The Pomp Podcast - Kyle Bass, Founder & CIO of Hayman Capital: From The Housing Bubble to Bitcoin

Episode Date: July 29, 2019

Kyle Bass is the founder and Chief Investment Officer of Hayman Capital Management. In this conversation, Kyle and Anthony Pompliano discuss the housing short trade that made him famous, what it was like to buy millions of nickels, what he believes is happening in Hong Kong today, what the structural issues that he sees in the global economy are, and what Kyle's thoughts are on Bitcoin and the future. -----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. -----If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. For more from Pomp, join thousands of other institutional investors for his daily newsletter on Off The Chain Substack. This podcast is presented by BlockWorks Group.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Kyle Bass is the founder and chief investment officer of Hayman Capital. In this conversation, we discussed the housing short trade that made him famous, what it was like to buy millions of dollars of nickels, what he believes is happening in Hong Kong today, what the structural issues that he sees in the global economy are, and what Kyle's thoughts are on Bitcoin and its future. I really enjoyed this conversation, and I hope you do as well.

Before we kick off this podcast, first a word from our sponsor BlockFi. As many of you know, crypto investors store their digital assets on exchanges or in cold storage for long-term safekeeping. However, this strategy doesn't help them grow their investment holdings or build overall wealth. With the new BlockFi interest account, users can now securely store their Bitcoin or Ether at BlockFi and receive 6% annual interest paid monthly in cryptocurrency. 6% is an absurdly high rate. It's the best rate in the industry. I highly suggest you go check out BlockFi.com slash Pomp. Again, that's BlockFi.com slash Pomp to sign up and start earning crypto today. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions

expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, bang, bang. I am here with Kyle. Uh, we were actually sitting in his home in Dallas, Texas. So, uh, thank you so much for, uh, taking time out of your day to do this. You're welcome. Absolutely. Um, people want to know a lot. Um, you've kind of done a bunch of stuff in your life. Um, maybe let's just start. If you can give us kind of 30 seconds on how you

describe your background. Um, I'll ask you then about a couple of other trades you guys have made previously and then we can get into some of the more recent stuff how i describe my background i think that uh i'm just intellectually curious and uh unfortunately like to uh be a contrarian where where uh where it makes sense and i think that uh what we do as a firm what i look to do is be a global event driven uh investor and i know that encompasses a lot of different asset classes a lot of different environments and and ideas but uh that's typically what we do as a firm got it And so one of those big trades, obviously, was the housing situation, 2007, 2008. Maybe talk a little bit about kind of what you guys did there, what led you to kind of become interested.

Yeah, there was an aha moment when, you know, back then, if you remember, China had ascended to the WTO in 2001. and really in earnest call it 2003 2004 you saw our rust belt the United States start to really hemorrhage jobs so there were significant job losses across you know caught the industrial belt of the US and at that point in time that was still a market if you remember oh three oh four oh five that was when when you You had, you know, Greenspan had taken rates down to 1%. It left them there probably too long. And we had our massive housing boom.

And then we started raising rates in really June of 2004. And you had housing continue to do better because instead of a housing downturn in 2004, what you saw was Wall Street had built this machine of securitization. They just decided to dip down lower and lower in the credit spectrum. so rates didn't really affect the total number of homes being sold and in the rust belt itself you actually saw um job losses and home price declines and so we i was on a call at one point in time in 2006 early 06 with an analyst or a mortgage-backed securities analyst at um royal bank of scotland and i was trying to isolate securitizations that had uh larger

concentrations in the rust belt because we knew you're seeing home price declines and job losses and historically that that uh was was the um that was the telltale signal of a of a bad securitized asset and um i was running through a model with him and i said so what if home prices across the us just go flat for a year because he had sent me a model of up six up seven up eight and i said but what about zero and he says yeah that doesn't happen so we don't even have it in our models and i said what if just hypothetically maybe there was just a zero forget a home price decline and he said well in a zero you know these securitizations would lose three to six percent of their assets and i said but that would wipe out the triple piece he says yeah but you know that's

not going to happen and that was that moment where you thought if you could find a decent concentration of a securitization in the rust belt but also we thought housing was going to flatten out and god forbid it go down it was going to wipe out a lot of these securitizations but that anyway that's what that's what happened that's that was the aha moment got it was just being curious and so in that situation you guys have capital that you can go and deploy in that situation you have to go convince investors i launched um look i launched my fund and really february of 06 our gold macro fund february of 06 with 33 million dollars uh and a chunk of that was my savings uh you know whatever i was uh one of the biggest investors and so um when we came up

