Investors are laser-focused on this weekend’s G-20 meeting in Japan, but famed hedge-fund manager Kyle Bass predicted that nothing of importance will be achieved there, and that investors should prepare for President Donald Trump to slap tariffs on every last dollar of Chinese imports.
President Donald Trump and Chinese President Xi Jinping are expected to meet on the sidelines of the G-20 gathering, set to kick off Friday in Osaka, and investors are increasingly hopeful that it will result in an easing of U.S.-China trade tensions and the resumption of negotiations to roll back existing import duties.
“I don’t imagine anything getting done,” Kyle Bass, managing director of Hayman Capital Partners told MarketWatch in an exclusive interview. While both parties may agree to schedule new talks, in an effort to boost investor sentiment, Bass said it’s in neither Trump’s nor Xi’s interest to actually reach a deal.
“Xi believes he can wait out Trump’s tenure,” with the idea that he won’t be re-elected in 2020 and Xi does not face an election. Meanwhile, it’s in Trump interest to avoid any deal unless it includes Beijing agreeing to robust enforcement mechanisms and changes to Chinese law that would give a trade deal real teeth. “If Trump agrees to an imperfect deal he’ll be attacked from both the left and the right,” a situation the president will seek to avoid heading into his reelection campaign, Bass said.
Both sides, however, will see benefit in issuing communiqués that create the appearance of progress, to boost stock markets and buy time, he said.
Bass said he expects President Trump to ultimately place tariffs on the remaining $300 billion in goods imported annually that aren’t yet taxed, as the president will be forced to follow through on this threat once its apparent that progress isn’t being made.
However, Bass is sanguine about the effects of these tariffs on the U.S. economy and stock market, pointing out that the $100 to $150 billion would be raised annually from 25% levies on all Chinese imports is just a fraction of the size of both the U.S. and Chinese economies.
Despite a consistent ratcheting up of tariff levels over the past 18 months, the S&P 500 index
reached record highs last week, while the Dow Jones Industrial Average
is roughly 1% from its record high reached last October.
Bass is the founder and principal of Hayman Capital Management, a hedge fund focused on global event-driven opportunities and is based in Dallas, Texas. In 2008 Bass successfully bet against the U.S. sub-prime mortgage crisis by purchasing credit default swaps which increased in value as the real estate bubble burst.
What should worry investors, however, Bass said, is a Chinese economy that will continue to slow as rising wages, insurance and shipping costs are robbing China of its longtime advantage as the world’s cheapest source of manufactured goods. “It’s cheaper to make products in Mexico,” and ship them to the United States in many cases, he said.
As this advantage has all but disappeared, so has the Chinese government’s ability to continue to prop up growth with government-directed lending and infrastructure spending. He said that when you combine central and local government spending, China is running budget deficits of 10% of its gross domestic product, or GDP, at the same time that it is evolving into an economy with a trade deficit, rather than the surpluses that marked China’s economic rise.
He said China’s growth has created massive demand for foreign oil, basic materials and food, which must be purchased with U.S. dollars, turning it into a “twin deficit” country, where any further government stimulus will put significant downward pressure on the value of the renminbi while encouraging wealthy Chinese to do whatever they can to move their wealth to more stable economies.
China’s fossil fuel imports, for instance, have risen from $27.9 billion in 2015 to $46.5 billion last year, an increase of 67%, according to FactSet.
A hamstrung and dollar-thirsty Chinese government, therefore, will be forced to preside over an ever slowing economy, and this downturn will help drag the U.S. into a mild recession by the middle of 2020, Bass predicted.
He advised average investors to prepare for this downturn by adding to their gold
and real estate
holdings. “It’s no secret why bitcoin
which I don’t own, and gold are starting to do well again,” he said. “Everyone sees the writing on the wall.”
“You have to own real assets, and the best thing is to be levered in real assets, like apartment buildings,” arguing that it’s an investment that will provide both steady income and will have the chance to appreciate in value as the Fed moves to lower interest rates in response.
Lower interest rates tend to be good for real estate, as it reduces the cost of borrowing to finance purchases, and Bass predicted the Federal Reserve will be forced to lower interest rates to near zero by the middle of next year.
But investors should also worry that real estate will increasingly be the focus of new taxes and regulation, as evidenced by the city of Berlin instituting a 5-year rent freeze and New York state agreeing to impose strict rent regulation. With governments further starved of revenue as a result of an impending recession, “property taxes are going to go up, transaction taxes are going to be implemented, as well as pied-à-terre taxes,” Bass said. Investors should factor these likely political developments in constructing their portfolios.
One tax that Kyle Bass agreed should be implemented is the Bernie Sanders-promoted policy of levying taxes on trades of stocks, bonds and derivatives.
“I actually agree with Bernie Sanders on something,” Bass said. “A [financial transaction] tax would be an interesting way to raise money on Wall Street. If you pay one-tenth of 1% on a transaction, it wouldn’t affect our lives at all,” he added. “But those people who do nothing for society, i.e. the algo traders, it would put the tax all on them.”