitely preparing for war. And Wall Street just hopes that it doesn't happen. And so it looks to me now strategically like in the next 12, 18 months is when this happens. Wow.

fascinating insights there, Kyle. That's exactly why we wanted you on the monk dialogues today. So let's talk about how that conflict could take shape, because I think there's a growing realization that this may not be, you know, an Omaha beach style D-Day landing, maybe as some people assumed, that the invasion of Taiwan could take should China move against Taipei. Instead, there's an increasing understanding, Kyle, that maybe the more optimal strategy for China is a blockade, surrounding the island of Taiwan, effectively cutting it off, in a sense, forcing the issue with the United States and forcing the issue with the government in Taipei to come to some kind of agreement, most likely a humiliation, that would then reset a new status quo,

a new normal. A, do you think that is the likely course of how the early stages of a conflict would look. And then what is the American response to that likely to be? Yeah. So the answer is yes. I think that if you look at a map and you see where all of the commerce in Taiwan happens, it's on Taiwan's west coast that faces the Taiwan straight with China, right? It's only 100 miles across the straight from China. Those ports are where all of their incoming and outgoing commerce happens. And we both know that there's a historical analog to the US blockade of Japan,

which caused Japan's actions in Pearl Harbor. Taiwan is very much like Japan. They don't have any of their own natural resources, so they have to import food, energy. They import energy daily, very much like China does. If there was an effective blockade, like we saw, in the military exercises in the post-Pel Pelosi visit, it can hobble the Taiwanese people in a matter of a week.

And so the answer is, yes, that's probably most likely, although a full-scale invasion isn't out of the question. And, you know, the one thing that really the Japanese or the Taiwanese don't have is they don't have missiles. They need to have be armed with missiles, these like harpoons, where, call it surface-to-ship missiles. And we as a country have only decided to start arming Taiwan with harpoons in the last couple of months. So I believe our response has been, I don't know, misguided or incredibly delayed. Up until two months ago in DOD's strategic chronology of recipients of harpoons, Saudi Arabia was the number one recipient on the timetable.

So, you know, we should have changed that long ago and made Taiwan number one. So your question is a good one. I think a blockade is a way to really force Taiwan to, I guess, come to the table and give in. We, of course, will not put up with a blockade in the Taiwan Strait. We will push for freedom of navigation of the seas. We have our carrier strike groups over there, and it's likely to get messy, as Admiral Richard said today in a public form. So, Kyle, is it your sense that U.S. Navy, in the situation where there is a blockade of Taiwan, would make an attempt to transit the strait, in effect, breaking the blockade? I guess I'm asking this question to you with some incredulity in my voice because we know that China has a large ballistic missile force.

let alone a large navy. And it has invested in its missile capacity, its offensive weapons for more than a decade now. And they've demonstrated, as you just mentioned, after the Nancy Pelosi visit, their ability to use their enhanced military capacity to attack not only targets in the Straits of Taiwan, but on the other side of the island itself,

potentially with great lethality and action. So, Kyle, how does an American military face off against China in its response to Taiwan to this blockade scenario? How does that unfold? What does it possibly look like? You know, the Allied West is transiting that straight. I was just with some French commanders over the weekend who command, you know, French frigates and and battleships, and they've been transiting the strait. And when they do, the Chinese Navy literally

comes right at them. And the younger kids on the boat were convinced that the Chinese destroyers were going to literally teabone them and sink them. And they turn at the very last minute, and they are very intimidating. And when you look at post-Kremaya, and again, I know Kremaya doesn't have much ado with China, but in the post-Kermaya world, China used to run when you think about this. They used to run a zone defense in the straight. And in 2015, they decided to go to a man defense. And now they're going to a full court press man defense. That's how you think about their naval operations in the strait. So they've constantly ratcheted things stronger and tighter. And they use Pelosi's visit just to move the ratchet forward yet once again. And you say,

you know, can the U.S. transit the straight? And should we do that? I guess I hear it in your voice. If I follow your logic, let's just say to a logical end, you would say, well, they're a belligerent nuclear power. We can't possibly fight them. We should let them take over whatever they want to take over. And the U.S. has really a national security problem that is of historic significance in Taiwan, not only to defend the rights of the Taiwanese people and the democracy in Taiwan, but as you know, Taiwan semi-makes upwards of 90% of the world's most. most advanced chips, and those chips are used in everything. And the U.S. is reliance on Taiwan

Semi and the West's reliance on Taiwan Semi is, say, a vital point, a choke point in the world that we are trying desperately to onshore, as you probably know, in 2017, we started building Taiwan Semi facilities in Phoenix, Arizona. You can Google Taiwan Semi Phoenix and look at the pictures. 14 billion dollar buildings are pretty big buildings. And the difference is they're building 5 nanometer fabs there, and those are the last generation fabs, even though we're spending the money today. In Taiwan, at Taiwan semi, they make two nanometers.

