Heyman Capital Mqnagement’s Kyle Bass On The Geostrategic Fallout To Come From Coronavirus; Crisis In Iran And Coronavirus Impact Being Dramatically Under-Reported; Banking Crisis Coming For Italy, China, And Hong Kong
Kyle Bass, Founder of Heyman Capital Management was interviewed on CNBC’s Squwak Box this morning/March 9, 2020 for his observations and thoughts on the geostrategic impact of the coronavirus. I always find Mr. Bass thought provoking and interesting; and, he did not disappoint. When asked what was on his mind in the midst of this black swan event, Mr. Bass said “be careful what you wish for in lower oil prices, because below $40 does not work. A number of U.S. shale producers are going to end up going bankrupt, he warned, if oil prices stay below $40 for any prolonged period of time. He does not however, oil staying near the $30 level where it is now for very long — because none of the producers make any money at these levels. When you think about the sovereign players that benefit from lower oil prices, like Japan and China that have few natural resources; and then, those countries who are dependent on oil revenue like Iran, and Russia. The regime in Iran was already facing its most serious existential threat it has faced since the revolution, with the coronavirus running through the regime’s senior leadership and down through the rank-and-file. Now, Tehran is being hit with $30 oil. Mr. Bass says his firms believes the extent of the crisis in Iran is being dramatically under-reported. Places that were unstable before the virus outbreak are very susceptible to going into complete disarray.
Mr. Bass believe that a lot of bad news has already been priced into the U.S. market — meaning we could be close to bottoming out. Any turn to the downside in the number of new coronavirus infections is going to be a very positive event, he said. The thing we have to hope for as a country is that this virus does not come back this fall. We only have 940K hospital beds in the U.S.; and, at any one time 600K of them are in use. With 340M people in the U.S., we can’t have any kind of significant infection with any kind of acuity without having real problems with those that would need to be hospitalized.”
Mr. Bass believes we have many more cases of coronavirus in the U.S, we simply just don’t know because we don’t have the necessary capacity and equipment to do adequate testing. Peak virus, in Mr. Bass’s opinion, is about one month from now — mid-April.
With respect to Europe, Mr. Bass said that European banks were never recapitalized in the aftermath of the 2008 financial crisis. So if you look where European banks are trading today, and where they will be trading in six months — Europe’s going to have a real problem. Italy’s banks in particular are going to become insolvent pretty quickly. Italy has north of 130 percent debt to GDP, and they have no capital in their banks. This coronavirus, black swan event could be a knock-out punch for Italy and the European Union. Either we’re going to see Italy default on their loan obligations, or the ECB, with German support, is going to have to provide more fiscal stimulus for Italy to get back on its feet.” Another scenario of course, is that Italy becomes the next country to leave the EU, so that Italy can return to having its own currency again.
With respect to China, Mr. Bass said the Chinese Communist Party (CCP) cares less about its people and more about maintaining power. Mr. Bass said that the CCP and President Xi are telling people to go back to work entirely too early; and, no one believes any of the infection numbers coming out of China. Indeed, Mr. Bass said that the seven doctors in Wuhan who actually discovered the virus last fall, were punished by the CCP, and made to apologize. God only knows what they did to them,” Mr. Bass said; and yet — the WHO lauds China for how it has responded to the outbreak. All China did was a major cover-up for who knows how long. Mr. Bass said China’s banking system is 3.5X larger than its GDP; but, Hong Kong’s banking system is almost 900 percent of GDP — and Hong Kong has been basically shutdown. What we’re going to see is going to be much worse than what we saw in southeast Asia in the aftermath of the 2008 financial crisis — and China and Hong Kong is going to be the epicenter.”
Rich and interesting, as always — with lots to think about. RCP, fortunascorner.com