Kyle Bass Reveals Hong Kong Dollar Trade

KYLE BASS: The 10-year period from ’08 to
2018 were the best 10 years that Hong Kong will ever see, will never
happen again. The Hong Kong banking system is now almost
nine times their GDP. Call it today, it’s 850% of GDP. 280% of GDP of the 850 is lent to Chinese
property developers into China. They’re the most levered nation in the world
with the most expensive real estate in the world with an economic arrangement
with a country that is no longer
synchronized. It is a recipe for disaster. RAOUL PAL: If you remember a month ago, Kyle
Bass was on Real Vision talking about China. And he said he had one big trade for us. The really big one, the one that he’s been
doing all of his work on. And he refused to unveil it until he told his
investors and got himself set up and positioned. That moment’s now. Kyle’s
back to come and tell us the next big trade. The trade that he thinks is one of the
greatest opportunities in financial markets. It’s going to be super interesting for us all
to sit back and watch Kyle Bass unveil this great idea. So, Kyle, you come with a tie, I’ve got my
collars up. What you promised me a month ago is you’re
going to come with the killer trade. The big idea that you’ve been working on for
a while ago and we alluded it on Real Vision to people. And now you’re back, and you’re ready to
unveil what is- you and I have spoken about it a little bit. And it’s, for me, fascinating and almost
incredible talking through it. KYLE BASS: Very start at the beginning. So,
for the last really three years, we’ve focused on as you know, I don’t know-
six or seven years, we focused on China’s financial system. And
that’s taken us to understanding the flows and the plumbing of capital and how it flows
in and out of China, whether you’re looking
at Hong Kong or China or you’re looking at
listed market or the domestic market in
China. The majority of the capital flows through
Hong Kong and when you look at Hong Kong as a
sovereign- tell a little bit of a story as far as the
existence of Hong Kong in its economic and financial state that
they’re in today, you have to look back 36
years. Really have to look back much further than
that when the UK or Great Britain really fought a couple of wars, the first and
second Opium Wars and then the balance for the new territories and took over Hong
Kong Island, Kowloon and the new territories. And they basically ruled those territories
for a very long time. And at some point in time, in the late 1970s,
early 1980s Deng Xiaoping started I think some rhetoric back behind the scenes some
conversations with Margaret Thatcher on
handing Hong Kong over back to the Chinese as you
know the British basically secured their rule over Hong Kong with a 99-year lease. The
Chinese wanted that lease to end in 1997 and threatened I think the British in one way or
another to get them to do it a little sooner. And so, while these negotiations were going
on, word got out that the Chinese were talking to
the British about a handover. And if you notice what happened then, the
Hong Kong currency had about a 50% decline versus both the dollar and the
pound going into 1983. And then, in late
1983- RAOUL PAL: So, it was a free-floating
currency then? KYLE BASS: It was a free-floating currency
then, yep. So, but 50% devalued over just a handful of
years. To the extent that the South China Morning Post was saying it’s becoming a
banana republic. The currency is in a “free fall”, and then
they pegged it to the dollar, the US dollar. Fascinating, right? It’s being controlled by
the British and yet they’ve pegged it to the US dollar looking for more stability
than I guess the British had. RAOUL PAL: Nice dig. KYLE BASS: And so, right now, we face Brexit
and I don’t know what’s going to happen next, but I think that back then, they engaged in a
peg to try to bring some sort of stability to
calm the nerves and the psyches of investors in Southeast
Asia and primarily Hong Kong, because as you know, investors were thinking
with Great Britain, there’s a legislative democracy, there’s
basically financial stability, there’s rule
of law. They’re all the things that capital needs to
invest and make real investments in the sovereign of
the territory. And with the idea that China might take back
over sooner rather than later, the money
left. And that’s why they had to institute the peg. So, the UK-Chinese agreement, this British
agreement 1984 stipulated or set forth the
rules by which Great Britain would engage with Hong
Kong in the future. And the handoff would be July 1st, 1997. Fast forward from ’84 to ’92 when the US
entered its Hong Kong-US Policy Act, both Great Britain and the US treat Hong Kong
as its own sovereign, as long as it maintains autonomy. Autonomy in its economic affairs, and its
legislative affairs and its rule of law. RAOUL PAL: What does autonomy mean? KYLE BASS: That no one else is running the
show. This agreement stipulates that it is a
special administrative region of China, but it’ll be treated as Hong Kong as long as
those things are maintained. Like, I’d love to cover that secondarily in
our conversation- RAOUL PAL: That’s my question, what’s
autonomy, but yeah- KYLE BASS: Yeah. The word’s very important. So, when you look at today, if you just look
at Hong Kong from a macro perspective, it’s really important to think about what
happens when you peg your currency to
another. There’s the pegged currency, then there’s the
anchor currency. The anchor currency, in this case, is the
dollar. What you’re doing is you’re basically saying
I will adopt their monetary policy. I’ll adopt their yield curve. I will basically let Jesus take the wheel and
let the US run my economy. Now, that works actually fairly well as long
as there’s a synchronicity in economic
outputs, right, i.e. if the economies are working
together, if one grows, the other grows, if one goes into decline, the other goes into
decline. That kind of relationship actually works. If one economy is growing, while the other
one is declining, and you have to import monetary policy and
i.e. the same rates curve, it’s a disaster for the one that’s declining. And so, 36 years ago, the US was the engine
for the world. And as the US economy went, the world economy went. There was
synchronicity. And if you fast forward to China’s ascension
to WTO in 2001, China’s move into becoming the second largest