The best intel can do today, for instance, is 7 nanometers. So this is very much like the Severe-Simpson scale, meaning it's non-linear when you are moving down that scale. and they make the best chips. So we can't allow China to simply take over Taiwan. Fascinating stuff. So in a sense, there's other strategic prerogatives here well beyond freedom of navigation. It's important that you bring those up. Earlier you mentioned Wall Street. And I guess what strikes me, Kyle, is that when you start thinking about the different chess moves as we've just described them, the potential impact on the global economy would just seem, it seems,

it seems mind-boggling to me. We are already, you know, in an inflationary moment. We have the after-effects of COVID and supply chains. Kyle, what would this economic shock look like? Because if I think about disruption to the two great trading and economic powers in the world, their relationship, the flow of goods and services between them, I mean, this is, it's hard to fathom. Yeah. I mean, if you remember also, the historical analog was going into World War I, the newspapers were printing that the relationship between Germany and the rest of Europe and Germany and the U.S.,

they were too intertwined from business perspective to ever have another great conflict. That was the battle cry from the press going into 1919, and we know how that turned out. And the same battle cry was heard in the late 1930s, that, again, economies were too inextricably linked, and that the negative outcome would be so horrific for the globe that there's no way that conflict's going to happen. Again, I hear the same things today. Yeah, China's 15% of global GDP. In the event of a conflict, let's just say that I think some of the U.S. economic reaction, which is one of the, I guess, pillars of this podcast today, would be an immediate

sanctioning of the Chinese banking system and removal of China from Swift, which would collapse China's economy very quickly in a matter of weeks. And so in that environment, what would happen to global GDP probably drop three, three and a half percent, which would be a pretty significant recession. But is it necessary? Probably necessary if China's belligerence continues to move on abated. We know they fully militarized three of the South China Sea Islands that Xi Jinping stood in the White House Road Garden and told President Obama that he would never militarize those islands and that it was only for civilian use. Forget the fact that they were putting in 10,000 foot runways and hangars. That was only for civilian use.

So their leadership lies to other leaders in state meetings, and they've proven that. And now we've got a situation where she is telling you in no uncertain terms that the rejuvenation of the great Chinese race, that assimilation and recombination of Taiwan, is his life mission. And if he doesn't achieve that, it will be a failure. In the new Politburo documents, they move the goalposts on what could instigate. invasion of Taiwan. One was, but prior to this Politburo meeting, it was a a revolt seeking independence in Taiwan and now it's simply Taiwan not accepting a reunification is grounds for invasion. So again, he was moving goalposts, he's put together a war cabinet. I realize this is something that we, that none of us want to happen, Roger, but I think the writing is all there.

All the arrows point in the same direction, and everything that's happening now is happening at warp speed, both on the Chinese side and the U.S. and allied military side. And we are working closely with all of our allied partners on a militaristic response, and we're working closely, let's say, with subject matter experts in the U.S. on an economic response. You know, I think of Neil Ferguson's term chimerica as the, you know, know, the let motif of the last, you know, quarter century of globalization. I mean, if this is going to be torn apart over a Chinese move against Taiwan, what does that look like in terms of what happens in the American economy? You have Apple, the company that has the largest market capitalization in the

world, America's kind of tech giant, if there ever was one, hugely dependent on Foxconn. And fabrication of its ubiquitous iPhone. You know these stats as well as I do, Kyle. You know, 90% plus of all antibiotics used in the West have precursor chemicals that originate in China. Medical, majority of medical devices used in hospitals for simple procedures, again, feedback into supply chains that originate in China. China. Again, I'm just struggling here to think about what Humpty Dumpty looks like. Forget about putting Humpty Dumpty back together again, but what does Humpty Dumpty look like in the aftermath of a conflict? Let's say it doesn't become even kinetic, but let's say just an open and avowed complete breakdown of the economic, trade, diplomatic, and political relationship between the United States and China.