once i had ironed out that idea which called that was call it june uh may june of 06 we went and we took that idea to investors and launched a subprime only vehicle in september of 2016 got it oh 2006 oh sorry sorry 20 2006 got it okay and then um and so as you go through that were there like the psychology of you put an idea together right you go and you pitch investors you get some that are interested um and then you kind of sit and wait because things really didn't get nasty until 2007 2008 or what was interesting about that is things were getting nasty in 2006 got it so you pretty much saw right away hey we're most likely right 23rd day of every month the performance report of all of the loans within these securitizations is released

it's released in tax it's released to these uh data services and um you get to you get to see how they're performing and their performance was constantly deteriorating and in fact we launched our fund in september of 2006 on like i can't remember the day september 16th or 17th people said why don't you just wait until october 1st i said i can't wait for another performance report because what if the market falls apart it's doing so poorly right now early payment defaults were spiking that means people that don't even pay their first mortgage payment wow those were spiking in, call it, third quarter of 2006. EPDs were spiking.

Performance was deteriorating. They were all still rated AAA, you know, for all intents and purposes. And we would have meetings and say, why aren't they falling apart right now? So if you remember, February of 2007 was the first time that there was a break in the bottom end of the structure of these securitizations. And then from February to June of 2007, they actually rallied back up. Thank God, because we were trying to get $5 billion invested and I needed every sucker

I could find. And unfortunately, we didn't get the whole $5 billion invested. Yeah, it kind of dried up. It's funny because one constant across a lot of investors who have these more macro, you know, approaches to the world, they come up with a single idea. They have a lot of conviction in it. You hear the same thing over and over again. I knew it was going to happen, but I didn't want it to happen immediately because I wanted

to get more money into the trade. Right. And so hearing that is pretty interesting. Another trade that you're well known for, I think, at this point is the nickels. So you took a bunch of money and you bought nickels. Explain a little bit about what the logic there was. That actually wasn't a quota trade and it had nothing to do with investor capital. It was, you know, in seeing what world governments did, including our own, in response to the 2008-7-8 crisis, we all know what happened, right? Central bank balance sheets went out of control.

And so whether it was the U.S. or Europe or Japan or China, you name it, they grew their central bank balance sheets like weeds. And I was trying to explain that to my kids. And in talking to my kids, I was explaining to them that this is the new path. This is what's going to happen. There is no going back. There is no return to a gold standard or return to some fixed asset standard. It's not going to happen. It can't happen.

because then growth gets cut off and you have all kinds of bankruptcies and we know that that just can't happen so in talking to the kids about it i said so rates are at zero there's no opportunity cost you're not earning anything in your bank account so why wouldn't you go own the actual metals right and basically copper and nickel and nickels uh and at the time copper and nickel together was worth about six cents and nickels were worth five cents so where in the world is there a free perpetual option on metal well in the marketplace you actually have to pay a pretty significant price to buy a two-year copper option or nickel option and in taking down nickels you got it for free so i was just teaching my kids that i'd rather own a bunch of nickels than

have my money sitting in the bank while the federal reserve prints it away yep and again that was just a teaching moment had nothing to do with kind of call it true capitalism or return on investment yeah it's pretty cool that um you're having those conversations so early in their lives right where they can understand it i'll tell you a story i've never told before okay um he's saying this with a grin on his face so this one's gonna be good this is a fun one uh you know in 2000 and And in 2008, early 08, before Bear Stearns, you know, went down, I was driving in my car. My son was in the car. And at that time, he was eight years old.

