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John Horseman Joins The China Skeptics
Corriente, Chanos, SocGen, and now John Horseman. The China skeptics are multiplying. From Horseman Global's latest letter.
The first stage of my investment process is to assess the likely outlook for growth and the risks either to the upside or downside. I then look at what bond yields are offering and compare this to the valuation of equities. In a world where the growth outlook is good and equities appear good value versus bonds, the fund will be net long. Conversely, when the outlook for growth is poor, and bonds look good value versus equities, the fund will be net short. The next stage is to build the stock positions. The short book is not a hedge against the long book but a separate profit centre. The long book looks for businesses where profits are likely to increase over a number of years and the market is not asking you to pay too much to participate in that growth. Conversely the short book looks for businesses where profits are likely to decline, and you are being asked to pay too much for these businesses.
From my point of view the outlook for the developed world is one of a prolonged period of slow growth and deleveraging. Despite the recovery in equity market and industrial activity, consumers continue to repay debt, and corporates remain conservative about increasing capital expenditure. US household debt outstanding continues to decline.
The outlook for the developing world remains highly dependent on the growth of China and its demand for commodities. Hence confidence in emerging markets hinges on confidence in a continuing growth story in China. I have been a decade long bull on China, but for me the underlying economic story in China is beginning to break down. Beginning with China's entry into WTO in 2001, China has developed an export machine as Chinese companies have captured market share in a range of industries. The profits that these competitive exporting companies have earned have been the basis of booming property markets and a strong consumption story in China. However, the dynamic of Chinese growth has changed from a free market, export led growth story, to a government directed credit driven growth story. Mandating credit expansion and increased capital expenditure from government controlled companies to achieve a predertemined level of GDP growth, tends to produce poor corporate results. China's biggest oil refiner has brought more capacity on line than China needs and has begun to flood an already saturated refined oil product market in Asia. China's exports of refined oil rose by 80% year on year in December. Chinese steel producers are adding capacity, while margins remain weak. China's aluminium producers are adding capacity while aluminium stocks are at all time highs. China property developers plan to add the most residential property ever in 2010, despite house prices at over 10 times average incomes.
While I am not predicting an imminent market crash in China, the possibility of a major slowdown in China is increasing in my view. Yet commodity prices and stocks do not seem to be priced for this scenario. I feel a short emerging market exposure offers a good risk reward trade at present. An interesting counter view to the current enthusiasm for China is presented in an intriguing note written by Paul Krugman, written as far back as 1994 called "The Myth of Asia's Miracle". The note laid out a bearish view on the Tiger economies of the time, which proved to be correct. However, on China he noted that in 1994, the World Bank estimated that the Chinese economy was 40% the size of the US economy, and that if it continued on its current growth rate of 10%, it would overtake the US by 2010. Alas that forecast has proven to be wrong, and I suspect that current forecast of Chinese growth will also prove to be exaggerated. Given the amount of stimulus rolling off, I believe we will see a long term peak growth rate in the second quarter of this year, with growth slowing substantially after that.
Timing, of course, is everything and while I accept that market could continue to rally, I feel that downside risks have been downplayed to such a significant level, that being net short offers an attractive risk reward opportunity. Should economic indicators point to a more sustainable upturn then I will revisit the positioning of the fund.
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WIthout growth in the US market there cannot be growth in China.
End of story.
Ha! I'm sure the boys in England said the same thing about America circa 1920.
Nice try but no banana.
England was the exporting mercantilist nation at the beginning of the XX century. The US was the booming internal market.
I agree! And especially with crashing PIIGS...
Agreed. The US will be a dead market for 5-10 years, regardless of the November elections. China will have to grow domestically, this will raise labor costs, and cool things off considerably.
China endured for thousands of years without a market economy. If they have to raise the drawbridges and return to a feudal society, they will.
> China endured for thousands of years without a market economy.
It is not true
dead market is bad how?
November elections are about making the country strong again. I love to trade the markets. But who gives a flying fig about the stock market?
Taken strictly as you wrote it, that comment is incorrect IMO. There can't be 9-10% growth, but with 1.3B people, they most certainly can grow.
"Timing, of course, is everything"
Especially when market prices are determined by the government's hand (instead of the free market), and when the economic data is fabricated out of thin air.
*test*
Growth is little tweeting bird in tree. Growth is beautiful flower which smells bad. [/spock]
Us growth = China growth -> buy UST -> create liquidity -> Us Bubble
Us Bubble burst -> deleveraging -> end of China growth (>8%) -> Chinese bubble burst
At the end of the day chinese government will have to increase wages in China to rebalance the growth and increase the domestical consumption.
And then China growth -> US growth
Dont be such a word miser. You could have said that in 10000 words or more.
yes 10000 words or more.
What is called...a bubble!
OK base metals will crash through the floor - but what about the shiny stuff
Will Gold demand crash in China or will the Chinese continue to print like chairman Mao oh I mean Bernanke and drive masses of Chinese towards the barbarous metal.
Chinese growth has been such a game changer ,the ending of this phase could have dramatic chaotic and unknown consequences
I guess I will stick to Gold for now.
Communist stupidity + capitalist greed = "Cultural Revolution II"
ACORN + GS&Co = Mugabe Jr.
..........................
