5 ms·

Contrarian Investor Predicts Economic Crash in China

33 points by sown 17y ago

byrneseyeview 17y ago
I don't have a source for this on hand, but I've read that Kynikos' Associates' average annual performance is negative. Since they're net short equities, that's quite an accomplishment (it means that if, for example, you made leveraged investments in an index fund, and additional leveraged investments in Kynikos, you could end up with a higher annual return with lower risk). But keep that in mind. The average result of a Chanos bet is that the entity in question goes up less than the rest of the market, not that it goes down.
jacquesm 17y ago
So he goes short on China, so what. There are enough people in the prediction business that some of them will be right some of the time. When all of them are right all of the time it starts to get interesting, probably we'll see new economic theories. Until then this guys guess is as good as the rest. Remember the story about the monkey and the dartboard vs the analysts. http://www.investorhome.com/darts.htm http://www.investorhome.com/darts.htm Analyzing economies as a whole is even more perilous and error prone. China is probably together with India positioned to create internal growth more than other places on the planet, whether or not they will succeed is a question that nobody has the answer to yet. So, to counter the contrarian investor I predict it will go the other way round, we'll see who is right. But on the off chance that I am don't take that as anything other than luck.
- joshu 17y ago
  Are you betting that it will go up, or are you just posting to a forum about your opinion? Big difference. I agree with your assessment of the difficulty of macroeconomic analysis. But it sounds like his details are more specific than that. I wonder if there are more interesting plays here; are there invest-able vehicles that we have access to that are going to do well if China does well AND if it does badly? I wonder if WMT would reap a profit either way.
  - jacquesm 17y ago
    Betting that it will go up because I firmly believe that China is doing what it can to move forward and become a real world power. If the last two decades are any indication they seem to be doing so quite well. They are trying to implement as many lessons they learned from picking Hong Kong apart as they can without losing control, I'm not sure that they will manage in that goal, and it frightens me to think of what it would be like if China ever fell apart. So, will you bet that it will go down? Name your price. I've never formally analyzed my investment performance, but to date I've made roughly 20% of my total income over the past 15 years on investments, both in stocks and in start-ups. I've lost about half of that due to failed investments. If I would be more risk averse and less inclined to give people chances then I probably would have done a lot better than that but that's my nature. edit: re: > are there invest-able vehicles that we have access to that are going to do well if China does well AND if it does badly? That depends mostly on what effect Chinas doing will or badly will have on the world currency market. There is a lot of money to be made in a falling market but the timing is very difficult, much more so than in a rising market. In a rising market you may limit your profit if you mistime, in a falling market you can easily lose your shirt.
- DrJokepu 17y ago
  Irving Fisher's unfortunate prediction from 1929 is a bit overquoted these days, but there you go: "Stocks have reached what looks like a permanently high plateau." My point is, economies have cycles and China won't be able to avoid its fate either. I don't know if it's going to happen tomorrow or in 20 years but I'm sure as hell that it is going to happen. The important question is not whether it is going to happen but if they're going to be able to recover from it eventually and honestly, I'm not sure if their opaque economic/political/social system will help them. In my view one of the reasons behind the West's wealth is that it always managed to recover eventually after economic / social meltdowns, one way or other. I'm no economist though, these are only my deductions based on my understanding of human history.
  - jacquesm 17y ago
    Predicting the long term future of the markets is like being a dowser, there is always water, you just have to dig a little deeper. If you are wrong, wait a little longer and voila, now you are right. Anybody can predict the long term fall of any economic system, but the only interesting question when it comes to stuff like this is what it is going to do on the next trading day and there are companies that have spent small fortunes and that are not much closer to answering that than they were when they started out. 'The Oracle' or 'The Golden Hand' is the goal of every investor, and if anybody ever would figure out how to do that and play the market long enough they would find that market changing to the point that it no longer worked. China does not have much experience in this field so far, the people in power are scared to death (sometimes literally) of what would happen if the general population managed to get enough power to rise up against them. How China will respond to their (inevitable, in the longer term) economic crashes remains to be seen. So far the accent seems to be (even in relatively good times) on the control of the flow of information, which according to a German theorist in world war II was the means to controlling the people. It proved to be mostly right. But in this day and age it is not so simple to control the flow of information. If China would be covered by a mesh wireless network then no single firewall is going to stop people from communicating. In the former eastblock this was done slowly by Samizdat press, today that would probably be encrypted communications on wifi. What will happen once those final barriers dissolve is anybodies guess, but that could be quite a while off. Technically speaking the means have been in place since '95 or so, from what we can see that has not caused major upheavals. (the same goes for Iran, last year, in spite of a strong effort at it) So I'm thinking that the same rules that apply to our society apply to the Chinese one, as long as the economy isn't doing too bad the people in power will be given more time, if there ever would be a major famine due to crop failure or some other 'act of God' then you can expect all kinds of trouble.
- artsrc 17y ago
  You can make a lot of money if you can correctly predict (50% + delta) of the time (on a return weighted basis). That means this guy can be both successful in a repeatable way and wrong.
