Wednesday, February 17, 2016

Kyle Bass (CNBC article) - Concerned about Chinese Banks and Currency

A big thank you to a blog reader who tipped me about this item related to well known hedge fund operator Kyle Bass. Mr. Bass is very concerned about stability in China including the status of many banks in China. Below are some quotes from this recent CNBC article (and video) covering the strategy Mr. Bass plans to use.


"A Chinese credit crisis would see the country's banks rack up losses 400 percent larger than the hit U.S. banks took during the subprime mortgage crisis, storied hedge fund manager Kyle Bass has warned in a letter to investors.
"Similar to the U.S. banking system in its approach to the Global Financial Crisis (GFC), China's banking system has increasingly pursued excessive leverage, regulatory arbitrage, and irresponsible risk taking," Bass, the founder of Dallas-based Hayman Capital, wrote in the letter dated Wednesday.
"Banking system losses - which could exceed 400 percent of the U.S. banking losses incurred during the subprime crisis - are starting to accelerate."
. . . . . .
"Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets," Bass wrote. "Historically, China has lost far in excess of 10 percent of assets during a non-performing loan cycle." 
He noted that U.S. banks lost about $650 billion of their equity throughout the global financial crisis."
My added comments: Kyle Bass is located here in Dallas and is well known for his influence in getting the University of Texas to acquire a massive physical gold position. Beyond that, the state of Texas has approved the building of its own physical gold depository to take actual possession of all state owned gold. As I understand it, the depository would also be available to anyone who wanted to store gold in it.
This illustrates why it is important for those running the current monetary system to understand that there are a lot people concerned about the stability of the system and also that another crisis could unfold at some point. 
It is a big mistake to assume that only a small group of people on the fringe are concerned about this. If too many people perceive that the system is unstable they could be ready to leave the system very quickly (think bank run). Too often the potential for this kind of reaction from the public is underestimated by those in charge of the system in my view. There are plenty of public officials in states all across the US that are very concerned. People like Jim Rickards are also reaching a large audience of influential people. I witnessed first hand how concerned they are when Jim spoke here in Dallas last April. A lot of the support people like Donald Trump and Bernie Sanders are getting is coming from people who are quite concerned and ready to throw out the current system if that's what it takes. Most of them no longer trust those running things.
We just got a small glimpse of how many people are ready to head for the exits if they sense another big crisis is coming just this last week when people lined up around the block in London to buy actual physical gold. That number will grow exponentially if things continue to be too volatile.
I don't believe in using fear tactics at all. Using fear to create a reaction is a terrible thing to do. Making decisions based on fear can be a big mistake. But I cannot blame people for being concerned and being susceptible to some anxiety when we see all the following regularly in the mainstream financial media:
- some monetary officials talking about getting rid of cash and recent news that high denomination bank notes may be eliminated - Summers - time to scrap $100 bill
- monetary officials talking seriously about charging interest to keep money in a bank account or a savings account or a money market fund (Ok, why should I keep my money there if you are going to do that?) (also, What are retirees barely surviving now supposed to do as you take money out their bank accounts?) 
- monetary officials (current and former) admitting constantly that the QE policies that have been used to prevent a systemic failure are creating big asset bubbles in all kinds of markets (see our long list of such warnings here)
- monetary officials saying one day that things are fine, but the next day that we may have to use more extreme measures like negative interest rates just in case things go south (or worse maybe bail-ins - see next point)
- monetary officials setting up bail-in regulations if banks go under (Dijsselbloem wants bail-ins)
- banks creating regulations limiting the amount of cash people can take out their accounts and rules that force banks to treat people like criminal suspects if they decide to take too much cash from an account on a given day

-monetary officials telling us we need to break up big banks because they pose such "massively asymmetric risks to society" (in this case its MInnesota Fed President Neel Kashkari). Bloomberg article title: Fed's Kashkari Floats Breaking up Big Banks to Avert Meltdown 
I hope anyone who may be an official of any kind in the current financial system who might happen upon this blog article will just take a look at the bullet point list above. Then think about this question. Exactly how do you expect people to react when they see all this being done and seriously talked about? 
I feel like I have a reasonably good feel for the fact that there are tools and options available to maintain stability in the financial system. It would be good if more people were aware of these tools.
However, I look at the bullet point list above and what I see are a list of signals and messages to the public that we reserve the right to confiscate your money at any time if need to because one of these "asset bubbles" blows up. If we don't confiscate it we can surely cut off your access to your own money (recall how things went down in Greece last summer). Don't even think about trying to get more cash than we think you should have and if you want to use a $100 bill you must be a criminal.

By the way, don't expect any kind of early warning if a crisis does emerge since we never ever bother to alert the public ahead of time when one does happen. But just take our word for it, things are fine. Ignore the fact that we are doing all these weird things to your money and are making all kinds of plans to take money away if something goes wrong (like a TBTF bank going under and starting a "meltdown"). Nothing to see here. It's all just for fun and we would never actually do these things.

It is almost absurd to expect people to just accept all this without question given all that has happened in the last decade in regards to problems in the financial system. We even have former BIS and Fed officials saying in public the QE policies used did not work as intended and have set up the potential for big problems due to asset bubbles. According to this CNBC article, negative interest rates employed in Europe were a failure because they instilled a lack of confidence in the system by the public. Of course they do. It's basically looked upon as officials waving a white flag of surrender. Everything else we tried failed so now we are going to punish savings and force you to spend or invest. It looks very desperate to most people.

I don't know if we will get another crisis or not. If we do, I can't possibly predict how everyone will react to it. But having done this blog now for a couple of years I do get a reasonable feel for how many people are feeling. I can tell you in no uncertain terms that there are a lot of people on edge and ready to bail on the system at the first hint of a major crisis. If they get blindsided by a crisis, the anger we are seeing right now in the US political environment is going to look like a Sunday picnic in comparison. They are still in for now, but are much closer to bailing out than monetary officials understand in my opinion. Things may seem calm on the surface, but there is very real concern beneath the surface for millions of people.

Monetary officials almost seem puzzled why people are worried or even scared. Perhaps if they stopped talking about doing so many potentially scary things to people's money it would be helpful (see list above). Even better, perhaps coming down off the mountain top at Davos now and then to make a sincere effort to help people understand the problems and possible solutions instead of being puzzled about why they are concerned. It's not puzzling at all if you spend time with very many average people trying to get by every day. If they have one unexpected event go wrong, they can be devastated financially very quickly
Dismissing their concerns and not making any efforts to reach out to people to help them understand the problems and potential solutions is a big mistake in my opinion. I hope that we will see more willingness by monetary officials to treat people's legitimate concerns with respect and make a proactive effort to help them get a better understanding of the issues (former Dallas Fed President Robert McTeer essentially says the same thing in this CNBC interview which I actually found after writing the above paragraph)

I don't really expect to see a more proactive effort from monetary officials, but it would be great if they surprised me and we did. We'll just follow things here and see what actually does happen. It's really all we can do.

Added note: Jim Rickards issues this comment on his twitter feed about China trying to shore up the yuan and also punish someone betting against the yuan like Kyle Bass.

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