economy in the world with roughly 15% of GDP. And you look at the infrastructure build that
China engaged in since 2001 in their southern ports, really
southern and up the coast, what you see is Hong Kong used to be the
biggest port in the world. They were a dollar-based goods exporter and
re-exporter of goods for Southern China. They were essentially China’s southern port. And they were very functionally relevant to
China especially in the early 1990s. They represented a quarter of China’s GDP,
actually, almost 30% of China’s GDP. Today, it’s 2.5%. So, they were ready
relatively unimportant, important, very
important, and now, unimportant again from an economic
perspective, right? From a capital raising perspective, very
important. But from an economic output perspective, not
that important. I think if you look at how Hong Kong’s
economy has changed over the last 36 years, they’ve gone from a goods exporter and
services importer, and right in the financial
crisis, that flipped and now, we have a chart in
here, whereby you see the blue bars are
goods, the red bars are services. So, it looks like
the financial crisis flipped them. But that’s just coincidental actually. It was the southern port buildout that
basically moved China’s, let’s say ownership of the top 10 ports in
the world, from 9% in 2001 to 60% in 2015. So, that’s what happened in making- forcing
Hong Kong to actually reinvent its economy. Hong Kong today is a massive goods, net goods
importer, it’s hard to believe that. And they’re a services exporter and they face
China, right, for travel, for financial services, real estate services,
legal services, call it 80% plus their economy relies on China on the export
side of services. And they import dollar-based goods. And so, there’s no lack of- there’s no
synchronicity between the two. RAOUL PAL: So, they coupled essentially from
the US economy? KYLE BASS: Yeah. And so, when you and I were
running Hong Kong today, and we said, how should we run our economy? We would say, pegging to the dollar would not
be the right idea. RAOUL PAL: X the R&D I guess, if you can do
it. KYLE BASS: Yeah. And so, their economic
arrangement with the US is one that has changed dramatically over 36 years,
but on the face of the world, that actually hasn’t changed at all yet. And
then you look at the macro of Hong Kong, if you import US monetary policy, as they
went into 2008, right? In 2008, US took rates to zero. So,
historically, the anchor currency is the one
that, let’s say is the fiscally responsible one.
It’s the one that keeps inflation under
control. It’s the one that keeps rates where they
should be, keeps a more stable economy and that’s why
people anchor to them. In this case, the inmates are now running the
asylum, we just took rates to zero. Imagine this, 2008, US takes rates to zero so
Hong Kong rates go to zero. And their largest trading partner, China,
goes to the gas pedal. So, the 10-year period from ’08 to 2018 were
the best 10 years at Hong Kong will ever see, will never happen again. So, no wonder real
estate went up five to 700% in a 10-year
period. Right? No wonder the price of Hong Kong real
estate is $10,000 a square foot. RAOUL PAL: And that’s why that chart of
services because it all becomes finance because it all just goes to
money. Right? KYLE BASS: Well, it’s free money. And your
largest trading partners growing double
digits. And so, what happened, the Chinese came in
with all the money they were making and bought all the real estate in Hong Kong.
So, now, it’s completely unaffordable, I think the most expensive real estate in the
world. And what’s interesting is the Hong Kong banking system did exactly what
Iceland, Ireland and Cyprus did. The Hong Kong banking system is now almost
nine times their GDP. What was the common denominator the countries
that fell apart in the European crisis? They fell like dominoes. It was the size of their banking system when
they hit a slight recession. Broke the country, right, because the country
has to go in and save the banks, save depositors. And that means the sovereign has to lend into
the banks and it breaks the sovereign because the banks
are levered to the GDP. RAOUL PAL: But what did they lend against in
Hong Kong? Because this is going to be the key, right?
The USA is the housing market- KYLE BASS: This is a fun one. Call it today,
it’s 850% of GDP. 280% of GDP of the 850 is lent to Chinese
property developers into China. The rest is lent to domestic SMEs and
mortgages. So, I hear a lot from the various sell side
firms that we call, they say, oh, Hong Kong mortgages are only
50% loan to value, not a problem. And I said really? How to how do they afford
a 50% deposit on the most expensive real estate in the world?
They said, that’s easy. So, the bank lends 50. The property
developers lend 35 in a second lien, and
families- the families or friends lend them the other
15. I said, so how does that work? And they say, well, that’s easy, because
housing goes up like 10% to 15% a year. So, in the first year- this is a partner at
one of the biggest firms in the world tells
me this that runs a real estate business. In the
first year, they re-fi their family home. And in the next two years, they re-fi the
developers out and then they have a 50% off of the loan. I said, but what if prices go down? He said,
oh, prices don’t go down. Literally, I’m hearing this again. RAOUL PAL: We’ve heard this before. KYLE BASS: And so, there’s this belief that
the loans in the banking system are safe because of their loan to value ratios. I
think we all know that that’s not going to be
true. RAOUL PAL: So, of the Hong Kong money, the
banking system, is most of that debt in
China. Chinese debt. KYLE BASS: Yes. RAOUL PAL: It’s nothing to do with the Hong
Kong domestic so- KYLE BASS: Oh, no, no. So, 280- say of the
850, 280 is on to China. The balances went to Hong Kong domestics. RAOUL PAL: Right. What the hell do they do
with it all? Because that many people in Hong Kong- KYLE BASS: Private sector financial credit is
the highest of any developed nation in the world. 300% of GDP. Look at the US and Japan
and look at where Hong Kong is. So, you have the most levered banking system
in the world- RAOUL PAL: [Inaudible] mechanism, that is
flowing back into China just feels that you don’t look at the streets of Hong
Kong and think everyone’s completely borrowed as much money as Libor’s. It feels like
