The Future of TikTok and the Collapsing Chinese Economy: Kyle Bass

[RUSH TRANSCRIPT BELOW]  Kyle Bass is the founder and chief investment officer of Hayman Capital Management, and he’s known for his prescient bets on major global economic events.

In this episode, we dive into why he believes China’s economy is collapsing, why Bytedance hasn’t sold TikTok despite a looming January deadline, and what he believes the big economic and financial priorities of the incoming Trump administration should be.

Views expressed in this video are opinions of the host and the guest, and do not necessarily reflect the views of The Epoch Times.

*Big thanks to our sponsor for this episode Patriot Gold Group. Check them out here: https://ept.ms/3sr5LhH

RUSH TRANSCRIPT

Jan Jekielek:
Kyle Bass, such a pleasure to have you back on American Thought Leaders.

Kyle Bass:
Great to be here, Jan.

Mr. Jekielek:
Kyle, you’re a big proponent of freedom of speech. You’re a big proponent of the Second Amendment. You’ve also been describing TikTok for quite some time as a digital Trojan horse, and you’ve been celebrating this recent court decision. So tell me a little bit about why.

Mr. Bass:
It’s important to remember why the Federal Communications Commission, the FCC, and the Act in the early 1930s set that up. Why is that in
existence? What we decided to do early on in this country is to not allow foreign ownership or foreign majority ownership of our broadcast licenses. And as the world has evolved from broadcast journalism into more social media and other kinds of journalism, which we’ve seen a major transformation here in the 2024 election, we have a scenario in which a foreign adversary, a foreign adversarial government, is the controlling entity of the majority of the companies that are based there. And in many, they’re almost all public companies.

Certainly every broadcaster has Chinese Communist Party officials officing in their office. CNBC China, for example, has Ministry of State Security people in the studio. If they ever say anything wrong, they just cut the feed. So it’s important to note that when you have someone like TikTok broadcasting and broadcasting kind of with quotes around it, they can broadcast directly into our kids’ bedrooms. And they have an algorithm that is addictive.

They’ve banned it in China. And yet they push it here. And they can influence the entire population here. And that is a battlefield asymmetry that we afford our number one adversary. And there’s no reciprocity. We don’t, we’re not allowed to, to let’s say, install our social networking companies and have that connectivity to the Chinese population.

So it’s a one-way street, Jan. They control the algorithm and they can broadcast directly into our kids’ bedrooms. And this is something the FCC is going to have to address. But the U.S. court system, if you read that appellate court ruling, summarily shut down. The Chinese Communist Party was saying this is, this is an infringement on our free speech, when in reality, this is a state-controlled adversarial algorithm that is broadcasting directly into our kids’ bedrooms. So this is a national security issue. So if you read the court ruling, it ruled on national security.

Mr. Jekielek:
It didn’t rule on free speech. The other side is the espionage side on the national security end.

Mr. Bass:
Xi Jinping, in his speeches throughout the years, almost the last decade, you’ve heard him refer to the smokeless battlefield and how they must win on the smokeless battlefield. But what is that battlefield exactly?
Well, number one, it’s social media. Number two, it’s kind of data writ large. And number three, it’s the cyber domain. TikTok can do just about everything that the Trojan horse of old did in today’s smokeless battlefield. There’s actually a tell and the tell is fascinating. Whether you agree with you and I or me on this issue or not, there’s such a tell. The Chinese government said it’s a private company and yet the Chinese government is opining on whether or not it can be sold to a U.S. company or whether or not they will agree to allow it to be sold to U.S. companies.

Let’s just look at the decision tree flowchart that the Chinese Communist Party and TikTok and ByteDance have to go through between now and
January 19th. It is if you sell TikTok America. So TikTok America does about $12 billion in revenue. TikTok globally does about $36 billion in revenue. So it’s about a third of their business. So when you look at TikTok America, $12 billion in revenue and they make money, a minimum price. I’m fairly certain there’s a bid out there from a big US company for $50 billion.

So let’s just assume it’s worth $50 billion or more. And here’s your decision tree. If you are ByteDance, you say, well, we just sell TikTok US for $50 billion and we run TikTok and the rest of the world. And a US company gets to continue to run TikTok and the algorithm has to be 100% in the US. All the servers have to be there. We have to have a full separation of TikTok, TikTok US. So $ billion is a pretty nice payday for ByteDance and the ownership there of TikTok.