All right. So, yeah, he's almost 20. So roughly eight years old. And I had just taught him in a year before that, you know, my son never spent his earnings. whatever he did chores around the house or did a job for a neighbor or something he would always save his money always save it and he would save it in cash in his box and i explained to him this concept of interest and that if you put it with a bank the government insures it so you're not going to lose it and um you're an interest and so the the closest bank to our house at the time

was a wamu and if you remember wamu's entire balance sheet was was option arms okay so i was talking with a good friend of mine in new york and i was on the phone and we were talking about which banks were safe and which banks were unsafe if you remember we're thinking about where where to put your money yep when we were all wondering which bank was actually going to be solvent with their levered balance sheets and he says you know what about whammy when i said well look whammy is all option arms i said they are done i don't care that bob steals a new ceo whammy is finished i said they're going to be bankrupt uh and the government will probably have to take them over and i i go through all this with my my good friend who's another asset manager i hung up

and my son in the back seat says so so dad the whim who you were just talking about he says is that the one where my money is and i said yes sam but you have nothing to worry about nothing to worry about he says dad i want my money out so so we went i took him to the bank we went in we filled out the the the deposit uh you know or the sorry with the withdrawal request for his entire credit balance of whatever it was 850 which at the time was a lot of money um and this very nice lady was at the counter and she said oh you know you were so cute you know but what are you going to go spend this on are you going to buy you know a nintendo or sony playstation what are you going to spend it on he says no ma'am your bank's going out of business and i need my money before it goes

out of business he said my dad says that you have you're going to be broke and an eight-year-old And my son and I were just so funny. We were just driving yesterday by this bank who's no longer a whammo. And we were both reminiscing about that time when he went in and convinced the teller that she was in real trouble. Anyway, it was a good time. The eight-year-old knew better than the people who worked there. Yeah, so it's good that my son was listening. Because, you know, anyway, it's a funny story that hasn't ever been told. For sure. No, I appreciate that. Hong Kong, you've been quite vocal about a lot of the structural problems going on there. Maybe describe a little bit about the pegging and kind of the challenges that you saw. And it's now probably two, three years ago at this point when you really started to pay attention. And then what's transpired in your mind in terms of really proving that you guys were spot on with the analysis? Yeah, well, I think when you try to understand this idea of two, you know, two countries in one system are really how they say it, one country in two systems. And just so those that don't know, Kyle's talking about China and Hong Kong. They're technically, they're a special administrative region of China, i.e., you know, Great Britain ruled Hong Kong for a long time.

They basically took over Hong Kong in the opium wars and then took over the rest of the outer area of Hong Kong, Kowloon, and the rest in the second opium war. And I think that they basically signed a 99-year lease. And then Deng Xiaoping went to Thatcher and said, we want it back. And that was in really the late 70s and early 80s, these conversations started to be had. And if you remember, as those conversations were being had after Hong Kong was ruled by Britain for so long and had a rule of law and had a judiciary, an economic system, and a legislative system that, again, had order and had law, a lot of money was invested there. And if you look back to 1980, call it from 79 to 83, so the currency's been pegged since 83 to the dollar. But from 79 to 83, the Hong Kong dollar lost 50% of its value versus both the British pound and the U.S. dollar because everyone was worried that if China were to get Hong Kong back,

that there would be the heavy hand of China's Communist Party and economic policies that are, let's say, substandard. and no autonomy, and therefore no one would leave their money there. So the first currency panic that really happened there was as a result of China's potential takeover. Fast forward, so they pegged in 83 to the dollar because it was literally out of control. And in 84 was when Thatcher signed the deal with Deng Xiaoping of China, And they basically signed what they called the British Sino 1984, sorry, Joint Declaration of 1984, which stipulated that they are going to, the Brits were going to hand back Hong Kong to the Chinese in 97.

And that was going to be a 50-year deal, i.e. China was going to abide by this agreement. The agreement is to remain autonomous, i.e. one country, two systems. one country being China. China is going to own them both, but it's going to allow it to maintain its autonomy in both in the economy, the judiciary, and the legislature. Yep. And so that agreement was signed by both parties. There is no adjudicative, let's say, review of that deal, meaning if one side breaks it, there is no de-escalation, there's no negotiation. Either it's an agreement or it's not, and that's kind of where we find ourselves today. But there's an interesting fun fact also uh as as we headed into the handoff of hong kong back to chinese in 97

what happened the asian financial crisis happened right and so uh the handoff was uh july 1st uh 1997 and when did the tai bach break it's hey i think it's the day after right the very next day That's not coincidental. The money started running out of Southeast Asia, primarily Hong Kong, because it was its financial center due to the British law. And the money started running. And so they had an existential crisis. Many currencies broke pegs.