there’s another mechanism. KYLE BASS: Well, they could have taken the
money and invested in China, right? What I’m saying is domestic private sector
credit to GDP is 300% banking assets to GDP are 850. So, they’re the most levered nation
in the world with the most expensive real
estate in the world with an economic arrangement
with a country that is no longer
synchronized. It is a recipe for disaster. RAOUL PAL: So, everyone’s kind of have in
their head, yeah, heard this all before in
’98. And everyone got every hedge fund to try to
take advantage of that peg breaking, didn’t break. What’s going on now that’s
different? Because you’ve got- you’ve look at reserves and a whole number of
different things [inaudible]. KYLE BASS: Yeah, let’s talk about ’98 first.
I think it’s important to see the HK may have a decision to make, right, either revalue the
peg or suffer a massive debt deflation. And now, their debt was nowhere near what it
is today. But what they did- if you look at this chart here, from July
2nd, 1997, which is when the Thai baht broke the peg,
interestingly enough, one day after the handoff from the Brits to
the Chinese, July 1st, ’97 was day the
handoff. July 2nd was when the Thai baht broke. That
is not coincidental. So, from July 2nd of ’97 to the beginning of
2003, Hong Kong real estate dropped 70% in value.
Right? So, they elected to take a multiyear
enormous, basically, deflation like
depression. So, the way that they made that election
during the crisis of ’97-’98, is they spiked overnight rates up to 20%. So,
US rates were 4.5%, 5%, right? So, they took rates from five to 20 on a
spike to forge any currency from leaving, they were trying to keep currency there,
right? Well, today, the fascinating thing about
their banking system or their mortgages, their assets, their loans and their system,
the substantial majority of all those loans indexes to one-month high
bar, their overnight lending rate and they all reset every month. So, imagine
taking an economy at max leverage and raising rates to keep currency from
leaving. RAOUL PAL: Impossible. KYLE BASS: That arrow is out of the quiver.
They can’t do it this time. So, if you look at the IMF’s article for
review of Hong Kong, the number one risk is the fact that all the loans are floating
an index to one-month high bar. RAOUL PAL: It’s the same with the UK back in
Sterling crisis. All the UK properties borrowed at the short-
term rate. KYLE BASS: Right. Same with Hong Kong. Now, they have a mechanism in their mortgage
market that has a cap at prime minus. A rate call it 250. Prime is at 5. And so,
the Hong Kongers believe that even though their rates have gone from an effective 1.25%
or 1.5% to 2.5%, that there’s a cap. So, the most fascinating thing was in
September of 2018- I think it’s September 29- was the day that Fed raised rates. That night, Hong Kong raised the prime
lending rate by 12.5 basis points. That’s it. The next week, the South China Morning Post
ran stories every day, talking about real
estate dropping 6% to 10% in a week, because all of
a sudden, the Hong Kongers figured out that the cap could move, right? You can’t
just move based lending rate, you have to move prime if rates are going to
move up. So, 12.5 bip move on the prime lending rate
scared the entirety of the Hong Kong real estate market. That’s why you see that hook down there at
the end of this chart. That started at the end of September. RAOUL PAL: So, then the other preconception
is right now- same as it was back then- is Hong Kong has unlimited balance sheet, the HKMA- because even I’m burned by the HKMA
because they even bought the equity market. They killed everybody, every hedge fund. You
can talk to Paul Tudor Jones and the whole
lot. I don’t fight these guys. So, Tudor and the
HKMA, the options they’ve got in this
situation. KYLE BASS: Let’s talk about Norman Chan,
right, the head of the HKMA. He’s going to retire here in the next four or
five months. So, they’re going to look for new leadership.
As far as the HKMA and this idea that is- let’s say talked about by the sell side a lot
with regard to they have a pile of dollar- based reserves. They have a what they call
perfect currency board. For every seven
point- call it 7.8 Hong Kong dollars in the system,
there’s a dollar in the system. And they’ve got more than their entire GDP in
money in circulation, everything’s going to be fine. When you think about that, if currency boards
worked, then Argentina, which used to be one to one to the US dollar
in 2001- if you just think about this- 2001, 17 years ago, 18 years ago now, I was
wondering what- we know what it is today. 43 to one, maybe 44. Who knows what it is?
Right? When you look at a currency board, if you look at a currency peg, let’s say that
identity is true. For every 7.8 Hong Kong dollars in the
system, there’s one US dollar in the system. You can’t take it below that and run a
fractional reserve peg, I guess you can, but
you’d lose- confidence would be lost very quickly. And so, the way we look at it, we look at it
as currency in circulation, which you can’t really- let’s just say go
into. You can’t go into that cookie jar. You have to stay out with your excess
reserves. So, Hong Kong reports every night what their
excess reserves are. They call it their aggregate balance. And just two years ago, that was about HKD
170 billion, real money. In the last year, they’ve spent 80% of that
money defending the peg- 80. 8-0. They have HKD 50 billion left, call it USD 6
billion left, before all of a sudden, they’re going to have to make a decision. Now, can they go find some other money in
their economy somewhere somehow to keep defending the peg? This actually goes back to this concept of
even sovereign default. And if you and I are running a sovereign or
you and I are running a peg, it’s actually similar. Do we think that it’s
anomalous that this attack is speculators? Or is it the macro economy telling us that
maybe the peg’s not pegged to the right
thing? And maybe not the value is the right value?
All right? Is it temporary or is it a secular problem? RAOUL PAL: So, in 98, what was different is
everybody was under pressure. KYLE BASS: Yes. RAOUL PAL: It wasn’t Hong Kongers problem. KYLE BASS: Exactly right. RAOUL PAL: But nobody’s- KYLE BASS: And it wasn’t Hong Kong’s leverage
either. And it wasn’t Hong Kong’s [inaudible] market
