Stock Markets Saw Their Biggest One-Day Gain In A Month
There is a positive undercurrent in the market
On Episode 499 of The Core Report, financial journalist Govindraj Ethiraj talks to J. Kyle Bass, Founder and Chief Investment Officer at Hayman Capital Management.
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(00:00) Introduction
(01:38) Markets on Tuesday
(02:52) The Rupee is Up
(03:18) The China Syndrome
(05:07) India Has Outgrown Emerging Markets – J. Kyle Bass Explains Why
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Wednesday, the 5th of February and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
The world is focussed on US President Donald Trump and what he may or may not do as he negotiates with China.
Events are happening so quickly that it is tough to catch every move and counter move even in our shorter news cycles.
As things stand, the US and China have announced tariffs against each other, though there is some method within the madness so to speak, in terms of products targeted, meaning these are not blanket tariffs.
It is likely that the tariffs will be pulled as it happened with both Mexico and Canada who have been given a one month lease of life.
At this point we don’t know.
Today is a special edition and has some news but a long interview where I hope to bring to you a different but important point of view on why the US is targeting China and what indeed determines US policy on China.
And how this eventually impacts markets and stocks right here.
This is important because the rationale will not change even if there is a tactical shift in tariffs or other economic measures that are announced as and when they are.
The rationale is important to know how the present administration in the United States will view China, including in the context of DeepSeek, the new seemingly low cost AI model that is creating waves.
Markets
The stockmarkets saw their biggest one-day gain in a month on Tuesday, mostly not affected by the China-U.S. trade war fears that were pushing down stocks worldwide.
There is a positive undercurrent in the market as we spoke of yesterday, even though the market was down on Monday.
The reasons are many but one view that is being put forth is that the markets are seeing the positive takeaways from the Union Budget presented on February 1, including of course the Rs 100,000 crore benefit that has flowed to tax payers by way of tax breaks.
Of course with a pause on Mexico and Canada tariffs, that changes the situation somewhat and brings life back to some normalcy.
The 30-stock BSE Sensex closed at 78,583.81, up 1,397.07 points from its previous close. Similarly, the NSE Nifty50 ended at 23,739.25, up 387.20 points.
The Nifty Bank, Financial Services, Metal, Pharma, and Healthcare indices were up and the Nifty FMCG index was the only index in the red, down 0.25 per cent which is interesting given that the Union Budget was expected to provide a greater filip to consumer stocks.
In the broader markets, the BSE MidCap index gained 1.35 per cent, and the BSE SmallCap was higher by 1.2 per cent.
Rupee
The rupee was higher on Tuesday with some swings, similar to the action in the region.
The rupee ended at 87.0675 against the U.S. dollar, against a record closing low of 87.1850 in the previous session, when it also fell to an all-time low of 87.28, according to Reuters.
The China Syndrome
The tariff wars have begun at least for now.
Beijing has put a 15% tariff on less than $5 billion of US energy imports and a moderate 10% fee on American oil and agricultural equipment on Tuesday, moments after new US tariffs entered effect, Bloomberg reported.
China said it will also investigate Google for alleged antitrust violations, although Alphabet Inc.’s search services have been unavailable in the country since 2010, Bloomberg reported.
There were also targeted measures,with Calvin Klein owner PVH Corp. and US gene sequencing company Illumina Inc. on a so-called blacklist of entities that could affect their sizable operations in China, and imposed new export control on tungsten and other critical metals used in electronic, aviation and defense industries.
Meanwhile, President Donald Trump has invited Indian Prime Minister Narendra Modi to visit the White House next week, a White House official said, hours after a U.S. military plane departed to return deported migrants to the country, Reuters is reporting.
Trump spoke with Modi on Jan. 27, when he discussed immigration and stressed the importance of India buying more American-made security equipment and fair bilateral trading ties and more of this shortly.
Importantly, India has transmitted that it is not going to become protectionist and has already offered some concessions to the US.
The general feeling is that India can come away with some trade and strategic wins following Modi’s meeting with Trump.
The United States is India's largest trading partner and two-way trade between the two countries surpassed $118 billion in 2023/24, with India posting a trade surplus of $32 billion.
