Kyle Bass, Founder and CIO, Hayman Capital Management, joined host Melissa Francis, former CNBC, MSNBC, Fox Business, and FOX News anchor, to discuss oil, alternative energy and strategies to navigate stagflation.
To watch the full interview with Kyle Bass, in addition to interviews with Jeffrey Gundlach, Kevin Simpson and Anthony Scaramucci, go to Magnifi by TIFIN.
Melissa Francis: Welcome everyone. Today, we are here to talk about Magnifi by TIFIN, a marketplace where you can harness real-time proprietary data to help individual investors and financial advisors fund, compare, and buy investment products like stocks, ETFs, and mutual funds, and model portfolios, to grow and preserve your wealth. I'm Melissa Francis, I know a little bit about this subject matter. I'm a former CNBC, MSNBC, Fox Business, and Fox News anchor. There is probably no more important conversation during these volatile times right now than what drives the economy? Joining us today is hedge fund manager and founder of Hayman Capital Management, Kyle Bass.
Kyle, thank you so much for being here. These are really turbulent times, today alone we have just watched the market seesaw. Everybody was ready to, they were sick to their stomach through the whole weekend, waiting for today, but I'm glad to have you on today, because you've made some really key calls in the past during times like this. You made a great call in subprime, China. You've made a lot of great calls in energy. Overnight, as you know, oil hit a 14 year high. This morning, though, oil was trading off as Germany came out and said they are not prepared yet to halt Russian imports. Oil just got slapped on that, but who knows what's going to happen next? What's your take on all of it?
Kyle Bass: Wow. Well, first of all, it's a pleasure to be here. Good to see you, Melissa. Look, I think that it's tough to predict what each sovereign's going to say and do, day to day. But I think looking at the secular trend, looking at the mistakes, big policy mistakes that the Germans and the Europeans, and therefore, I guess on a later date, the US has made. The desire to immediately switch, i.e, turn the switch on for alternative energy and turn the switch off for hydrocarbons, that desire's intense. And that desire has really manifested itself over the last handful of years. And historically, when we moved to coal, and then we moved to natural gas, and moved to crude, those energy transitions have taken 40 to 50 years. Think about this, we've been all in as a, let's just say the West has been all in on alternative energy, on wind and solar, for the last, I think, 10 to 12 years. And we're not even 3% of global production of energy.
So it's important to note that this is going to take many, many, many decades. In the meantime, we're going to continue to see hydrocarbon demand grow. So for the last six or seven years, we have starved hydrocarbon capex all over the globe, in the interest of converting immediately to alternative energy. I run a conservation based private equity firm, I care very much about, let's say the climate, global warming. I care about everything that we talk about every day. But we also have to live in the reality of how to make that transition as seamless as possible, and I think that's the disconnect that we're seeing manifest itself in price today, Melissa. I think we have a secular problem with supply, and I think that we're going to have to come to some reckoning, realizing that this war, this awful humanitarian disaster that Vladimir Putin has brought upon the world, is not the real reason we're seeing crude at a $130. All he did was speed it up. We have a secular supply problem that we've got to address very quickly.
Watch the full interview with Kyle Bass HERE
Melissa Francis: Yeah. And events come on like this, as you said, and it shows that this dramatic shift that we've tried to make, it comes up and bites you in the ass. And then we have our officials going down to Venezuela over the weekend, and trying to make deals with those, any other day we would be saying are despots, are governments we wouldn't deal with. Kyle, another thing that jumps out at me is that oil is fungible. And just because we say that we are not going to buy Russian oil, someone else will, and the oil just goes around. And then you look at, you talk about environmental projects, the amount of oil that would have pumped through the Keystone XL Pipeline exceeds what is sent to us by Russia. So we make these sanctimonious decisions at different points in time that we're not going to do this and that. And it ends up costing something down the road that we also find to be morally unacceptable, as in not having enough power to step in and do something about Ukraine. Your thoughts.
Kyle Bass: Yeah. You put it perfectly there. I think that this is not a problem, or say a puzzle, where the pieces are obvious and they're going to fit together perfectly. This is a very difficult leadership policy driven problem that we and the West has to take a much more constructive approach to. Again, you have Germany turning off their nuclear plants because they don't think they're green. And at the same time, spooling up coal fired power production, because all of a sudden, they now rely on Russia for their power. It's insanity. Whoever's been running these countries has made these sanctimonious choices, and they've been really poor long-term decisions for their constituencies, and truthfully, for the globe. I personally think small modular nuclear is the greenest way for our world to move forward.
Imagine if we stop flying airliners after two of them crashed, where we'd be today? We're nowhere near the old technological problems that we had with Chernobyl and Three Mile Island. We have really, really advanced technology today, and small modular nuclear is the answer, in my opinion, really solving the climate crisis, and getting us to a path of sustainability. So I think that's where we're going to end up, Melissa. It's just going to take a $150 crude to convince everyone that they really made bad decisions, and that it's not just Vladimir Putin's fault, on the energy side. I'm not defending him at all for his humanitarian disaster.
Watch the full interview with Kyle Bass HERE
Melissa Francis: No, but we're talking about energy. No, you're absolutely right on the nuclear side, and it has such a bad name. It's really hard to get people to understand that we're talking about clean energy. I just want to remind them that when they're driving their electric cars, when they plugged them in overnight, most likely they got electricity from coal. So they're actually driving filthy, dirty, coal cars most of the time when it's an electric car, but I digress. Let me ask you about, there was this FT article that caught my attention talking about. So, of course, a lot of the world is so dependent on the Ukraine for food. This is something that I don't think many Americans had thought about before, and especially China is dependent. How does this play into, because there's that relationship between Russia and China. China can have an influence on Russia if they want to, in this situation, and they need the grain and other food stuffs out of Ukraine. How does that play out?