or banks. It was people were running into dollars
afraid of China taking over the region. And so, now, you have this hyper levered
system. In the most expensive real estate market in
the world, you have the natural moves. So, right now, if these two- if the Hong Kong
dollar and US dollar interchangeable, which freely interchangeable which they are
at the peg, you can earn 83 basis points more on an
overnight rate if you just have a dollar
deposit. So, if I asked you, Raoul, would you rather
have 1% or 2% on your deposits? And it’s freely interchangeable. You don’t
have to be a genius to figure that one out. So, then, that’s why the pressure continues
to mount and mount and mount. People are just converting the dollar. RAOUL PAL: So, I don’t think many people will
be aware of what’s actually going on the Hong Kong
currency. Explain a bit about the situation
of what’s been going on how it’s been trading
versus the peg. KYLE BASS: So, it has a very narrow band. So,
the peg was set in ’83. They adjusted it to a band, the band is 7.75
to 7.85 to the dollar. It’s basically a little more than a 1% band. And so, for the last few years, it’s traded
at the strong side of the band. And in the last one year, it’s traded to the
weak side, the 7.85 to the dollar. And so, what happens when- RAOUL PAL: But a flat line there, though. KYLE BASS: But what happens is if you’re
going to maintain a hard edge, like they have to maintain, they have to sell
dollars and buy their own currency. So, they have to sell their rainy-day fund,
their excess dollars, they have to sell. So, they’ve sold 80% of those dollars in a
year’s time. Just think about that. So, what happens when they sell the last 20%?
So, two things happen. Either they find more dollars by mortgaging
or leveraging another asset or requisitioning funds from somewhere. It’s
not the only money they have. And we’ve done a very in-depth analysis, not
in our letter, we can cover that another day. But let’s just say they have a decision to
make. They can raise rates up to the level where
they stopped the currency from running, i.e. converting the dollars, or they can find
some more money to fight the peg with. RAOUL PAL: Now, the other question is, is
this is clearly tied into the Chinese story. Is this also a capsule flight from China via
Hong Kong? Because that’s always been my premise that
this is a mechanism that’s part of a bigger story, and too
difficult for the HKMA to stand in the way
of. KYLE BASS: I’ll say that your premise has
been right for a few years, in the last few
years. But if you remember when China closed the
door, really shut down and put their fingers in the holes of the dam
or the money running out of China. They did that really beginning of 2017. I’ll
give you some anecdotes. I have friends that are some of the biggest
art dealers in the world and they do these Art Basel shows, right. And
there’s an Art Basel in Miami. There’s an Art Basel in Hong Kong. And so, in the last couple of years, this
year in particular, my friend that sells all the fancy paintings,
not one Chinese buyer this year, not one. And three years ago, they were selling them
like hotcakes to the Chinese. So, they can’t get their money out. And they’re policing that very, very, very,
very closely. RAOUL PAL: But my guess is they can put the
money, as you said earlier, into Hong Kong, right? So, their first step was put into Hong Kong
real estate, right? You’re outside of China, because within
China, then you’re free. You liquidate the property or whatever you
do- KYLE BASS: And in theory, there’s a rule of
law on Hong Kong, right? It’s still a UK rule of law in theory. RAOUL PAL: In theory, exactly. Which we’ll
come a little bit on to in a sec. But I just have a feeling that that money is
flowing out. So, let’s say they sell real estates. It’s
mainland money that’s been there for 10
years. It now finds its way out because they’re
looking for more security. So, it goes to Vancouver, it goes to Sydney
or wherever. KYLE BASS: Imagine if you’re a Hong Kong
family that has been there for generations. And let’s say you’ve built wealth over time.
You would have to be foolish. And in a freely convertible market, you’d
have to be foolish to leave at Hong Kong
dollars given the macro economic instability of Hong
Kong. And what happens in a peg where 36
years, there’s no volatility, right, no volatility
begets no volatility until it doesn’t. But if you look at the macro, if you had your
entire wealth invested in Hong Kong dollars, in Hong Kong stocks and bonds, and I sat and
talk with you and explain to you how bad the macro is, and then you say, well, it’s
probably going to be a political situation. I don’t care. I’d rather own US dollars
tomorrow, and not be on the hook or at risk of my home
currency collapsing. RAOUL PAL: So, let’s talk a little bit about
risk in terms of the rest of the people in Hong Kong. Because
we talked about autonomy, we both sniggered about autonomy in Hong Kong
because it feels like and from friends of
mine in Hong Kong as well and you’ve got friends
in Hong Kong- that autonomy is going fast. KYLE BASS: So, last night, I had dinner with
a friend that just sold both pieces of real estate that he had there and he moved
his family to London. RAOUL PAL: Oh, really? KYLE BASS: Gone. He grew up in Hong Kong,
generational Hong Kong family, the moment that China started actually
floating a proposal to be able to extra judicially grab someone off the
streets of Hong Kong and take them to China without any court
proceeding, that’s scaring the Hong Kong- not only the Hong Kong elite, but 85,000
Americans that live there, right? In the past, we all know that the MSS from
China grabbed booksellers that were writing
books about President G that he didn’t like, and
they came in the middle of the night, took him and ripped him, rip them back to
China. That was a political grabbing. And everyone was up in arms about it. And there were four booksellers that went
missing for a while, and then they resurfaced at some point in the
future, never to sell another one of those books
again. This is a different thing. The proposal in
the manner in which it is stated today, and Carrie Lamb’s government is the one
making this proposal. So, she’s not really democratically elected,
right? She’s chosen by President G to be the CEO of Hong Kong and she’s proposing