ajju 17y ago
I have heard strong skepticism about official growth (and other) figures from China for a long time from folks in equity trading.
tokenadult 17y ago
"He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent." That's quite likely, actually, given the lack of transparency in Chinese internal politics and the lack of access of independent journalists to the relevant data.
- mahmud 17y ago
  China might be a blackbox, but at least you can measure its inputs and outputs. It's a largely manufacturing economy: you have imported raw materials, and you have exports. You can get a good ballpark estimate of Chinese economy by just studying the receipts and invoices of importers in the U.S. (or the West in general.)
  - trevelyan 17y ago
    Until Chinese families and companies can invest their savings abroad, the only three places they can go is into education, real estate and the stock market. China has bubbles in all three of those sectors. Those last two are the most closely related to the massive property bubble in China and are also the reason the stock market is so volatile: companies own land and they own each other and that dynamic leads to a virtuous cycle of increasing market capitalization in good times, and collapsing valuations when valuations fall. Small price changes can have a disproportionate effect on market capitalization. My business teaches Chinese online (http://popupchinese.com http://popupchinese.com) from Beijing, so we're face to face with the economic reality here. And while everyone knows there's a bubble in real estate (it's on television every night), when you adjust Chinese GDP to account for purchasing power parity and adjust to the wage scale, the Chinese economy looks much, much bigger and more important than it seems if you're looking from an American perspective. Anyone who hasn't had the chance to visit yet definitely should! And start learning Chinese too. Incidentally, a number of studies on Chinese energy use have cast doubts on its rate of growth for years. Still doesn't mean that the Chinese economic miracle isn't the story of the century.
    - Retric 17y ago
johnl 17y ago
You can get a hint of what is happening by looking at the countries around China. South Korea real estate prices are back up to where they were before the crash, Australia has had to raise interest rates to cool down their economy. There is even talk the Japan might be coming out of it's funk. With that type of growth China's books have to be pretty messy, but I don't think they are blowing smoke.
- boredguy8 17y ago
  Why is that at all true? Seems equally as likely the growth of surrounding economies could be the result of Chinese regional spending and an indicator of financial mismanagement as it is an indicator of some underlying health.
  - evgen 17y ago
    It is worth considering that if you are inside China and sitting on a pile of money from foreign trade over the past few years the best place to put that money if you think things are going to go south is probably somewhere outside the country. Buy foreign real estate and equities while you can but make your purchases in places that you can easily visit/check-out/escape-to...
jfarmer 17y ago
About ten years ago I read a book about the Great Chinese Famine. One story I remember is that the so-called scientists of the Communist regime claimed they had produced a new way to grow wheat so that it was much denser, both as a way to prove the superiority of the Communist system vs. Western capitalism, and as a way to head off any rumors of famine. This wheat was so dense, the Chinese government claimed, one could stand on top of the wheat field without falling to the ground. In the book was an old black and white photo of two Chinese children apparently doing just that: standing on top of a wheat field. But the caption explained that actually there was a step ladder underneath them placed there to produce the illusion. I'm not trying to draw any parallels between the above story and the linked article, besides the fact that the latter made me remember the former. It's hard to say whose economy is most like that wheat field these days.
- baguasquirrel 17y ago
  Maybe everyone's is. If this sounds scary, perhaps it's true.
mynameishere 17y ago
Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore. This seems completely wrong. Here's a large-volume and presumably shortable ETF with Chinese holdings: http://finance.yahoo.com/q?s=FXI http://finance.yahoo.com/q?s=FXI If I remember, I'll try to put a short order on it in the morning to see if I'm right. Not sure how the Times and Chanos could say something so incorrect tho'.
- garply 17y ago
  Instead of shorting FXI, you can buy FXP, which will have a similar effect.
  - mynameishere 17y ago
    The leveraged short and long ETFs have built-in decay which makes them unsuitable for anything but daytrading. http://seekingalpha.com/article/119316-double-and-triple-etfs-decay-their-value-faster-by-design http://seekingalpha.com/article/119316-double-and-triple-etf...
    - BearOfNH 17y ago
      I think it's unfair to claim "built-in decay" is unique to leveraged ETFs. This happens with all financial instruments: stocks, funds, ETFs, futures, options, etc. Any price that goes up X% and then down X%, or vice versa, ends up lower than the starting point. For any instrument. The only difference with the leveraged instruments is the corresponding loss is greater. But that's the whole point of using leverage -- the gain is greater, too.
      - byrneseyeview 17y ago
        No, it's completely fair. Leveraged ETFs rebalance in such a way that the losses compound faster than the gains. If they did no rebalancing (i.e. started out with $100M in cash and $200M in debt, and kept the $200M no matter what the equity price did) the decay wouldn't happen.
llimllib 17y ago
I expected to see onion.com on the byline, not nytimes.com
maxklein 17y ago
The reality in china - there is a huge underemployed class of people. But real estate is still cheap. In Beijing, Shanghai, Shenzhen and some other countries, housing is expensive, but the rest of china is still cheap, even for locals. So I dont really see a bubble there. Also, the government is pumping money into infrastructure - dams, roads, tollgates, hospitals. No matter what crashes, the infrastructure remains. China will hit crisis like all economies do - but I do not think it will be in real estate.
jacoblyles 17y ago
So I guess most investors are predicting growth. If most investors were predicting a crash, then the ones predicting growth would be contrarians, and you could write an article about them. Doom and gloom always gets a higher page count, though.

33 points by sown 17y ago

I don't have a source for this on hand, but I've read that Kynikos' Associates' average annual performance is negative. Since they're net short equities, that's quite an accomplishment (it means that if, for example, you made leveraged investments in an index fund, and additional leveraged investments in Kynikos, you could end up with a higher annual return with lower risk). But keep that in mind. The average result of a Chanos bet is that the entity in question goes up less than the rest of the market, not that it goes down.

jacquesm 17y ago

So he goes short on China, so what. There are enough people in the prediction business that some of them will be right some of the time. When all of them are right all of the time it starts to get interesting, probably we'll see new economic theories. Until then this guys guess is as good as the rest. Remember the story about the monkey and the dartboard vs the analysts. http://www.investorhome.com/darts.htm http://www.investorhome.com/darts.htm Analyzing economies as a whole is even more perilous and error prone. China is probably together with India positioned to create internal growth more than other places on the planet, whether or not they will succeed is a question that nobody has the answer to yet. So, to counter the contrarian investor I predict it will go the other way round, we'll see who is right. But on the off chance that I am don't take that as anything other than luck.

joshu 17y ago
Are you betting that it will go up, or are you just posting to a forum about your opinion? Big difference. I agree with your assessment of the difficulty of macroeconomic analysis. But it sounds like his details are more specific than that. I wonder if there are more interesting plays here; are there invest-able vehicles that we have access to that are going to do well if China does well AND if it does badly? I wonder if WMT would reap a profit either way.
- jacquesm 17y ago
  Betting that it will go up because I firmly believe that China is doing what it can to move forward and become a real world power. If the last two decades are any indication they seem to be doing so quite well. They are trying to implement as many lessons they learned from picking Hong Kong apart as they can without losing control, I'm not sure that they will manage in that goal, and it frightens me to think of what it would be like if China ever fell apart. So, will you bet that it will go down? Name your price. I've never formally analyzed my investment performance, but to date I've made roughly 20% of my total income over the past 15 years on investments, both in stocks and in start-ups. I've lost about half of that due to failed investments. If I would be more risk averse and less inclined to give people chances then I probably would have done a lot better than that but that's my nature. edit: re: > are there invest-able vehicles that we have access to that are going to do well if China does well AND if it does badly? That depends mostly on what effect Chinas doing will or badly will have on the world currency market. There is a lot of money to be made in a falling market but the timing is very difficult, much more so than in a rising market. In a rising market you may limit your profit if you mistime, in a falling market you can easily lose your shirt.
DrJokepu 17y ago
Irving Fisher's unfortunate prediction from 1929 is a bit overquoted these days, but there you go: "Stocks have reached what looks like a permanently high plateau." My point is, economies have cycles and China won't be able to avoid its fate either. I don't know if it's going to happen tomorrow or in 20 years but I'm sure as hell that it is going to happen. The important question is not whether it is going to happen but if they're going to be able to recover from it eventually and honestly, I'm not sure if their opaque economic/political/social system will help them. In my view one of the reasons behind the West's wealth is that it always managed to recover eventually after economic / social meltdowns, one way or other. I'm no economist though, these are only my deductions based on my understanding of human history.
- jacquesm 17y ago
  Predicting the long term future of the markets is like being a dowser, there is always water, you just have to dig a little deeper. If you are wrong, wait a little longer and voila, now you are right. Anybody can predict the long term fall of any economic system, but the only interesting question when it comes to stuff like this is what it is going to do on the next trading day and there are companies that have spent small fortunes and that are not much closer to answering that than they were when they started out. 'The Oracle' or 'The Golden Hand' is the goal of every investor, and if anybody ever would figure out how to do that and play the market long enough they would find that market changing to the point that it no longer worked. China does not have much experience in this field so far, the people in power are scared to death (sometimes literally) of what would happen if the general population managed to get enough power to rise up against them. How China will respond to their (inevitable, in the longer term) economic crashes remains to be seen. So far the accent seems to be (even in relatively good times) on the control of the flow of information, which according to a German theorist in world war II was the means to controlling the people. It proved to be mostly right. But in this day and age it is not so simple to control the flow of information. If China would be covered by a mesh wireless network then no single firewall is going to stop people from communicating. In the former eastblock this was done slowly by Samizdat press, today that would probably be encrypted communications on wifi. What will happen once those final barriers dissolve is anybodies guess, but that could be quite a while off. Technically speaking the means have been in place since '95 or so, from what we can see that has not caused major upheavals. (the same goes for Iran, last year, in spite of a strong effort at it) So I'm thinking that the same rules that apply to our society apply to the Chinese one, as long as the economy isn't doing too bad the people in power will be given more time, if there ever would be a major famine due to crop failure or some other 'act of God' then you can expect all kinds of trouble.
artsrc 17y ago
You can make a lot of money if you can correctly predict (50% + delta) of the time (on a return weighted basis). That means this guy can be both successful in a repeatable way and wrong.

ajju 17y ago

I have heard strong skepticism about official growth (and other) figures from China for a long time from folks in equity trading.

tokenadult 17y ago

"He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent." That's quite likely, actually, given the lack of transparency in Chinese internal politics and the lack of access of independent journalists to the relevant data.

mahmud 17y ago
China might be a blackbox, but at least you can measure its inputs and outputs. It's a largely manufacturing economy: you have imported raw materials, and you have exports. You can get a good ballpark estimate of Chinese economy by just studying the receipts and invoices of importers in the U.S. (or the West in general.)
- trevelyan 17y ago
  Until Chinese families and companies can invest their savings abroad, the only three places they can go is into education, real estate and the stock market. China has bubbles in all three of those sectors. Those last two are the most closely related to the massive property bubble in China and are also the reason the stock market is so volatile: companies own land and they own each other and that dynamic leads to a virtuous cycle of increasing market capitalization in good times, and collapsing valuations when valuations fall. Small price changes can have a disproportionate effect on market capitalization. My business teaches Chinese online (http://popupchinese.com http://popupchinese.com) from Beijing, so we're face to face with the economic reality here. And while everyone knows there's a bubble in real estate (it's on television every night), when you adjust Chinese GDP to account for purchasing power parity and adjust to the wage scale, the Chinese economy looks much, much bigger and more important than it seems if you're looking from an American perspective. Anyone who hasn't had the chance to visit yet definitely should! And start learning Chinese too. Incidentally, a number of studies on Chinese energy use have cast doubts on its rate of growth for years. Still doesn't mean that the Chinese economic miracle isn't the story of the century.
  - Retric 17y ago

