From a deep interest in investigative journalism, Kyle unearths some truths that relate deeply to work today. Our current global situation means we’re facing a completely changing world of work. Through looking at the micro factors, to the macro alongside the political landscape that underpins this; leaders can be better prepared for the future of work.
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Doug Foulkes: Hello and welcome to the future of work and the investment landscape. The podcast that looks at all things work in the future brought to you by Wndyr, for their blog, Chaos and Rocket Fuel. Today, Wndyr CEO, Claire Haidar and myself, Doug Foulkes, are joined by Hayman Capital Management’s founder and CIO, Kyle Bass.
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Hi Kyle. How are you?
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Kyle Bass: I’m great. Glad to be here.
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Claire Haidar: Excellent, Kyle, thank you so much for taking time out of your very, very busy schedule to be with us today.
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Digging right into things kyle, whatever you and I have conversations that I always try to dig into the details because I’m just so fascinated with the work that you’re doing.
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From my perspective, I consider you to be much more of an investigator rather than an investor. And the reason why I say that is because so much of your work involves tracing the money to unearth truth. How did you come to do what you do today?
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Kyle Bass: Well, Claire, I’m excited to be here with you too. The answer to that is as a very long answer. But let’s just say early on in my career, I really had a thing for investigative journalism. I wasn’t one to just subscribe to newspapers, read the news and move on. I was very interested in long form, deep, deep investigative journalism and unearthing those truths and also bringing justice to the world and bringing those truths into the forefront.
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And as you know, in today’s day and age, everything is so polarized and you must consider every source of every bit of data that you read. Things I used to trust almost completely, now my my initial take is, is always to distrust everything I’m reading and figure out how to pass through truth from editorial slant. Early on, I started, you know, I guess trying to understand how; and this was more financially speaking, how special situations evolved.
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And what I mean by special situations are bankruptcy spinoffs, frauds, corporate actions, mergers, things like that. And that’s always been where I focused in my career from the moment I got that phone call.
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Claire Haidar: Your work spans such a broad swath of of major issues, everything from the opioid crisis through to the atrocities of the Chinese government and many other really, really serious global issues.
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Would you say that injustice is one of the core values that drives your work?
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Kyle Bass: That is actually a really good question, Claire. I think that when you when you dedicate yourself to, you know, let’s just say following what gets our markets or individual companies into either difficult situations or great situations, and you try to and you try to peel back the layers of the onion that that get it there. I’ve just been incredibly interested all along in the micro universe, i.e. company level, corporate company level data are things that I focused on early on in my career, and that was from 1992 until 2007.
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And when you got to when you got to the global financial crisis, sovereigns had to back their banking systems regardless of the fact that their banks were all insolvent and many of it ended up breaking many of the sovereigns. If you remember Iceland, Ireland, which Claire, you’re very familiar with, Cyprus, Cyprus, Greece, is what ended up happening in any of those places is when this financial crisis hit, they realized that their banking systems were much larger than their economic output and and or macro potentially they weren’t paying attention.
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And then when the banks collapsed, tracking those bad private assets to public balance sheets, became somewhat of an obsession to me. And then that opened the world to this to this trying to understand the way the world’s banking systems work. And when you try to understand the economics of the world, invariably it takes you to the politics and then, then the injustices of the politics and the pros and cons of maybe Marxist, Leninist, totalitarian communism versus good old fashioned Western democracy.
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And that’s where we stand today. But along the way, there have been many permutations of both. And the more time you spend understanding the plumbing of the systems, it takes you to what drives the plumbing. And invariably it leads you to call it grand strategy of politics.
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Claire Haidar: I just love what you’ve just said about, you know, peeling the onion back through those layers in terms of, you know, looking at the micro, which then leads you to that macro, which eventually ultimately leads you to the politics and then therefore the injustices of the politics. We are a company that that’s all about the future of work. And during this current global situation that we’re facing, work is completely changing shape.
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And that’s why I believe it’s so important for leaders and executives who are navigating this landscape to start and basically follow that recipe that you’ve just laid out there, which is that look at the micro factors, you know, then move on to the macro and then look at the the political landscape that underpins that, because by understanding those three layers and the drivers within them, we will better be able to prepare ourselves for the future of work. So, yeah, it just just really happy that that’s your thinking and that that’s what’s coming out here, because that’s exactly why, you know, your view on the future of work is so critical here.