this, and her proposal is it states that
there’ll be a judicial review, i.e. if the crime that
is supposedly been committed by the
“fugitive” is a crime also in Hong Kong. So, let’s
choose murder, right? It’s a crime in both
places. If China calls the police station in Hong
Kong, and says Raoul committed a murder in China,
arrest him and send him over here. The court says their judicial review is okay,
is murder a crime here? Oh, yes, it’s a crime here, we’ve got- the
presumption is guilt. So, there is no court process to determine
whether or not this is a political movement or not or whether or not you actually
committed a murder. RAOUL PAL: So, how can people like Li Ka-
shing remain within Hong Kong? KYLE BASS: I think they have to leave. I
think it’s a real problem. My friends that are very well-off are
leaving. Now, if you remember Nancy Pelosi
just had a group of 10 delegates from Hong Kong here to
the States two weeks ago. And was very forceful with some language and
said, there are 85,000 Americans that live in Hong
Kong. And we are very concerned about the new
proposals that are being floated in the legislature in
Hong Kong. If this becomes law, more importantly, this
goes back to this word autonomy. The Brits agreement with Hong Kong and the US
agreement with Hong Kong, for instance, the 1992 US-Hong Kong Policy
Act is re-ratified annually. The State Department submits report to the
President and then it’s up to the President to either take the State Department’s
recommendations or do whatever he wants to
do. If he determines that they are no longer
sufficiently autonomous, we can treat Hong Kong as China. Well, that changes the entire complexion of
Hong Kong’s economy, meaning all of a sudden, all the tariffs, all the restrictions, all
the rules of trade that we engage with China
on, we start treating Hong Kong that way. Today,
Hong Kong is treated as its own sovereign. There are no tariffs, it’s free trade,
unabated free trade. And as long as, again, they maintain that
autonomy, we honor that agreement. If this law goes through, it is a clear
violation of our policy act and it’s a clear violation of the Brits agreement with Hong
Kong. That in itself will force- remember in 1995,
during the Tequila Crisis, what happened? What precipitated the Mexican decline? What
precipitated Thailand in ’97? It’s always one thing. It’s always the
wealthy lose faith or fear the government and they start moving their assets out. RAOUL PAL: Yeah. I was thinking too. It was
the same. KYLE BASS: That’s what happens. So, if the
wealthy in Hong Kong either convert to
dollars or start leaving, which I think both will
happen, then Hong Kong is finished. RAOUL PAL: So, what do you think? How does
this play out? So, we’ve seen the HKMA is running low on the
accessories. The currency is staples to the limit, so they
haven’t intervened almost every day. The US dollar as of today looks like it’s
breaking high and it’s going to get stronger, which will only put more pressure on this
situation. How does it play out? What’s going to happen
in this? KYLE BASS: I really don’t know. All I know is
the pressure that is being applied is not a- this is not anomalous, it’s not a one-off, it’s not they’re just caught up in the in the
tide of people moving to dollars everywhere and in Hong Kong, it’s not of its own
problems. You’re talking about the most levered
developed economy in the world with the most
levered consumers in the world with the most
expensive real estate in the world, all of a sudden, having a real problem. RAOUL PAL: So, why do people look at
Australia and Canada before they look at Hong
Kong? KYLE BASS: Again, 36 years of stability
begets more stability. It’s an availability heuristic, right? It’s
the way we think. RAOUL PAL: Because we all think that
Australian housing market is going to blow
up, the banking system is going to get trouble.
Canada, probably the same. There’s nobody talking this Hong Kong story. Everybody says, don’t be stupid because Hong
Kong will be fine. KYLE BASS: Yeah, well, if I were living in
Hong Kong with my wealth there, I would have already converted it and left. RAOUL PAL: And the currency is telling us
something every day, there’s money leaving that country and
nobody’s noticing. KYLE BASS: And you know what’s interesting?
The architect of the peg himself, Greenwood wrote an article just last week
published in The Wall Street Journal, I
believe. In it, he says, people are starting to
speculate on the Hong Kong dollar. They’ve lost money for 36 years. They’ll lose
money again. It’s a perfect peg, nothing to see here. Then
why did you write the article? RAOUL PAL: Yeah, he can’t say these things. KYLE BASS: It’s just like when you incur-
going into the European crisis, he said Greece will not default. It’ll never
default. And then we didn’t have a meeting. And then a few finance ministers said, but we
just did- a reporter said, we just talked to other finance ministers
that were in the meeting. And they said, so you just lied to us? He said, listen, when it gets serious, you
have to lie. You remember that? RAOUL PAL: Yeah. KYLE BASS: So, like, no one’s ever going to
tell you this is coming. No one. RAOUL PAL: Before, it’s trading through. KYLE BASS: No. RAOUL PAL: That’s interesting. KYLE BASS: They’re still trading on rate
differentials. So, I think when they run out, then you get
the next move. RAOUL PAL: I don’t think people understand
quite the impact that if Hong Kong were to devalue or have to
abandon their peg, let’s say they’ve dressed it up as a, we want
to re-peg to the mainland. KYLE BASS: Yeah, that makes a lot of sense. RAOUL PAL: It would make- yeah, politically,
you can get away with it. But what that does is immediately put
pressure probably on the Chinese currency
itself, but across the region because Hong Kong
is/was one of the stabilizing economies because Hong Kong and Singapore- they’re the
two Free Trade Zones, you do that? It’s going to start devaluing all of the
currencies across the region. KYLE BASS: I don’t know. I hear you but I
don’t have an opinion on it truthfully. RAOUL PAL: No? KYLE BASS: No, I think that- RAOUL PAL: Maybe, it’s the knock-on effects
are enormous. KYLE BASS: They typically are. And nothing’s
ever- because subprime wasn’t contained,
right? No matter how big the problem is, there’s
never true firewalls, you remember that? RAOUL PAL: Your focus is on okay, this is the