Kyle Bass: Yeah, I think, look, Ukraine represents about a third of the world's barley and wheat production, a third. I can't tell you how important that is for one area, the size of Texas, to tell you that it represents that much of the world's production. The real scary part here is, Melissa, if you go back to the February 4th joint press release between Xi and Putin, it's actually a really frightening read. For some reason, it didn't make it into the press very much. Everyone thought it was just opening ceremonies, the Olympics. But when you read about their new strategic partnership, one that they say will be stronger and everlasting, and be much more important than the allied partnership to World War II, and that no area of cooperation is what they call off limits, it goes to show you that this was premeditated.
And what I mean by that is in this communication with Russia, or let's say China gives Russia the go ahead to talk about one Russia and the reunification of the Ukraine with mother Russia. And in the same breath, Russia reaffirms China's one China policy and talks about the eventual reunification of China with Taiwan. Sounds like I'm digressing from your question, but it's important.
To note that I think if China and Russia have a deal, which look, you've already seen the payment system, when Visa and MasterCard abandoned the Russian banks for the payment system, the Russian banks immediately went to UnionPay in China. This is the single key issue of this war. If China is providing Russia with a back door for its crude, for its gas and for its food. And what we're witnessing here, I believe, is the bifurcation of the world into two world orders. One is the rules based West who prioritizes human rights and climate and everything that you and I have near and dear to our hearts. And then you have the axis of evil, which is Putin, Xi, Maduro, and the rest of them that want to barter and trade with one another and create a world order that is authoritarian, totalitarian, and evil. And we're just starting, the world just woke up to Putin's evil. And the world is waking up to Xi's genocidal evil, and the way that they operate these countries.
Watch the full interview with Kyle Bass HERE
So what you're seeing today, I believe, is this bifurcation. What the US has to do going forward is a really, we have to make difficult decisions. And one of those is if we're going to primarily sanction Russia, we need to get into this concept. I spent a lot of time on sanctions back in 2018, believe it or not, when I chaired the risk committee, the largest public endowment in the United States at university of Texas. There are primary sanctions, Melissa, and then there are sanctions that are secondary or what they call reviewing scrutinized entities. A scrutinized entity is an entity that continues to do business with a primarily sanctioned entity. So think about this, back when we were sanctioning Iran in 2018, we knew behind the scenes, US treasury state knew that the Chinese banks were still funding the purchases of Iranian oil from the Iranian national oil company, which was in complete contravention to our primary sanctions.
The question was, and is, are we willing to sanction the secondarily sanctionable entities or scrutinized entities? I think UnionPay is giving the Russian banks basically the workaround for US primary sanctions. We need to show that we're willing to sanction Chinese payment networks and Chinese banks and punish those that contravene our primary sanctions. If we're not willing to do that, then our sanctions are meaningless, because anyone can work around a sanction.
Melissa Francis: So I, a hundred percent agree with everything that you have to say, and it does seem like, as you said, our world is splitting into these two camps. And I have two questions based on that. Number one, with everything that's going on with the food situation, if we stay in these camps, does China have everything it needs? And then I would also ask you that if we do those secondary sanctions, like you mentioned, which I've done the deep dive on the Iranian crisis. There were all of these different situations that it comes back to the same thing. Are we willing to punish the people that are facilitating financially the bad guys doing the bad stuff? What does it mean for the economy if we do that? Are we in for, how much does it hurt? Does it push us into recession if we do something like that?
Kyle Bass: Again, Melissa, if economics ruled the day, and I've always said this, if we left US foreign policy up to Wall Street, you and I would be speaking Chinese tomorrow. So the economic decisions aren't necessarily congruent with national security decisions. And we've allowed the Wall Street elite to have direct lines to the president. President Trump spoke with Schwarzman and Fink and Adelson and Wynn almost every day, believe it or not, I've talked to people on his security council. So they have a lot of say in us maintaining the financial relationships with these evil regimes. Wall Street has a love affair with evil as long as it can make it money. And I think at some point in time… [crosstalk].
Melissa Francis: Well, I don't know Kyle. I have to stop you there because you need to be the financial capital in order to have the power to put forth all of these other policies. If we don't maintain our hold on the financial system, if we don't keep the dollar as the number one currency, if we don't have all this wealth, we don't have the influence any longer.
Kyle Bass: I get it Melissa, but what about… CLICK HERE to watch the rest of this interview at Magnifi by TIFIN
SPY shares were trading at $445.04 per share on Wednesday afternoon, down $4.55 (-1.01%). Year-to-date, SPY has declined -6.01%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Gary Kaminsky
Gary Kaminsky is a Senior Advisor to Morgan Stanley Global Wealth Management and the Co-Host of "Wall Street Week." Formerly the Vice Chairman of Morgan Stanley Wealth Management, Gary joined Morgan Stanley in April 2013. Throughout the last 25 years, Kaminsky was CNBC's Capital Markets Editor, Co-Creator and Co-Host of "Strategy Session" and a regular contributor to "Squawk Box" and "Squawk on the Street."
Energy, Stagflation, and the Fed: An Interview with Kyle Bass StockNews.com
