Kyle Bass Talks Tariffs and US Recession Odds
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Bloomberg Audio Studios. Podcasts. Radio. News. Let's talk about this all with Hayman Capital Management founder and CIO Kyle Bass joining us now. Kyle, it's great to have you with us. I know that last week on a competing network, you said that I think the tariffs are thoughtful. I think they will work. With that in mind, I would love to hear your thoughts on what you make of the tariff rollout and now this 90-day pause. Which adjectives would you use now?

I'd use the same adjectives. I mean, look, you've got 75 countries to reach out to us in two days, and they're all the countries that matter minus China on a trade perspective. So, you know, it takes 90 days to sit down with someone and iron out something that isn't simply a tariff number. There's tariffs, non-tariff barriers, there's currency, there's all kinds of

inputs to this equation. And so giving a 90-day reprieve while they hammer out trade deals is a good idea. Kyle, we have had a lot of big multinationals pulling their outlooks due to this uncertainty and then small Main Street businesses writing in en masse and saying it's just impossible to do business in this economy. Who are these tariffs good for? I mean,

It's more important to reset the trade relationships between the United States and the rest of the world. And I believe President Trump thinks that bilateral trade negotiations end up being better for the world's largest consumer, which is the United States. And so if we can get to a place where trade is more fair,

then I think we can get to a foundation where we can build, grow, or we can grow once again and grow from a much stronger foundation. These tariffs, these non-tariff barriers, the manipulation that's gone on against the United States for so long is no longer going to happen. And I think

Our trade relationship with China is the one that doesn't look to have any off ramps at this moment in time. But I can tell you that once all of these agreements get hammered out, the U.S. is going to be in a much better place. Well, Kyle, to that point, I know that you're focused on China. Do you see any chance of a de-escalation? I know that you said that there isn't a clear off ramp right now, but do you see any chance that things could cool down? Or do you think that this trade war specifically between the U.S. and China is just getting started here?

Yeah, I mean, it actually got started back when China sent the WTO and China's been at this trade war with the United States for its entire ascension, call it 20, 23 years. And so the U.S. has just figured out what China's malign intentions are. And we all know we've seen their militaristic belligerence in the second Thomas show on the Philippines. We've seen it.

surrounding Taiwan. We've listened to the rhetoric of Xi Jinping, and we are now in a place where we're going tit for tat on tariffs, where I think China's made a grave error here

As you know, we only export about $140 billion a year to China. We import, call it $450 billion from them. And so I think that if we're doing tit for tat on tariffs, then China loses because there is no functional equivalency in the amount of goods and services moving back and forth. So we'll see what happens here. But I think it looks like we're in a game of...

We can call it a Chinese standoff or we can call it a Mexican standoff. I don't see an off ramp here. Kyle, to the extent that you see escalation of this trade war with China in particular, you're looking at two whales in the ocean going at it. And you do have investors getting increasingly concerned about a weakening here of Chinese currency in order to boost their exports. How many tools does China have

really in order to fight the U.S. on this battle? Yeah, I mean, you heard Treasury Secretary Besant said they're playing a poker hand with a pair of twos. They've got a banking system that's three and a half times more levered than ours. And they've only been at banking roughly for 20 years, like real banking.

So they've got a system that's levered to real estate and real estate in China is down 30 to 50 percent, depending upon where you are. So they've got an insolvent banking system. They've got runaway unemployment amongst their youth. They've got another 12 million kids graduating their universities this year. And so you've got youth unemployment.

a banking system that's insolvent. You've got a real estate collapse. And so when you're asking me what tools China has, they've got a couple of places where they could really press us, right? One, believe it or not, we still have the majority of our active pharmaceutical ingredients for all antibiotics in the U.S. made in the city of Wuhan. Yeah, that's just a sad truth. And then

on the finishing side of synthetic graphite, on rare earth minerals. If you remember back in our trade spat in 2019, Xi Jinping made a visit to where they do the rare earth metals finishings. And we haven't seen Xi since April 7th. So, you know, we'll see. Yeah.