johnl 17y ago

You can get a hint of what is happening by looking at the countries around China. South Korea real estate prices are back up to where they were before the crash, Australia has had to raise interest rates to cool down their economy. There is even talk the Japan might be coming out of it's funk. With that type of growth China's books have to be pretty messy, but I don't think they are blowing smoke.

boredguy8 17y ago
Why is that at all true? Seems equally as likely the growth of surrounding economies could be the result of Chinese regional spending and an indicator of financial mismanagement as it is an indicator of some underlying health.
- evgen 17y ago
  It is worth considering that if you are inside China and sitting on a pile of money from foreign trade over the past few years the best place to put that money if you think things are going to go south is probably somewhere outside the country. Buy foreign real estate and equities while you can but make your purchases in places that you can easily visit/check-out/escape-to...

jfarmer 17y ago

About ten years ago I read a book about the Great Chinese Famine. One story I remember is that the so-called scientists of the Communist regime claimed they had produced a new way to grow wheat so that it was much denser, both as a way to prove the superiority of the Communist system vs. Western capitalism, and as a way to head off any rumors of famine. This wheat was so dense, the Chinese government claimed, one could stand on top of the wheat field without falling to the ground. In the book was an old black and white photo of two Chinese children apparently doing just that: standing on top of a wheat field. But the caption explained that actually there was a step ladder underneath them placed there to produce the illusion. I'm not trying to draw any parallels between the above story and the linked article, besides the fact that the latter made me remember the former. It's hard to say whose economy is most like that wheat field these days.

baguasquirrel 17y ago
Maybe everyone's is. If this sounds scary, perhaps it's true.

mynameishere 17y ago

Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore. This seems completely wrong. Here's a large-volume and presumably shortable ETF with Chinese holdings: http://finance.yahoo.com/q?s=FXI http://finance.yahoo.com/q?s=FXI If I remember, I'll try to put a short order on it in the morning to see if I'm right. Not sure how the Times and Chanos could say something so incorrect tho'.

garply 17y ago
Instead of shorting FXI, you can buy FXP, which will have a similar effect.
- mynameishere 17y ago
  The leveraged short and long ETFs have built-in decay which makes them unsuitable for anything but daytrading. http://seekingalpha.com/article/119316-double-and-triple-etfs-decay-their-value-faster-by-design http://seekingalpha.com/article/119316-double-and-triple-etf...
  - BearOfNH 17y ago
    I think it's unfair to claim "built-in decay" is unique to leveraged ETFs. This happens with all financial instruments: stocks, funds, ETFs, futures, options, etc. Any price that goes up X% and then down X%, or vice versa, ends up lower than the starting point. For any instrument. The only difference with the leveraged instruments is the corresponding loss is greater. But that's the whole point of using leverage -- the gain is greater, too.
    - byrneseyeview 17y ago
      No, it's completely fair. Leveraged ETFs rebalance in such a way that the losses compound faster than the gains. If they did no rebalancing (i.e. started out with $100M in cash and $200M in debt, and kept the $200M no matter what the equity price did) the decay wouldn't happen.

llimllib 17y ago

I expected to see onion.com on the byline, not nytimes.com

maxklein 17y ago

The reality in china - there is a huge underemployed class of people. But real estate is still cheap. In Beijing, Shanghai, Shenzhen and some other countries, housing is expensive, but the rest of china is still cheap, even for locals. So I dont really see a bubble there. Also, the government is pumping money into infrastructure - dams, roads, tollgates, hospitals. No matter what crashes, the infrastructure remains. China will hit crisis like all economies do - but I do not think it will be in real estate.

jacoblyles 17y ago

So I guess most investors are predicting growth. If most investors were predicting a crash, then the ones predicting growth would be contrarians, and you could write an article about them. Doom and gloom always gets a higher page count, though.