Or plan B. Plan B is the government decides they’re never going to give up that algorithm and they’re going to fight on free speech grounds and they’re going to ignore national security because gosh knows the Chinese Communist Party doesn’t want to talk about U.S. national security. They only want to talk about themselves. And then it’s worth zero. So if they don’t sell it to a U.S. entity, a U.S. owned entity, then the U.S. shuts it off.

Now, there is a provision in that court ruling, if you saw it, and in the law that says if they can show demonstrable progress towards making a sale, President Biden can give them a 90 day reprieve from January 19th. Maybe that will happen. Maybe it doesn’t. The fact of the matter is the most exciting part of what we’re about to see here, Jan, is the Chinese
Communist Party will have to reveal itself in that decision tree matrix. They’re either going to receive $50 billion in a sale to Microsoft or Oracle or someone here in the US, or they’re going to get zero.

And the only reason, in probably the largest case of cutting off your nose and maybe your cheekbones to spite your face, this is the largest case I’ve ever seen of that dilemma. And that dilemma is something the Chinese Communist Party has to face between now and January 19th. It’s going to be fascinating to see what they do. My guess is that they won’t sell it and it will be worth zero.

Mr. Jekielek:
I believe that the algorithm is considered, you know, a national security issue, basically a state secret.

Mr. Bass:
Of course, it’s a state secret. They’re gathering data on every single American household that hooks into TikTok. You know that kids under, I think people under the age of 31, get almost 100% of their news from TikTok. Imagine how important that is as a tool from a foreign
adversary.

Mr. Jekielek:
The other thing that just strikes me, if you look at these Salt Typhoon attacks that were incrementally getting more and more information about the depth and breadth of the security breach. That seems somehow relevant to what we’re talking about here.

Mr. Bass:
The Salt Typhoon hasn’t received as much media coverage as it should. I know they talked about targeting the Trump administration’s phones. But in essence, if you actually read or hear what happened there, they got into every single phone network. They got into every single phone. They have everything. You have to assume that the Chinese Communist Party has everything. And it’s the biggest breach in the history of the United States.

It’s important to know who we’re dealing with, Jan. This just goes back to leadership. During the Cold War, every American, let’s say the average American, knew exactly who the bad guy was. They knew the malign actor was Russia. In this situation, we have yet to define the Chinese Communist Party as the enemy. If you read the Director of National Intelligence’s annual threat assessment report to Congress, in no uncertain terms, we call the Chinese Communist Party and their organization and their malign intentions to be the single number one threat to U.S. national security.

We’ve done it every year for the last five years. Our president needs to stand up and say, China is the enemy under this leadership, and we’re going to do everything we can to redefine the battle space. I don’t think you can even define the battle space until you can define who the enemy is. And I think we need to start doing so.

Mr. Jekielek:
This is, of course, in the context of Xi Jinping himself saying for years now that he’s waging a people’s war on America.

Mr. Bass:
Yes, and he says he must win that war and he must win that war at all costs. And at the same time, in the last year, he’s had official Chinese government representatives interface with our government representatives.
And they’ve told us four times in 12 months they are going to forcibly take Taiwan and that it’s their business and none of our business. With Taiwan making 92 or 95% of the most advanced chips in the world, we all know that Taiwan’s democracy must stand.

It is China’s belligerence that is going to tip us into a potential kinetic problem or data problem and or cyber problem or all the above. If Xi Jinping would leave Taiwan alone, the world would be a much better place. But Jan, you and I both know since 2017, he’s told us what he’s going to do. And at some point in time, I hope people start believing him.

Mr. Jekielek:
Let’s talk about the Chinese economy. I think you’re one of the people who understands this whole realm best. You’ve said that you believe
right now the Chinese economy is collapsing. That’s also something that numerous people that are dubbed China hawks have said in the past while, but somehow they managed to pull through. The property sector is absolutely collapsing, I think unquestionably, but somehow they seem to be pulling through. And so why is it different now or is it different now?