Hong Kong back then held the peg. But as a result, they suffered a massive depression. Real estate dropped 75% in value. Imagine real estate dropping 75% in value, what that would do to a banking system and an economy. Now, how do we get from like that mass panic and, you know, all the concern, money running, et cetera, to more stability over the last, you know, call it almost 20 years or 20 years or so? So China basically decided to stand behind its commitment in the 1984 Sino-British Joint Declaration and also the U.S.-Hong Kong Policy Act of 1992,

where we decided to treat Hong Kong as its own separate sovereign territory as long as China lived up to its end of the agreement and didn't infringe on the autonomy of Hong Kong in any of those three areas. we re-review we re-under that we we as a country re-underwrite that agreement every year the state department writes a letter to the president and says either we believe hong kong sufficiently autonomous or not the brits actually re-underwrite it twice a year so you can go to parliament and read what the british essentially state department writes to their parliament and what you've seen uh in the so think about this the last 10 years of hong kong's life has been the best 10 years

that they'll ever see reason being they're pegged to the u.s economy they're pegged to our central bank we took rates to zero in 2008 and their largest trading partner china went to the gas tub they had the golden years of hong kong they had free money and they had a market that a real estate market that went berserk one six seven hundred percent ten years imagine that yeah uh now they're the most expensive real estate market in the world they have the most leverage of any developed economy in the world. Their private sector credit to GDP is 300%. The U.S. and Japan is a little less than 150. Okay, and you know how levered Japan is and how levered the U.S. is.

So it's literally double. Yeah, double. And double at a very low base. So when their rates start moving up, it hamstrings their entire economy. Again, they've had a real estate market go to the moon. And then they also have one of the most levered banking systems in the world. They're 900% of GDP in their banking system assets. Again, so when losses just start to trickle through, their bank equity disappears. In the U.S. financial crisis, we all in, including off balance sheet financing, we're about 1.75x. They're 9x. Just to put things into perspective. Today, we're 1x. And if you include Finney and Freddie, we're call it 1.5.

Okay. And then describe this idea of pegging the Hong Kong dollar to the U.S. dollar and what you originally saw as to why the peg can't possibly work for two separate economies. Yeah. Just imagine a rigid financial relationship. Rigid, meaning there's a peg at a level for 36 years, okay? For 10, 20 years. You think about back in 83, as the world went, as the U.S. went, the world went. I.e., if we grew, the rest of the world grew with us. And if we declined, the rest of the world had a small recession with us. We were the economic engine of the world. Today, one could argue that China, since the financial crisis, pulled the world out of the world financial crisis, i.e., their economic growth kind of pulled the world. And they still run about a $13 trillion economy, and we have about a $20 trillion economy.

So we're still almost twice as big as they are, but they've grown a lot. And so I think that what you see happening now is Hong Kong is now completely dependent upon China for their GDP. It's service growth. So it's real estate services, financial services, legal, accounting. That is Hong Kong and travel. That's Hong Kong's economy. It used to be they were an exporter and re-exporter of goods for southern China.

Now they're a service-based economy facing China. So if our rates go down while China's economy blows up in a good way, then Hong Kong has a great 10 years. If our rates start to move up and China continues to slow down, that is the death knell for Hong Kong. And now that's what we saw. The other most interesting part of that is you could sell forward Hong Kong dollars and they pay you while you had it sold.

It was a positive period transaction. So if you were Japanese or if you're European and you have negative rates, wouldn't it be more fun to have a positive carry position in the most levered developed economy in the world? And if you're in Hong Kong and you have free convertibility between U.S. dollars and Hong Kong dollars, you'd actually have to be a fool to hold the Hong Kong dollar, right? Because of all of these reasons I give you, you don't even have to agree with me. You actually just earn more money holding dollars. For sure. So why not hold the dollar? And so as you guys see this coming together, right, you went out and literally said, hey, we believe that this is going to be a problem. Here's why. And what we've seen transpire over the last two to three years, I think just now people in the Western world who aren't specifically focused on Hong Kong are starting to see it creep into mainstream media coverage.

I wouldn't say creep. It was on the front page of every paper for the last few weeks. For the last few weeks. Because of the protests. Now, at the beginning of this— And this is secondary to our idea. Yeah, so at the beginning of the year, I think if you asked kind of a normal American, they would have no clue that there was any trouble on the horizon in Hong Kong. That's right. Probably the last four to six weeks now, it's really, hey, every single day they see the videos of the white gang beating people.