Yeah, you know, you make a good point on antibiotics. And if you remember, we were forming a presidential commission to study the origin of at the time the Wuhan virus and now the COVID. And if you remember, within an hour of us mentioning that we were putting together a presidential commission, we already were at the finish line to put that commission together. And it's something any and all presidents of our country should do. is a nonpartisan issue, given the fact how many people that disease is killed around the world. And China made a press, they had held a press conference within an hour of us saying, we're putting together a presidential commission. And they said, if you do that, we will withhold all antibiotics from the United States.

And I have friends on the National Security Council who told me that forced us to cancel the commission. If you read in Shari Marxon's book, what really happened in Wuhan, that it's further elucidated. So I think that that's a real threat. When I think about where China has us in a strategic deficient position, antibiotics, the fact that we let that frog boil over time, it's 95% of the active pharmaceutical ingredients

in all U.S. antibiotics are made. Not only in China, they're made in Wuhan, which adds insult to injury. 100% of blood pressure medicine is made in Wuhan. So we have, what, 750,000 people that require that medicine daily. So this is a big deal. It's not a technological challenge for us to re-shore APIs for antibiotics. It's just a logistical thing where we have to simply put together a Manhattan commission and say, we're going to do this as fast as we can do it.

On the chip side, there's not really an answer to two nanometer chip fabs. But if we have the five nanometer fabs built in Taiwan, semi's people over here, that'll be very helpful. The problem is, again, with a duration mismatch, those won't be ready for a few years. And it looks like China's moved up their invasion timeline to the next 12 to 18 months. So that's a real issue. When I think about what their reliance on us is, you know, 86% of global cross-border transactions settle in U.S. dollars. China has its internal economy, which is R&B-based, and they run it as well or as poorly as they

want to run it, i.e., they can abandon moral hazard whenever they want, and they can fix their holes in their banks and things like that domestically. But their interface with the rest of the world is actually in dollars. And so they need to buy energy, they need to buy food, they need to buy basic materials and dollars every single day to keep China Inc. operating. So we have an economic nuclear button and we should socialize the concept that we are, not only do we have it, we will press it if they move on Taiwan. I think the reason the Cold War never turned into a hot war with Russia until recently, was because that deterrence factor was real. We knew that if we pressed the button, they would press the button and vice versa.

And that's why nothing ever happened. And in this case, God bless Janet Yellen, but she doesn't have a national security bone in her body. We need real leadership to start socializing the concept of where we actually stand as a country. The narratives that are drawn are drawn by the Chinese propaganda outlets and white people. papers that are getting written in their funding of U.S. thick tanks. And as you know, they've infiltrated every nook and cranny of our world in the West. But the narrative's just not right, meaning we actually hold all of the cards. And we need to let China know that we will press that button.

And it will hurt us, right? There is no easy button here, Rudyard. There is no strategic easy button, as we saw with our Russian sanctions. But I think here this is a much, much larger problem and a much, let's say, potential negative outcome for the world and for our economy. Let's maybe just talk about what some of those outcomes could be. Inflation, I presume, Kyle, would be then, in a sense, a longer threat, a deeper threat. I've always wondered to myself, you know, would an institution like the Federal Reserve have a plan on the shelf? for China and Taiwan, where they already have kind of thought through or tried to think through,

what do we do to make the American economy more resilient in that moment of stress when suddenly the world realizes that, you know, the undergirdings of the global economic order for the last quarter century, you know, have just snapped. Yeah. We haven't had that plan in place. You think back to Hank Paulson. Hank Paulson, as you know, former Goldman partner. He was a senior file. He was very close to China. He's still very close to China. Steve Mnuchin was more of an economic actor thinking about his life, both pre and post his Treasury Secretary position. He was never tough on China. In fact, he stopped many of the plans that the Security Council had for the defense of the U.S. So when I think about having a, quote, strategic plan or, you know, if things

go poorly, break glass, here's a good plan. They're just now formulating those plans. In fact, I'll be in D.C. exactly a week from now in a strategic planning session on the economic front. The good news is DOD and the administration is actually engaging in that kind of planning right now. I think they're running a little late, but those plans are being devised as we speak, both offensively and defensively. Hey, Monk podcast listeners, I wanted to let you know about our other weekly audio program. It's called Friday Focus. And hey, guess what? It comes out each and every Friday.

It's half an hour long, and it provides you with a master class on international events, all the big issues and ideas shaping our world. We've got that for you. each and every Friday here at the Monk Debates, simply access via our website, triplew monkdebates.com. Click on Friday Focus in the top right navigation. You'll get all the details or check out a sample of the program in the same podcast feed as the main Monk Debates podcast.

