Podcast Summary
Focusing on macroeconomic themes and theories for successful investing: Kyle Bass, a macro investor, gained success by focusing on housing market short in 2006, but ended up shorting mortgage bonds. The financial crisis of 2008 shifted his focus to macro investing, believing that macro drives sentiment and investing market-wide. He recently focuses on China's accounting, military, and central bank digital currency developments.
Learning from this episode of The Investor's Podcast is that Kyle Bass, the founder and principal of Heyman Capital Management, has had a successful career in investing by focusing on macroeconomic themes and theories. He started out trying to short the housing market in 2006, but ended up shorting mortgage bonds instead to hedge against being long in Asia. The financial crisis of 2008 then shifted his focus to macro investing as sovereigns took on the bad private assets, making it a logical process for him. Kyle believes that macro drives sentiment and investing market-wide, and that excess liquidity in the markets is what moves things. He has recently been focusing on China and its accounting protocols, military initiatives, and central bank digital currency development. Successful investors like Kyle and Stan Druckenmiller often have a high conviction bet or a concentrated position early on.
Jason Brett's fund profited from shorting mortgage bonds during the 2008 financial crisis despite high annual risk: Despite high annual risk, Jason Brett's fund saw potential for high returns by shorting mortgage bonds during the 2008 financial crisis. Today, they believe real estate prices will continue to rise due to low interest rates and high job openings, but caution against aggressive rate hikes.
During the financial crisis in 2008, Jason Brett's fund, Hema, had a significant position in shorting mortgage bonds, which had a negative carry of 1.5-2%. Despite the risk of losing 2% annually, they had a high conviction in their upside scenario, where they could make 80-100%. They also launched mortgage funds with implicit leverage of 10 times and a negative carry of 11%, presenting a high-risk, high-reward proposition to investors. The speakers discussed the similarities between the 2008 financial crisis and the current situation, but they do not believe we're in a bubble today due to the massive increase in liquidity in the system. They also believe that real estate prices will continue to rise over the next decade due to low interest rates and high job openings. However, they caution that if the Fed aggressively raises rates, it could lead to a flattened or inverted yield curve, posing challenges for the central bank.
Impact of Interest Rates and Inflation Metrics: Record-low interest rates make raising them significantly difficult, even a small percentage increase could cause financial distress, and chain weighted inflation metrics don't fully capture the decrease in purchasing power.
The current economic situation, with record-low interest rates, makes it challenging to raise rates significantly without causing financial distress for both the government and corporations. The speaker argues that the percentage change of rates is more important than the absolute change. Additionally, most debt is financed on the short end, meaning that even a small increase in interest rates could lead to a large increase in interest payments on the national debt, potentially causing economic collapse. Another point discussed was the difference between chain weighted and non-chain weighted inflation metrics. Chain weighting attempts to compare apples to apples by adjusting for changes in the quality and composition of goods over time. However, it's important to note that this method doesn't account for the actual decrease in purchasing power that occurs when prices rise. This discrepancy can have significant implications for investors and their discount rates.
Discussing real-life expenses vs. official inflation numbers: Central banks' money printing harms middle/lower classes, alternative assets like Bitcoin may face crackdown, real assets as inflation hedges
While official inflation numbers may not accurately reflect the true cost of living, it's essential to consider real-life expenses when evaluating economic conditions. The speakers in this discussion argue that central banks, like the Fed, are engaging in money printing to mitigate recessions, but the unintended consequences disproportionately harm the middle and lower classes with negative real returns. They also believe that governments may crack down on alternative assets like Bitcoin as inflation hedges, making traditional inflation hedges like real assets more appealing. Ultimately, it's crucial to be aware of the potential discrepancies between reported and actual inflation rates and adapt accordingly.
Investor discusses rural land acquisition and digital assets: Investor sees potential in rural land and digital assets like Bitcoin, NFTs for long-term gains, but cautions about private crypto. Macro trends like population movement impact investment demand.
The speaker, an investor, is actively investing in rural land acquisition for both personal financial gain and environmental reasons. He also holds private positions in companies dealing with Bitcoin, NFTs, and other digital assets. He believes in the long-term potential of blockchain and NFTs but is cautious about private crypto. The speaker also highlighted the trend of population movement towards low-tax states in the US, leading to significant demand for land in those areas. This discussion underscores the importance of understanding macroeconomic trends and their impact on various investment opportunities.
Investing in Rural Land vs Gold: Some investors prefer rural land over gold due to its tangible benefits, population demographic trends, and the potential for those selling crypto to invest. China's CBDC poses a risk to the rules-based order in the west.
While some investors are turning to alternative assets like gold in response to inflation, Todd Bebe sees value in rural land due to its tangible benefits and population demographic trends. Bebe believes that those selling crypto to buy real assets are more likely to invest in land rather than gold, as rural land offers physical and mental benefits that gold cannot. Additionally, China's development of a central bank digital currency (CBDC) poses a significant risk to the rules-based order in the west, as it would enable the Chinese government to export digital authoritarianism and potentially force individuals into using their currency for international trade.
China's CBDC could give them economic and geopolitical advantage: China's CBDC could potentially control transactions and cut off access to dollars, leading to a shift in global power dynamics and potential geopolitical risks, particularly regarding Taiwan.