They see the photos of people with kind of blood running down their faces, and I think most Americans would say something's going on. I haven't really been paying attention, but there's kind of unrest, right? From somebody who's been paying attention for years now, kind of describe what's transpired over the last six months and why it's all coming to a head now. So there's a much longer situation going on with the relationship between China and Hong Kong and what China's trying to do to further control Hong Kong's economy. Hong Kong is the epicenter of where China raises dollars in the world. And it's important to understand, China, how many times have you talked about China's economy and you say, well, I think they're going to have a recession, or I think they're going to do better, and someone says, yeah, but they're China, they can do whatever they want

to do. So, in China, the Chinese government controls everything. They control the printing press, they control price levels, they control the police, and they control the narrative. Now they control the people with Orwellian social credit score. They literally control everything. So you and I can sit here and say, but they can do whatever they want. They can recap their banks in RMB.

They can print more RMB. They can, again, do whatever they want. I actually agree with that. And if they had a closed system and they didn't have to trade with the rest of the world, if they were not resource rich, then we probably wouldn't be doing anything here. But what's important is China has to interface with the rest of the world, and the rest of the world won't take their shitty currency. I don't know if I can say that on here.

You can say whatever you want. No one's going to take monopoly money, right? And so it's important to realize that China's FX reserve balance is their working capital. It is what they, they're desperately short energy. They're the largest importer of crude oil in the world now. They're desperately short food. They're desperately short raw materials, right? They are resource poor.

And so you see China using Belt and Road around the world to basically lend themselves into acquiring big assets, whether it's port assets or mines or roads or airports or governments. They're lending their way into resource-rich areas for the long run. And so for them to buy any resources, they have to spend dollars, euros, yen or pounds, mostly dollars. So they must maintain this dollar balance. So it's important to realize that China is running a massive fiscal deficit, 10% of GDP or more. Just think about that. When the U.S. breaks 3% of GDP, Congress goes berserk. China's running a 10% of GDP fiscal deficit when you include their local government financing.

And they're running a current account that we think will go negative from now on. It has never been negative before. it went negative just recently and we think it's going to stay negative and we don't have enough time to get into that but their dollar balances are going to start deteriorating yep so how do they maintain a positive dollar balance to keep growing their economy well they get people like msci to make the china weighting in the index go from five percent to twenty percent in just a couple of years which is happening right now right they get someone in the bloomberg ag index uh ag bond index, the old Lehman Brothers bond index, to add them to that index, and money flows

into them that way. Oh, and then they open up their capital markets for US investors to buy more of their banks. Right after they wreck their banks, they say, the spider says to the fly, oh, you can own more of our banks now. But in the end, they need dollars of serious dollar flow. So Hong Kong is the epicenter where they raise those dollars. Alibaba says, we want to raise 20 billion in a spot secondary in Hong Kong. Well, of course they do because money is fungible.

Alibaba is run by the Chinese government and they're just going to sell as many shares as they can to bring dollars into China Inc. So Hong Kong is functionally very important to them from a financial perspective. And China's economy has enabled them to be more aggressive on the geopolitical front. They take the money they get in and they build aircraft carriers and they build missile systems and they build hypersonic this and that that they steal from us. but they they need dollars to build these things yep and so hong kong's really important what china's did this february they got carrie lamb the ceo of hong kong to introduce a bill kind of quietly that stipulates that if china determines anyone's a criminal in hong kong and that's china's sole determination that they can extradite them uh and and basically hold them accountable

on china so they can take them out of hong kong bring them to china and extra judicially meaning if they say anthony you came to beijing oh and there's no statute of limitations so you came to beijing 20 years ago you stepped foot there and they said you know you raped a girl and if the allegation carries if the conviction would carry more than a seven-year penalty then you're extradited no questions asked in the hong kong court and as you know the chinese use political persuasion and their legal system is a kangaroo court and so there are 85,000 Americans that live in Hong Kong anyone that literally lands in Hong Kong on a stopover if you're going to land in Singapore or Hong Kong in the past you probably say I don't care which one

it is but now you're going to say I'm never going to land in Hong Kong if China can grab me I'm going to go to Singapore yep and so it's important to realize that the citizens of Hong Kong realize that there's no statute of limitations and now they're subject to the call it the whims of the Chinese Communist Party it basically completely violates the British Chinese agreement yeah and the U.S. Chinese the U.S. Chinese agreement the U.S. Hong Kong policy act of 92 and so i.e. Hong Kong must remain sufficiently autonomous and what you're seeing today what you're seeing this extradition bill is their autonomy is gone it's just a question of time for when china sends in the pla their army through shenzhen into hong kong and then it's over so any any hope that the hong