I hope you'll join us for the next edition of the Friday Focus podcast. Now back to our program. What do you think, Kyle, the will of the amazing. American people when it comes to this. I'm talking to you from from Canada. We we have the same debate, the extent to which our bonds of kind of empathy and concern, you know, extend half the world away. To what to what extent are we willing to, as you say, potentially face some economic and other kind of hardships on top of what is already a pretty anxious geopolitical kind of moment. How do you see public opinion in the West reacting to China? Do you think it will be

noticeably different than the reaction vis-a-vis Ukraine and Russia? Do you think that that's a template to understand what could happen next? Yeah, I think that, okay, first of all, when you talk about empathy and concern, the fact, just think about this for a second. You had your prime minister Trudeau today accused China of fundamentally screwing around with the electoral process in Canada and funding dissent and directly funding candidates in Canada. You know, Vancouver is now China West. It's pretty crazy what's gone on in the West here and as it relates to the U.S. and Canada. I think that when you, we would not be, again, imagine. Imagine if China wasn't the second largest country in the world per GDP, and they were the last two U.S.

Secretaries of State, Pompeo and Blinken, have both said that China's committing cultural and ethnic genocide. Why haven't we labeled them a terrorist state and why do we do business with them? Well, everyone believes kind of because we have to or because we have fear of missing out. I actually don't understand it. It makes no sense. The only thing that makes sense is greed ends up trumping human rights because that's what's happening today.

So when you talk about the will of the people, if you notice how the Chinese government is polling in the U.S., it used to have a 60% plus favorability rating just five years ago. And now it's polling lower than that of U.S. politicians and journalists, which call it sub 25%. That is a massive swing in the views of the United States, let's just say, rank and file citizens. So, you know, the big question here is, is there a, is there a collective desire for us to engage in a kinetic conflict in the Straits of Taiwan with China? And the answer that I have is there isn't today. But in the event of a catastrophe, if they were to attack one of our ships, imagine if they sunk

one of our aircraft carriers, we'd have 5,000 of our best men and women at the bottom of the ocean, I can tell you that the one thing the U.S. does when attacked is we come together and we fight. It's hard to say, are we ready to fight today? but I can tell you that if something like that were to happen, September 11th kind of thing were to happen, you remember how bipartisan the move in Iraq and Afghanistan was in the beginning. I know in the end it became a political hot potato. But in the beginning, you even had global publications like the New York Times and the economist

endorsing the war. So I think it's important to note that we all know that China's a bad actor. We all know that they're not a responsible global actor. We know what their proclivities are as a government. But we put up with all of that in the hopes of earning one more dollar there before the music stops. And I think that as you've seen with Texas teachers' retirement plan, cutting their investments in half in China. And if you've seen, as of recently, Chase Coleman's Tiger Global, who made his fortune in China, said, no more investments in China. So I think you're starting to see people reading these tea leaves.

And the tea leaves, again, all point in the same direction, Roger, and it's not in a positive one. Yeah, that's where I wanted to go next, because you have been, Kyle, way out in front in cautioning investors about China. Many of us in our pension funds, maybe, you know, through passive strategies like ETFs, are told to allocate, you know, a portion of our investment portfolio. to China. It's just kind of conventional thinking. It's part of how people think the capital allocation should happen today. But we've talked about the moral dimension. I think it may be important for you to share your views of just about like the real risk of capital loss at this moment to investors in China, especially should this issue of the Taiwan Straits be forced to some kind of reckoning. Because maybe many people don't understand.

the extent to which foreign investors enjoy very little rights when it comes to the companies that they've invested in, the legal structures that they operate in, how they trade securities to share or not in the profitability of those Chinese firms. Yeah, it's a great issue that you've just brought up because let's say the legal structure is one that I bet, I would bet 90% of those that own Alibaba don't realize that, they own a fantasy football share of a company, right? They own a claim to a Cayman sub that has no claim to assets that is just a tracking stock. In the end, they own nothing. And I bet retirees and investors alike would be shocked to understand that they actually don't have a claim

to anything, but that's just the construct of the market today. The losses will be enormous. So if you think about MSCI's emerging markets index, if you peel back the layers of the onion, almost 42% of the entire index is Chinese, go back and back test the Shanghai composite or the Shenzhen composite over the last 10 years. They annualize it less than today. Now it's less than 1% a year when the U.S. and Canada have been annualizing between 12% and 14% a year, where we actually have a rule of law. We actually have empathy and respect for human rights. I realize we all have our own problems, but we try desperately to achieve equity and equality and respect for human beings and their rights.

And China has never respected that. And yet their companies also haven't submitted themselves to Western audits. And we still have this natural faux mode where we say, well, they're a big economy. we've got to send some money over there. We've got to own it in our portfolios. The answer is you don't have to do anything. You should be thinking about things on your own two feet and realizing that you're not going to miss out if you don't get wiped out in China. Yes, when Russia invaded Ukraine, anyone invested in cheap Russian stocks like Spurbank or Gazprom Bank or Gazprom itself where things were trading at super low multiples of cash flow, but the government owned half,

of each of these companies, you lost everything. So it was cheap for a reason. It was a trap. China is cheap for a reason. It's going to be a trap. And while people lost a few billion dollars in Russia, as you and I both know, people are going to lose tens of billions of dollars, even a trillion dollars in China. And you know what? It's going to be a lesson that you need to be thinking for yourself when you're investing. You shouldn't be blindly allocating to some pool that's run by people that have been corrupted by China. And we can get into the fact why they were ever admitted to the MSCI. Why did we even admit them to the WTO when they didn't meet the characteristics?

Why did the IMF add them to the SDR basket when they didn't meet any of the key characteristics of that addition? The answer is they infiltrate supranational institutions and they make things happen. So I think people are going to lose a lot of money. I've had the opportunity to meet with many Fortune 500 CEOs that have businesses in China. And behind the scenes, I just met with one that has a $12 billion business there who told me, he says, I agree with everything you say about China. We're doing all we can to quietly exit, but we can't even let China know we're exiting,

and we can't let our investors know we're exiting yet because we need to get out first. And he said, our supply chains, our operations there, he says, you know, when we've been working for the last two years to get out, and he says, we still have about a year left to get out what we want out. He says, but it's almost impossible to remove everything. And I hear that behind the scenes, Roger, all the time. Again, there's no upside to them making a public pronouncement about this. But I can tell you, that move is happening en masse,

and it's happening as fast as it can possibly happen. Another one of those clocks ticking that you mentioned, that seems to me to be, again, a forcing mechanism that unfortunately brings this conflict forward in time as opposed to pushing it back. Final question, Kyle, you know, you spent a lot of your time thinking about China, but also thinking about investing. you were really ahead of the curve, joining people like Larry Summers and Muhammad Ilerian and others to warn about inflation when others were characterizing it as transitory and something that wouldn't be much more of a feature of our day-to-day life and certainly the sine qua non-seemingly of markets and investing at this moment as central banks around the world raise interest rates

at an unprecedented pace to try to slow the pace of inflation. What advice would you have for people who are trying to understand now, maybe for the first time in their investing lives, geopolitics as a new kind of variable that seems to be feeding a world of instability, rising prices, a whole sense of new risks that have to be thought through. Yeah, that's the best question you've asked all day. I think that although I think when I'll throw I'll throw this back at you I think that the proper order of when you think about cause and effect it's not geopolitics causing the difficulties in our portfolio I actually think the the root of the cause of all of the frictions around the world other than there are some bad global actors

and some totalitarian autocrats and all of those things. The central banks of the world and mostly the Fed, again, we go back to, I think people lose sight of the fact that if more than 80% of cross-border currency settlements happen in dollars, there are 18 people that are unelected that run monetary policy for the entire world. And I realized that Canada has its own central bank and Japan has its own central bank and the UK does too.

But the central bank that actually matters most is the U.S., and it's not because I live here. It's because of the fact of global cross-border currency settlement and where things trade. So I actually believe that the central bank is the root cause of many of the global frictions and the inflation we're seeing today. So I'll unpack that by saying, you know, the Gini coefficients in almost every country of the world

are widening dramatically, meaning the rich are getting richer, the poor are getting poor, the middle class are getting further away from having any kind of upward mobility. And that's all derived by the looseness or the incredible balance sheet expansion of central banks. The U.S. Fed created the globe's inflation, right? Just think about this. Pre-financial crisis, so going into 2007, the U.S. Fed Central Bank had $900 billion on the balance sheet in an economy back then of $17 trillion.