one thing. KYLE BASS: Yeah, I think that the rate
differential is really interesting, and I think that if as a global investor and
as someone that looks at risk, the way you look at risk, if you’re- there
are a few people that this should appeal to. Number one, it should appeal to anyone that
has their wealth in Hong Kong dollars. They better pay a lot of attention here
because right now, it’s free to hedge
yourself. It actually pays you to switch to the other
currency. That doesn’t have all the problems that are
endemic in yours. The second group of people are the global
asset allocators, right? If you and I are running a pension endowment
or sovereign wealth fund, and we have money to your point allocated not
only to Hong Kong- Hong Kong, China, Southeast Asia, this will
be a destabilizing event. And so, maybe there’s a way you could hedge
yourself against that. There is one, right? And the most interesting thing about that is
the hedge pays you, you don’t have to pay for the hedge. RAOUL PAL: And so, HSBC. HSBC is an enormous
bank split between London and Hong Kong. So, surely, they’re doing the hedge, right?
If you’re the CEO of HSBC, you should to be switching all of your- can I
see, bizarrely enough, I do know one of the treasurers or the
treasurer of HSBC- I could probably find out, but somebody, they
would know. And they would have some idea what they will
do with their reserves. KYLE BASS: So, the funny thing is about Hong
Kong also, just think about it. The two largest banks in Hong Kong are two
orphaned children of British financial institution. That are bankruptcy remote. They’re firewalled from a corporate capital
structure perspective. RAOUL PAL: Obviously, in the UK and Hong
Kong. KYLE BASS: And they don’t have any British
depositors. So, yeah, I’d be worried if I
own- we don’t have any positions in any banks to
be clear. But I can promise you, I wouldn’t own either
one of the rest. RAOUL PAL: So, there’s another trade. So, back in my youth, I see a lot of these
equities pair trades. KYLE BASS: Long their parent, short the Dows? RAOUL PAL: Well, particularly because there
was the Jew listing. I remember, in fact, when I was a salesman, I
did, I don’t know, maybe $2 billion of this trade for equity before long term
capital, which obviously blew them up. But the point being is I don’t have a trade
any longer. But my guess is there’s the pairs trade
because you basically go the UK and say, the Hong Kong and said they trade at
the same price. They won’t trade at the same price in the
future because the Hong Kong entity, because it’s bankruptcy remote. I’ve tried a
massive discount. KYLE BASS: That’ll be for you to engage in
and not me. But it’s definitely an
interesting idea. RAOUL PAL: Yeah. So, I think- yeah, it’s
super interesting because lot of people just haven’t looked at
this yet. And I think what you’re on to is something
that nobody’s been talking about. I like the fact that most people will be
cynical about it as well. KYLE BASS: Oh, yeah. Look, one or 2% of the
people end up getting it right in things like this, right? RAOUL PAL: Yeah. That’s right. KYLE BASS: You look back to Switzerland going
through a strong side, you look back to the Tequila Crisis or the
Thai baht, or- there’s so many other situations that just
caught everyone by surprise. If you just took the time to analyze it, it
wouldn’t have caught you by surprise. And if you watched what the wealthy were
doing in all of those situations, you didn’t know what was going to happen. RAOUL PAL: So, the worst question of all,
time horizon? KYLE BASS: Yeah. It’s 36 years, Raoul. It’d be arrogant to say that you have any
idea with what’s to happen. RAOUL PAL: You can’t get away with saying I
have no idea. KYLE BASS: Okay. If 80% of the rainy-day fund
is burned up in a year’s time, in time continuum, just 12 to 18 months a
long time. I don’t think it’s very long. RAOUL PAL: No, I don’t think so at all. KYLE BASS: I don’t think 18 months from now,
you’re going to know what happened. RAOUL PAL: Yeah. KYLE BASS: You were going to know and it’s
probably sooner, I’m hedging. RAOUL PAL: Yeah, no, I get that. Yeah, I
think it probably is, if it’s going to
happen, it’s likely to happen relatively soon. KYLE BASS: Yeah. RAOUL PAL: Well, Kyle, it’s brilliant. Thank
you for coming back and unveiling the big trade. I think people
have been super interested by it. KYLE BASS: Thanks, Raoul. RAOUL PAL: Thank you so much for your time. So, there you have it, the big trade. It’s
Hong Kong. And that’s what interests me about Hong Kong
is I lived and breathed the ’98 Hong Kong dollar peg
crisis, and all the things going on. I know how people are scarred by this. Nobody
wants to take on the HKMA. But Kyle does, and I think that’s
interesting. It’s ballsy as well. But I think his thesis is sound. It’s
interesting, it’s unique. You don’t hear it a lot. Very many people are
dismissive. And like, I also know people will say, well,
Kyle said this about Japan, and Kyle said it about China. This is the game that we play. Not everything
comes to fruition. But when you’ve got an opportunity like this,
with a really skewed risk reward, you can make exponential amounts of money
when you get them right. Sometimes you don’t get them right. But the
point being is the facts, tip probability wildly in the favor of this
trade. And I think it’s interesting. It’s also interesting I asked Kyle- I said,
hey, Kyle, so tell us what trades you’re
doing. He’s like, well, the Coca-Cola gave away
their secret sauce. People want to know, but he’s not going to give us that. But what
I do know is- and I asked him in the
interview, there’s a lot of knock-on effects. And again,
he was lip-sealed on the knock-on effects, there are knock-on effects. I talked about
the Hong Kong dollar pairs trade in HSBC. There’s obviously abilities to trade the
currency. And there are the effects on the markets
around it. I think the Australian dollar, or whether
it’s the South Korean won, or some of the other currencies will get
caught up in this or whether it’s some stock markets, or you
can just distill it down to- if this happens, people are going to buy US
government bonds. So, buy bonds. Either way, there’s lots of ways of skinning
this cat. You can filter into your own investment
decisions, but I think it’s an important one and a
fascinating one. So, let’s see how it plays