kong people have had for a true democracy maintain a rule of law and be be the center that they've always hoped it was going to be that's been extinguished so i want to touch on one more thing before we get to more global macro and bitcoin stuff but um i saw you tweeting about recently there's these videos of basically gangs of men running into train stations all dressed in white and what i've gathered is basically the police are not participating in protecting the citizens there's these gangs that are beating up um you know it's the teachers it's the journalists it's the protesters it's all stuff um and what it looks like is those gangs will allow somebody most likely the chinese government to step in and say we must protect the people and therefore they

will then send in the army the police whoever to to kind of take control yeah it's what's interesting is if you if you follow this on a daily basis and you know people throughout hong kong both in their government and and in the in just the citizenship what you see is these the initial protests whether it was the lawyers the three thousand or so lawyers that protested the extradition bill silently walking from uh walking to parliament or the one million protesters or the two million that showed up on the on the biggest day two million people only seven and a half million people in hong kong imagine if a quarter of the u.s population ever protested anything right that that would be crazy 70 million people or more that would be on just on an order

of magnitude you can't understand you can't it's hard where do you put them all yeah i mean i just think two million people but the two million person protest if you saw the pictures and the videos that people took, it was perfectly clean, it was perfectly non-violent, and then post those marches, Carrie Lam said, you know, despite the fact that two of seven and a half million stood outside in 97 degree weather for an entire day to protest this bill, I'm going to go ahead and put it through. And then people went a little bit more crazy, but you've just recently seen these triads, These gang members come in, in the white shirts with poles, sorry, bamboo poles, iron poles, and even machetes.

And they beat the living hell out of some of the protesters. And I mean, it looked like the Rodney King beating in the United States. I haven't seen anything like that on video in a long time. And the Hong Kong riot police are in the periphery, turn around and walk the other way, while their own citizens get beaten almost to death. And so you see that the police are complicit. And in fact, there are many photos of the police with the rioters beforehand, almost like game planning. And I don't know if you've seen these photos.

I have not, no. So collaborating. So the police are in on it. And the police are run by the government. And the government is really run by China and the pro-Beijingers. And I think it's important to realize that, you know, in Xinjiang, where the Chinese have at least a million, and U.S. intelligence believes it's 3 million political prisoners based upon their religious preference.

It's starting to sound like a real problem, like a Hitler-type problem because the U.K. just determined they were live organ harvesting from these people and they're just political prisoners because of their religious preference. So those things don't make it into the mainstream media because you can't take pictures. The Chinese will never let that happen. Xi's existential nightmare is Hong Kong because it was technically free and democratic before

and everyone has smartphones and cameras and internet so all of these pictures circulate on the internet and so everything he's doing to incite violence so we believe that the Chinese government and the Chinese army have brought in the triads and the gangs to beat the people to create violence so that China can come in and rescue Hong Kong from these violent times with their own army.

And then, again, that snuffs out any autonomy. So that is what's going to happen next. Watch what happens. That's what will happen next. In one sentence, what is the way that you guys plan to, from an asset management perspective, like how do you play all that happening? Yeah, I just think the common denominator is this peg

between the Hong Kong currency and the U.S. currency. And we think that Hong Kong needs a peg, But we think that that peg will be to the Chinese currency or a basket of Southeast Asian currencies where their economies move in tandem and not with the United States. Got it. Let's switch gears real quick to more the global economy, right, in terms of I think there's a lot of people who say there's warning signs, whether it's the inverted yield curves or other kind of alarms going off that there's likely to be an economic downturn at some point, you know, in the short term, whether that's six months, 12 months, 36 months, whatever. how do you think about the central bank reaction to that and then as part of that talk me through your framework for evaluating something like gold or bitcoin that's that's a that's a pretty big open-ended question there anthony um look we think that we think that you're going to see a slowdown

in southeast asia you're already seeing it china's growing at the slowest rate it's grown at in the last 35 years and that's what they're reporting so we all know that that when the books are in oven yeah I see something even better than that is real so we think they're growing GDP two or three percent in fact last year could have been flat and so if if Southeast Asia is going to have a zero GDP year or small recession then the rest of the world will grow a little less so again I don't expect a 2008 style I don't know where to put my money crisis I think you're going to see a shallow recession the developed world a deeper recession in the in the Asian