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Doug Foulkes: Kyle, I’m going to jump in here and ask you to actually bring it down to the micro level, if you like. I mean, if the future of work has taken a massive turn in the last few months, what do you think the landscape for an average employed person is going to look like in, say, the next twenty four months through to say, the next five years?
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Kyle Bass: It is invariable that we will see, I believe, permanent reductions in headcount, number one. I think that this virus has basically been a polarizing force on the on the leadership and the rank and file of employees in the organization. Those of us that run organizations realize that it’s been a forced realization of who the superstars are and then who the people in your organization are that actually you can easily do without, and I know that that sounds particularly harsh, but I can tell you that that’s true across the board.
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So there’ll be there’ll be a certain amount of people that are unemployed today that will be rehired at their current rate of salary and benefits. I think that’ll probably end up being about 40 percent of the people that are unemployed will be hired without without any other change.
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I think then you’re going to see maybe another 30 percent that would be called, recall that a reduced rate of benefits and salary.
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And I actually think there’s going to be, unfortunately, a permanently either unemployed or sector of the workforce that have to retrain into becoming more productive. So I think that this crisis is going to bring change within organizations that way and then external to the organization itself, I think it’s going to change the manner in which some commercial real estate is valued.
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I would not want to be the owner of office buildings based upon cap rates from 2019 coming into 2020 because I think I don’t know about you guys, but I think you’re going to see you will see more people working from home.
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I think you’re going to see valuations of various real estate assets change pretty dramatically over the next call it two or three years.
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Claire Haidar: Kyle, you’ve you’ve stated something very interesting there which which I’d like to segway to, which is you’ve broken it down to where you believe, you know, that about 40 per cent of the unemployed population right now will be rehired at the current rate, there’s going to be the 30 per cent that will be rehired at a reduced rate, and then the remaining 30 per cent will most likely have to be retrained. That is a significant impact on any organisation, particularly focusing in on that retrained piece that 30 per cent retrain piece there.
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Talk to me a little bit more around. What do you think are going to be the significant areas where that retraining needs to happen?
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Kyle Bass: I believe that it’s really tough to teach an old dog a new trick. And when I when I say that, I think these retraining programs, and what I mean by that is, is people that have jobs that are either going to be automated out, or are no longer needed given the dynamism of the workforce and the manner in which people have adapted to work on, let’s say, Slack or some other messaging system like Slack. I think we’re going to be much, much fewer executive assistants and receptionists.
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And I think those people are going to have to learn how to do something that is vitally important to these organizations, i.e., whether it’s code, whether it’s get into legal and compliance, whether it’s through education or professional training. I think people are going to have to learn how to adapt and kind of move up the ladder. What we’ve learned is there is a way to really reduce and eliminate positions that otherwise have been around for the last 30, 40 years.
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Claire Haidar: The other thing that this opens up is the divide of income. The popular opinion on the streets is that the income divide is growing. I’d like to hear from you based on the numbers that you tracked so closely, what is the data really telling us?
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Kyle Bass: I actually think the more important and the more divisive issue is the wealth gap that’s so much different than the income gap. And so I actually think the central bank’s policy is the key adjutant or friction creator for all of the all of the inequities that you see in the world today and all of the protests. When you see central banks try to eliminate business cycles, how many rich people do you know that were less rich than they are today in 2006 at the top of the market, before the 2008 financial crisis?
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What central banks have done, taking rates to zero and expanding their balance sheets into the trillions across the G7 has created this this giant. It’s just expanded the wealth gap that the haves have so much more because they’re leveraging all of these assets. The have nots continue to have not in the middle class, actually has less upward mobility because they can’t afford homes, because median income is not moving as fast as home prices. And so I think you see the unrest in Hong Kong, the unrest that you’re seeing across the US, you know, they like to call it.
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I don’t think it’s that racial. I actually think it’s it’s a it’s a difference in wealth.
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Claire Haidar: This is such a critical core concept for people to really understand, because this is directly linked to work and how people should be thinking about their employment. If you were to break what you’ve just explained down to us as if you were explaining it to a five year old, could you do that?