Well, we'll see what he does, but he can he can start withholding things like antibiotics and rare earth minerals. But this is something that our administration has thought through. Well, I want to talk to you as an investor now, too, because as I mentioned, of course, China has been signaling that it will gradually let the yuan weaken. And I'm curious how you're approaching that, whether you're seeing that as a trade and betting against the offshore yuan.

No, I think I'm not at the moment. But I would say that it is not under China's control. When you think about go back to the to the Asian financial crisis of 1997 and 98, it wasn't it wasn't Thailand's decision to let go. It was Thailand running out of reserves. And so when you look at

China and the and the offshore yuan in the end China's got to spend dollars to support that relationship and China needs a strong yuan they buy 13 million barrels of crude every day eight and a half bees of gas every day and they buy 40 percent of their food every day in dollars so if for some reason they have to let that relationship go in the yuan weekend as we saw it weekend two days ago to its weakest level ever

We'll see if that if that relationship holds and my view is that when you look at the differentials and interest rates and you look at China's bond market, the one thing that that can't be lying coming out of China is their bond market go where the look at the Chinese Chinese tenure. It's collapsed.

So their economy is in a very different place than ours. And that relationship between the yuan and the dollar and the Hong Kong dollar and the dollar, that's a tenuous relationship. And we'll see what happens. Hey, Kyle, just quickly, what do you think the most they can allow the yuan to weaken is? I mean, where's the point where they have to step in and can't allow any more slippage?

Yeah, I mean, it's just begun. All you've seen is a move from roughly 620 to 740 over a period of time. So typically, again, when countries run out of reserves, as you know, the currency flaps in the wind. So there's this concept of them, quote, controlling where it is, and then there's the uncontrollable moves. And what we saw in the Asian financial crisis, even with the largest player back then was South Korea,

We saw some pretty notable currency moves, and I think that's coming. And I just don't know if it's coming in the next month or so. But I'll tell you, the interest rate differentials, the business cycle differentials are going to dictate the movements in the currency. So we do expect-

the Chinese currency to weaken pretty materially against the dollar. Kyle, I want to talk about the tariffs that are still in place. Of course, we got the news about the 90-day pause on certain countries yesterday. But you take a look at what still stands. You have 25% on steel, aluminum autos, 25% on auto parts starting from May 3rd. And I want to bring this to your home state of Texas. I know that you're a Texas guy. And you think about Texas's economy. There's a lot of car dealerships. There's a lot of car

companies and of course a lot of energy there. I'm curious, you know, what you think the impact on Texas might be?

Yeah, I mean, in the near term, the impact is going to be slightly negative, right? But when you think about the carve outs, first of all, we import about $4.2 trillion a year as a country. Roughly 40% of those imports were already exempt from this new round of tariffs. You mentioned the 232 tariffs, right? Steel, aluminum, autos, auto parts, things like that.

But I think it's important to understand that those those 232 tariffs, Section 232 tariffs were put on by Trump in his in his last administration. And if you remember, Biden ran on on we're going to cancel those the tariffs. In the end, what happens is when someone like China, a state actor, can act uneconomically or non-economically,

and they can flood your market with steel or aluminum or synthetic graphite or anything like that. And why it's important is they can act for a longer period of time to put your businesses out of business. So they can take capacity utilization down enough to where they can literally

turn our steel industry off, turn our aluminum industry off. So those tariffs are necessary and those will live and they will live into the future and they may not be high enough. We must maintain domestic production of certain things from a national security perspective. And that's why those stand where they stand for autos.

It's just, you know, you see China building plants in Mexico and Canada, so basically to avoid the tariffs on their cars. And so our negotiations with Mexico and Canada are primarily on fentanyl, secondarily on Chinese transshipments. And we'll end up getting this right.

Kyle, even if you believe that the tariffs are ultimately necessary for the American economy, how much more pain do investors have to bear? Because you do still see the S&P 500 after yesterday's rally still down more than 7 percent this year. You saw the bond market whipsawing wildly just this week. How much more pain is there as this transition and this negotiation proceeds?