world or Southeast Asian world and what does that mean right that means that the central banks were just print more right you're seeing today we're expecting what the end of this month we're here in July of 2019 you know part of the market believes we're gonna have 50 bit cut the other you know the other cadre believes we'll have a quarter point cut we're at 3.7 percent unemployment we're still at But we're still at emergency levels of rates, and we're talking about cutting rates again. And is it the QE and printing of money is really just because the central banks only have two tools of cutting rates or printing money? Or is it something else that you think they're kind of tied to?

I think that in the event that you have a small recession, and if you're near the zero lower bound, you have very few tools. It's just the only other thing. Look at Japan. People say, well, how long can this go on? You know, the tea partiers. And by the way, I'm technically a tea partier from the perspective of looking at financial economics. But people say, how long can it go on? And you can say, well, if this is the tactic, then it can go on almost forever.

In a nominal world, the Bank of Japan owns 77% of every ETF in Japan. Wow. they are a top 10 holder in four of the largest companies of japan just think about that they've been buying stocks for a very long time and they're going to keep buying stocks they own over a hundred percent of the bonds of japan of japan inc they've monetized a hundred percent of gdp of their deficit and i asked one of japan's top central bankers at a breakfast that was private. And I said, you know, you say you don't monetize your debt and yet you own over 110% of GDP of your debt at the central bank. So what do you call that? And he looked

at me and he says, you know, Kyle, son, we're only monetizing our debt when the market tells us we're monetizing our debt. But that is how they think about it. And so that is the path. So what I'm convinced of is the path. The path is simple. You know, they'll cut rates to zero maybe some will even go you know uh nerp um i don't i think nerp decimates the banks and as you see europe's all their zombie banks has you know uh deutsche bank just found a magical 80 billion euro hole uh all of these banks have big holes the u.s recapped its banks europe's banks are zombie banks and you know china's banks are now levered more than any bank has ever been lever in world history in in nominal call it uh rmb but not in terms of capital but

all these banks there's no way to go other than to print yeah and then um i know that you guys have looked at bitcoin specifically over uh over some period of time um just what's the framework that you've used to look at it and then kind of what are some of the things that have kept you guys from uh from doing anything there yeah yeah i think that we spent a lot of time beforehand talking about this so i'm leading him we'll cover it again the bottom line is um as the digital asset class began its growth so back when bitcoin very specifically was 2300 is when we were looking at looking at this saying this is going to be um an asset class and i use bitcoin in kind of a collective term it's crypto bitcoin uh not speaking of the ico securities that are crazy

You know, let's just talk about pure crypto assets. I think that we try to get comfortable with the fact we are a fiduciary. We are regulated. We are governed by the regulatory bodies that oversee fiduciary capital management. And we couldn't find what we deem to be a qualified custodian. A qualified custodian needs to be stipulated by the Securities and Exchange Commission and fed and all these people uh need to approve as you probably know uh who was holding the public key was holding the private key we as an asset manager can't ever take possession of our assets

for instance when we own if and when you own gold you can take delivery of gold into a bona fide comex warehouse that is a qualified custodian you can actually take physical possession you just can't put your hands on it it becomes illegal for you as a fiduciary to put your hands on it and so that was the problem that we ran into in hiring as many different legal teams as we could hire and in this evolution of asset prices or sorry evolution of this asset class made it difficult for us and so we began it at twenty three hundred dollars a Bitcoin in our then we stopped at about four thousand a Bitcoin on its way to whatever it went to twenty thousand and

that god only knows where it is today but then then the the argument becomes as i as you and i discussed a little earlier more philosophical from the perspective of putting yourself in a central banker's seat and or let's say more importantly someone that's running the government or the treasury or the presidency of of any sovereign nation uh when you think about what your sovereign identity is and what you can control and can't control this is that ideological difference between call it a libertarian and a and a sovereign government and i think you probably know from reading anything i've written that i fall more into the libertarian uh camp uh and i'm a fiscal conservative however um when i think about the rules-based system and the system that's been

developed the way it's been developed i and i mentioned to you earlier today um i think that this asset class can grow to a number i don't know what that number is uh and today i actually don't know what the whole asset class is worth you probably 350 350 billion you know could it go to a trillion probably but i'll bet when it gets to a trillion it becomes a much larger problem and it require it will require um almost affirmative determinations by governments that it's either okay or not okay with them and you could say well it's too bad if it's not okay I'm going to own it, and it's decentralized, and I can own it in my Japanese account, I can own it in this account, I can own it in this account. Well, the U.S. government, for instance, has a number of different things that they require you to file with your tax return every year.