CCCP
Yes, I concur that a slowdown in China is the next biggest potential catalyst to global asset price implosion, after sovereign debt defaults. The government is catching on to the bubble though - first it's raising bank reserve requirements, outright rate hikes will be next. After that, it's on to local RE market... well, you already know the rest of this story.
I think people are missing an important piece of the puzzle. China uses capital reserve requirements to manage its economy. At the present time, its largest banks are allowed to lend out only $6 for every $1 of capital. (as opposed to the 40 to 1 crap we allowed our banks to leverage at the height of insanity)
Thus, if China overshoots in its credit tightening policies, it is able to quickly reinvigorate its markets by reducing the capital reserve requirements and thus allowing its banks to quickly lend out more money.
If our government were not captives of Wall Street, we would be using this tool also.
China has demonstrated the ability to quickly reignite its economy when it needs to. I think they will continue to be able to do this in the future, JMO
http://news.xinhuanet.com/english2010/china/2010-02/13/c_13174339.htm
Horseman's take on China might be correct, but his discussion about aluminum is retarded. The fact that we're at record inventory levels means one thing only: the companies that operate in this industry are vulnerable. But... if you are a state-owned company that has the possibility to produce the cheapest aluminum, I would say now is the time to bend Alcoa and Rio Tinto over the table by flooding the market with ever cheaper aluminum. Then use the Chinese SIV and buy them... or parts of them... like sell UST and buy distressed companies... perhaps through an intermediary. Horseman thinks like an accountant, not a strategist.
One more point about China - Its economy is significantly larger than the official numbers indicate. First, there is an underground economy that is estimated to be an additional 20%. Secondly, it is being measured in dollars and thus is understated by the amount to which its currency is undervalued.
However, if one looks at consumption metrics, such as 20 million annual auto output & sales, steel & concrete consumption, cell phone usage, etc., then China's economy truly takes on the characteristics of the 800 pound gorilla in the room.
Further it will only take 7 years for its economy to double in size at the current rate of growth (do the math).
Therefore, an official $5 trillion economy is $6 trillion when the underground element is included, is likely $12 trillion on a purchase power parity basis and may be $24 trillion 7 years from now if its current growth rate continues.
We honestly do not know what is about to hit us!
Everyone's A China Hand Now
For those of us who remember the early years of China's open door policy, it is not difficult to see today the similarities to the Dot Com Bubble. You know that the moment everyone is an expert and everyone is long that the game is already over.
China fever will prove deadly at this very late stage.
Do not underestimate China.
80 years ago, Soviet dictator Joe Stalin told to his close associates: the West and the USA have no future without colonies. Consequently, he has done everything to destroy the West colonial empires. He started a process which is still going on.
Following Stalin death in 1953, Soviet's highly dogmatic, incompetent and corrupt leaders never were interested in a continuation of Stalin's crusade against the West. Now, it is a game-changing situation.
Chinese miracle is very much similar to the old Soviet Stalin miracle when a highly backward country became a world superpower. Both communist giants, the former Stalin's USSR and today China, have both strong and weak sides but both were/are able to achieve a lot. Today communist China is under control of very flexible and well educated leaders.
For very long time, the USA were able to hold to its visible and invisible colonies using its military might, highly developed & productive economy and US$ as a reserve currency. Now, American's economy and political system are both in a deep crisis. With all three mentioned above pillars of America might and prosperity are in a state of decay and collapse, it is a geopolitical game-changing situation.
So please, do not underestimate China using old and failed American past standards.
Oh.... China or anything else is NOT similiar to the old Soviet Stalin miracle. During Stalin era, 20,000,000 people die thats about 15-20% of population... China is repressive but it did not kill 200M people... So they have long long way to go...
" During Stalin era, 20,000,000 people die thats about 15-20% of population..."
Just a correction: the number of 15-20% of population that was lost/slaughtered is about correct but USSR population prior to the WWII was close to 200 millions. Consequently, the real numbers were somewhere near 40,000,000.
As a matter of fact, Mao killed much more that 40 millions Chinese. But it took place a long time ago. This is why I mentioned that new Chinese leaders are much better educated than peasant Mao or seminarist Stalin.
Not Similar?
Mao's first "reform" after winning the civil war in 1949 was "The Great Leap Forward." The resulting famine resulted in the death of 30 million people. That mass movement was followed up by many others, including the Cultural Revolution (1967 to 1976). Millions more dead.
http://en.wikipedia.org/wiki/Cultural_Revolution
Did you not notice during the 2008 Olympic Games' opening ceremony that absolutely no reference was made to Chairman Mao?
Yes...they have a long way to go.
Some 50 million perished under Mao.
Doesn't seem like something to brag about.
Soviet Russia had some brilliant scientists, though the state economy lacked the expertise to turn those ideas into quality products. China has yet to show either ability---innovation or quality manufacturing---and has risen largely as a result of assuming the entire world's production of low value added products, plus stealing the technology they needed to try to move up the food chain. Their current efforts are geared to producing GDP for the sake of GDP, even if the production is superfluous. Some might argue that unused fixed assets and excess capacity are better than paper wealth. To those who argue such, I say there are about 8 million residences in the US waiting for your purchase, if you like fixed assets.
Didnt Horseman retire????
In 1994 Did the world bank predict that china would totally hack their entire shit and know everything there was to know about the world bank?
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