#378 - Kyle Bass - Founder/CIO @ Hayman Capital Management, L.P. - Invest In America

Chris Powers: Kyle, welcome to the show. Thanks for joining me today. 

Kyle Bass: Glad to be here, Chris. 

Chris Powers: Fellow Horn Frog, I can't get away without asking you, how did you get into diving at TCU? You're the first diver I've ever met. 

Kyle Bass: Well, thanks. My mother was always trying to keep me out of trouble, which was a good thing. One summer, she knew I had two weeks between my job and school, and there was an Olympic diving camp at UT. UT always has a top 10 team, and all the Olympic coaches were there. So, she signed me up or asked me if I wanted to go. I went to UT for a two-week intensive camp. We did platform diving, trampoline, springboards. And what was fun about that is it's like the first time you ever played golf, imagine being taught by Tiger Woods' coach. You don't develop bad habits. Your learning curve is so much quicker. So it ended up working well. I wish I would have started sooner. I didn't start until I was 15 or 16 years old. 

Chris Powers: Is it dangerous? Is like the hardest thing that can happen to you a belly flop or can it get worse than that? 

Kyle Bass: Let's say the second worst pain I've ever felt in my life, and at the time it was the first worst pain, was diving in nationals. You know how sometimes you spin reverse and you jump forwards and spin backwards towards the board? I came out, looked back for the water, and I was too close to the board and broke both of my, all my fingers. But even worse, when that happened, it tore all of my fingernails off. And so I hit chlorinated water with no fingernails and broken fingers. I can tell you, that is certainly, certainly the most pain I had felt until that moment in my life. 

Chris Powers: Alright, I just had to get that out of the way. Alright, let's talk about the Eastern German shipyard, your first short sell. 

Kyle Bass: Wow, you've done some work. 

Chris Powers: Yeah. I came prepared. How did this thing come to be? 

Kyle Bass: When I came out of TCU, you probably know that these Wall Street firms don't really look to hire undergrads, especially into their capital markets and brokerage groups. You typically come from investment banking or you come from, after business school, you come from a job. What I wanted to do was become, at the time, a retail stockbroker. I interviewed with every firm there was to an interview with, and finally, Prudential Securities gave me a job. I probably had 30 people tell me no before one told me yes. It was really demoralizing, but at the same time, they finally told me yes. I had never earned any money in my life. Here's a fun story that I've never told before. The manager said, I really like your tenacity and your drive and what you want to achieve here. He says, how much do I have to pay you? I said, what do you mean? He says, well, what are your monthly expenses? So I, being the person I was back then, went home, opened up a spreadsheet, and I said, okay, this is my car payment, this is my apartment lease, this is my insurance, this is my food, and it came out to be exactly $17,000 a year. I went back to him and showed him the spreadsheet. I said, $17,000 a year. He goes, done. So my first salary was $17,000 a year, and it did cover my expenses. It didn't leave much for anything else, but I was working six days a week, sometimes seven. Anyway, so long story short, I saved up some money, and I worked there for a quick call it 18 months, and I figured out very quickly that I wanted to be more in the middle markets. I wanted to work with hedge funds or professional investors on reorg spin-off special situations. I was a student of the markets and just wanted to- I didn't want to be cutting dividend checks to grandma and grandpa for the rest of my life. And so Bear Stearns hired me and kind of the world was my oyster. So the way Bear Stearns worked, they're very entrepreneurial. There were no geographic boundaries to your ability to set up relationships and establish them with people that were transacting. So, I saved up $3,000, which at the time was saving up real money, and bought a plane ticket to Geneva, Switzerland, for the very first MAR hedge fund conference. I met one of the institutional investors’ top shipping analyst there. He was a German guy based in Frankfurt. We were working together on a couple of things and literally started working on Bremer Vulkan then. And that was back, as you know, the wall fell in ’89. I graduated in ’92. This was probably ’94, ’95. So the integration of Eastern German companies and Western German companies was just starting to happen. And that was one where we were fairly certain that the majority of the capital that was going into this company was being spent on second and third homes, hookers, houses, boats. Like whatever these guys were spending it on, it certainly wasn't going into the company. And so it was both a blessing and a curse because when you short sell something and it's a fraud, the worst thing that can happen for you is like the first time you go into a casino, the worst thing that can happen to you is you win big. And this one never hurt. It went from- this was back when- this was pre-euro, this was pre-’99. Went from 120 D marks to 100, to 80, to 60, to the first day of my honeymoon in Australia, I opened up the Australian Financial Times, and there were the doors of Bremer Vulkan being shuttered and padlocked. So I thought certainly this is going to be easy. 

Chris Powers: Do you think you have to have more conviction to short sell something or go long something? 

Kyle Bass: Oh, certainly. Certainly. I mean, on the short side, your losses are endless. I mean, you could lose more than 100% of the money you put in the account. So that's a real problem. There’s a negative asymmetry to being against something. You also have to have a certain temperament. You also have to size these positions properly. You have to do all of these things that are very different than investing in companies that you like. 

Chris Powers: Okay, real quick. So you go to this conference. You're young. You meet some folks that have some information on this shipyard. One, how did you know that they were buying hookers and planes and everything? Was that something you read? Did you meet the executives? How do you actually find that out? 

Kyle Bass: I had flown to Germany. I had done on-site investigations. We had done analysis of their income statement and balance sheet. It was fairly obvious that it was happening. So I just think that that kind of depth of work is what's needed in all of your investments, truthfully. Very few people do it. Yeah, it was a truly remarkable scenario. It also helped that institutional investors’ number one shipping analyst in the world was the person working on this with me. That was an industry I was not fully versed in on how they account for things and how to look at things. So, yeah, it was a great first foray into short selling. 

Chris Powers: Okay, well, let's talk about the one I think you're most notable for. It's how I knew of you. I'm good buddies with your good buddy over here in Fort Worth, Mark Hart. And let's just talk about, I asked him when I had him on the podcast what life was like for him, but I would imagine while you were coming up with this thesis, the housing market was the greatest it's ever been. I mean, you were probably- if anybody's watched the Big Short, you would have had to look like a total kind of buffoon to have an idea that it's going to go down. So like when did you start having this idea? 

Kyle Bass: I was on the line with a good friend of mine named Alan Fournier. Alan was David Tepper's number one right-hand analyst. And Alan and I were trying to really, if you remember, this is call it January, February, March of 2006. So things were really going well. Everything was working. A lot of companies were being bought out. Almost anyone, any sponsor could arrange a term loan B and buy a company with it. So we had a scenario where we believed that we needed somewhere in the portfolio, we were long Asia, we were long America, and we wanted somewhere in the portfolio where we could be short to offset how much we were long. And we were trying to isolate the area of the Rust Belt, so the upper Mississippi River Delta, where now JD Vance is famous for hillbilly elegy about this, but we allowed China to send the WTO 2002, and by 2006, we'd already lost like three and a half million jobs, and it was all from our old Rust Belt. We had exported all of those manufacturing jobs to China. So we already actually had home price declines and joblessness in that area of our country. And so, what we were trying to find is companies or securitizations that had geographic specificity in the Rust Belt. But that eureka moment happened or the epiphany happened when we were on the phone. We were on the phone with the Royal Bank of Scotland mortgage analyst and we were trying to determine which mortgage securitizations had the highest concentration of mortgage loans in that area because we already saw job losses and home price declines, and so we knew those securitizations were going to be in more trouble. And we were talking about home price appreciation and what was modeled into his models and how much of the securitization could actually go bad before anyone lost any money. There was a moment where I said, well, what if home prices don't go up 5% or 6%? What if they just stay flat? He said, nationwide? I said, yeah. He said, that's never happened. That'll never happen. I said, but what if it does? He said, oh, these trusts would lose 9%. And remember, we were only betting against the bottom 3% of the trust. And so that was the moment where we hung up the phone, and I said to Alan, I said, every bartender has three homes right now. All of these- there's going to be a moment where housing at least flattens out. And if it flattens out, none of these machines that have been built can withstand even a flattening, much less a decline. And so that was the moment where that light bulb went off. And it just took the due diligence that you had to do to be talking with analysts and try to understand how they're modeling things. No one had a zero HPA scenario modeled in any Wall Street model until October 2006. And I think we had something to do with getting it put in there. UBS was the first firm to model a zero or a flat home-price appreciation number. 

Chris Powers: Okay, so you get off that call and you guys look at each other and say we have something here. What did the next- like how long until you actually put your first dollar to work shorting the market? How long did you spend kind of flushing out the idea? 

Kyle Bass: Yeah, so my guess, that call was probably had January, February, March, somewhere in there in ’06. And we launched our first vehicle in July. So back then, you didn't have the ability to really search these prospectuses. And the prospectuses were like Bibles of each one of these securitizations. They were typically about a billion dollars each if you think about how large each securitization was, and the average loan size in these things, depending upon where they were in the country, a couple of hundred thousand bucks a piece. So, there were a lot of loans in there, and you had to, excuse me, you had to read, I had to really literally read through a number of these securitizations, which was like watching paint dry. But I wanted to understand exactly how they worked. I wanted to know how the excess spread built equity. I wanted to know who put them together, who held the risk, who didn't hold the risk. That took a while. It took a couple of months to really figure that out. My wife thought I was just an awesomely fun person for a few months. 

Chris Powers: Did the collapse happen as quickly as you thought, or was it longer than you thought, or did it happen just as you saw it? 

Kyle Bass: It happened just as we expected, which again was not great for what happened next. But basically, on the 23rd day of every month is the day that all of that data from those securitizations gets uploaded and gets released. And so, you can see on the 23rd of every month how many payments, so early payment defaults, CPDs, are when, imagine if you took out a mortgage, Chris, and you never paid your first mortgage payment. Like you just didn't, you just took a mortgage and- okay, those numbers were skyrocketing in the back half of ’06, early payment defaults. And then you saw 30, 60, 90 days delinquent buckets and you saw foreclosures. And I tell you that the slopes of the ’06, ’07 vintages were parabolas compared to linear slopes of the securitizations in the past. So, when we raised the money that we raised together and then the portfolios that we managed separately, we couldn't wait another day. You can ask Mark, when one investor said, why is your launch date going to be, I can't remember the exact day, but call it October 17th. And I said, because I can't let another 23rd go by because this whole thing could be over when people figure out that it looks like it's over. And so, we said that to investors, and we were right. Because by the way, the numbers, you didn't have to have an imagination. It was happening. People just weren't paying attention. They didn't want to believe it. They thought you could pull the early payment default loans out and stick them back on the lenders and drop some loans in there that work. I mean, the things that we heard, again, you didn't have to have an imagination. It was all right in front of you. 

Chris Powers: And does that still exist today with all the technology that we have today where something could be happening in real time and nobody's paying attention? Or is there a lot more kind of guardrails and tech and sophistication that would say alarm bells are going off? 

Kyle Bass: It's more ideological. I mean, look, there's a ground war in Europe between Russia and Ukraine. There is a war between Israel and Iran and its proxies. And there's certainly going to be a China-Taiwan war at some point in time in the next couple of years. Xi Jinping's been telling you this since 2017. There are still people, there are still institutional investors with billions of dollars invested in China. They might just enjoy lighting their money on fire. I don't know. It is obvious what's going to happen. And they just don't want to pay attention. So the answer is yes. There's like the obvious 800 pound gorilla right in front of us. 

Chris Powers: Oh man, you just got to- you just went into the deep end. Really quick, and then I'm going to ask you, I was going to ask you about China and Taiwan. You were at Bear Stearns, which was the epitome of like the downfall of this, yet you made one of the best bets. So, was the rest of the firm just not listening to you and they were doing- like, how'd you have the biggest winner at the firm and also the whole firm collapse at the same time? 

Kyle Bass: Yeah. So when you go back and you look at the archives, you'll see that, first of all, my fund’s prime brokerage account was at Bear Stearns. The partners there were partners of mine. They're all friends of mine. And so, I knew Bear Stearns' balance sheet was levered roughly 25 times to their mortgage book, and Lehman's balance sheet was levered 35 times to their mortgage book. And so, once we got these positions on, in November of 2006, I went to New York, and the head of risk for the firm invited me in. It was a guy named Bobby Steinberg, invited me in, and he had everyone from risk, everyone from the desk in a standing room only room, and I explained to them what I saw happening. And after an hour and a half, we're walking out, and Bobby put his arm around me and he said, Kyle, that's a very compelling presentation, and God, do we hope you're wrong. Just think about that. And I said, guys, if I'm even half right, you need to right size your balance sheet right now, right this minute. And they were like deer in headlights. Again, they didn't want to believe that this could be true because the concentric circles of cause and effect were so negative on their lives that they thought it just couldn't possibly be true. So fast forward, Bear Fails, Jimmy Cayne, who at the time, as you know, was the CEO, Ace Greenberg was the chairman, and Ace and I were friends. And when I was there, I saw Ace, even when I was there at Bobby Steinberg. And Jimmy Cayne got interviewed, I can't remember, by Fortune or Forbes or something. And he said, three things caused the demise of Bear Stearns, John Paulson, Kyle Bass, and Goldman Sachs. And so of course, I got subpoenas one through three to go to the SEC and explain how it wasn't our fault. So that was always a joy. But I called Ace when I saw Jimmy say that. And I said, Ace, I came to you to explain to you what I was doing. And I said, I didn't do that for any other firm on the street. The only reason I did it is because I love you guys and all of you are my friends. And he paused and he said, Kyle, Jimmy smokes too much marijuana. He said, we pay him a lot of money to do what he does, and he just missed it. And that was that. 

Chris Powers: What were they accusing you of? Like bringing the market down by these allegations? 

Kyle Bass: They literally think we conspired to somehow wreck their balance. I mean, again, when people's lives fall apart, there has to be something to blame. It can't be themselves. So, they go to play the blame game, and yeah, it was awful. And the SEC was still trying to figure out what the hell was going on. The Fed obviously didn't see it. And so, the regulatory regulators didn't see it. Now they were caught like deer in headlights. So, a week before Lehman went down, I got my second subpoena to come into the New York office and explain my positions in Lehman. And I went in and I said, well, do you guys know how CDS works? Like, do you understand how the levered balance sheet works and what one year CDS means to your levered balance sheet? And they handed me a dry erase marker and I drew it up on the board. I gave them literally a CDS 101 class, again, standing room only, in the SEC. And I said, you realize, so at the time, one week before Lehman went down, Lehman's one-year CDS was trading 750. I said, when you have a 35 times levered balance sheet, your one-year CDS is at 750, I said, you got about a week. And the head of the situation like was aghast. He said, what does that mean? I said, that has about a week, like it's finished. Like you understand how all this works, right? And literally a week later is when it went down. 

Chris Powers: Okay, what's it like to, when the whole world is melting down and you're kind of like I am making the biggest win of my career, you were young... 

Kyle Bass: It was awful.

Chris Powers: It's still awful?

Kyle Bass: It's awful. Look, because every friend you have and even the investors that had invested with us, they were very happy they invested with us, but the rest of their portfolio was getting decimated. So no one was happy. And truthfully, I've never seen a monument erected to a short seller. I mean, you're always kind of the bad guy. And so it's important to note that even though all we were doing was playing fantasy football, we were in the, not the cash market, we were in the synthetics market, and we were playing fantasy football. We were just saying, hey, that guy right there is not going to do well, and here's why. And that guy's not going to do well. We had nothing to do with the cash market. 

Chris Powers: I'm pretty sure I had a TCU professor, Mr. Lipscomb, that was either with you or he... one of them. But I remember him telling me about this as a young guy. 

Kyle Bass: He was my advisor. He was the best. Joe Lipscomb is the best. 

Chris Powers: He's the best. Real quick on, you made this comment, like they didn't want to believe it. And I can't remember where I was doing some research on you, but I wanted to ask you the question, like how do you actually hire a contrarian, that's what you do, or how do you know you're talking to someone who's a true contrarian or can really see the world differently when everybody else is screaming yes and the answer's no? Like how do you know you've spotted one? 

Kyle Bass: I don't know, I just- look, there are plenty of times where I'm with everyone. If you're a contrarian for contrarian's sake, it's almost like if you take that position and just are swimming upstream your whole life, you're going to get tired. You get tired pretty fast. And so I'm not a contrarian for contrarian's sake. I was just in a meeting yesterday with a well-known dignitary of the world, and I was with him all morning, and he was explaining to me that the tariffs that we are arbitrarily and capriciously, his words, levying on our closest allies Canada and Mexico were going to be extremely problematic and that it was not well thought through or reasoned and that it was going to cause irreparable harm. And there were 20 people sitting around a round table, and everybody just stayed quiet. And I said, I raised my hand. I said, you know what, sir, I don't think you're looking at this properly. And since Operation Lone Star began, we have, the state of Texas has interdicted 350 million lethal doses of fentanyl since we began. That's enough to kill every man, woman, and child in the United States. Last year in Canada alone, we seized 43 pounds of fentanyl. That will kill 10 million Americans. So these tariffs are about one thing and one thing only, shutting the border down and stopping the illegal fentanyl drug traffic coming in from both Mexico and Canada. And if Mexico and Canada know what's good for them, and they certainly do, they're going to comply with our demands for policing the border and stopping the drug trade. I said I applaud President Trump for doing so, and he's doing so thoughtfully, and he's doing it with a big stick. But guess what? Nothing anyone else has done has helped. We had 115,000 people die from opioid overdoses last year alone, 115,000. But it's not necessarily contrarian. It's a view that is well-researched. It's a view that is misunderstood. And I believe that people get Trump's Derangement Syndrome or they decide on their own that it's just a horrible idea, but they may not be paying attention to every single one of the moves on the chessboard. So, I bring that up because there were 19 people in there shaking their heads. And I'm like, you guys are smart people. How can you agree with this? So, it's kind of- things like that. I just think you have to be willing to speak your mind, which sometimes is contrarian and sometimes isn't. But you also better be correct. 

Chris Powers: Yep. And sometimes, it's kind of where I was going on some of that timing is a lot of times it's not whether you're correct or not, it's the timing of when you're correct. What did I say, the difference between being wrong and early is indiscernible. 

Kyle Bass: Yeah, well, I have another way of saying it and put it into Wall Street parlance. You know what the definition of a long-term trade is? 

Chris Powers: What? 

Kyle Bass: A short-term trade that didn't work out. 

Chris Powers: You said China and Taiwan is an inevitable outcome if you just listen to what Xi Jinping has been saying. That's, I guess one, like how much should the average American person care about that? Going back to things that might not seem important, it's like you hear it so often and it hasn't really happened yet. Like, is it a big deal or on the magnitude of big deal to small deal, how big a deal is this? 

Kyle Bass: I mean, if you read, let me ask you something, Chris, you're well read. Have you read or ever read the Director of National Intelligence in the US oversees 16 intelligence agencies, 16 intelligence gathering organizations. Every year, they compile a report entitled the DNI Threat Assessment to Congress. So, they compile a classified version in February, and they release a declassified version in March. And they've been doing it for five, six years now. And whether I'm at the Jackson Hole Fed Conference or whether I'm at a big Wall Street conference in New York, I ask the crowd before I start talking, I said, how many of you read that report? And I mean, maybe one or two hands out of a thousand goes up. And it's vital because that's the sum total of all of our collective intelligence, and for five, six years in a row, it says unambiguously that China is the largest threat to US national security period. And then they go in and they explain exactly why and how, and they don't mince words. And so, when I think about our relationship with China was predicated on a hope, a hope that we could teach them that capitalism and rule of law and Western values, all of those things could really help propel the acceleration of the poor to the middle class, middle class up and really take China out of the doldrums. And so, we made that bet. We allowed them to send the WTO early in 2002. We've allowed them to do so many things that didn't fit the codified rules at the time. And it's turned out to be a horrible bet because they have never lived up to one agreement they've ever signed. They have abrogated filed treaties with the UN, and we just let them continue on because they are world's second largest economy and we have to do business with them is the narrative. Imagine a world where China and Russia have a limitless partnership. Oh, that world's today because they've not only publicly proclaimed it, they have ratified that several times. Russia and Iran have a special relationship. Iran, North Korea and China are all together. All of the adversarial, autocratic, crazy men are working together. So when you say, if we go sideways with China, what happens? Well, 95% of our antibiotics are still made in Wuhan. Kind of hard to believe, but true. They control 100% of the market for synthetic graphite, for rare earth metals. It'll be difficult for us, but is it going to be the end of the world? No, it won't be the end of the world. It's going to be difficult for the average American. 

Chris Powers: Okay, so dumb question, what's the deal that they're making with Iran and Russia? It's like hey, we're both bad guys or whatever you want to call it. Let's just be bad together. Like what do they gain by pairing up that they're not doing with America? 

Kyle Bass: They're strange bedfellows, number one, but at the same time, while their goals are different independently, collectively, their goals are to disrupt and dishevel and displace US hegemony and global primacy. I mean, China's stated goal has been global primacy at any cost, and so they are happy to use every asymmetric advantage that we afford them against us. And one day we're going to realize that they are a mortal enemy and that we're going to fully decouple. I believe that will certainly happen. 

Chris Powers: In your lifetime? 

Kyle Bass: Oh for sure. I think in the next five years or less. 

Chris Powers: Okay. Well then that asks my next question then. I would imagine that Trump's obviously fully aware of this. I think the first step he took that at least the common guy like me was aware of is like he went to the Panama Canal and said you're no longer controlling that; we're taking it back. How's he going to use the next four years of his presidency? Does he want to make the relationship better? I'm assuming he doesn't want- I don't even know how to ask this, but like how's he going to have a successful presidency with China? What would success look like? Maybe that's... 

Kyle Bass: Look, this is my own opinion, but my opinion on what I see out there so far is he wants to make a deal. He wants to make a deal with Russia to stop fighting. He wants to make a deal with China to stop their belligerence and stop the unrestricted flow of fentanyl precursors to Mexico and Canada, killing 115,000 Americans every year. Trump's a deal man. He wants to do a deal. I've never spoken with him about this, but I believe that, yeah, I think doing a deal would be a success for him. 

Chris Powers: But what's the deal? 

Kyle Bass: The deal is have some of their belligerent behavior stop. Have them stop lying, cheating, and stealing their way through our technology sector. Have them to stop their militaristic belligerence in the South China Sea, as that relates to the Philippines, Vietnam, and Taiwan. I think it also means that, I guess if you think about it, it's a virtual bury the hatchet and let's just get along. I think that would be, in his mind, that would be the win. Think about the irony of today, we're doing this podcast February 12th, 2025. Today, we have the US delegation. We have general Kellogg. We've got secretary Rubio. We've got a number of people in Munich looking to do a- enter into some sort of peace deal or try to get Russia and Ukraine to enter sort of peace deal. The irony, like the irony is so thick that they're in Munich. Just remember the Munich agreement that was signed between the Allies and Hitler that was lauded as the greatest peace agreement of all time. It was going to avert a great war. Everything was great. It was going to be settled. And six months later, what did Hitler do? Kept going. He swore he wasn't going to attack Czechoslovakia anymore. Guess what? He regrouped and he went. So the fact that they're hoping to get another peace agreement in Munich, I just wish they chose a different city, number one, because the first one didn't go so well. Second of all, I just don't understand these other- I don't understand the off-ramps. There is no off-ramp for Russia, Ukraine. What are we going to do? Draw territorial lines on the advances and just call it even? I mean, what we've learned throughout history, Chris, is that you cannot appease madmen. You can't. Some of these things are inevitable. And I believe Putin's a madman. I believe Xi's a madman. I believe certainly the Ayatollah is a madman. And so is Rocket Man in Korea. They're all madmen, and they're all working together to disrupt the Western values, the Western way of life. And I think, unfortunately, I don't know, have you read the book, The Fourth Turning? Did you and Mark talk about this? 

Chris Powers: It's Mark's like number one book he had me read a while ago. Yeah, we're living like in the- it is by the word, we're in it. 

Kyle Bass: We just had, I was just in Normandy for the 80th anniversary of D-Day. We are 80 years in, we are exactly in the fourth. It's been a long period of pretty significant prosperity. Now, we have central banks and governments completely outspending their incomes, and we've got global inflation, we've got global instability, and the architecture of the financial system in the Middle East and Asia has never been worse. So, you're not going to have some kind of global kumbaya when you see that Lebanon hyperinflated post-COVID. Pakistan, Iran, everything's falling apart there. So, for those people that believe we can just agree to stop fighting and go back to life, there's no architecture there for life, either financially or physically. A lot of these places have been completely ruined. 

Chris Powers: We asked China to stop doing all this stuff. What do they get for stopping? Like we'll just be your friend, and we shake hands? Or like what's the give? If they're willing to stop doing all these things that we think are bad, what are we giving them if they do it? 

Kyle Bass: Oh, I mean, look, the world was doing pretty well. 2004, ’05, ’06, the world was actually doing pretty well, albeit with a little inflation 2017, 2018, 2019. And look, China wasn't that belligerent back then. I guess it was starting in 2017, but that's really when they begin to kind of raise their ugly head at the time. But I think you have a world where global GDP was growing 3.5% and the world was looking pretty good and there weren't any great conflicts. And now all of a sudden, you have a scenario where the Fed has taken its balance sheet. In 2008, the Fed's balance sheet was sub $1 trillion. And by 2019, it had hit $4.5 trillion. And by 2022, it got to $9 trillion. So it went from one trillion to nine trillion in a time continuum of 2008 to 2022. That is a very short period of time when you look at our lifetimes or much less our lifetimes or history. So the destabilization of the global financial system was partly caused by China's lab leak and by our financial crisis and now China's financial crisis. So what do they get out of this now? They get potentially a world where they can thrive again if they were to stop being so authoritarian and so belligerent. By the way, that's just not going to happen. But there's a world out there that says if they were to become- if Xi Jinping would leave Taiwan alone, if he would stop ramming Philippine Coast Guard ships and the Second Thomas Shoal, maybe the security situation in Southeast Asia would be better. Maybe we could all figure out how to grow harmoniously once again. But unfortunately, and this is a conversation we had yesterday too, how do you enter into an in-depth, fully integrated trading system or economic system with an adversary or with an opponent or with a counterparty that doesn't share any of your values. It actually was doomed at the start. Unless they were willing to change. But in the end, they never changed. 

Chris Powers: Okay, real quick. They import most of their food and energy. I think they import like 90% of their energy or 90% of their food. So I guess the easy question is, if they get a little out of hand, don't you just cut off the energy and food supply and that takes care of itself in about 30 days? Or there's all these other on-ramps for them to get what they need to survive? 

Kyle Bass: I like the way you're thinking. This is my area of expertise. 

Chris Powers: You started it. I had the notes, but you got us here. So here we go. 

Kyle Bass: They import 13 million barrels of crude every day, 8.5 BCF gas every day in a world of like call it 53 B. So they are the largest crude oil importer. They're the largest LNG importer, and they import about 40% of their food every day. They have to pay dollars for all three of those things. All of those things are priced in dollars and trade in dollars. They've gone to Saudi Arabia, they've gone to Russia, they've tried to form this BRICS currency union, and it's like five garbage trucks backing into each other. Like nobody is ever going to put real reserve assets in with a bunch of authoritarian madmen. And we have a funny saying here at the firm, I said, India's publicly proclaimed that they will certainly never be a part of a BRICS currency union. And when Argentina hyperinflated, they said, we're in, we'll do whatever you want because you never met a born again Christian on a prom night. It's when the shit gets so deep that Jesus shows up. So Argentina found Jesus in the BRICS. So, if you take the I out and you add the A from Argentina, you reorder it, they're the crabs; they are just the bottom feeders. 

Chris Powers: Yep. Okay. So back to my question though, could they survive for very long if they got really out of hand without many imports coming in? They have to have thought about this.

Kyle Bass: I don't believe so. I think that, again, look back to when the Soviet Union fell. The Russians didn't wake up one day and say, you know what, Chris and Kyle, you guys are right. Democracy sounds like a better idea. So, we're just going to take that wall down and abandon communism and just become a democracy. What caused that to happen is we broke them. We intentionally broke them. We, along with our Middle Eastern partners, took crude oil to single digits or 10, 11 bucks, and that's 60% of Russia's GDP is Urals crude. We broke the Soviet Union, and that's how the wall came down. So when you think about what we can do now, the Biden administration, when they decided to sanction Russia, and I mean sanction in quotes, we sanctioned 10% of the oligarchs, there are 220 oligarchs, we sanctioned like 21 of them. We didn't touch the banks, we didn't touch energy. We let the blood flow continue to the tumor intentionally. We didn't touch Russia. And so in 2017, through the Trump administration, had Iran screwed to the ground, had them down to like 12 to 15 billion of working capital. And then what did Biden do? He released a hundred billion dollars to Iran. And then what do you think happened? October 7th happened, right after that. So we need to go back to using our strengths, and to your question, China needs to understand that we will in our first move, if they move on Taiwan, they need to know that what we will do is we will break out the real sanctions and we will shut them, we'll shut their access to dollars down. And if we do that, they don’t have much time. Their economy cannot withstand a shutdown of access to dollars. They will treat that as an act of war just like Putin has said he will. 

Chris Powers: Is there a logical answer to why we would give Iran a hundred billion dollars? 

Kyle Bass: There is not. There was a hope. John Kerry, Joe Biden, Anthony Blinken, I mean, just look at those three guys and look at their histories. Trump pulled out of the JCPOA, but he pulled out of it properly. Iran was not adhering to its side of the agreement. They were enriching uranium and we knew it. So it's important to note that when you have a deal with someone and they break the deal, the deal's off. And that's what Trump did. Biden couldn't wait to possibly have another JCPOA 2.0 or put the Iranian deal back together again. And I think something petty, and I don't mean to make someone's death sound trivial, but when Khashoggi died, he was a journalist, they sedated him too much or whatever happened, and they ended up cutting him up and the world was just aghast that the Saudis ended up killing one of their journalists. And it was at that time when we pivoted to Iran. We pivoted to a country that was yelling in the streets, death to America, that the IRGC and the Ayatollahs and the Mullahs publicly proclaim that they want to destroy the United States of America. Why we would pivot to them is beyond me unless we are just trying to avoid at all costs a nuclear confrontation. But as was proven in World War II, again, trying to appease a madman only brings a bigger fight later. And I think there was a period of time when we turned our back on the Saudis and decided to coddle the Iranians where the Saudis called us and said, hey, can we still trust you? It's a pretty interesting thing to say, can we still trust you? They called one of our ex-presidents and said, can we trust you? And he said his answer was, I hope so. So why they coddled Iran and released $100 billion is beyond me. But here we are with Iran on the brink of being able to make a nuclear weapon. And so hopefully Trump takes this as an opportunity to finish the job. 

Chris Powers: You said earlier, you said, if you were to invest in China, it's like just lighting money on fire or something to that degree. You take one of the worlds, and maybe you would agree with this, maybe you wouldn't smartest investors, Charlie Munger. And before he died, he was actually pretty pro China and he had a lot of money over there, relatively speaking. What did he see that you don't see? Or like if you were sit- if he was sitting here as a third guest, what would the conversation look like? He was pretty vocal about China towards the end there, but I tend to be on your side. I can't see why I would put a dollar over there. 

Kyle Bass: Yeah, I think that what China is so good at as a nation state is they find people in the United States to give special treatment to. They allow Ray Dalio to be the very first hedge fund license in China. They allow special cosmetic access to one person in America. They allow Blackstone or BlackRock to be the first US firm to go sell widely amongst the Chinese. You get guys like Steve Schwarzman and Ray Dalio and all of these people that are... When you look at what they're so good at is they take titans of business here and they make them richer. They give them special access. It's a genius maneuver because what happens is those people are also very influential with our politicians and our president and they become cheerleaders. And they say, China's the greatest thing that's ever happened to us. They really love us. We need to integrate more with them, we need to encourage them, we need to give them the bear hug and tell them how great it is to be in a great trade relationship that's productive with America. They are so good at that, and Munger was one of the people. Now look, we'll see, we'll see if Munger ever gets his money out, but let me give you some numbers. If you invested in China 17 years ago, China's GDP, the reported GDP is up 505% in the last 17 years. If I told you 17 years ago, Chris, I know that there's an economy in the world that's going to grow 500% in the next 17 years, they have capital markets, you can put your money in there, how much do you want to put in? You would say, I'm all in, I think. How much money did you make if you invested all of your money in the largest index in China, the Shenzhen Shanghai 300, 17 years ago? You've lost 35% of your money. The GDP's gone up 505% and you're down 35%. In America, our GDP is up in the last 17 years about 75% and you’re up 440% investing in the S&P 500. And you didn't have to discount Xi Jinping risk. You didn't have to discount the fact that no Chinese companies submit themselves to PCAOB covered audits. You don't have to submit yourself to the theft, the graft, everything that goes wrong over there, the absence of a rule of law, the absence of a respect for individual human rights. You don't have to discount any of those things. So there is no one on this earth that can tell me it's a good idea. And there's no one on this earth that can tell me it's a prudent fiduciary thing to do for you, your family, or whatever institution you invest for. In fact, I could win every single arbitration against you if you lose money in China. 

Chris Powers: Why do you think- then let's just move it over to the side a second, they're buying a lot of our land over here. And I believe, I could be wrong, did Trump say or was something said like we need to either buy it all back or take it all, like they don't need to own land here. What's going on? They've bought quite a bit of land. I'm assuming it's not because they ran out of land to buy in China. 

Kyle Bass: No, I mean, look, the flaw that we have that we need to rectify is, again, I mentioned earlier in the podcast, we afford them what I call battlefield asymmetries that we should not afford to them. Right now, it doesn't matter who you are in China. You can come to the US, you can buy 10,000 acres of farmland in Iowa, you can buy farmland in Texas, or you can buy 100,000 acres of land between our most active airbase and the border, which happened here in Texas. You can't believe that these things are happening. Do you know how, if you and I wanted to go buy land in China, do you know how successful we'd be? Zero. We would not. They don't allow it. So reciprocity is really important. Every single one of our internet search engines and social media companies is banned in China. And yet when TikTok gets banned here, or actually just got an order to be forcibly sold to an American company, they lose their mind and they say, you're infringing our First Amendment rights and this and that when every single one of ours is banned over there. They manipulate everything that we do. We are an open society, they are a closed society. They navigate, manipulate every single crack and crevice in our openness to take advantage of us. And so when you ask about them buying land, it's absolutely insane that they can buy land in size over here. And then what they do when you start being more vociferous or even start to draft legislation to prevent it, they get like local real estate agents that are Chinese, Chinese Americans or naturalized Chinese citizens and they say, you are just a racist. How can you tell a Chinese family in America that's become Americans they can't buy a house? They create false equivalencies and functional racism, and they throw it all at the screen, and you say- and they were trying, now they have you on your back feet. It's just insane what they do. We need to take a stance, we need to show leadership, and we need to just say we're going to engage in reciprocal tariffs, and we're going to engage in reciprocal actions with China. That would take the race card out of the equation and just say we'll permit whatever you permit. And we'll see how that goes. 

Chris Powers: And I'm guessing that would be, that would put it to bed pretty quickly because China...

Kyle Bass: You've heard about reciprocal tariffs. I mean, I think that's genius. I think reciprocal policy would be genius. And it has nothing to do with racism. It has everything to do with leveling a playing field. 

Chris Powers: Can we talk about Texas for a bit? 

Kyle Bass: Yeah, love to. 

Chris Powers: Okay. Well, one, you've got a big, I think one of the ways you're playing Texas is you're buying a ton of land. But maybe just start with like the high level, you're a macro guy. How do you see Texas from your perspective? What are some numbers or some things that you think about that make Texas interesting? 

