Hayman Capital Management CIO and founder Kyle Bass warns investors an economic bubble is about to pop and it won’t be pretty.
“What I see in Southeast Asia is a bubble. The whole bubble is going to pop and people are going to lose a lot of money. I think people should just be investing domestically.” Bass was speaking at a conference in New York sponsored by the Committee On The Present Danger, a foreign policy interest group that has turned its focus toward China.
Bass has been sounding alarms about China’s banking system and potential threat to investors. He said Chinese banks are over leveraged and face a financial collapse like the one that brought western banks to their knees in 2008. It’s one of the reasons he advises against investing in China right now.
“We've restructured our banks. Europe hasn't and China's about to. So when you look at the U.S., I just think we're in a much better position than anywhere else in the world to let's say weather any kind of global difficulties,” Bass said.
BNY Mellon Fixed Income CIO David Leduc said China is a market that people have been concerned about for a long time. “A lot of their policies particularly the growth oriented policies that they have employed in the past seem very unsustainable,” he said. But Leduc said China’s current stimulus program should be effective, in the short term, and he added, “We think they do have room in their current policy situation to continue to do more.” Leduc expects tax cuts in China, as part of that stimulus plan, will help ignite consumer demand with positive effects on the global economy.
Bass, pointing to China’s growing current account deficit, said China will need to borrow more money from foreigners to finance the stimulus necessary to fuel consumer demand. It’s a thesis supported by Morgan Stanley. The investment bank recently told clients that China, this year “... is expected to see its first annual current-account shortfall — 0.3% of GDP — since 1993. This time, however, the deficit may stick around. Due to the ongoing transition to a consumption-led economy and a decline in savings amid an aging population, China’s annual current-account deficit could reach as much as 1.6% of GDP — or $420 billion —by 2030.”
Bass said the shift in China gives the Trump administration good leverage in its negotiations and he urged U.S. Trade Representative Robert Lighthizer to take a hard line on key issues like the theft of intellectual property and forced transfer of technology from U.S. firms to Chinese partners. “China is definitely our enemy,” Bass said. He sees little danger to the U.S. economy, if the U.S. were to impose new tariffs and raise current tariffs on Chinese goods. In fact, Bass thinks U.S. trade negotiators should play China and the EU against one another in upcoming talks to forge a new trade path for the United States.
“Even though we're talking about bilateral negotiations with China and bilateral negotiations with Europe, it's really a trilateral situation, where if Europe gives us what we're looking for in China, then we will go easier on Europe. If they don't give us what we're looking for in China, but basically have some solidarity with how the west is dealing with China, then we're going to be much harsher on Europe,” Bass said.
Adam Shapiro is the co-anchor of Yahoo Finance’s On the Move.