So, we need to separate a few things that you said. The bond market had a fit in the sell-off, and it was largely due to-- it wasn't a basis trade. It's the fixed floating swaps, and I know that gets into a world that a lot of people don't want to talk about. But it was very simply a regulatory trade that bond traders had on expecting

uh... thing except expecting banks abilities to buy treasuries to increase and then the the tariff mayhem showed up and and that had to unwind i think that a lot to do with the crazy move in the tenure so i think things are settling down but that you know as far stocks are concerned you've heard the president you've heard the treasury secretary say we have to make some difficult choices and we must reset our trade relationships for the rest of the world we also

narrow our fiscal deficit in the United States. And both of those things might be slightly recessionary. And if that's true, we might have to go through a brief recession in order to rebuild our foundation. And you say, how much longer can investors hold? You know, look, the market's not up and to the right.

you know, every year of every decade. And I think that this is a necessary resetting so that we can grow again in the future and grow more thoughtfully. Kyle, as an avowed free market capitalist, I care mostly about myself, right? So the 2017 Tax Cuts and Jobs Act, President Trump punched me in the gut with a massive punch.

tax raise, right? Because he takes out all of a sudden this state and local tax deduction cap that's been in place or puts in a cap after we had a state and local tax deduction for 104 years.

If I can get a discount now on my taxes because of Doge cuts or because of revenue on tariffs, I'll be happy. And you have said you think that Doge is going to cut $600 billion out of government costs and that we could raise $600 billion in revenue. Is that going to offset the tax increase that Trump handed me in 2017 somehow? No.

No, and look, let me let me begin by saying Matt I know you're out in things for yourself and that's I guess what you care about That the good news is is is you and I am Wall Street are not setting Trade policy for the world because if if all we did was open ourselves to unrestricted free trade We'd all be speaking Chinese tomorrow. We need to be thinking about national security in the long run on the tax side

You know, there are gonna be some tax breaks, but they're not gonna be for the top of the scale. It's gonna be focused more in the middle class. And as far as state and local deduction caps, I mean, it's interesting to see the migration in the United States. You live in a place that sounds like it has state and local taxes. One could say that the- - We all pay property taxes, right? Don't you in Texas?

Yeah, we do. We pay property tax. But when you think about high tax, high cost jurisdictions that some might say are mismanaged, you see the migration in the U.S. moving from the northeast and the west coast to the south, to Florida, Tennessee, Texas, South Carolina. And that's where major businesses and people are moving. And so I think that tax arbitrage or movement is going to continue for the next, call it 10 years to come. And I think you're seeing people vote with their feet.

And I do want to defend Matt a little bit. I know you care about more than just yourself, but people care about their pockets. In terms of the wealth of nations, right? Adam Smith, that's how capitalism works. Every man for himself. That's how it's supposed to work. Well, Kyle, with that in mind, I want to talk to you about you and your future because Bloomberg reported in January that the Trump administration was considering you for a post at either the Treasury Department or the Defense Department. And I'm really curious. Here we sit in April. Are you joining the administration?

I mean, I'm going to go no comment there. It's not worth talking about unless there's actually a deal on the table, and there certainly is no deal on the table. My biggest regret in life is that I've never formally served our country. And if there's a place where I can serve it and it can work out in my life as well, it's

then I'm always open. I've got open ears. Well, definitely come back if and when you do have a deal. But I also have another question, Kyle, for you about you and your portfolio. When you look at this market, how do you play this? What are the trades that you would put on right now?

I think that when the market's down 20, it's year to date, which was, I guess, a couple of days ago. I think it's an overreaction. But when I think about the coming GDP prints,

You're going to see a recessionary impulse. You're going to see a slight inflationary uptick on a couple of goods that ended up in the tariff melee. But I believe the slight recession impulse that we're going to see over the next six months will actually bring the general price level down. I don't think you're going to see a big inflationary move or stagflationary move.

I think six months from now, the market's going to be in a much better place. And that's with the caveat of if China doesn't attack Taiwan, if things in Iran don't get much worse, and if things in Russia, Ukraine don't get much worse, I think things are going to look better in the next six months. If China invades Taiwan, I think all bets are off. All right, Kyle, we've got to leave it there. You've been very generous with your time this morning. Really appreciate it. That is Hayman Capital's Kyle Bass.

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