Heyman Capital's Kyle Bass, who as we reported two weeks ago returned an impressive 25% in 2016, spoke to Bloomberg TV's Erik Schatzker and likened President Donald Trump’s trade and tax policies to gasoline which will accelerate an economic "restructuring" - a polite word for crash - in China.
Discussing a topic he has been particularly focused on since late 2015, Bass said China has “recklessly built a system that’s going to need to restructure and that just so happens to be metastasizing right when Trump becomes elected. This is a fire that’s been smoldering and it’s now starting to burn, and Trump is just more gasoline." As he put it later "in lifecycles, what Trump is going to do, he is going to speed everything up." That statement is absolutely spot on, on many different levels as we will soon find out.
Bass also said that imposing tariffs on Chinese imports could have “profound consequences” for the nation’s economy, where credit over the last 18 months has grown by $6.5 trillion while deposits have grown by half of that, or just $3 trillion, "so credit is growing exponentially, China has to fund enormous moves in credit growth just to keep in roughly the same place. We call it running to stand still."
He mocked "the idea that China is now the driving economic power in the world" calling it "illusory or somewhat of a fallacy" and as we reported in early January, confirmed that "it’s safe to say that the Asian theater is where we’ve been focused.”
Aside from China, Bass echoed recent favorable remarks by both Ray Dalio and Stanley Druckenmiller about the impact Trump would have on the US economy, which he said would now focus on labor over capital, and the resulting increase in capital investment could to a jump in productivity, all of which is happening near full employment and when combined with tax repatriation, will be "extremely stimulative" but also be inflationary. The impact will be “positive for the United States and slightly negative for the rest of the world,” he said. “But it’s not the globalist nightmare, in my opinion.”
As he says, if you need to boil it down into a soundbite: "short rates, dollar strong", but the question is how do you get to pay for cutting the corporate tax rate, to which his answer is that a border tax - or "taxing the trade deficit" - is the "only way to pay." However, if various retail-affiliated lobies such as Nike and WalMart offer enough resistance, Trump may simply enforce tariffs.
When asked how he played the election, Bass said that he waited until the results started coming in and found the market's initial reaction to a Trump victory as irrational, and that just like Carl Icahn, he took on very "pro-growth" positions in currencies and rates in "huge amounts" later that night, in what ended up being an "easy trade."
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But what we found most interesting is a section discussing inflation in Germany and German Bunds, in which he may have dropped a hint to help us identify a trade he previously dubbed the "greatest risk-reward profile ever encountered." Recall in his year end letter, Bass said the following:
One opportunity in particular has the greatest risk-reward profile we have ever encountered in our decade of being a fiduciary. As investors of ours, you are positioned to take advantage of one of the world’s greatest macro imbalances.
The trade Bass may be refering to is the same "short of a lifetime" first brought up by none other than Bill Gross in April of 2015, namely shorting German bunds, and which promptly crashed just days after the Gross prediction almost two years ago.
Why do we think so? Because when Shatzker asked Bass if "there are any natural Trump trades right now" Bass' response was quick and to the point:
"Real rates in Germany are at the lowest level ever right now. Inflation in Germany is spiking. It’s not even moving in a linear fashion. You have even seen members of the ECB and the Bundesbank speak today about the fact that I think we are going to see inflation running much hotter than any of the central banks thought it would. Therefore I think the move in bonds is just beginning."
It sounds that Bass now in agreement not only with Gross, but also Jeff Gundlach, who in his recent public webcasts has continued to hammer the thesis that shorting German Bunds has huge profit potential, and if indeed Bass sees the Short Bund trade as the greatest opportunity of his career, the Bund crash and VaR shock observed in May of 2015 may be imminent once again.
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The rest of the Bloomberg interview, predictably, focuses almost entirely on China, where the crash thesis is well-known (if not the timing), and Bass expounds on the various ways one can play the upcoming crash, although - like any smart hedge fund manager - he won't explicitly state for the record that he is short the renminbi or other Asian currencies. Toward the end, Bass takes an interesting detour in which he praises the Russian economic response to the recession of 2015 in what appears to be a decidedly bullish outlook on Russian assets, and when Shatzker proposes summarizing the Bass interview by saying "short China, long Russia", Bass responds "that's a good place to start"
Watch the full interview below: