How kyle bass is betting against hong kong!
Who is Kyle Bass?
Kyle Bass is a legendary investor well known for his extremely rigorous analysis. He is also well known for sounding the alarm on China and Hong Kong.
He called the US banking crisis in 2008 and now he's calling for a Hong Kong banking crisis in 2020, specifically HSBC!
Kyle Bass outlines his views starting with the extreme levels of debt in Hong Kong, and points out the banking sector is 850% of GDP!
Today I’m releasing our views on the financial, political, and legal plight of Hong Kong. I think Investors that have assets invested there should immediately move them into USD before it’s too late. #china #onecountryonesystem #hk https://t.co/91rE7SVN6T
— 🇺🇸 Kyle Bass 🇹🇼 (@Jkylebass) May 23, 2019
(Make sure to follow Kyle Bass on Twitter)
When a recession comes around, it will spell disaster for HSBC. Especially considering Hong Kong accounts for 32% of HSBC's revenue!!
And the numbers Kyle Bass provides get even crazier.
If the Hong Kong dollar was a free-floating currency the issue wouldn't be as bad according to Kyle Bass, but with the currency pegged to the US dollar, it makes the situation grim.
According to Bass, a peg only works if the economies of the two sovereigns are aligned. When they diverge it creates massive structural problems that usually end in collapse.
And this time around Kyle Bass things the Hong Kong collapse is going to take down HSBC as well.
In this Kyle Bass and HSBC Hong Kong video I'll discuss the following:
- Explain Kyle Bass's numbers on Hong Kong and HSBC.
- Explain the dollar peg and how it spells disaster for Hong Kong and HSBC.
- The HSBC end game outlined by Kyle Bass.
Make sure to hit the play button on the video player above to follow along with the breakdown below.
Hong Kong represents 32% of HSBC's total revenue
We've got to go over the numbers. Hong Kong represents 32% of HSBC's total revenue. So whatever happens in Hong Kong happens to HSBC.
Let's go to a chart going back to 2000, or a little before 2000 – 2012. This is the banking relative to GDP for different countries.
Our baseline is the United States, which in and of itself, isn't great, but it is when you compare it to some of these other countries, like Iceland prior to the GFC.
Their banking system, relative to GDP, got up over 800%.
Think about that.
Their banking system is 800% of the entire country's GDP.
Ireland got even worse than that a year or so later and Cyprus in 2011, 2012, got up near 850% of its GDP.
All three of these have one thing in common. They came crashing down.
So where is Hong Kong's banking system relative to GDP, right now? 850%.
private credit inside Hong Kong
It doesn't get much better. The private credit in the Hong Kong system relative to GDP is over 300%.
Just to give you some perspective in the United States, it's right around a hundred to 150% of GDP, and we spend like drunken sailors.
And Hong Kong’s real estate market is even worse. It's the biggest housing bubble by far that I have ever seen. There are so many charts that point this out. I couldn't fit half of them up on this board.
Let's walk through them. I've mentioned several times on this channel that the price to income ratio in Los Angeles is completely absurd. But when we look at a poster child for today's housing bubble, everyone goes straight to Vancouver.
But look at Hong Kong, the real estate bubble there is twice as bad as Vancouver, and here we can see Hong Kong tops the list of the UBS global real estate bubble index.
Definitely not a chart where you want to be number one.
And to put things into terms that we can all understand, the average cost per square foot on Hong Kong Island is over $16,000 Hong Kong dollars per square foot. To put that in dollar terms, that's over $2000/Sqft US dollars.
You may be asking yourself, “My gosh, George, how did their debt problem and their housing bubble get so out of hand?”
Well, like everything, it goes back to the federal reserve.
This is a chart of interest rates in Hong Kong from 2000-2020. And you'll see that they mirror the interest rates in the United States.
So the question is why did Hong Kong’s interest rates mimic the United States almost identically?
Because Hong Kong pegs its currency to the United States dollar. And if you peg your currency to the dollar, or whatever currency you're pegging to, you have to also adopt that country's yield curve. More on that later.
And to get even further insight on the insanity of their real estate bubble, let's go right to a real vision interview with one of my favorites, Kyle Bass.
I hear a lot from the various sell-side firms that we call. They say, “Oh, Hong Kong mortgages. They're only 50% loan de-value, not a problem.” I said, “Really? How do they afford a 50% deposit on the most expensive real estate in the world?”
They said, “Oh, that's easy. So the bank lends 50, the property developers lend 35 in a second lien, and families, the families or friends, lend them the other 15.” I said, “So how does that work?”
And they say, “Well, that's easy because housing goes up 10 to 15% a year. So in the first year,” this is a partner at one of the biggest firms in the world tells me this, that runs the real estate business. “And the first year they refi their family out. And in the next two years, they refi the developers out, and then they have a 50% LTV loan.”
I said, “But what if prices go down?” It's all, “Yeah, prices don't go down.” And literally, I'm hearing this again.
Kyle Bass thinks HSBC is sitting on the greatest financial time bomb in history
“We've heard this before, right?”
Oh, but wait, there is more, now it is really stiff drink time for HSBC.
We know that Kyle Bass thinks HSBC is sitting on the greatest financial time bomb in history.
Those are his words, not mine. That's what he's referring to the debt problem in the real estate bubble in Hong Kong.
But what you might not know is that most of the interest rates, especially on the mortgages, are adjustable and they're not just adjustable in the way we think of ARMs or adjustable-rate mortgages. They adjust by the month.
Let that one soak in for a minute.
The Hong Kong currency peg fail
And that reminds me, if you're not following me on Twitter, make sure you go there and follow me as soon as this video gets done.
We know that the Hong Kong dollar is pegged to the United States dollar, but how does that really work?