That if you don't declare it, it's a felony. And the last thing you want to do is go to jail. And so I believe that there are structural things that are going to happen when it becomes more functionally relevant and more widely adopted. But I do believe it's going to be more relevant and more about it. So I don't know where that really puts me other than in a philosophical bind. Well, I think just talking to you today, you understand the philosophical arguments behind it. You have a pretty good understanding of the technical, how it works, why it has value in certain cases, all that. And I'm a huge proponent of the blockchain.

I get it. I understand the concept of the immediacy and the perfect archive. let's say the perfect historical archive of the blockchain, I'd buy that hook, line, and center. Yeah, I think your argument is a rational one in the sense of if it actually works, you run into an obstacle. Now the question is, is it a roadblock where literally you can't get through it because the government just clamps down on it? Or is it more of a speed bump, right?

And it's kind of, hey, they've got to do some work, and then they come out and they say, okay, it's fine in this sandbox or within these rules. But I think that even, you know, last couple of weeks where we've seen the Senate, the Congress, you know, literally the chairman of the Federal Reserve, the Treasury Secretary, the president, they've all discussed Bitcoin, cryptocurrency, Facebook, Libra, etc. They're not asleep at the wheel, right? It's not like they're not paying attention. It's just a question of, you know, how kind of included do they want to be or how active do they want to be versus, you know, kind of letting it just grow on its own before they step in. I think, as you mentioned earlier, I think Facebook has become the devil to both sides of the aisle.

And the one thing that Facebook doesn't have on you, they have your pictures, they have your identity, they know who all your friends are, they know what you care about, they know a lot about you. They don't have your personal financial data and your social security number. And guess what? Libra's going to get all of that. And so whether they say it's altruistic or whether they say it's just a business proposition, for Facebook to have that much data, that much power, I think that's why you're seeing this pushback. And again, this gets to my point of can a cryptocurrency ever gain that much power in its own right as a challenger to a hegemonic system? And I believe its own success will be its own problem. and so you're just starting to see some of that do i think this is the top i wouldn't possibly

call the top here yeah do i think it has more room to run probably yeah yes but do i think that that's going to be a speed bump or a roadblock if i were betting i would bet it's more of a road block than a speed bump but there'll be some along the way that are speed bumps it'll just what i'm telling you is the obstacles will get larger and larger the more successful it becomes yeah and i think also um which jurisdiction you're talking about is a whole nother thing right there's some there's some jurisdictions that will say bring it all yeah there are great places for it you mentioned argentina these troubled third world countries look iran venezuela all of these absolute horrible communist socialist dictatorships that have ended so greatly

i mean this is what everybody wants right everyone wants there to be a perfect socialistic communist government where everyone has the same amount of money and everything's going to work great everyone has college and okay we all know that's never going to work go talk to the people that have tried it but those places sorry there's a little political jump there but i think those places show you that there is a need to be able to save yourself from hyperinflation from your government getting it wrong right absolutely and i think that is what's fueling a number of the players today to think i need one percent of my assets there are 50 bips or i need four or five I mean, some number that's not going to break me if I'm wrong, some number that if the government gets out of control with its spending and its policies, then I have some store of value, right?

I mean, this is the whole argument. And I buy that argument. Yep. I just, if I put my Treasury Secretary hat on, it's a problem for me. Yeah, it's you're one of the few people I've talked to that understand the asset, the benefit, the risk. Right. And yet still can rationally think about the outside forces that don't care about, you know, kind of the fundamentals, if you will, to some degree. Right. And those two things are separate. Right. And frankly, the stronger the fundamentals, the more your concerns about some of the other stuff becomes real. So listen, I really appreciate you taking all the time to do this. It's been a lot of fun.

And I promised him that we would end on time so he can go do some family stuff. But we could talk for hours. So thank you so much. And we'll have to do it again. It's a pleasure. Thank you. All right, guys. Thanks so much for listening to that podcast.

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