So now, or just prior to COVID, call it the end of 2019, we had gone from $900 billion to $4.1 trillion. That was what we did to grow ourselves out of the mess that we created in the global financial crisis. So call it 2008, 2019, call it 11 years. From 2020, the beginning of 2020 to call it 2022, we went from $4.1 trillion to $9 trillion. We added $4.85 trillion to the Fed's balance sheet. We put 40% more M2, more broad money into the U.S. system in 18 months.

And then we had the geniuses at the Fed telling us it's transitory. just think about like if you're playing monopoly and I'm the banker and I say you know what rudyard we all have the same amount of money and we're operating in a game where there's a certain amount of capital in the game I'm just going to add 40% to everyone's stack what do you think happens to prices of everything in monopoly right it's so easy to see think about where the Fed was at the beginning of 22 their expectations They're publicly discussed expectations were for 4.4% real GDP growth and 2.5% inflation in 2022. The fact that we're still listening to these fools today is mind-boggling to me. The fact that we sit at dinner, at a dinner last night with the probably 20 top CIOs,

and we actually had a very orderly discussion of the Fed and their ability or not to, to rent in inflation and where the buying point was and that and I said do you guys realize what we're talking about here we're talking about this without alacrity we're talking about this with saying well yeah you know they might have overcooked it now they're going to get it under control so I actually think the U.S. Central Bank got this horribly wrong and printed way too much money and I think that's clear for everyone to see today the fact that we're raising rates and your Your question is, I guess, formed around how do investors think about inflation today? And what's going to happen is I think they're going to continue QT.

They're going to break something. They already broke the UK pension market, which was forced to be saved by the BEOE. And they're going to break some other things. And you already see kind of the yen flapping around 150. It's probably lost more than a third, 40 percent of its value in a year. That's a big loss of purchasing power. But the BOJ is stuck. So I think we're going to keep raising rates

and we'll probably get them close to 5% on the front end. And I think that going forward, the geopolitics are simply going to worsen this and make it more difficult. But again, I think the originator of the problem is a central bank. They try to smooth out business cycles. They try to pretend nothing bad is going to happen.

and they've created this monster that they're now trying to put back in the bottle. And I don't think they're going to get a trillion dollars off their balance sheet before they have to stop. I think that they're going to raise rates too high. And I think a year from now, they'll be cutting. So my answer to your question is I believe that there's, A, going to be a flight to quality, which you're already seeing. Where are you going to invest your money? In China?

Absolutely not. In Europe. They never recap their banks. a central taxing authority and they still don't have a unified fighting force. The European union is still just a hope. It's not a real union. So we have the U.S. and Canada to a smaller extent, but say the globe's reserve managers will come to the U.S. and in the event of an attack, that will create, I think, temporary just stagflation, right? We'll have global transit and commerce routes will be blocked. Places like the Malacca Strait and the Stagflation.

to harm moves are going to be difficult. I think the price of energy will go up. It'll be tough and the economies won't be growing. But in that environment, I'll leave this on a positive note. I think that the U.S. tenure at 420 is probably the trade of the next 12 months where you should have your money. Could it go higher and yield? Maybe. I think in the event of an invasion, in the event of a geopolitical event, in the event of a sharper recession than people are expecting today, I think that's a great place to be. Kyle, thank you so much for coming on the Mug Dialogues today. Getting your analysis, your insights, both into the military, economic, diplomatic dimensions

of challenge, the contest between China and the United States has just been a privilege indeed. So on behalf of the Monk Debates community, again, thank you for sharing your analysis and insights. Thanks for having me. I really appreciate it. I enjoyed it. Well, that wraps up today's program. I want to thank again, Kyle Bass of Conservation Equity Management for coming on the program. He certainly gave us a lot to think about it. I hope you appreciated his analysis and insights as much as I did. We'd love your feedback and reflections on what you've just heard about this or any of our other podcasts. Please send us an email to podcast at monkdebates.com. That's MUNK Debateswithan S.com. And just a reminder, if you're into current affairs,

if you're interested in all things international, including the fate and future of Taiwan, be sure to check out our weekly geopolitics podcast called Fours. Friday Focus. It comes out. Surprise, surprise, surprise. Every Friday, it features me in conversation with Janice Gross Stein, the founding director of the Monk School of Global Affairs. You can access the Friday Focus podcast in your iTunes, Apple Store, Spotify app, or on our website, triple W monkdebates.com. Thank you for spending some time with us and lending your time and attention to our efforts to bring back the art of public dialogue, one conversation at a time. I'm your host and moderator, Rudyard Griffiths. The Monk Debates are a project of the Aurea and Peter and Melanie Monk Charitable Foundations.

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