Kyle Bass: Yeah, okay, so it's a great question. Look, Texas is the Tigris and Euphrates of growth in the entire world. There's no sovereign entity in the world growing anywhere near as fast as we are. We grew 7.5% last year. Think about this, the world grew, call it 2.3 last year and developed world grew 1.4. We grew 7.5. Nobody grew like that. And for 14 years running, we've had the largest number of population coming into our state. We are right now just behind France and the UK in GDP. We're at about 2.65 trillion of GDP. We'll pass France sometime this decade, and it's likely that we'll pass the UK sometime in the middle of next decade. So in the next 15 years, we will be the world's sixth largest economy or fifth largest economy, just our state. And when you look at the Texas Triangle, that grows even faster than the rest of the state. So Dallas-Fort Worth, Austin-San Antonio, Houston-Galveston, that triangle has a trillion nine of GDP. That thing is- I mean, we are growing so quickly. You live in Fort Worth. Fort Worth's the fastest growing city in America with more than a million people. We have a research university setting up shop in Fort Worth as we speak. We have- you go out to dinner anywhere in the state of Texas, and there is a buzz. There's a hum. There is such a sense of optimism and growth. And like I was at dinner with the governor last night in Austin, and the way that the governor brings together Texans, and he encourages us to work together to attract businesses here, and his pro-business stance is unparalleled in the rest of the country. In fact, some of the governors around the country that have run everyone out are doubling down on the instant replay. They're getting even more woke and doing even more stupid things. So, I think when you see our governor and what he's doing and how fast our state is growing and to realize, again, that we happen to be the growth engine of the United States but more importantly of the world. And so, when you think about the macro backdrop for what I'm doing, you have the influx of the people from the Northeast and the West Coast and those are high-tax, high-cost, mismanaged jurisdictions, and everyone is moving to the South and Southeast. So when you look at the states that are garnering the most population migration movements within America, it's Texas, it's Tennessee, it's South Carolina and Florida. It's everywhere in the South, Southeast and all of those places are pro-business. All those places are low or no tax. All of those places have room to expand. And that's the pattern and the pathway. So if you imagine that you have a non-linear movement within a very positive macro scenario, I just think that owning land and improvements within certain distances of major metropolitan statistical service areas, I think you'll stay ahead of inflation, and I think actually we'll do a lot better than that. So I think from a macro perspective, I don't want to say I don't know how I can lose because that's where I will lose, but I think it's a very good bet to make over the next decade or so, or longer. 

Chris Powers: And then you take, do you also think about all the on-shoring and everything that's going to be coming up through Mexico? Or is that overhyped, or is that baked into the equation? 

Kyle Bass: No, that's actually not overhyped. So you're about to see an announcement, I don't know, in the next week or two of a massive chip foundry happening in the center of our state that will get the whole world's attention, call it a $15 billion building. Samsung's already now turned theirs into a $40 billion project, in Taylor, $40 billion. Just think about it, that's one building. I don't know if you've seen this building. It's unbelievable. We are attracting some of the world's most interesting businesses. And so when you think about the manufacturing revolution in America, you're going to start reading a lot more about digital manufacturing. So one other thing that we're doing is we're partnering with the Defense Department and we are making loans to American defense tech companies. And we just made a loan to a company that can literally 3D print an aluminum alloyed Tomahawk cruise missile in one day. They just brought it... 

Chris Powers: Is that Rochefort? 

Kyle Bass: What's that?

Chris Powers: Is that Rochefort? 

Kyle Bass: Yeah, Rochefort. It's called Rochefort Ventures. Joe Rochefort was a famous crypto analyst, crypto analyst that broke Admiral Yamamoto's code in World War II and saved our aircraft carriers from being sunk. So that's why we aptly named that business Rochefort. But we just lent to this company, and it is the most amazing company I've seen in my 55 years of being alive. They can 3D print a Predator drone, 35 feet long. They 3D print a supercar, the whole chassis of the car, the engine, the brake mounts, and it's beating every track record around the world. And that kind of raw manufacturing talent just hasn't been seen here in so long. This company and others like it will revolutionize the US manufacturing base in the next decade. You're going to read a lot about digital manufacturing. And man, I'll tell you what, we are back. We are so back. It is just, my hair stands up on my neck when I talk about it. It's truly remarkable. 

Chris Powers: So my question then is give me just a sense of like how big is this defense tech movement? How many companies are there? Is the young talent of the country really starting to get into this and become kind of war fighters again? Like what's the movement happening here? 

Kyle Bass: Yeah, I don't know. Did you- you know Palantir, of course, and Alex Karp just wrote a book, and what he says in the book is that we need to encourage young tech entrepreneurs and young people in tech to work closer with the government and with the military, because clearly, that's what Palantir's doing, that's what Amdurall's doing, that's what this new company Divergent's doing. Because we must get back to the position we were in. And by the way, everyone says, oh, we're so far behind. China can make so many chips and we can't do this. We are back, and the Chinese cannot replicate what we're doing because this is an iterative process like Google is. The more you use it, the better it gets, and it's a learning process over time. You can't just steal it and employ it. So we're in such a good spot. Yes, I think when you look at defense tech, if you look at the tables for funding and venture capital, AI is number one, defense tech's number two by a large margin, meaning over number three. And one could say that a lot of AI is defense tech also. So it is the number one place that you're seeing venture capital money spent and our money in that business is senior secured lending with Defense Department as our partner. And the companies we're seeing would just blow your mind. I mean, we had a company at the ranch with some military leadership two weeks ago that has a drone that's actually working in the Ukraine. So it's a 11 foot drone. It has multiple sensors in there, so it doesn't use GPS. Why our stuff didn't work in the Ukraine is because Russia is very adept at shutting down the GPS networks. So anything that's GPS guided didn't work. So what do our brilliant, innovative technologists do here, we figure out how to fly something that doesn't use GPS, but it's really accurate. So this drone can fly for 12 hours at 20,000 feet. 12 hours at 20,000 feet, find targets, laze them, and finish them off. That just started happening in the last three weeks. So if we're led to innovate, we are the most innovative economy in the world. We just need to focus our attention. For a while, during the, call it, woke revolution, a lot of these people that were technologists, you probably remember at Google, when they heard they were working on a US Defense Department idea called the Butterfly somewhere, a bunch of the Google programmers just quit. They said, we're not doing it. I think the whole situation is changing for the better right now, and the young people that I'm seeing are so exciting and so innovative and so amazing that, yeah, we're in such a great spot. And it's what we do best. 

Chris Powers: Just at a high level, what would get a yes from you, yes, we'll give you a loan, and what's like a no? How do you guys determine who you'll be lending to, especially with the DOD as your partner? 

Kyle Bass: Yeah, so we have a basic formulary that you have to have revenues and customers and products. We're not a venture lender. We're not going to hope your technology works. We're going to get to a place where a lot of these companies spend, I mean, sometimes hundreds of millions of dollars of paid-in capital of equity to get them to a place where they actually make something that the market adopts and they start selling it. And even at that moment in time, they could still be losing money or they need more working capital because they're growing. That's perfectly the place where we plug in. And the other thing we can do is we can bring the might of the entire defense department to you and say you might be running some pilot programs, but how would you like to meet with the secretary of the army or Navy or the people in charge of war fighting so that we can cut through and break- We have to break the glass. A typical program of record in the Defense Department takes 10 years to materialize, 10 years. We need to stop that. We need to take our best innovators, break the glass, meet with the war fighters and allow them to interface directly once, of course, they're vetted for intelligence purposes. We need to make sure that everyone is who they say they are, and then we need to let these guys interact and develop and cut through the long lead times of the defense procurement system. 

Chris Powers: So what happens then to the Lockheed Martins of the world that are obviously, are they going to buy all these companies, or are they going to become less and less relevant? I think it's- I was eating at one of our probably favorite spots, Joe T's, the other day with a friend, and he works at Lockheed, been there a long time, he said, without a doubt, their biggest threat is Palantir, which I was just kind of shocked to hear about. You wouldn't think, more software and Lockheed's more hardware. But like, what does this whole industry look like in 10 or 15 years? 

Kyle Bass: Yeah, I think the Defense Primes, the Lockheeds, the Boeings, the Northrop Grumman's, the General Atomics, they all realize that they have to really innovate. They still have cost plus agreements. Boeing has a cost plus agreement with NASA, meaning once they find proper technology for NASA, they get to just add something on, and that's just the way it goes. But in the long run, they're all going to be forced to adapt. The most amazing thing that I see out there now is all of those players I just talked about, the defense primes, to say, are they going to buy these companies? They are equity owners in all of the interesting companies we run into. So they're keeping their functional relevancy through investment. They're keeping it through their defense prime relationships, and they realize that they need to move faster. And so I think they will innovate. I think that they have, those companies all have interesting technologies of their own, but the tip of the spear, the true innovation is going to happen in entrepreneur-led companies. 

Chris Powers: Okay, real quick, you obviously know all the leaders of Texas. You're influential in the private sector, the public sector. Do you have an opinion on this kind of class of folks that are starting to end up in Austin? You obviously have Elon and you have Joe Lonsdale and you met some of the people that kind of are around this crowd that seems to be building. They're close to the- they even office close to, whatever, our capitol building. Like when you think about it from that lens, what's building in Texas from an influence level? 

Kyle Bass: Yeah, I mean, look, part of the meeting last night was to talk about bringing venture capitalists and influencers here. We already have some of the big ones. We have Joe as an amazing investor and also an amazing patriot, but also someone who's so proud to be in Texas. He is just, he's a great, great man. And Elon is the same. And it's rumored that Zuckerberg's going to move Meta here. There are a lot of people voting with their feet and they're coming. And the question is, can we build up our research university capabilities big enough, fast enough, great enough to attract the best of the best? Because as we all know today, the best of the best are still at Stanford, MIT, Caltech. Those are the best of the best on the science side. Can Texas A&M and UT and TCU and these universities in our ecosystem, in our orbit, can they really raise their game? And the answer is yes. I think money and commitment, those two things are required to raise the game. But you're seeing these, look, Samsung opened where it opened because it needed two things. It needed access to engineers from UT. It needed access to water from the Alcoa plant. The new one that you're going to see open up will open up very close to a school, and it's because they need engineering talent. So it's happening. A&M is building five buildings in Fort Worth. They're committing a billion dollars. That first building is already built. They're moving biotech research, they're moving defense tech research, and they're moving their law school to downtown Fort Worth. That is unbelievably great for Fort Worth and the surrounding areas. What's happening in each of the big cities in Texas is mind-numbing. Austin is also just truly remarkable. The trouble Austin's going to have going forward is at the bottom, the southwest quadrant of the, or the quadrant, southwest third of the Texas Triangle has two things happening, severe drought and population influx. And so they're running out of water. So I think you're going to see the biggest bottleneck for Texas growth in the next 20 years will certainly be access to water. 

Chris Powers: Do we take Mark Zuckerberg at his word? Is he MAGA or is he just pandering? 

Kyle Bass: So, look, I don't know Mark, I've never met him, but I'll give you an opinion. I don't think he's a political flip-flopper. I know he appears to be. I think that when Elon challenged him to the MMA cage fight, Zuck started training and he started training MMA. He started training with men with testosterone. He started realizing that interfacing with people that used to be in the military and people that are MMA fighters and people that are very respectful of women, but they also have a little masculinity to them. And I think he started seeing the world through a different lens at that time. And I want to believe that he didn't just flip because Trump became president. If he moves to Texas, that is a pretty big tell that he's not just betting on the next four years. 

Chris Powers: All right, I got one more for you, it's deep. What do you want to be known for? 

Kyle Bass: Ha, that's a good one. David Brooks wrote this book that stuck with me forever, something he put in the book. He said, most people live their lives to build their resume. They just want, they want to build the best resume of them all, and in the end, what you should- what you really need to be known for is what gets put on your tombstone. So it's not your resume, it's your tombstone. And I have plenty of faults, I'm sure, like you do. We don't know each other that well. But I want to be known as a great partner, great father, and great citizen of this country and this state. I want to be known as someone who left it all out on the field. If I were to go tomorrow, I want- everyone would know that I certainly left it all out there. And I think living life that way is important. I still cliff dive, I still free dive, I still do all these things. Mark Hart still jiu-jitsu's every day. I think that keeping it interesting and fun and funny is so vital, I think, to existence today. And look, we all went through this crazy time in the last few years where we were like where is our country going? Like men playing in women's sports. There are trans whatever being shoved down our throat and we're pushing these people around and into embassies around the world. Like what- it was embarrassing for a while to be an American. And I think you feel it now and I feel it now. It sounds political, but it is the cabinet across the board and what's happening now where that pendulum just swung too far and it's now swinging back. Somewhere in the middle is good. I think that sense of optimism and enthusiasm and excitement in life is refreshing. I think we love getting out of bed these days and living life. So I don't know what you want to be known for. But I just think being a great friend, a great father, great partner, and an amazing patriot would be fine for me. 

Chris Powers: I love it. Kyle, I really appreciate your time today. It was great to get to know you better and this was awesome.