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Kyle Bass: You would just say that the Wizard of Oz that happens to be running the biggest bank in the country, make sure that most businesses stay open and that people have access to borrowing money whenever they want. And the price of everything is going up very quickly. And your income is not. The money you bring home it’s not going up that much. So, you know, as each year goes by, we’re going to have to, you know, have have fewer, nicer things and Mom and dad are going to have to work a lot harder.
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It’s a tough subject to to boil down to a five year old because, you know, central banking is something that it’s a concept that’s hard to explain to a twenty five year old that that’s not well versed in economics.
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Claire Haidar: I like the Wizard of Oz explanation because it is simple enough to understand this is the broken piece. And ultimately, the problem that you’re describing is not something that an individual can actually control.
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Kyle Bass: It penalizes savers because they take interest rates to zero and negative. It penalizes people that have worked their whole lives and are expecting their companies to provide them their pension to retire on. And it affects people that already have savings in the bank because as we all know, if you’re getting no return on your savings, but the price of hamburgers and hot dogs and steaks and barbecue and anything, you consume movies. I mean, just think about when you go to restaurants, you go to movies.
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I remember when spending one hundred dollars for a dinner for two at a restaurant was like your anniversary dinner once a year. And you went back you went back to eating peanut peanut butter and jelly the next day to save up. And today I dinner for two in a decent restaurants is one hundred dollars. I think every single person listening understands that. Like what’s the price of a new car? Have you ever seen the price of a new car that you like go down over time?
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Claire Haidar: No.
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Kyle Bass: Right. And this is the insidious nature because by the way, the government prints these things.
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So we went back and we looked at 30 years of how the US government calculates consumer price index. And we looked at the auto component very specifically. And when you look, call it 30 years ago, the average car price in the US was around thirteen thousand five hundred dollars. When you look at today, the average car price of a new car today is somewhere around forty two thousand or forty one thousand dollars. So you’re talking about a tripling of the average car price in a 30 year period. If car prices have more than tripled in 30 years, how much of that do you think made it in over a 30 year period in Consumer Price Index. Six or seven percents made it in out of three hundred.
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You know why? Because they do this thing called chain weighting. So they’ll take the car today at forty two thousand and the government will say, well, you know, you have electric windows, the car 30 years ago had rolled down windows. So if you take out, if we compare apples to apples, you’re going to have to remove the cost and the equipment for the electric windows.
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And then you say, well, you have this heads up display of all of this functionality in your dashboard, but back then it was an analog dashboard. So if you were to put in an analog dashboard, what would it cost today. And so they literally take apart the car virtually. And they and they say, well, if it was just a car, just like it was back then, then it’s only six percent more expensive. But in reality, when you get your checkbook out, you don’t have those options. The chain weighted concept allows the government to actually not record inflation. And why that’s important to the government is many of the government’s adjustments; you probably heard of this concept of COLA cost of living adjustments; any of the government payments that they owe people have COLA adjustments in them that are indexed to it, to the government’s determination of inflation. So what I’m telling you is the inmate is actually running the asylum. If you look at the CPI, there’s one big deflationary component where they actually record significant price declines, and it’s in the court, it’s in the price and cost of data.
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Doug Foulkes: I just like to bring it back to to work again. And you mentioned it a little bit earlier, that remote work, which is definitely the new thing, from your lens. What are the top five precautions and considerations that senior leaders in organizations should be thinking about?
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Kyle Bass: I’m a poor leader of large organizations. I have a small organization and I’m much better at that. But one of the concepts that I discuss with my contemporaries that some who run much larger organizations, for anyone that says people that work at home and more productive than someone that works at an office, I think that is a fallacy. You and I both know that, the three of us know that anyone working at home has many more distractions than they have at work.
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If you were to think about the efficient frontier, one hundred percent being a someone that’s 100 percent productive at work, minus a 30 minute break here and a 40 minute lunch break or whatever, whatever, where they have schedule time off during the day, it’s my view that people that that prior to the Covid virus, I would say people are probably at work even on average, we’re probably 60 to 70 percent productive. The friction at home is probably gone from 30 to 40 to 50 to 60.
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And so that’s that’s materially worse. So when I think about how do we how do we combat that? There are a lot of tech gadgets out there that enable. Orwellian text, get tech gadgets out there that will allow employers to make sure their employees are productive, working hard and paying attention. And so whether that’s facial recognition cameras and keyboards that need to stay active in phone monitoring, I know that all sounds terrible to all of us. But if we’re going into this mode, working at home, we need to have someone overseeing both quality and quantity control of your workers.