Trade Wars
The trade wars have begun, at least with China. Why is China in the Trump administration’s cross hairs and from a financial markets perspective, what do these latest developments mean for markets in America and Asia and more importantly India.
How is 2025 panning out in terms of investment opportunities and themes, both sector wise and country wise.
I spoke with veteran hedge fund manager J Kyle Bass, Founder and CIO of Hayman Capital Management, an investment manager of private funds focused on global event-driven opportunities.
Mr. Bass is a Life Member of the Council on Foreign Relations and the recipient of the 2019 Foreign Policy Association Medal for his responsible internationalism.
Mr. Bass is the former Chair of the Risk Committee of the Board of Directors of the University of Texas Investment Management Company (UTIMCO), which manages approximately $65 billion.
Formerly, he was a Managing Director at Legg Mason and a Senior Managing Director at Bear Stearns.
Bass is an Advisory Board member of the Hudson Institute’s China Center, an Executive Advisory Board member of the George W. Bush Presidential Center, and an Investment Advisory Board member to RIA NewEdge Wealth.
Investor Kyle Bass, who spent much of his career betting on sovereign debt crises and interest rates, is shifting focus from hedge funds to the environment with a firm that will buy rural land and create environmental mitigation offsets.
The new firm, Conservation Equity Management, was officially launched on Thursday and plans to rebuild wetlands, streams, and endangered species habitats to help create offsets, or tradable credits, to diminish the ecological damage from development. These types of credits are highly sought after by large corporations and developers which generate emissions in their businesses but are pledging to cut or offset them.
The land in Texas and nearby states might also be used for regenerative cattle grazing and renewable energy, Bass said. And the firm plans to elevate the ecosystem of the properties it buys and then sell the parcels for more over time.
Bass, who grew up playing in streams and woodlands near his home in Texas, is pivoting to a new form of investing as pension funds, endowments and wealthy families search for ways to make money while improving the environment.
TRANSCRIPT
Kyle Bass: I mean, look Govind, I think what's very important to understand about this action is last year we lost over 110,000 Americans to opioid and fentanyl overdoses. There is a reverse opium war going on. It's coming through the Canadian and the Mexican border and all of the precursor chemicals, 97% of the precursors are sent to Mexico and Canada from China.
This is something, this is, China is a country where they chased one or two COVID cases around the whole country and locked the whole country down. And somehow magically they can't stop hundreds of thousands of doses, lethal doses coming into America. Just to be clear, last year on our Canadian border alone, we interdicted 43 pounds of illicit fentanyl from China through Canada.
43 pounds of fentanyl will kill 9.7 million Americans. 9.7 million. Since Operation Lone Star began in the state of Texas, we have collected 350 million lethal doses of fentanyl, enough to kill every man, woman, and child in America.
So, when you start hearing about tariffs on Canada and Mexico and China, they are directed at one thing, it's drugs. Stop the drugs flowing across our borders. And if you don't want to do it, these tariffs will stick.
And so, we have talked and talked and talked and talked. We know we're talking at you, it doesn't get you anywhere. And if you're dealing with an authoritarian state, the only thing they understand, they understand violence and money.
Those are the two things they understand. So, guess what? We're coming at them with tariffs because we want the drugs to stop.
It's that simple. So, when you say, is it going to be a negotiation? It's certainly going to be a negotiation because 25% tariffs close things off.
So, if Canada and Mexico have half of a brain, they're going to comply.
Govindraj Ethiraj: Right. Okay. So, let me come to China in specific now.
So, the problem of fentanyl is obviously to do with health and healthcare issues. And as you said, it's killing Americans. But there is a larger trade problem with China.
And that's something that's been articulated, including in the campaign trail, leading up to the most recent elections. I mean, if you were to take the danger part of out of the equation, in this case, fentanyl, is everything else hunky-dory or fine on the trade front?
Kyle Bass: We all know that's not true. It's very difficult to isolate specific, this 10% is for drugs, this 10% is for dual-use military operations, or let's just say malign actions in the South China Sea. Everything is, I guess nothing's monocausal.
It's an amalgamation of things. I can tell you the tariffs that were instituted or that will be today are very specifically focused on drugs. It's that simple.
We're trying to tackle one problem at a time. If you understand the way President Trump negotiates, he said this publicly, he doesn't believe in a multilateral or let's say a multivariable settlement. He wants to go handle individual settlements, individual countries, individual negotiations, because he believes that's how you optimise the negotiation.
I tend to agree with him on that. So we're tackling drugs first. We're going to be tackling China's belligerence in the South China Sea, what they're doing in the Philippines, what they're doing throughout Southeast Asia, militaristically, that's coming, but right now we're focused on drugs.
If you're asking about the rest of the relationship or as it relates to trade, we do about 600 billion of trade with China annually. We're about a $30 trillion economy. I think people errantly believe that we can't do without China.
We can certainly do without China. We have a great relationship with India and it keeps getting better and better. We have relationships throughout Southeast Asia.
India is the world's largest democracy. I believe the primary issue with India, this is my opinion, is we need to get your defence capabilities away from Russian equipment and into some sort of Western equipment. Then I think India will be in a much better place, but that's going to take some time.
Govindraj Ethiraj: Yeah, I mean, India made the first move, I mean, amongst many other moves in the past, to reduce duties on Harley Davidson bikes, which has been a sore point of sorts with President Trump from his previous administration as well. So things are moving on that front. But let me understand your views on China a little more.
So you've been speaking on this subject, I guess, over the years. Why is it so much of a concern for you? And in the context of trade, in the context of, let's say, something more recently like deep-seek and so on?
Kyle Bass: Yeah, look, if you look at the primary objective of Xi Jinping and the ruling elite in the Chinese Communist Party, they've been telling us since 2017 that they have a few goals. Number one is global primacy at any cost. Number two, he will reunify Taiwan, reunify is his word.
He will have to invade Taiwan and take all of the people in Taiwan against their will, if you look at the polling there. And so when you read the Director of National Intelligence's report that... So in the US, we have 16 primary intelligence agencies.
The Director of National Intelligence synthesises a report to Congress. So there's a classified report and then there's an unclassified. Unclassified is released in March of each year.
Govind, if you take the time to read that report, you see that there is no question that China single-handedly represents the largest risk to the US national security and to the national security in the West. And so when you ask why I care so much, if you look at the world the way it sits today, you have a ground war in Europe between Russia and Ukraine. You have a war between Iran and its proxies in Israel.
And you have a coming war with Taiwan, China, and maybe Japan, Australia, US in the South China Sea. And so why does it matter? It'd be like asking, why does Hitler matter in 1936?
And I say that not to compare Xi Jinping to Hitler, but to compare them in one aspect. These people, Putin, Xi, they are authoritarian madmen. They don't operate democratically.
They don't care about their people. They care about their power. And so I believe China and Xi Jinping is the largest risk to our way of life going forward.
Govindraj Ethiraj: And if I were to come back to trade, now the linkages or the interlinkages between the United States and China are obviously very high. Even in the case of Deep Seek, the $6 million or allegedly $6 million AI project has been greeted favourably by CEOs, including the tech CEOs in America, and it's seemingly including by President Trump himself. So there seems to be a constant current of mutual benefit running at all times.
Kyle Bass: Yeah, I mean, first of all, the $6 million, as you know, it's a fabrication. It's a claim that's made by, let me get this right, some hedge fund kid who had a side hustle where he thought he could develop the world's best large language model and AI programme? I mean, come on, Govind.
Just the actual claim is so ridiculous that I'm surprised that everybody bought it. Like, it's so obvious what they do and what they're doing here. And when you look at Microsoft, you look at the investigative authorities in the US, we saw huge amounts of chat GPT, open AI's source code going to China in October.
So you have an entire edifice of the Chinese Communist Party in a race both for AI and quantum. And we all know that that race has to be won by the West and not by China because, well, we don't need to get into that if you don't want to. But the bottom line is there were hundreds of billions of dollars spent to get open AI to where it is.
And if you look at Google, Meta and Amazon's announced capital expenditures for AI for 2025, they're all between $60 and $80 billion each. So call it $210 billion will be $20, $25 spent on AI. There is no Chinese hedge fund manager side hustle at $6 million that is doing anything meaningful.
Can they make something a little bit better if you give them the corpus or the body of the work that you've done so far? Well, of course they can, right? But $6 million didn't create this and it won't.