Mr. Bass:
When you think about China, you have to think about it in two spheres. You have to think about domestic China and how they operate their own economy, their own internal situation on the mainland. And then you think about China Inc. as they interface with the rest of the world. And it’s important to think about it in those two buckets. And here’s why. Internally, they have an R&B-based economy and China can abandon moral hazard. And they can, I don’t even know if they have a moral hazard, but they know how to define it, but they can do whatever they like there. If their banking system isn’t solvent in RMB, they can print the RMB.

When you look at their banking system, it’s about 350% of GDP. The US banking system is one times GDP. If you include the non-banks and then the Fannie and Freddies of the world, we’re about 1.7 times GDP in RMB. So China’s banking system is twice as large as ours in an economy substantially smaller than ours, in a world in which they’ve only been at, call it advanced banking since 2002. They’ve only been at this for 20 years. So they’ve got a lot of plates spinning and they’ve got a lot of leverage.

And almost 40% of bank assets in China are lent to domestic real estate. So if your real estate market is down 30 to 50 and your economy’s three and a half times levered to your banks and your banks are insolvent, you have a real problem. And their problem is larger than ours was banks and your banks are insolvent, you have a real problem. And their problem is larger than ours was during the global financial crisis.

Now, Jan, they were never they would never tell you this. They can’t tell you that they don’t want to show that they’re weak. They control all of the data. But it’s easy to see the architecture of their economy, what they did wrong and what they’ve done wrong and what’s happening internally. Their dealings with the rest of the world are vital to them. And what I mean by that is they import them.

They import about 13 million barrels of crude oil every day, the world’s largest importer of crude oil. They import almost nine BCF of LNG every day. They are the largest importer of LNG in the world. They import 40% of their food every single day. And all of those imports, they have to pay dollars for. So where do they get the dollars is the question. And they have to keep a robust trade relationship in dollars with us to be able to pay for their daily operations with the rest of the world because they have a closed capital account. Their RMB is not convertible into anything unless the Chinese party allows it to happen. They control that escape valve.

So it’s really an artificial exchange rate, closed capital account, internal disaster, but they’ve made a lot of money by being the world’s factory floor. They made it two ways, right? They’ve been the world’s factory floor since 2002. And then they started stealing IP. Their IP, if you think about this, if you stole $200 to $300 billion worth of IP every year, and you make a return on it by employing it, using it, and even making it potentially better, they’ve got a machine where they were factory workers and stealing IP.

The way you think about China Inc, they’ve had a positive net income, right? That means if you and I were running a country, we need to have more dollars coming in than leaving. That’s how you think about the current account. And they’ve taken that money and they’ve spent it on modernizing the military. So their capital investment has been to make money while the sun is shining, make some hay while the sun’s shining, and then modernize your military and force project so that you can achieve your potential goal of global primacy at all costs. And they’re going to come up a day late and a dollar short, but it’s going to be a potential kinetic situation if and when they take Taiwan. And I think that is coming.

Mr. Jekielek:
Just give me the building blocks. You mentioned a few different things. There’s this property sector, and it’s interesting how you divide the internal and the external. But give me the pieces that make up the Chinese economy now.

Mr. Bass:
It’s important to note that when you look at the breakdown of their economy, real estate and its concentric circles were the driving force in the, let’s just say, in the uplift, in lifting 400 million people from poverty into the lower middle class in China. And I’m going to tie the most important driver to maybe one of the biggest risks that’s facing them real quick. And it’s happening in the developed world too. We’ve seen all of these reports of birth rates collapsing, whether we’re talking about the US, Europe, or China, and China’s birth rates collapsing faster than anyone else’s.

And here’s why, Jan. You just have to think about this intuitively. If you allow real estate prices or even encourage them to just move up and to the right, and you know how local governments in China were selling land to developers, and that’s how they meet their local government budgets. Well, as we all know, that’s not happening anymore because we’re in a collapse. But housing prices as a percentage, so median housing prices in the numerator, median income in the denominator in tier one cities in China, that ratio got to be 25 times.

So imagine if you made $100,000 a year and you had a $2.5 million house, could you afford it? The answer is absolutely not, right? In the US at our subprime worst, our median home price to median income got to 6.6 or almost seven times. They got to 25 times. So what happened in China with this, call it unrestricted speculation in real estate?

The men, when they graduate university, they don’t have enough money to get an apartment and therefore they’re not having sex and procreating and they’re not getting married. So if you look at the number of marriages in China, it’s collapsed. The number of births has collapsed. They’ve gone from, you need 2.1 births per woman to just sustain a population. China’s now down to 1.2.

So what’s happening? They allowed real estate prices to get so high that no one can afford them coming out of university. Therefore, their birth rates collapsed, which became a real problem. So the reason that China is not stimulating its domestic economy and turning real estate around and letting it move back up is Xi Jinping realized his folly. And you remember when he came out in 2019 and he said, financial security is national security.
And he realized that the population demographic curve was tanking. And it was because they allowed this rampant speculation in real estate, which basically was the Chinese miracle.

The Chinese miracle was real estate and all the concentric circles around it moving up into the right, growing GDP exponentially, and basically becoming the growth engine for the world on paper. But when you look at, did that wealth in GDP creation end up in the pockets of investors? Imagine this. 16 years ago, if I told you that I knew that there was a country in the world that would become the world’s second largest in GDP, and it was going to grow its GDP 505% over the next 17 years.

If you invested in their largest public index, which is the Shanghai Shenzhen 300 index, going into a 500% increase in GDP, you would imagine you would have made more money than you could pull vault over. And instead, what happened is you lost a third of your money. In the US, we’ve grown our GDP over the same period about 75%. And you’re up about 440% if you’re invested in the S&P 500.

So investing in communism has never worked in the long run. It never will. And they end up showing themselves. And Xi Jinping has shown himself since roughly 2017. And so when you get into a scenario where you’re trying to bet or hope on a turn in the chinese economy um and you realize that it’s actually an architectural structural flaw in their economy it’s just kind
of a fool’s errand uh to i mean i’m not saying that you can’t trade it i’m not saying that you can’t get in front of a big government announcement and have stocks move up briefly which just happened uh but it’s it’s of my opinion that they have about two trillion trillion equivalent of equity in their banking system. The first $14 trillion RMB that they print will only fill a hole.

Mr. Jekielek:
The stock market in China is basically down by a third, there are actually quite a few Chinese companies that are through this very unusual mechanism, listed on U.S. exchanges, at least a thousand. They are significantly invested in as well by Americans and others.

Mr. Bass:
Yes, it’s actually crazy. As you know, if it’s in the VIE structure, which is typically how all of them are, not all of them, the majority of them, then you only own a fantasy football warrant, right? VIEs have no ownership directly to the entity in China. It’s a tracking entity against their performance. So there’s actually no there there. There’s nothing underneath.

Oh, and by the way, the VIEs aren’t subject to U.S. PCAOB covered audits like every U.S. company is. As you know, in 2013, we entered into a memorandum of understanding between China’s securities regulator, the CSRC, and the U Securities Accounting Regulator under the SEC. It’s called the PCAOB, the Accounting Oversight Board. So we said, you know what? Even though every US company is subject to PCAOB covered audits, we just think China will be okay. We’ll just trust you guys. And in fact, you saw Gensler did a spot audit of four Chinese companies.

And a spot audit means they just get to see the paperwork. They don’t get to call the banks. They don’t get to have interviews with these people in the companies. They just get to read some paperwork that’s redacted. And they decided to give them another three years. What’s been happening, Jan, is insane. We need to have uniform standards for listing in America, period. We should stop the shenanigans.

Mr. Jekielek:
I would love to know how that happened. Do you know how that, you know, the exemption to actually having meaningful audits occurred in the first place?and how this investment vehicle that you don’t actually own anything as you’re telling me exists?

Mr. Bass:
Yes. If you own a Chinese listed ADR in America, it’s most likely that 95% of them are called the variable interest entities, the VIEs. And again, they own nothing. They don’t have a claim. They don’t have any liquidation preference if the company liquidates. In America, there are bank loans, there are bonds, there are stocks. If a company gets sold or if a company gets liquidated, if things go poorly, there’s a chain of a waterfall where you own this thing, so you’re going to get what you deserve. In China, if it goes bankrupt and you own a VIE, you get absolutely nothing. You have no claim on any asset.

Just imagine owning a fantasy football share in an economy run by a communist government who’s our number one adversary. It’s like it’s actually hard to believe. It’s antithetical to anyone’s common sensibilities. And yet we do it. You know why? Because there’s this 1.4 billion person rainbow over there. And we can’t wait to sell something into them or see it perform so that we can make some money. And in the end, everyone’s losing their money. I mean, in the end, you’re going to lose everything.

Mr. Jekielek:
It’s hard to imagine that what you’re describing is real at this point and that our Treasury Department basically sanctions it.

Mr. Bass:
Yes. Again, it was an agreement and the MOU was entered into in 2013. It was seen as an olive branch to continue to open to China, right, with the expectation or hope that China would end up understanding that a capitalist-based society and a society based upon the rule of law, not the rule by law, and fee-simple property ownership and basic human
rights, which is what every democracy tries to achieve, will show them that economic prosperity is good for the people of China.

And in the end, you know what their government has done. They’ve gone the other way. They’ve become even more authoritarian. Xi Jinping holds all five aspects of dictatorship firmly in his hands today. And the Chinese people have the internet firewall, a great firewall where they can’t see out, and we can’t see in. China’s walls are intended to keep the people in and keep them uneducated as to what’s happening around the world.

We made a bet back then. We can go all the way back to when Kissinger decided to pivot to China to counter Russia’s influence in the region. Then in 2002 we allowed them to ascend to the WTO without uh being properly qualified, just like we did with the IMF SDR basket where they promised to show us the composition of the reserves within two years. That didn’t happen.

Typically, to be in the IMF SDR basket, you also need a freely tradable currency. That didn’t happen. So every single promise they’ve made along the way, they’ve broken. And yet here we are continuing to open our doors and afford them important battlefield asymmetries that we’ve got to turn down.

We have to stop the madness, Jan. And it’s everywhere. It’s on social media. It’s in the financial markets. It’s everywhere we do with them, everywhere we engage with them. We’ve afforded them, let’s say, the benefit of the doubt and an asymmetric advantage over us in hopes we could teach them and their people that it is a good idea. And, you know, the most extreme example of this is if you look at the GDPs of South Korea, North Korea, I think you see what I’m talking about. I think it was a good bet back then. It’s no longer a good bet.

Mr. Jekielek:
Just how much money is invested in these VIEs out of curiosity? And is there any hope of ever seeing that money or does it just exist on paper? This is what I’m trying to understand.

Mr. Bass:
It’s hard to tell. And here’s why it’s hard to tell. If you look at Alibaba, for example, trading where it trades now around $85, $90, somewhere in there. It has a market cap because of the number of shares outstanding
and the price, but all of that market cap was not paid in capital, right? It just traded at a level and people started buying it. When we think about the amount of capital that has flown into China from the various inclusions in the indices, the MSCI, and let’s say the Bloomberg Aggregate Bond Index, we think that there’s at least two-and-a-half trillion U.S. dollars invested into China writ large, including VIEs and ADRs domestically. And that’s only a guess. There is no one’s capacity to actually tell you exactly what it is, but it’s real money, right? It is a huge amount of capital.

Mr. Jekielek:
The other question is, you know, a number of people have basically said that the only thing that’s really keeping, you know, the Chinese economy alive or, you know, functioning is these influxes of capital from mainly the United States, but the West writ large. How do you view that?

Mr. Bass:
If you saw 2023, it was the first year of net capital outflows from China. And you’ve seen a number of states, a number of endowments, a number of
pensions say, we’re just not going to invest anymore in China. In fact, some, like the state of Texas, just recently banned investment into China with state funds. A couple of other states have done so. You’re seeing a reversal there, Jan.

What your audience also needs to understand is when you talk about foreign direct investment, FDI is also investment into property, plant equipment, into companies, into China. I know U.S. companies that have had billions of dollars in earnings sitting in Chinese banks, and they can’t get it out. They can’t. The Chinese won’t allow it to be wired out. So they hire consultants here, and they try to keep it there.

Here’s a fun fact. Any U.S. company that has net profitability in China and that leaves their money there over those profits if they remain in bank
accounts in China, China automatically accounts that as additional foreign direct investment. So if you see FDI going negative, that means it’s really negative because these companies aren’t doing that voluntarily, if you follow me.

Mr. Jekielek:
The foreign direct investment has really plummeted, and I’ve been watching that as well but there are other ways that money is still getting in there.

Mr. Bass:
Yes. FDIS is actually excluding portfolio flows through the MSCI, the inclusion in the Morgan Stanley Global Indices and the big bond index, the Bloomberg Aggregate Bond Index, through those two things alone, and the way you think about those, those are passive pipelines of blood that grow the tumor.

Those pipelines continue to be open today. And those are almost forced investments. And, you know, we fought long and hard against the government’s own pension plan, including China. And it’s an investment scheme, which is just insane that our warfighters and our congressional folks were actually using some of their earnings to grow the Chinese military industrial complex. Again, it’s stranger than fiction.

Mr. Jekielek:
There are reports that Chinese Vice Premier He Li-Feng, he’s been basically speaking with a lot of Wall Street people, American Wall Street people, prior to the Trump administration coming in on January 20th. There’s a lot of money, Chinese money in D.C., and there’s a lot of interest in keeping those flows going and not having tariffs that are too hard, at least from what I’m hearing. What do you think?

Mr. Bass:
Again, it comes down to what are the intentions of the Chinese Communist Party? Why did they continue to push into and bring militaristic belligerence to the Second Thomas Shoal in the Philippines? Why are our warfighters working day and night with war games against China from a kinetic perspective? And yet on Wall Street, we’re considering maybe investing more into our adversary.

There’s a schism between the intelligence community, our government, and our warfighters understanding the practical reality of Xi Jinping, his speeches and his actions, and then Wall Streeters who can’t wait to make another dime investing into China. Now, mind you, the dimes they’re making are not performance dimes. They’re getting fees on the capital that’s moving in there.

I had a conversation with one of Wall Street’s largest investors in China, one of the titans of investment. And he said, we were doing a round table discussion with the Secretary of State. And he said, well, you know, I think our hawkish stance is unwarranted. We’re listening to the hardliners. We need to be listening to the reformers in China. If we listen to the reformers, they really want to reform. They’re just having trouble with the Communist Party hardliners. So we need to meet them halfway.

And I looked at him and I said, that’s interesting. So we should allow them to steal like 150 billion of IP each year instead of 300. Should we let them just put half-a-million Uyghurs in concentration camps? Exactly how do we meet someone who doesn’t share any of our value system? How do we meet them halfway? And he got up from the table and he left. He hadn’t even eaten his salad. He doesn’t want to have the conversation.

The people that are throwing this money over there can’t have a dialectic about this situation because the facts are too difficult to ignore. You can have a Chinese propagandist tell you, oh, we’re growing. We’re the world’s second largest economy. You can’t ignore us. We certainly can, especially if their malign intentions are so acute that it could take us to the brink of a kinetic conflict, which I fear is where we are today.

Mr. Jekielek:
All this is also in the context of increasing what we call transnational repression, where we have anybody that’s connected with Uyghurs remotely in the U.S. or the Falun Gong practitioners or Hong Kongers. We have a Hong Konger that has a massive bounty on her head here in DC, for example. These actions are actually escalating. There doesn’t seem to be an attempt to placate on this side as much as there’s this huge outreach towards Wall Street.

Mr. Bass:
Yes. And it’s not just towards Wall Street. It’s really towards everyone. Again, we have allowed and allowed. Imagine if we had an army of lobbyists and influencers in with the Chinese Communist Party leadership, what we could achieve. They just don’t allow it, so it’s important to think about every single asymmetry we afford them.

I was in a room, around the time of Jackson Hole, with some of the Fed’s top folks and the top economists in our country. I was giving a speech. I said, before I get started, I would just love to see a show of hands of anyone here who has read any time in the last five years, the Director of National Intelligence’s threat assessment report to us. Not one hand went up, not one. So there is a huge disconnect between Wall Street, Washington, and the Chinese Communist Party.

Mr. Jekielek:
You’ve been an advocate of decoupling from China. And it seems like Xi Jinping and the Chinese Communist Party has been actually, in a sense, decoupling as well, but basically on its own terms. Right now, the connectivities between the Chinese economy and the U.S. economy are huge. And of course, huge amounts of imports are still coming through. How would this decoupling actually look? And the argument is that the impact could be very negative on the U.S. consumer at a time when inflation is very high. Would it be economically difficult?

Mr. Bass:
Yes. We import, call it 600 billion from China. Our total imports in the US are about 3.2 trillion, about 600 billion come from China. Our economy’s about 30 trillion. Is it the end of the world if we have to find alternate supply chain deliveries from China? It’s not the end of the world. that decoupling? Absolutely. 95% of the active pharmaceutical ingredients, the APIs for all antibiotics in the US are made in China. We’ve allowed that frog to boil over time. And now we’re in a very vulnerable situation.
Many of the rare earth metals are, as you know, about 98% of them are processed in China. And we saw the Chinese move on our additional chip restrictions by banning a couple of the most important rare earth minerals metals for us. So is it going to be difficult? Of course it is. But if you have an adversary that is marching down the road to war, you better figure it out quickly. And so is it difficult? Yes. Is it going to happen? Let’s just say organically. If China attacks Taiwan, all bets are off.

Jan, how long have we had to have corporate America realize that they need to move a large portion of their supply chains out of China? Probably since 2017 and certainly since 2020. So we’ve had a pretty long road to at least we’ve had a lead time to move, move out. For the people that haven’t moved out, that might end up, you know, losing a lot more or having a much more difficult time, I’m sorry, because the writing has been on the Great Wall since 2017, if you’ve been listening, reading the Xi Jinping speeches. So I think that that is something that’s vital and worth focusing on, worth talking about.

Mr. Jekielek:
Let’s say most people that I’ve spoken with are kind of enthusiastic supporters of the Wall Street engagement that’s been happening. Scott Bessent, you’ve been a huge supporter of his, in fact, for him getting the nomination, which he has now. What can we expect might be different from the past when it comes to the Treasury?

Mr. Bass:
Money does a lot of talking in D.C. When you look at Scott Bessent, one thing you realize is, A, he doesn’t need any more money. He doesn’t need to go raise money from the Chinese or the Saudis or anyone afterwards.
He is a pragmatist. He understands the plumbing of global capital flows better than anyone that was in the running by far. And he also has a gravitas amongst global central bankers that is important. He doesn’t have to earn it. He already has the world kind of mapped out and figured out.

When you ask, how is this going to change? We are not going to be taken advantage of the way we had been taken advantage of in the past. Scott, I believe will end up using the tip of the spear of our economic power. And we’re going to start acting like we are the number ones, the world’s number one economic power. We also need to know if you’ve listened to his growth plans, you realize we’re not going to be able to bring the national debt number down. We’re just going to have to grow the denominator. We’re going to have to get to 3% to 4% growth. We’re going to have to get below 3% inflation.

And we’re going to really energize our economy by unlocking that capitalistic spirit. The prior administration lockdowned many of these ideas in the interest of climate change and God knows what else. They were anti-competition. When you think about this Treasury vs. Yellen’s or Mnuchin’s Treasury, I would bet all my money on this one and forget about the other two. Because Scott is as talented as anyone has ever been in the position that he’s in.

Mr. Jekielek:
This Trump administration is inheriting, you know, an accelerating debt, right? And, you know, the debt payments become like an increasingly significant portion of the actual, you know, money that’s out there.
That’s one side. The other side is, you know, we have this Chinese economy, per what you’ve been saying, that’s about to implode, that’s kind of insinuated itself into kind of everything, the US economy for sure, but also all sorts of places, right? So the question is, this seems to be an incredibly volatile situation that this administration is inheriting. How do you view that?

Mr. Bass:
Yes, I agree. I think when you look at the time continuum of the United States and where we’ve had our best years in economic terms and financial terms, you have to go back to what makes this situation so unpredictable and so difficult to deal with prior to 2009, the Federal Reserve’s balance sheet in the United States had never hit a trillion dollars.

So think about this. 15 years ago, we had never approached, we had never broken a trillion dollars in Fed balance sheet creation. From 2009 to 2019, call it the financial crisis up until the Wuhan virus propagating itself around the world. In a very small window, 15 years, we took the Fed’s balance sheet from below one, below one, all the way to $9 trillion. We created $8 trillion of Fed balance sheets in 15 years.

The majority of it was created, 5 trillion was created in a less than
a 24 month period between 2020 and 2022. So we have huge imbalances. They went berserk. They clearly overcooked it. Thank God Joe Manchin is alive or we’d have another trillion-and-a-half or 2 trillion thrown into this.

So you have a scenario, Jan, where the macro forces acting on us and the rest of the world, we just blew it. We just pushed 40 to 50% dollar inflation to the world. And the world has a negative convexity to our push, meaning what we push them is only the beginning of what happens to them.

So if you look at the Middle Eastern economies surrounding, let’s just say Israel today, if you’re not a monarchy, you have hyperinflated your currency. It’s just gone, including Turkey. And if you look at the South American countries that struggle with populism, we just push the same inflation
to them because the way the world works is everything is priced in dollars. So if we create dollar-based inflation, that inflation affects the whole world. And you look at Japan. Japan’s 10-year bond is still at one-tenth of a percent.

You know why? They can’t move it so we push the inflation to them uh and what happens their currency depreciates 50%. That’s the relief valve, so it’s vital. We must focus on the Fed’s balance sheet, capital money creation, and the deficits. I think there is a focus in this new Trump as much as we can do on the cost cutting. So we have a cost cutting crew and we have a growth crew, and both of them need to be very successful. And I’m very enthusiastic about that.

Mr. Jekielek:
Kyle, you painted a picture here of basically a very fraught situation that kind of requires that the U.S. be successful. Where do you see the biggest challenges that need to be overcome here, or the key areas which need to be addressed in order to achieve this?

Mr. Bass:
Domestically, I think the roadmap that the Trump administration has starting January 20th is exactly what’s needed. I agree with the roadmap wholeheartedly and Scott Bessent’s vision of how the Treasury will act and Elon Musk’s vision on cost cutting. All of those things together create such a beautiful menagerie of growth and also fat cutting. We need to be leaner, meaner, and we need to show our true economic potential. With those people in charge, along with President Trump, we’re going to be able to achieve that.

The challenges that are global are the inflation we just pushed to the world is very destabilizing from a geopolitical perspective. Several countries around the world that are vital to their regions hyperinflated their currencies away to where now they’re struggling with just just operating on a day-to-day basis. It’s a real problem. China’s economic collapse is a problem where they were a positive force on global GDP growth. We know that they’re having an economic collapse.

Look at the Chinese bond market today. The Chinese 10-year is comfortably below 2%, around 1.75%. And the Chinese 30-year is below 2%. Think about that. Think about what the Chinese bond market is telling you that the Chinese Communist Party won’t tell you, telling you that China’s in a recession. So that’s an enormous, let’s just say, speed bump in the parlance of global economic growth, GDP growth, and what the U.S. has to do to overcome that growth.

But remember, it is vital to remember one thing. People vote with their feet and their money. The U.S. is 4% of the world’s population. We are 25% of global GDP and we are 46% of global capital markets. So we are the economic superpower of the world. And when the rest of the world falters and fumbles, some of those people will buy Bitcoin, which is why you see it above $106,000, because they can’t stand U.S. governance and values and everything that we’ve got going for us here. And the rest of them will keep investing, I think, in U.S. dollar denominated assets.

We still have the most innovative population of any population in the world. We have the best education system in the world. And we have the greatest rule of law and, I think, human rights perspective of almost anywhere in the world. So we kind of have it all going for us, Jan. And I think that we need to remind ourselves that we are in the position that we’re in and we need to do our best to move forward despite these global situations.

But you ask what the problems are. There’s a ground war in Europe between Russia and Ukraine that I don’t see an off ramp. If we think we’re just going to draw some arbitrary line and sign another Munich agreement, you and I both know how that will turn out. Israel, Iran, and Iran’s proxies, there’s no real off-ramp for that war at all. I think that is going to rage. And again, it’s going to rage because we’ve had these built-up animosities over time and long periods of prosperity have allowed both sides to, I guess, build armaments.

And now you have a scenario where Iran and its proxies have the gloves off. And again, I don’t see that stopping. And invariably, in the next few years during this administration, most likely, you’re going to see China take Taiwan. How do we react? Those are enormous geopolitical stumbling blocks to a beautiful growth story.

Mr. Jekielek:
These values of freedom and democracy are the best values for America to promote, and then live by example.

Mr. Bass:
Yes, I agree.

Mr. Jekielek:
Kyle Bass, it’s such a pleasure to have you on the show.

Mr. Bass:
It was great to be here, Jan.