100 thoughts on “Kyle Bass Reveals Hong Kong Dollar Trade”

  1. Gotta love Kyle Bass… Has a ratio of facts to opinion of 1000 to 1. I just love facts because they can't manipulate the way you think and I can get to my own conclusions

  2. this interview was brilliant! Thank your for sharing this!
    could you maybe tell us more about germany and the housing bubble there? what will happen to Europe!

  3. why cannot they just banned the free selling of HKD when CCP took over? does not need to raise rates, and HK can still pegged to USD. In fact, RMB is exactly this kind. Contral the money outflow, and buy and sell RMB according to dollar.

  4. China unleashed and promoted selling Fentanyl into working class regions of America that were in extreme distress as a direct result of China's aggressive/unethical economic policies and American politicians naivete and complete stupidity.

    This alone is evidence of China's attitude towards America and the west in general. Subvert until they are sufficiently weak and dependent on you and can't fight back.

  5. We should call this channel fake vision. Why this guy did not mention that George Soro attacked HongKong and others Asian countries, therefore cause the 97 Asian financial crisis. directly cause the real estate price drop, capital leave HongKong, thank you telling everyone such lies and stop fooling ppl. HongKong still take a very important part in China’s economy. City transfer its functionality all the time, such as us manufacturer move to overseas in order to reduces costs, develop better supply chain and markets.

  6. The US is a warmongering lawless rogue state. Trump is a low life pathological liar and a little Adolf Hitler while Pence from the fascist Christian Right is a little Joseph Goebbels. Read Chris Hedges book, America the farewell tour and check out his, Joseph Stiglitz and Jeffrey Sachs videos on YouTube. Also read 'How Fascism Works' by Jason Stanley, 'Giants The Global Power Elite' by Peter Phillips and 'The Management of Savagery' by Max Blumenthal.

  7. Soothsayers have been commenting negatively on HK trying to predict its collapse. Heard it for almost a decades. But nothing of that sort happened. HK will never collapse as it is under China. And HK economy is so small relative to China. If China collapses then HK will also collapse.

  8. 28:10 Presumption of guilt looks like right out of the democrat playbook in the US. All of the socialist around the world are looking to turn the world into a communist utopia that failed in the USSR. We seem to have short term memories and will repeat the errors again, except this time in the USA! Defeat the democrats and the complicit media/academia in the 2020 election or descend into chaos in the USA.

  9. The country doesn’t jump in to bail out depositors in these credit frenzy induced financial crises. The country bails out the banks themselves. Give depositors their money and write off all the credit. That would wipe out the banks and allow a consumer reset. Would it destroy credit systems? Yes. Is that a bad thing?

  10. It's funny seeing how many Americans who just blindly believe in the one-sided opinions from this wanker. This guy clearly has his prejudice against Asia, and last time I checked, his fund hasn't really been performing since 2008. So I don't know how he deserves all this credibility.

    This simple fact is that Hongkong is a small part of China, and China wants Hongkong to do good. So if the central government plays against the short, the short is dead. However IRL the central government would only want to maintain stability, not actively going against the short sellers.

  11. It's a Jeremy Siegel moment ! Equities European? Money flowing east to west with a huge tail wind? China could burn Hong Kong and everybody by …… Going well past 7 to the dollar /33 to the buck? The queen summoned Rusty Bathwater and the Mystery machine to solve the britexit and save the bank of england?(Donald trump MBE)

  12. The federal reserve could send the regional bank presidents to local ATM machines to create a sizable sum to start a rocking GO FUND ME PAGE on monday?

  13. Does this guy speak Cantonese? He cannot talk this authoritatively about these subjects just from research done in English.

  14. the disaster Kyle Bass predicted will never happen to HK, this guy has no idea how rich HK people are. HK people will not sell their real estates at a huge discount like they did in 2002 SARS. Nothing can bring down the price of HK real estates unless there's war or nuclear explosion.

  15. Kyle bass is obviously ngo. He talks about china extrajudicially kidnapping people. Well what about USA and Assange, Snowden, Huawei, and many others?

  16. the corrupt CCP already cracking down on Hong Kong. large demonstrations over new extradition proposals. the CCP are thugs: they are thr sole jury, judge, and executioner as history has demonstrated time and time again…

  17. Hongkong is absolutely controled by the ccp, and became the happy pool of money laundry for the top officials of ccp like Jiang ze Min and Wang Qishan.

  18. The ccp printing hongkong dollar to exchange for USD and hide huge amount of money in the west by family trust, private foundation, insurance, petrol and fund flow and so on

  19. The problem with China is, the US for example is a free economy, China's is a different animal, they can just tell people tomorrow they can't sell their apartment for the next 5 years…

  20. Smart dude, one of many I like to listen. Bulls and Bears, then make my own judgement after a little research and tossing a coin to see which way to make educated bet.

