Bass Fishing

The trees are drawing me near
I need to find out why
Those gentle voices I hear
Explain it all with a sigh
--Moody Blues

Always interesting to hear what Kyle Bass has to say. Some points from this recent interview.

Fed monetization of debt will result in inflation. 

The 'official' numbers grossly understate the extent to which purchasing power is declining. He provides an example of the average car 30 yrs ago which cost $13,000 then marked at less than $15,000 in the inflation basket today--even though the average price of a new car is about $40,000. How can this be? The trick of hedonic adjustments. Even though a new car buyer's bank account goes down by $40K, the CPI number account for only a fraction of the actual price.

The Fed will be unable to taper much. Short rates higher than 1% would break the system. This means more monetization (inflation) pending in attempts to keep the wheels on the wagon.

The field position of government and central banks makes it unlikely that they will be able to intervene as Paul Volcker did in the late 70s/early 80s to 'break the back' of big inflation. Radically raising interest rates (and therefore borrowing costs) to curb inflation today would bankrupt the federal government (debt payments skyrocket) in addition to rendering leveraged entities across the globe insolvent.

He's not a Bitcoin/crypto fan.

Instead, he especially likes the prospects of rural real estate, particularly as populations migrate to states such as Texas, Tennessee, and Florida that are positioning themselves as business and consumer friendly with less regulatory burden. He likes land as a 'hard asset' play better than gold due to real estate's functionality.

Lots of discussion about China. Bass has been outspoken on what he feels is China's irresponsible, aggressive agenda. He believes that the country's move toward a national digital currency bodes poorly for global trading partners. He thinks the US should outlaw trading in it. He also believes that Taiwan faces imminent threat, and that markets have not seriously discounted the possible of Taiwan asset appropriation by the Chinese (e.g., TSM). Suggests strategic supply chain risk as well.

He thinks that the Chinese real estate problem will remain largely contained to the mainland, and that the PBOC will print yuan to keep the local economy afloat. He did NOT discuss what that money printing might mean to the global system.

Bass believes that fiduciaries should be fired if they buy Chinese stocks for their clients--due to their unaudited, manipulated nature.

Although he admits that he is a 'tree hugger' and believes in global warming, Bass thinks that under-investment in hydrocarbons over the past few years (due to widespread virtue signaling behavior) may take oil and gas prices to levels that we've never seen--particularly if we have a cold winter. The transition to cleaner energy will take decades and requires a far more measured approach than climate change zealots have been pushing. 

Stock may be the best tool for average investors trying to weather inflationary periods. Bass's work suggest stocks keep up with about 85% of general price increases. Investors will still lose, but stocks mitigate the losses.

position in gold