Global Macro Investing And Geoeconomics With Hedge Fund Investor Kyle Bass | Hoover Institution

There are three paths China could take Taiwan—soft power via a China-funded KMT victory in 2028, a naval blockade, or an all-out amphibious assault—but the amphibious option is uniquely difficult because the 110-mile Taiwan Strait has 22-foot tidal surges making invasion feasible only ~3 months a year, and the island has two giant mountain passes creating a 'Thermopylae problem.'

“there are um there are 22 foot tidal surges in the Taiwan Strait. It's 110 miles wide. The largest amphibious assault in the history of the world was D-Day”

When a country bails out its banking system, bad private assets migrate onto public balance sheets, so the relevant analysis becomes which sovereign balance sheets can absorb the losses—the US could (lost ~$800B against ~$1T of bank equity and one-times-GDP banking assets) while smaller European systems like Iceland and Ireland, with banking assets ~10x GDP, could not and fell in succession, followed by Greece.

“you had to follow the bad private assets to public balance sheets. So then the analysis was which public balance sheets can handle that kind of movement of that many bad assets.”

By 2006-2008 the subprime risk could be sized by recognizing it was a 'disassociated risk paradigm,' then mapping it onto leverage structures: Lehman was ~36x levered with $50-60B of this product warehoused and Bear Stearns ~29x, so when assets lose ~40% of value, 30x leverage is simply a math problem that wipes out the firm.

“Lehman was 36 times levered and they had a huge amount of this stuff on their books had you know 50 60 billion of this in a warehousing facility... Bear Sterns was was was again, you know, 29 times leverage”

Almost no sovereign actually defaults; instead they expand the central bank balance sheet, print money, and suffer inflation, but keep paying—meaning the currency, not default, becomes the escape valve, which is why Japan at 265% debt-to-GDP can never let rates move and must absorb the adjustment through its currency.

“almost no sovereign ever defaults John they get into a crisis they print they print and print money expand a balance sheet but they always pay they they rarely if ever stop paying”

China was a good investment bet in the 2000s and early 2010s because westernization grew its productivity and GDP per capita, but at some point it became a bad bet—evidenced by the Shanghai-Shenzhen 300 returning a loss of about a third over ~18 years even as China's GDP reportedly grew 505%—proving Westerners get left holding the bag in a communistic economy.

“if you invested in the Shenen Shanghai 300 20 years ago and China has reportedly grown their GDP now 505%... you've lost a third of your money and they've grown their economy 505%. What else do you need to know?”

China's economic system was structurally flawed from inception: its banking system is 320% of GDP and two Chinese banks each hold more assets than JP Morgan despite China's economy (~$18T) being only a little more than half the size of the US economy (~$30T)—an imbalance Bass treats as an Achilles heel.

“Their banking system is 320% of their GDP. There are two Chinese banks that have more assets than JP Morgan.”

Fractional-reserve central banking that loses its fiscal moral compass—running huge deficits, expanding balance sheets, and injecting inflation—is the underlying cause of collapsing fertility worldwide, because when real estate prices rip while wages don't, young men can't afford homes, so they don't marry, don't have children, driving marriage and fertility rates down across the developed world and China.

“If the men in your economy when they graduate university can't afford to buy a home, they live with their parents. They're not having sex, they're not having kids, they're not marrying.”

The DIU's 2016 report authored by Mike Brown documents Chinese economic statecraft in America in comprehensive detail—including stealing roughly $300 billion of IP per year and earning a return on it, and infiltrating Sand Hill Road venture capital by intentionally investing in info-tech companies hoping to sell to the CIA, which effectively disqualifies those companies once Chinese investors are present.

“It talks about how they steal 300 billionish of IP from us every year and earn earn a return on it. It shows you how they infiltrate the venture capital uh companies in PaloAlto and and in on San Hill Road”

The Fed understates real wage declines because it chain-weights inflation, masking that asset prices have so far outstripped wages that real wages have been massively negative; the FHFA's own unchained housing index rose 50% between 2020 and 2024 while wages did not.

“The reason the Fed's not saying that is because they chain weighted inflation.”

Because China operates with a closed capital account through four SOE banks and twelve joint-stock banks dependent on dollar access, the US holds China's 'ticket into the world financial system,' so when China goes kinetic over Taiwan the US can hobble it financially, making it hard for Xi to hang on—likely precipitating regime change.

“when they go kinetic John we hold all of the cards. We we have their ticket into the world financial system. They have four joint stock they have four SOE banks 12 joint stock banks. They have an Achilles heel or two and we know exactly where they are.”

China's economic relationship with the West is no longer a trade negotiation but a 'hostage negotiation,' because leverage like rare-earth magnets needed for every EV makes it coercive rather than mutually beneficial—and investing dollars in a communistic economy you may go to war with makes no sense.

“This is not a trade negotiation. This is a hostage negotiation. We need to bring in hostage negotiators because that's what we're negotiating with China.”

The US is the best place for long-term capital allocation because, despite being 4% of world population and 26% of world GDP, it is 60% of world capital markets—people vote with their money, and the US has the deepest, most liquid markets plus exceptionalism in schooling and entrepreneurship; no recorded economy has ever exceeded 26% of world GDP.

“We are 4% of the world's population. We're 26% of the world's GDP. We are 60% of the world's capital markets. So why? Because people vote with their money.”

Taiwan demonstrates what China could be if it embraced Western values and capitalism: its GDP per capita is roughly 300% of mainland China's, which is precisely why an ideologically successful Chinese democracy that embraced Western capitalism so threatens Xi Jinping.

“Taiwan is like a Chinese democracy that's embraced Western capitalism. Taiwan's GDP per capita is 300% what China's is. So Taiwan is what China could be if it embraced Western values and Western capitalism.”

Milton Friedman predicted that countries with economic freedom would inevitably develop political freedom, a prediction he later effectively recanted—China became more capitalist since Deng Xiaoping but with heavy state control and without the political liberalization Friedman expected.

“Milton Freeman, I I think famously made a... it was in part it was a prediction and he recanted it later on, but those that countries with economic freedom will inevitably develop political freedom.”

Decades of predictions that the US would be economically eclipsed—Paul Samuelson's textbook claim that the USSR would surpass the US, the 1980s Japan-overtakes-US narrative, and the 2000s China narrative—have all repeatedly failed, making betting against the US a poor long-term strategy.

“all these people that have predicted that the USSR was going to you know eclipse the US and growth and then uh it was uh Japan uh in the 1980s and then you know China in the 2000s and it's amazing how all those predictions uh have failed.”

Understanding China requires starting empirically with the architecture of its closed-capital-account banking system and the interaction of onshore RMB and offshore CNH with the dollar; doing that work leads through cultural norms and history to China's grand strategy, which Bass concludes is completely incompatible with the West—and led him in 2016 to conclude conflict was inevitable.

“I want to understand how their domestic since they have a closed capital account. I want to understand how the Chinese R&B or offshore CNH and the USD interact. I want to understand the architecture of their system.”