Kyle Bass, CIO of Hayman Capital, sits back down with Raoul Pal in order to finally reveal the opportunity that he called “the most asymmetric trade ever seen in my entire life.” Bass follows up on his earlier thoughts on China, and lays out the logic behind his thesis. He also delves into the relevant historical context, and discusses the risks to the financial system posed by an overvalued property market. Filmed on April 24, 2019 in New York.
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The Asymmetric Opportunity Revealed (w/ Kyle Bass & Raoul Pal)
For the full transcript visit: https://rvtv.io/2KFv5rA
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 1
, 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 conversationRAOUL PAL: That's my question, what's autonomy, but yeahKYLE 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