They like to keep the range. And when I say they, I mean the Hong Kong monetary authority, they're like the central bank. They try to keep the peg 7.75 to 7.85 Hong Kong dollars per one United States dollar.
If the Hong Kong dollar starts to get too strong, meaning at the bottom of this range, the Hong Kong monetary authority has to sell Hong Kong dollars into the FX markets.
They sell Hong Kong dollars and they buy US dollars. That creates more supply for Hong Kong dollars, more demand for USD. That makes the Hong Kong dollar grow weaker with respect to the USD.
In other words, it goes further up this chart, closer to the middle of the range, which is 7.8.
If it gets too weak, they just do the opposite. They go into the FX market and they buy Hong Kong dollars by selling USD.
But of course, there's a catch. They have to have USD reserves, in order to have those dollars to sell into the market, to buy back their own currency. If they deplete their reserves, And if they don't have any dollars, then the peg breaks.
So you may be asking yourself, okay, George, well, what would make the Hong Kong dollar get to the top of this range, to where the Hong Kong monetary authority would have to come in and defend the currency?
Well, I don't know. How about, capital flight? Capital flight as a result of oh, Hong Kong protests? Or maybe a specific that I can't mention right now (COVD-19) or YouTube will demonetize this video.
So we'll go ahead and call it the Cerveza sickness, wink, wink, wink. I think you know what I'm talking about.
So because of this, Cerveza sickness, that is also going to create a lot more supply for Hong Kong dollars if there's a capital flight leaving Hong Kong.
there's a gigantic bubble in Hong Kong
Also, there's a gigantic bubble. If we can see how giant this bubble is, don't you think the people in Hong Kong can?
If they could see it, wouldn't they start selling their assets, getting their wealth out of the country as quickly as they can?
And if they're selling those assets, that are denominated in Hong Kong dollars, that makes less demand for the Hong Kong dollar, more supply, and that makes it even weaker.
And also remember, there's going to be potentially a lot less demand in the future for the Hong Kong currency from China, because of the Cerveza sickness has really got this entire country on lockdown.
So you have a greater supply going out of Hong Kong with capital flight, and you have lower demand going into Hong Kong as capital flight from China.
If their dollar reserves get depleted, that means they don't have any ammo left to defend that peg. And according to Kyle Bass, he thinks they are very close to running out of dollars right now.
If they do run out of reserves, they're going to have one of two choices, and neither is very good.
#1 – They can jack rates Paul Volcker style, like they did in 1998, to defend the currency. The problem is that it isn't 1998. Things are much different now.
Remember, Hong Kong is married to the US yield curve. And that curve is very flat right now, and very low. If Hong Kong even raised their rates to 5 or 6%, it would crush their economy far worse than it did in 1998.
Not only because the interest rates are going up from such a low base, but because they have so much debt in their system, going back to step number one.
Time out, I want to make sure I didn't lose some of you there. The reason the Hong Kong monetary authority would have to jack interest rates because those higher interest rates would attract capital coming into Hong Kong.
That would create more demand for the Hong Kong dollar, which would keep it closer to this peg.
#2 – They can just go ahead and let the peg break on its own, but that would have the exact same effect because if that peg breaks, that creates inflation and that creates massive capital flight out of Hong Kong, which boosts interest rates naturally.
So they're right between a rock and a hard place, where if they completely run out of reserves, they're either going to have to force interest rates higher or let the market do it for them.
How does this apply directly to HSBC?
Well, what happened to the US banks when they had all those adjustable-rate mortgages in 2008 after interest rates spiked in the US around 2006?
That's when we got #Lehman (and make sure you remember to follow me on Twitter).
And let me remind you that our interest rates spiked a lot less than Hong Kong's would, and our banking system relative to GDP was around a hundred percent. And Hong Kong's is 850%.
how screwed is HSBC?
We know Kyle Bass says Hong Kong itself is the greatest financial time bomb in history.
And what's going to detonate that time bomb is the HKMA running out of dollars. And right now, they're almost empty.
So how important is Hong Kong to HSBC?
Hong Kong is the number one revenue source by far. Hong Kong has gone from 24.2% of HSBC's revenue in 2015, now all the way up to 31.9%, like we said, in step number one.
This is what I call having all your eggs in one basket. And that basket is a ticking time bomb.
It gets worse, though.
HSBC's revenue since 2015 has gone down by $6 billion. So that means that Hong Kong is even more crucial to the success or failure of HSBC.
To take it a step further, the majority of this growth has come from retail banking and wealth management, both of which will vanish if interest rates spike and/or they lose control of that peg.
But to put all the pieces of the puzzle together, let's go right back to Kyle Bass.
What you're seeing in Hong Kong today is a collapse in their economy. And that's an economy that's the most highly leveraged economy in the developed world. They have a banking assets to GDP at almost a thousand percent. That is exactly why Ireland and Iceland and those other countries in the EU collapsed back in 2011, after the global financial crisis.
So what you're going to see, [Vonnie 00:13:55], in 2020, is you're going to see a full-scale banking crisis in Hong Kong because you've got such a tightly wound economy in a stage of free-fall, from an economic perspective.
So I think when you think back to the US financial crisis, our financial markets, and specifically, our credit and mortgage markets collapsed in mid-2007.
Bear Stearns didn't go down until till March of '08, and Lehman, AIG, and Fannie and Freddie didn't go down until September of '08. So it takes about a year for the full-fledged banking crisis to hit. You're going to see a full-fledged banking crisis in Hong Kong next.
Does that include HSBC?
I think HSBC, Standard Chartered. I think they're all in real trouble in Hong Kong.
In Conclusion, Kyle Bass thinks HSBC will go into crisis mode in 2020. If HSBC isn't already the repo market bailout, they most likely very soon will be.