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And I think those are the things that as we take that kind of large step, I think that that those kinds of Orwellian things that that are required to monitor folks are going to have to be put in place.
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Claire Haidar: Kyle, is this a personal opinion that you have or do you have actual data sets that you’re looking at that backs up what you’re saying?
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Kyle Bass: This is not my area of expertise at all. This is in talking with people that run firms that have, you know, ten to five hundred people. So those are actually considered small firms. So I’m not even talking about Fortune Fortune 500 or Fortune 1000 based companies, but everyone’s trying. All of the business leadership is trying to grapple with this. This this Covid questions slash problem. In my case, I’ve spent almost all of my time dealing with the investments and moving the firm forward from the investing perspective. So I’m giving you this pure opinion and nothing backed from a data perspective.
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Kyle Bass: The interesting thing to comment on what you said there, this is actually an area where I would disagree with you on based on our own experience of running a virtual company. But coming back to the point that you made about the fact that organizations are really going to be grappling with who their superstar employees are. I think that’s we’re going to see this interesting mix start coming to the fore here. Where we are going to grapple with these type of concepts is, I think that we can’t just make a blanket statement across organizations to say that the numbers that you’ve hypothesized about apply across the org.
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I think, like you see in most things in life, there’s a distribution where you’ve got your outlier performers. And I think that’s where organizations are really going to start focusing, because I think the productivity numbers from those superstar employees are going to look very different to the rest of the dataset.
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Kyle Bass: I actually might agree with you that you talk about the high, high functioning employees that you have and partners that you have. I think we can all turn off the world and focus on our work and what we need to focus on the highest skilled and the people that are running firms. I don’t think you’re going to see any any loss of productivity whatsoever, but I do think you’ll see it. You’ll see it in the middle of the organization.
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Claire Haidar: Coming back to that political level, I think we’ve we’ve looked at the micro, we’ve we’ve dug into that piece. We’ve definitely looked at some of the macro components. If we can move onto that political piece of the onion that we’re peeling back, what are some of the legislative reforms that you suggest countries should be looking at and seriously considering, given this big, big disruption that we are currently living through?
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Kyle Bass: When I think about my area of expertise is at the time in the last eight or nine years has been the US China relationship, the US Hong Kong relationship, the China Hong Kong relationship. And so we’re talking today, we’re talking about a period of time in which all of those relationships are at their most severe. They’re in the most severe flux that they’ve been in in the last 40 years. When you ask the legislative reforms I take, I’ll take you a step back and you say because you have this fundamental forces acting against one another, you have you have fundamentally incompatible political systems. You have a totalitarian Marxist Leninist communism with Chinese characteristics, and then you have Western democracy.
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One has doesn’t care about human rights whatsoever. In fact, they will trample human rights to achieve the goals of the state. And the other is has a fundamental basis in a bill of rights and inalienable rights that each individual citizen, the United States and Europe, must must have as a fundamental, basic right of life. And those systems, in my view, are completely incompatible. And yet we’ve been trying to trade where fundamentally from a systemic perspective, there is no common ground, there is no agreement on what’s right and wrong.
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From my perspective, we think about legislating things, the simple basic legislation that’s got to be pushed through and again in financial markets is; we’ve got to level the playing field. Right now, chinese companies in the United States don’t have to adhere to the exact same securities laws as US companies do. They get a pass. We gave them a pass in 2013. I think we need to level the playing field from the perspective of corporate interests. But it goes another step further Claire. Why on earth do Western democracies interface with a villain like China who who has between one and three million people in concentration camps simply because of their religious preference?
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I thought our our world said never again after World War two. And it’s absolutely insane that we’re entering into; that Wall Street continues to invest in countries like this by turning a blind eye to human rights abuse. That in itself is a big head scratcher for me. So when I think about policy, I think we need to completely rewrite policy and require our trading partners to adhere to some sort of a basic norm of human rights of climate.
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We continue to interface with some of the worst climate offenders on the planet today, and it’s in the interest of trying to just earn another or another shekel.
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Claire Haidar: And this is where that inter play between the micro and the macro and the political become so important again, because the whole culture that we try and breed in Western democracies, not only the US but other democracies, is the basic principles of if you had a relationship with somebody, there has to be some shared value set. If if you’re hiring people into a company, there needs to be some type of culture fit. Those are the things passing at the micro micro level.