  21. Kyle is so knowledgeable. It's interesting to hear such informed opinion with the contrast his portfolio hasn't performed in years. There's something missing here. For one, HK is backed by mainland, I'd be careful betting against them even if I am theoretically right. Second, US treasury curve is pricing 100bps cut in 1-2years. This is easing to all pegged ccy.

  22. I wonder how much credit went into Mainland China or went through Mainland China to the Projects like Silk Road 2.0 and other Infrastructure Projects outside of China? Anyone curious?

  23. I'd rather watch a video of someone holding his feet to the fire about him preaching the last big idea, shorting the yaun??????????????????????????????????????????????????????????????????????????????????

  24. Yea. Short sovereign 10 year. Ok. Sure. I see Bass started jumping on that trade in 12/18. Now it's looking like it's being defended so call in the lemmings to help support Kyle's position.

    What else ya got?

  25. Great discussion, but isn't he totally off on the aggregate balance figure being the reserves to protect the peg? It's the Exchange Fund which is the reserve to protect the peg, and the funds value stands at 437bn USD.

    "The HKMA, under the delegated authority of the Financial Secretary and within the terms of the delegation, is responsible to the Financial Secretary for the use of the Exchange Fund, and for the investment management of the Exchange Fund.
    The Exchange Fund's primary objective, as laid down in the Exchange Fund Ordinance, is to affect, either directly or indirectly, the exchange value of the currency of Hong Kong. The Fund may also be used to maintain the stability and integrity of Hong Kong's monetary and financial systems to help maintain Hong Kong as an international financial centre."

    "The Hong Kong Monetary Authority (HKMA) announced today (Thursday) that the official foreign currency reserve assets of Hong Kong amounted to US$437.8 billion as at the end of May 2019 (end-April 2019: US$436.4 billion) (Annex). The total foreign currency reserve assets of US$437.8 billion represent about seven times the currency in circulation or 45% of Hong Kong dollar M3."

  26. Kyle Bass track record since 2008:

    Bet against European sovereign debt – FAIL
    Bet against Japanese sovereign debt – FAIL
    Concentrated position on GM – FAIL

    ONE correct, lucky, profitable, contrarian bet compared to a string of miserable failures does not make one insightful.

  27. Elitists like Bass don't belong in Texas, unless they're at the bottom of a lake. Anytime one of these finance criminals announces their trade it means they're in trouble.

  28. A highly leveraged short on the HK dollar would be the final nail in Hayman Capital's coffin. RIP to the guy who got lucky on subprime but has been wrong ever since.

  29. Dear Kyle Bass, buy silver contracts and take physical delivery. The exponential increase in silver prices would make the Hunt brothers blush if they were still alive.

  30. this just seems like a bad play all around, hong kong has current account 5%, trade is negative this means money is flowing through there, ccp uses hong kong to get money out/in so central bank will be injected with supply of dollars, for this to stop, ccp itself would have to have a depleted central bank, witch they dont. kyle is trying to short china through hong kong, it wont work.

  31. Hong Kong is like the ultimate example of cheap debt effect. Homes all inflated to the point only another debt zombie can buy it. Overleveraged, no farms, etc etc. In reality, they really depends on China's economy. Hell, it's a city built originally as Opium distribution center.

  32. China is getting very close to destroying the autonomy of Hong Kong. If they continue, Hong Kong will be finished. Sad.

  33. Can't say whether Kyle is merely speaking out what he thinks, or there's actually a vulnerability to take advantage of. The only hard part is that with China funneling most of the money through HK or Macau, the money pool would be way larger than what most funds would have. Well, unless there's a large enough fear to trigger a stampede then there may be a point to start

  34. may i know if Bass trade is right, what will be the value of real estate in Hong kong? If HK is depeg, will HK dollars be appreciated or depreciated? what will happen to the property price if depeg happens?

  35. Bass had a high conviction short JPY trade for a few years, didn't work, and now comes up with another one that is much less likely to succeed. George Soros used all his might to attack the HKD during the Asian Financial Crisis, and failed. Why would the smaller Bass be able to do it now?

  36. See no reason it cannot defend the peg at expense of economic deterioration. When hibor can go up to 300%, you won’t attack the peg, but other assets, which HKMA wont care

  37. Wait a minute..
    Wasn't this guy talking about the collapse of Japan for the last 3 to 4 years and betting on it.
    Now he's talking about the collapse of China.
    What happened to his Japan angle?

    Forget about past predictions and Onward Ho ?

  38. HK will be destroyed by the CCP.
    and Chinese will be destroyed by their own govt.
    Good luck north east asia hahahaha

  39. In the end he goes "Well, there you have it!". Except we don't. He didn't say what the investment idea was. He didn't say how to trade it. He didn't say how to put the trade on or even what it is.

  40. Gotta say I hesitated to watch — like what an HK story gonna teach me? But oh, boy am I glad I did. This video was really good — I put it on my "must re-watch list". Thanks guys!

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  42. wow I diden't know and this, this is the first time I heard of the problem with Hong Kong, I have shorted Tesla but HSBC seems to be in worse shape by far!

  43. kyle bass really did his homework, i enjoy his thought process, unfortunately the interviewer was unable to be on his wavelength and it shows.

  44. From what i heard Lee Kai Shin sold off all of his assets in China and moved the majority of his businesses to the UK circa 2012 when Xi Jinping came into power.

  45. The attitude of an American is funny, when the US is hijacking people all over the world. Now, when some one might do the same to them they shake in their boots.

  46. His statement about the HKMA burning through their US dollar reserves is unsubstantiated here is the government link with current and historical data.

  47. Ask yourself why is Kyle so inclined to share with us his China idea and not anything else?! Makes me suspicious!? I would NEVER follow this guy into a trade. You are crazy if you do!!!

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