Submitted by Taps Coogan on the 18th of December 2018 to The Sounding Line.

Kyle Bass, founder of Hayman Capital Management, recently spoke with Yahoo Finance to discuss his outlook on markets, the Fed, and the ongoing trade tensions between the US and China.

Kyle Bass on US-China trade relations:

“When you think about what’s going on between the US and China, it shouldn’t matter as much as it’s mattering in the press… Even if we were to take our tariffs to 25% on the full… $520 billion (in trade), we are talking about $125 billion between one economy of $13 trillion and one economy of $20 trillion. It doesn’t matter that much. I think us trying to reset our relationship with China, this is just one part of this discussion, and it’s a minor one when you compare it to $200 to $500 billion of IP (intellectual property) stolen from us every year by the Chinese…”

On China’s economy:

“When you grow a financial system 1,000% in ten years and you only grow your GDP 500%, you’ve built a reckless pile of credit that is now beginning to show itself. As China’s… fiscal impulse contracted 5% in the last two years, that’s what’s driving China’s decline. It’s their attempt at a soft landing. It literally has nothing to do with Trump and tariffs. Trump and tariffs are maybe just putting a little bit of icing on the cake… The ultimate arbiter of China’s printing $35 trillion worth of their own currency in the last 15 years will be the exchange rate between the Chinese Yuan and the US Dollar…”

On the US economy:

“When you think about the net effect of the tax plan, we think about it in the net rate of change of stimulus. So in 2018, the net cumulative effect of the tax cuts were roughly $250 billion in stimulus to the US. Next year it will be roughly $400 billion, and then in 2020 it will be $150 billion. So when you think about the rate of change from this year to next, it will be about plus $150 (billion). From 2019 to 2020, it will be minus $250 (billion), and so my opinion is, unless Trump gets a… trillion dollar infrastructure plan put into place sometime early next year, it is almost inevitable that we have a recession in 2020…”

On the Fed:

“I think the Fed is doing a darn good job of trying to thread this needle… They are trying to get rates up to a level so they can meaningfully cut them if and when there is the next recession. Typically, when the US enters recessions we cut interest rates 500 to 600 basis points (5 to 6%). When rates are 2.5% you can’t cut them 500 basis points… I think the Fed is concerned about two things, stimulating at full employment (and) growing the fiscal deficit at full employment, because when you do those things, you always get inflation, and on the other side they are trying to normalize rates so they can get a few arrows in the quiver for if and when we stumble…”

There is more to the interview so enjoy it above.

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