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Yet we’re not doing it at the at the macro in many cases and at the political level, as you say.
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Kyle Bass: No, and it’s almost taboo to talk about. You’ve seen the narrative change because the communists are playing their hands so poorly.
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They’re playing such a heavy hand, whether it’s North Korea literally blowing up the the relation center between North Korea and South Korea just a couple of days ago. Or whether it’s or whether it’s China abrogating a deal that they signed in 1984 with Great Britain in 1992, with the US and the 1984 agreements filed and ratified at the UN. And yet China says, you know what, it’s actually not useful for them anymore.
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So they’re just going to come up of Hong Kong. That kind of abrogation of international agreements, international responsibilities for that matter, is going to forever change the governance, the relationship between our two countries and really Western democracy. Those countries relationships with with the totalitarian systems of, let’s call it Russia or Venezuela or China or Cuba, I think those relationships are going to be rewritten over the next few years. And I think it’s I think that will happen regardless of political leadership in the US or Europe.
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I think I think the pattern in the path is set because we all, I think you put it perfectly Claire, you have to have a shared value set and that shared value set, that can’t be money and profits at the cost of everything else. I think we need to bring morality back into the equation.
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Doug Foulkes: Kyle, we’re actually coming towards the end of our time together. And just listening to that, I mean, legislation is obviously something you could talk about passionately for for many more hours, I’m sure. I just like to bring things just back down for my last question, which is just around the macro level again. What do you think society’s blind spots are when when we’re considering the future of work?
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Kyle Bass: When I think about the biggest blind spot that the world has, it’s it’s simply greed, and it’s it’s allowing greed to to supersede any of the rest of your of your own value system.
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Claire Haidar: Kyle, to wrap up our session today, as you know, I can keep talking for hours and hours on so many of these topics with you, but to bring things to an end, you’re a deep thinker. You’re a prolific reader. And as I learned today, which I didn’t know before, is that you truly have a passion for investigative journalism, which very much makes total sense because of your curious mind.
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What would you say people should be paying attention to right now and are there specific sources that you could recommend to everybody listening in?
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Kyle Bass: I don’t read the newspaper every day. I don’t have any particular routine. What I found and maybe to my wife’s chagrin, about two or three years ago, I actually found Twitter and with Twitter, I’ve learned throughout my years that I trust very specific people. And in the end, whether they’re journalists, academics, politicians, there are some people I trust. And then if you look at who I follow, I follow President Trump. If that’s not because I fully trust him or that I voted for him, it’s simply because I also need to see some of the propaganda and rhetoric that’s out there.
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I follow the Chinese propaganda outlets because they’re the official mouthpieces of the CCP. So I still follow people that are playing games, but I also follow very specific people that I have a lot of trust and faith in. And so I think Twitter is kind of a newspaper TV for intellectuals. I don’t use it for leisure at all. I use it for kinda creating an information funnel that that I use that that comes to me. That is the way I want to see it and read it.
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And so when I think about what what some of the best books are out there today, they’re books that I’m very interested in. The One Hundred Year Marathon by Michael Pillsbury. Now, I think Michael Pillsbury is actually a double agent working for the Chinese government, but he wrote a really good piece on the history of the relationship.
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Claire Haidar: Kyle, final question just based on something you said. You said that you follow very specific people that you trust, could you give us a framework in terms of how you define trust and how you recognize that in somebody.
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Kyle Bass: You know, I have a lot of friends in various places, again, whether they’re academics, think tanks or in the government. You know, if I interface with them on a personal basis like you, and I say Claire, who do you think the best person in a specific technology is or someone that writes about it? I bet right off the top of your head, you know, one or two names. You know, it’s just like that.
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Claire Haidar: Kyle, thank you so much for your time today. It’s been really, really good to have this hour long conversation with you. Thank you for taking time out.
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Kyle Bass: Thank you. Claire. Thanks, Doug. And I look forward to talking with you guys in the future.
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Doug Foulkes: Our time is up. Kyle, thank you for your time and global insights to the future of work. Claire, again, thank you for for being here, for setting everything up. From us at Chaos and Rocket Fuel, thanks for listening. Keep safe and be sure to be back soon.
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