🔴 Kyle Bass Explains The Chinese Currency Crisis As An Investment Opportunity

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
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
Hong Kong or China or you’re looking at
listed market or the domestic market in
The majority of the capital flows through
Hong Kong
and when you look at Hong Kong as a
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
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
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
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
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
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
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
And that’s why they had to institute the peg.
So, the UK-Chinese agreement, this British
agreement 1984 stipulated or set forth the
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
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
There’s the pegged currency, then there’s the
anchor currency.
The anchor currency, in this case, is the
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
right, i.e. if the economies are working
together, if one grows, the other grows,
if one goes into decline, the other goes into
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
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
and now, unimportant again from an economic
perspective, right?
From a capital raising perspective, very
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
that flipped and now, we have a chart in
here, whereby you see the blue bars are
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
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
let’s say is the fiscally responsible one.
It’s the one that keeps inflation under
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
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
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
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
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
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
RAOUL PAL: So, of the Hong Kong money, the
banking system, is most of that debt in
Chinese debt.
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
in the world with an economic arrangement
with a country that is no longer
It is a recipe for disaster.
RAOUL PAL: So, everyone’s kind of have in
their head, yeah, heard this all before in
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
July 2nd was when the Thai baht broke. That
is not coincidental.
So, from July 2nd of ’97 to the beginning of
Hong Kong real estate dropped 70% in value.
So, they elected to take a multiyear
enormous, basically, deflation like
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,
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
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
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
I don’t fight these guys. So, Tudor and the
HKMA, the options they’ve got in this
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
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
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
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
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.
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
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
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
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
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
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
KYLE BASS: I’ll say that your premise has
been right for a few years, in the last few
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
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
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
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
given the macro economic instability of Hong
Kong. And what happens in a peg where 36
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
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
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
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
never to sell another one of those books
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
be a judicial review, i.e. if the crime that
is supposedly been committed by the
is a crime also in Hong Kong. So, let’s
choose murder, right? It’s a crime in both
If China calls the police station in Hong
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
there are 85,000 Americans that live in Hong
And we are very concerned about the new
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
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
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
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
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
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
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
You’re talking about the most levered
developed economy in the world with the most
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
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
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
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?
KYLE BASS: So, like, no one’s ever going to
tell you this is coming. No one.
RAOUL PAL: Before, it’s trading through.
RAOUL PAL: That’s interesting.
KYLE BASS: They’re still trading on rate
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
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.
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,
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
It actually pays you to switch to the other
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
KYLE BASS: And they don’t have any British
depositors. So, yeah, I’d be worried if I
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.
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
it’s likely to happen relatively soon.
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
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
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
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
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
but I think it’s an important one and a
fascinating one. So, let’s see how it plays

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