Kyle Bass is a hedge fund manager and the founder of Hayman Capital Management, focused on global macro conditions. He joined the ETF Think Tank to discuss the global push towards clean energy, the impact of upcoming Fed policy decisions, and the latest events in China.
Bass has a lot of thoughts on the current focus on developing clean energy solutions and how effective they could actually be. His primary concern is that the idea of turning the switch off on traditional fossil fuels and turning the switch on to clean energy is incredibly misguided. The current narrative is being driven by some really bad energy policy and that ideology is only likely to hurt. Governments are making pledges to turn carbon-neutral by 2050, but those agreements are neither enforceable nor measurable and that’s likely to make them ineffective. The world needs a leader with the courage to make the right choice and not just consider the economics.
Bass’ current prediction is that oil is going to move above $100 and will likely get there soon. He expects a huge supply/demand imbalance driven by this pivot towards clean energy. Investment in traditional fossil fuels has fallen in half over the past seven years, while the demand for energy has remained steady. Investors and politicians are trying to force this move towards clean energy, yet the infrastructure is still developing and there’s still a huge dependence on hydrocarbon energy. If omicron subsides and demand for energy shoots through the roof within three months, there will be a big supply and demand mismatch. Front-dated oil contracts could move well above $100 in a similar fashion to how they went to $0 in 2020.
Bass’ outlook for the U.S. financial markets is cautious because of what the Fed might do. He believes asset prices can move higher in the near-term, but the Fed’s ability to balance growth and inflation while tightening policy will determine where they move after that. His main concern is that we know what tends to happen when quantitative tightening and interest rate hikes are combined – the Fed will raise interest rates by 100 basis points, the Treasury yield curve will invert, and the Fed will be forced to back off on its policy plans. He believes that the Fed is going to need to do another round of QE after it goes too far with QT over the next year.
Bass also has a lot of concerns about China right now. Beyond his belief that you can’t believe a lot of the economic numbers coming from the government, he thinks inflation is China’s biggest problem. Retail prices for food jumped 18% in two weeks. Soybean prices are up 30%. Packaging materials costs are up 20%. Prices are spiking everywhere, and commodity prices are soaring.
Because of inflation, supply chain issues, a collapsing real estate market and government control, Bass wouldn’t be investing anything in China right now. The government there is in the process of detonating the real estate market and could be attempting to force real estate prices down. China real estate is in the stratosphere in terms of affordability and a lot of apartments are currently being used as trading vehicles. He wouldn’t be surprised if the actual GDP growth rate in China right now is 0%.
He does say, however, that he believes that China has passed the United States as a short-term economic power during the pandemic. Since the U.S. sells services and China sells things, the COVID pandemic recovery has benefited heavy goods producing nations more. The costs of shipping and transporting those goods is becoming costly.
How do we avoid a stock market debacle? Bass says he can’t really see being able to avoid it. Federal Reserve quantitative tightening and raising interest rates at the same time is never a good thing for the market. In the short-term, however, we could be OK. There’s still a lot of cash on the sidelines and investors are still buying the long end.
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