And I think it's vital to understand that China itself has said, the Communist Party has said they're going to spend a trillion yuan, about $135 billion state spending supporting AI research in China this year. So which one is it? Did you spend $6 million in a side hustle and create the greatest AI programme in the world?
Or are you going to spend $135 billion supporting AI in your country this year? I mean, again, their own actions contradict their own statements.
Govindraj Ethiraj: And you're saying that this is symptomatic of something larger and has been happening for a while.
Kyle Bass: Yes. And look, let me equate it to how China operates in various world markets, because you want to talk about trade, you want to talk about how they operate. Let's look at rare earth metals.
They have 97% of the world's finishing capacity for rare earth metals. So geographically, they don't have all of the rare earth metal deposits, but they have all of the finishing. They control rare earth minerals.
Rare earth minerals are very important in a number of defence applications, as well as practical and commercial applications. So they also hold the price of every all of these finished goods down in the world markets enough to where U.S. businesses can't spin up, make, comprise some finishing capacity and finish it and make any money. They keep the global price below where we could make money.
Therefore, they keep global supply and they keep control. Whether you look at rare earth minerals, whether you look at aluminium, whether you look at synthetic graphite, I can go on and on and on. The playbook is the same.
So when you think about the DeepSeek psychological operation, which is what they launched, what they're trying to do is get people to maybe stop for a second or even attenuate their capital investment in AI. Because if they say, well, it only took $6 million and it's going to be free and you guys charge 200 bucks a month or 300 bucks a month, what they're trying to do is stop or severely reduce U.S. investment in this arena. And that was their objective with this DeepSeek operation.
Govindraj Ethiraj: Right. So I'm trying to link all of this, obviously, to financial markets and capital markets. So a step back question first, till Donald Trump was elected president, the markets were running up and I'm talking about Wall Street now in anticipation and in some ways having also concluded that he was going to come back.
And he did. So after which I think the market seemed to be a little more stable and now there is uncertainty. So how are you seeing this whole period of financial market behaviour?
Kyle Bass: I mean, we are still within one, one and a half percent of the all time highs. We are materially higher than when Donald Trump won the election. Are there some things we're going to have to do to change the tectonic plates of the world?
They're going to have to change a bit and they're going to have to change because the prior administration was trying to build a regulatory superpower, very much like Europe, which, Groban, we know where Europe's gone in the last 20 years. It's gone nowhere. Europe has become a regulatory superpower where they've run out all of the innovative talent and they continue to do so.
And so the new, if you're, I don't know if you've been to America since the election, the buds and the enthusiasm and the, the business expectations, I've actually never felt them greater or higher than they are right now. We, the, the business world believes that our country actually is going to stop being a regulatory superpower. You know, people like Lena Khan at the FTC and we can go through department and by department, but there were, America was stifled.
Our growth, we were growing, but we were, we were growing despite the fact that we have people at the top trying to restrain and, and, and stop some of these business practises. But in the end, we're going to go back to traditional antitrust analysis. We are going to lessen regulation and we are going to kind of ignite those capitalistic fires that must be lit to get our country to move forward.
Because as you know, we're not going to pay down our debts. So we're not going to be able to move the numerator. What we've got to do is grow the denominator.
We need to grow GDP. And when you see what Scott Besson's objectives are on the treasury and what the Trump administration has elucidated so far, we will grow our GDP. I think faster than people think we will.
Govindraj Ethiraj: So if, if I were to drill that down a little further and you mentioned the FTC, so and, and maybe if I can ask you to illustrate that. So does that mean telecom companies will be freer to grow? And my, of course, my subsequent questions would be to do with if they grow, then how, and what could that mean for the rest of the world?
But are there any other examples that you can quote where you felt that there was stifling regulation and therefore things could change now?
Kyle Bass: Yeah. I mean, look let's just say the news over the weekend is, is how Elon Musk, Doge team is in the U S aid offices and, and our focus there. When you, when you understand what the prior administration was doing around the globe the reason Musk is in Doge is when you walk in the front door, there was an LBGTQ plus sign.
There was a sign about diversity, equity, inclusion. They were spending hundreds of billions of dollars in pushing these narratives of multiple genders and diversity, equity, inclusion at the top to our embassies and other countries around the world. I don't know if India felt this, but we had, we pushed, we pushed the LBGTQ plus platform in the Roman Catholic countries thinking we could change them.
And we became the laughing stock of the world. And that became a priority of the United States. So we are going to deprioritize the crazy things that we were doing in the last four years.
And we're going to focus on businesses as it relates to Lena Khan and, and telecom growth, or let's just say M&A. As an example. Yeah.
An example. I'll give you a perfect example. So any hydrocarbon mergers, because they also had a very, a very large green agenda, which as you know, I'm an environmentalist.
I'm sitting here in the middle of a forest talking to you, believe it or not. And you manage a fund as well, which. Yeah.
Yeah. I mean, I, I manage a conservation based fund and those two things can exist at the same time. You have to have clean burning hydrocarbon growth.
You have to focus on LNG and natural gas, which only has two byproducts, CO2 and water. That needs to be, that needs to proliferate around the world, especially in the world's island nations, in my opinion. But Lena Khan and the FTC were telling every single CEO buyer and seller in that space that she's not going to let mergers through.
She's going to challenge these mergers. And I'll give you an example. EQT, one of the big, one of the big energy companies in America that is focused on paying dividends with upstream company, they buy upstream and they turn into an MLP and they pay dividends, was buying a company called Tug Hill.
It was a Marcellus play. Marcellus is up in the, in the Pennsylvania area of the United States. It's where, where there's a heavy natural gas presence.
So EQT owned 6% of the Marcellus shale and Tug Hill owned a little less than 1%. So when you're doing traditional antitrust analysis, Jobin, if, if a 6% owner is buying a 1% owner and creating a seven and there are many other players there and, and it doesn't create a monopoly. It doesn't create any like traditional antitrust analysis.
This wouldn't even have made the conversation. And she filed the block that, and she did really underhanded things when she was blocking that. So I'll give you an example on process.
So the, the FTC has five commissioners. So there are rules about open records and foyable records. So when you, when you go state your case or make your case at the FTC, typically you see three to five of the commissioners in your hearing.
And if there are three commissioners in there, so if there's a, there's a majority, a simple majority, every single comment, every statement, every video is now a matter of public record. So when she was blocking these mergers, her legal counsel instructed the, uh, the five member board that when they're meeting with the companies that they're blocking, that they should meet with them individually so that nothing can be discovered. So when Chug Hill was making its case to the FTC about this blocking being absolutely insane and having no basis in, in the legal, uh, let's say structure of the United States, they were, they were forced to go meet with one and one and one.
And if they meet with them in separate meetings, then nothing's an open record. So what I'm telling you is they played dirty. They played illegally and they filed to block things.
And in this case, just for an example, this, this began as a $5.3 billion merger between these two players are an acquisition of 5.3 billion. It ended up costing the seller $500 million and then $85 million in legal fees. And it took an extra 18 months.
Imagine if, if you knew that any possible combination was going to cost you almost a hundred million in legal fees and take you 18 months of your time, you might not even enter into the agreement. And that was the idea. The idea was to stifle any kind of M&A.
So what you're going to see going forward, again, we do have laws in our country. We do have a basis for those laws that are, that go all the way back to the Sherman and I trust that, but we're going to go back to a proper legal basis for challenge. Do I think we should challenge mergers?
Absolutely we should, especially if it's number one, buying number four to make number one and even bigger monopoly, well, we should block that. But if it's, if it's a 6% buying a 1% and no one has a monopoly, then it, it, it shouldn't even play is what I'm telling you. So Lena Khan was a menace to U.S. business.
Govindraj Ethiraj: Right. So I'm assuming that you're saying in the new administration or the current, current administration, things should be freer for companies, businesses, and their CEOs to expand, to grow. How is this likely to play out on wall street?
And if I could come to how or what kind of themes that you would look at now as an investor, first on wall street, and then in the rest of the world, to the extent that you do look at the rest of the world.
Kyle Bass: Yeah. This is going to sound like it's on that I'm pandering to you, but, but, but I'm going to, I'm not pandering to you. I would just say that I wouldn't invest anywhere other than America or India.
When I look at India, India has a very favourable population, uh, dynamics. Uh, I think that if India finds its way through its, uh, away from its relationship with Russia and into more into the Western world, India is a very exciting place. Uh, as, as China's belligerence or malevolence, uh, rears, it's ugly had more and more, as you know, Apple has moved a huge portion of its, uh, separately from China to India.
I think India should be the net beneficiary of all of the troubles in the world, uh, with China. So I think India has a lot going for it. When I think about America, I'm very positive about America.
When you think about where we stand, we use American dollars or us dollars for everything that we purchase. We have all of the, uh, protections of the U S legal system. And when you look at the way the capital markets are set up, we're 4% of the world's population.
We're 25% of the world's GDP, but we're 60% of the world's capital markets. So people feel safe here. And if you look at the rest of the emerging world, you look at the architecture of their markets and the inflation that we just pushed to the world in the last four years, you know, we pushed you and I both know we pushed 40 to 50% inflation to the world.
There's a negative convexity. There's a, there's a level of things get worse for an emerging economy that isn't America. Meaning the financial architecture of emerging markets is more brittle than that of developed markets.
And when we push that kind of inflation to the world, you can break these countries. So when you look at the hyperinflation that happened in Argentina, a hyperinflation that happened at start choosing countries in Middle East, Lebanon, uh, um, uh, Iran, Pakistan, you look at, we destabilised all of those regions. And so I don't believe that investing in emerging markets is a good idea right now.
Uh, I believe sticking with developed countries with positive population, demographic trends, and strong legal systems is the right thing to do. Uh, so when I think about asset allocation, I'm going to focus here. And places like India are fine.
Places like Australia are fine. Although they're approximate to China. Uh, you know, there are a few pockets of developed countries to invest in, but I would not be investing in emerging markets now because I believe geopolitically, uh, the world is on a path, uh, that is, uh, not going to get any better anytime soon.
Govindraj Ethiraj: Uh, I mean, this is just for, uh, those who will listen to this, how are you distinguishing or defining emerging markets? Uh, and what kind of do you usually put in that basket?
Kyle Bass: Uh, so I'm not talking about Africa or frontier markets. Uh, I'm talking about, um, when I think emerging markets, I think Southeast Asia and I think South America. Okay.
That's the best way to put it.
Govindraj Ethiraj: Okay. So that, uh, so when you say Southeast Asia, you mean, uh, uh, I mean, would that be Indonesia and Malaysia? Yeah.
Kyle Bass: I'm thinking Indonesia and Malaysia, Thailand, Vietnam, Philippines, you know, those areas, because those areas also need, they need us dollars. They need a us influence. Again, the reason China's pushing so hard in Scarborough Shoal and, and, uh, down in, in the Sabine Shoal and, and all of the places where it's pushing right off the coast of the Philippines, because they had, they, they, they are trying to create their whole skier force projection and kind of rule Southeast Asia, uh, with a, with an iron fist.
So I think we, as democracies need to be investing in those nations so that they can stand on their own two feet. So maybe even ideologically, I'm interested in, in, in investment there. Once we can fix things.
I mean, you look at the Philippines, China owns 40% of the Philippines electric grid and they own the software that manages the grid. So, uh, the Philippines have a hard time pushing back against China right now. And, you know, there are us treaty ally.
We've had a, we've had a mutual defence treaty with them since 1951. And they're reluctant to engage in that and ask for our help because they know their electric grid will go down. I mean, there are some really bad situations in the world today that we need to fix.
Govindraj Ethiraj: Right. And, and just to come back to India, uh, I mean, and when you look at India as, as, and when you do, uh, what's the basket that India usually sits in for, from your point of view or vantage point?
Kyle Bass: Again, I think what I'm doing is you were asking me where, where I think in the longer run from a macro perspective, uh, there, there would be kind of positive asset allocation from us investment. I think India is a large enough economy. I think of India as a developed economy, maybe a little lesser developed than, than other developed economies.
But I don't think about India as an emerging market. I think about it as, I mean, there is huge technological capability in India. They are, again, there we've been doing a lot of outreach with you, as I'm sure as you probably know, your ambassador has, has done tours around the United States.
Um, they've done a great job with the consulates that you've got set up and really trying to get us businesses to, to partner with Indian businesses. The outreach has been pretty substantial in the last 24 months. Uh, so when I think about where India fits, I think India fits in a, in a portfolio that is looking for international diversification in a, in a period of time in which that diversification should be severely reduced due to the conflicts around the world and, and, and the coming conflicts, uh, in the next few years.
Govindraj Ethiraj: Right. And, and, uh, so that's at the country level, uh, are there specific sector themes that you're focused on and particularly, let's say in 2025 or, uh, given everything else that's been happening around, because you talked about, uh, you know, you touched upon phones in a slightly different context, uh, electronics, or we talked about minerals, we've talked about oil and gas. So are there any specific themes that are, uh, interesting you're right now within?
Kyle Bass: Yeah, that's a great question. Uh, we, we launched a, uh, at our firm, we launched a, uh, a business, uh, that does specifically does lending to defence technology companies. You probably know if you look at, uh, if you look at, uh, the, the venture capital league tables and you look at where the capital and VC has been flowing, uh, you know, overwhelmingly that has been flowing into AI and AI as a very large bucket, as you know, it's almost like.com was, uh, back in the, in the first run, everything, of course, has some AI to it. Uh, so I, I know that needs to be differentiated, but you take AI and then you look at the second bucket and the second bucket is defence tech. That, that is, you've seen enormous amount of capital moving into specialised, uh, defence tech. And that, that is something that's absolutely necessary because Govind, you know, the next wars that are fought as, as we've seen in Ukraine, as we've seen, uh, in Israel, uh, uh, Iran, uh, there, there's a lot of cyber that goes on, right.
There's a lot of electronic warfare that's going on, on the battlefield, uh, with Russia, you know, being, being very adept at, at being able to neutralise GPS, make it unusable. So a lot of these defence tech companies are figuring out how to fly without GPS. Uh, in fact, I, uh, I hosted this weekend where we're sitting here, uh, some of the top defence tech companies in America, along with some of America's top war fighters, uh, in our military.
And we got together and you think about historically that, that life cycle of programmes of record for the defence department take 10 years. They literally take 10 years to get going as a official programme of record. Well, the world has been innovating much quicker than that.
And if we're going to be effective as a deterrent in our war fighting, we better figure out how to get programmes of record in less than a year. Uh, and so that's a lot of the talks. So we've been lending to, uh, some very interesting defence tech companies.
And I think that is when you look at what the U S is spending as a percentage of GDP, we're spending 2.9% of GDP on defence during the cold war period, we spent on average about 6% of GDP during the Vietnam, uh, Korean wars. It was a 10, 11% of GDP. And at the backend of world war two, 1945, we spent more than 40% of our GDP on defence because we had to win.
So I think you're going to see macro winds change where you're going to see, uh, a lot of the glass of the system is going to get broken that has existed for the last several decades. And there's going to be a new procurement process and a new adoption process of some of the most interesting defence stack of golden. One of the most important things that I've seen in the last few years, digital manufacturing.
So we all know about 3d printers and how important they can be for very specialised parts, but they can also print end to end now, um, a predator drone that historically might've taken four or five months to make. They could make one every two days. Now, uh, it used to have 28 parts.
Now they can print it in four parts. You can, you can literally see the evolution of digital manufacturing. The United States is here.
So what you're going to read about in the next two years is how the U S is going to have a Renaissance in manufacturing, which is something that not a lot of people are ready for. But I've been to a few of these factories recently. Uh, and I leave there with a hair standing up on my neck.
It's some of the most amazing things I've ever seen in my, in my life. So that's something to be very, and if you think about how that process, well, let's say now some of it's for aerospace and defence so that we can catch up on munitions and, and, uh, deterrents, but it, it permeates the rest of the world's manufacturing, whether it goes from automobiles, automobiles, chassis, brakes, and things like that, or even engines to other manufacturing around the world. So I think you're going to see a digital manufacturing revolution in the next few years, and very little has been written about that.
So that's a, that's an exciting, uh, uh, I think, uh, thing to look at and India should have its part there because you have such an amazing brain trust of intellectual capacity that this is something that could be, I'm going to say easily adopted, but it should be adopted.
Govindraj Ethiraj: Kyle. It's been a pleasure speaking with you. Thank you so much for joining me.
Kyle Bass: Yeah, you too. It's a pleasure. Pleasure to meet.