The implementation of China's Central Bank Digital Currency (CBDC) could potentially give China an unprecedented economic and geopolitical advantage, allowing them to control transactions and potentially cut off access to dollars for individuals and corporations. This could lead to a shift in global power dynamics, particularly in relation to China's geopolitical risks, such as potential conflicts with Taiwan. Investors should be aware of this risk and consider how it could impact their investment strategies. Additionally, Xi Jinping's recent speeches indicate a stronger stance on Taiwan's reunification, which could increase the risk of conflict in the region. It is important for investors to stay informed and consider these geopolitical risks when making investment decisions.
China-Taiwan tensions escalate, posing national security risks for US: China's military preparations and rhetoric towards Taiwan could disrupt US semiconductor project completion, requiring alternative suppliers. Xi Jinping's actions towards Evergrande and the Chinese real estate market may be strategic to address population decline and high housing prices.
Tensions between China and Taiwan are escalating, with China making public displays of military preparations and increasing rhetoric. This poses a significant national security issue for the US, particularly with the ongoing construction of a new Taiwan Semiconductor fab in Arizona. The timing of a potential Chinese takeover of Taiwan could disrupt the completion of this project, leading to a duration mismatch and the need for alternative suppliers. Additionally, Xi Jinping's actions towards Evergrande and the Chinese real estate market could be intentional, as the high housing prices and population decline pose significant challenges for China's future.
Chinese Government Tackles Economic Challenges, Particularly in Real Estate: The Chinese government is implementing property taxes and supporting depositors to address real estate crunch, potentially causing economic slowdown and losses for developers, but minimizing global financial crisis risk.
The Chinese government, led by Xi Jinping, is taking aggressive measures to address economic issues, particularly in the real estate sector. The elimination of the one-child policy and the subsequent increase in allowed family size to three did not lead to the expected increase in births due to affordability issues. Real estate, a significant portion of China's economy, is experiencing a crunch, leading to defaults among developers like Evergrande. The Chinese government is introducing property taxes to curb speculation and bring down prices. These actions are expected to negatively impact the Chinese economy, potentially causing a slowdown in global GDP. However, the Chinese government is likely to support depositors, minimizing the risk of a global financial crisis. The Chinese property developers will face significant losses, and the Chinese banking system, which is three and a half times the size of its GDP, will need to print enough RMB to stabilize the situation.
Caution on Investing in Unaudited Chinese Stocks like Alibaba: Trey Lockerbie expresses concern over investing in Alibaba due to lack of Western audits, potential accounting complexities, and Xi Jinping risk, which could lead to job loss for investors as fiduciaries.
Stig Brodersen and Trey Lockerbie discussed the potential investment in Alibaba, with Trey expressing caution due to the lack of real Western audits and the Xi Jinping risk. He considers Alibaba's earnings, which come from markups of their private investment positions, as a house of cards, and as a fiduciary, he believes buying unaudited Chinese stocks could lead to job loss. An example of accounting issues was not explicitly discussed, but Trey mentioned the markups being run through the income statement, implying potential complexities and potential inaccuracies in the reported financials. Additionally, the podcast was sponsored by Public.com, offering a high yield cash account with 5.1% APY, and NerdWallet, a financial advice platform.
Transition away from fossil fuels could lead to supply shortages and price increases: The shift towards renewable energy sources may result in inflation or higher prices due to the world's heavy reliance on oil and limited investment in traditional energy sources
The lack of investment in traditional energy sources like oil and gas, driven by virtue signaling and a shift towards renewable energy, could lead to inflation or higher prices in food and other areas due to the inelastic demand for fossil fuels. This is because the world still relies heavily on oil, with over 1.2 billion cars and trucks on the road, and only around 30 million electric vehicles. The transition to renewable energy sources is a long-term process that requires significant investment and the development of better storage solutions. The mass exodus of funding in the hydrocarbon industry due to public market pressure has made it difficult for private equity to raise money in this sector. This could lead to supply shortages and price increases in the future. The speakers also touched upon the Ant Financial situation in Alibaba, highlighting the unique business practices in China that may not be acceptable in the West.
Growing Demand for Hydrocarbons and Its Impact on Prices: Despite the shift towards electric vehicles, the world's demand for hydrocarbons is inelastic and expected to continue growing. If production doesn't increase, there could be significant price hikes. Electric vehicles rely on natural gas and coal for electricity generation, potentially offsetting their environmental benefits.
The world's demand for hydrocarbons is inelastic and is expected to continue growing, despite the shift towards electric vehicles. The speaker believes that if production isn't increased to meet this demand, there could be significant price increases for hydrocarbons in the near future. Additionally, the production of electricity for electric vehicles relies heavily on natural gas and coal, which could offset the environmental benefits of the shift towards electric vehicles. The speaker also emphasizes the importance of an incrementalist approach to transitioning away from hydrocarbons and the challenges of flipping a switch overnight. The discussion also touched on the current state of the global energy grid and the role of countries like China in shaping the world's emissions profile.
Navigating Economic Uncertainty: Lessons from the Late '70s and Early '80s: Stay informed, stay flexible, and stay resilient during economic uncertainty. Learn from past stagflationary periods and consider alternative investment strategies to protect purchasing power.
We're entering a stagflationary period with rising inflation, negative real rates of return, and potential economic downturns. The Fed's efforts to taper and raise interest rates could lead to a recession, and the US should consider unconventional measures to maintain its global hegemony. Investors need to protect their purchasing power by staying informed and exploring alternative investment strategies. Despite the challenges, it's essential to remain hopeful and adapt to the changing economic landscape. As Kyle Bass emphasized, the late '70s and early '80s provide valuable lessons for navigating similar economic conditions today. Ultimately, it's crucial to stay informed, stay flexible, and stay resilient in the face of economic uncertainty.
