As the old saying goes, they don’t ring a bell when a market tops.
But sometimes it sure feels like it.
Two quick examples: The first from my days as a wet-behind-the-ears commodity broker in 1998.
I had come into the biz near the tail end of one of the most vicious commodity bear markets of all time. The president of the firm, a diehard grain bull, was convinced everything was about to turn around. Many of our big clients were farmers and he couldn’t bring himself to go bearish, repeating the mantra to “never short anything below the cost of production.”
The crop report came out, and the news was incredibly bullish — just as we had anticipated. Soybean prices were set to explode! Except they didn’t. The futures climbed a couple cents on the open, then ran out of gas and slumped lower on the day.
The boss was frustrated beyond belief. “I give up!,” he shouted, throwing up his hands and walking out of the room.
Wheels were turning in my rookie brain. “If beans are that weak in the face of a big bullish report,” I thought, “maybe we should be shorting them in size.”
Unfortunately, as the “new kid,” I didn’t have the moxie to act on that idea — or the guts to go against the rest of the firm. And it was too bad… over the next eight months or so soybean prices plummeted, hitting a mind-boggling low of $4.02 per bushel in July 1999. I have little doubt that at least a handful of traders, more seasoned and more objective, made an absolute fortune on that move
The second “bell ringing” example comes from June 2007, when the Blackstone Group went public.
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Those were the days of private equity euphoria. In March ’07 The Economist had declared PE guys “the kings of capitalism.” In an over the top cover splash, Fortune magazine declared Schwarzman himself “the new king of Wall Street.”
Private equity had ridden a wave of cheap money mania to the ultimate leveraged glory, and Schwarzman was cashing out — via the IPO — at the perfect time. Fortress Investment Group (FIG) had gone first, making its founders billionaires on paper. Blackstone represented the crescendo — confirming Schwarzman a sort of diabolical genius.
Given that private equity’s game is to fix up assets and then hand them off at peak valuation (or as close to that as possible), you had to give Schwarzman a golf clap. The hype, the mania, the buildup, the final coup of selling at the most breathless moment — it was perfect.
BX (the Blackstone ticker) debuted on the NYSE in the rough vicinity of $35 per share.
It pretty much went straight to five bucks after that.
So why bring up these stories? Because that old “bell ringing” feeling is in the air again…
You know those tired jokes about how Hummer and Ferrari drivers are “compensating for something?” One could say the same (on a national scale) when it comes to tall buildings. The desire to show off the world’s tallest building is a sort of reliable ‘tell” for excesses of hubris and economic leverage.
The von Mises institute has an article describing this phenomenon, Skyscrapers and Business Cycles. Bottom line being, the skyscraper indicator has “a good record in predicting important downturns in the economy.”
As the above graphic shows, for some time the world’s tallest building has been the Burj Khalifa in Dubai, opened in January 2010.
So getting back to the bell ringing, I give you “China plans $1.3 bn seven star hotel:”
Beijing authorities plan to build a “seven-star hotel” modelled after Dubai’s Burj Khalifa — the world’s tallest building — in a $1.3 billion joint project with Saudi Arabia.
The hotel will be erected in western Beijing’s Mentougou district some 30 kilometres (18 miles) from the Chinese capital’s centre, the state-run Beijing Morning Post said in a Thursday report, quoting a local parliamentary meeting…
Classic isn’t it?
Noted bear Jim Chanos has said that China is “Dubai times a thousand.”
China’s planners seem to have taken that statement as a compliment — or even a pledge to live up to — as opposed to a dire warning.
The air is rich and thick with irony… and hubris-fueled stupidity. Considering that China is in the grips of a white hot real estate mania, you’d think the last thing they want to do is invite comparisons to a major league fiasco that wound up like this (Time Magazine, Oct 2010):
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There’s a half-off sale in the world’s tallest building.
Even with an address at the iconic Burj Khalifa, rents for residences in the tower are not immune from Dubai’s real estate crash. Indeed, nearly a year after it was inaugurated with a massive water-and-fireworks display, about 825 of the tower’s 900 ultra-luxury apartments remain unoccupied, according to Better Homes, a real estate brokerage in Dubai…
Geniuses… or Idiots?
And by the way, this topic brings up a little bone I have to pick with the China bulls.
As of this writing, bullish views on China are extensive and widespread. Underscoring much of this bullishness is the implied belief that Chinese planners are “smart” while the American government is “stupid.”
Beijing, and China at large, is supposedly being run by savvy geniuses who will successfully manage away all problems (like rampant inflation) and not put a serious foot wrong.
After all, while American politicians play “checkers,” China is populated by serious long-term thinkers playing the subtly complex strategic game of “Go.”
I ask you, how incredibly out of synch with history is this conveniently bullish viewpoint? Over the centuries, the millennia even, the track record is clear: Governments are cack-handed and dumb. If they do not start out dumb, they wind up dumb. Hubris, overreach, and the great weight of managing complexity overtakes them.
The old saying, “shirt sleeves to shirt sleeves in three generations,” could well apply to economic booms in modified form. Even the founding fathers of the United States made plenty of gargantuan economic mistakes.
What’s more, the “China won’t falter” narrative is all the more impossible given that the historical track record of major power success is one of experiencing crisis, dealing with crisis, and eventually overcoming crisis — not sidestepping it completely through slick management!
And yet now we are supposed to believe the Chinese government is different? That these guys — a bunch of dusted-off communists no less — have cracked the code?
“Not bloody likely,” as a subject of the defunct British empire might say.
Just for fun, let’s go with the hypothesis that maybe China’s leaders are not geniuses but idiots… run-of-the-mill knucklehead types as with other heads of state. What evidence might we have for this assertion? How about the following:
- China has bet its future on an aggressively mercantilist and, in the eyes of some, massively protectionist growth strategy that could wind up blowing up in its face (via Western backlash) at precisely the wrong time.
- China has “bet the farm” on its ability to avoid devastating breakouts of strife and civil unrest, born as direct result of a mercantilist strategy that holds back purchasing power, holds down wages, and pumps up internal inflation pressures (in a country where food and energy costs still represent the lion’s share of domestic income).
- In its effort to hoover up large volumes of business, China has forced major portions of its export sector to live or die on razor-thin profit margins, leaving these businesses exceptionally vulnerable to new threats of economic downturn, modest currency revaluation, or state-subsidized financing withdrawal.
- China has presented itself as the savvy accumulator of huge amounts of U.S. debt, potentially without realizing it is the “fish” at the poker table. (If I sell you a mountain of worthless paper and convince you it is worth something, who exactly is the sucker here?)
- In embracing runaway stimulus and out-of-control money pumping, China has embraced the failed policies of Alan Greenspan, even after observing what the Greenspan mentality hath wrought.
- In dragging its feet on reining in a real estate mania, China is willingly setting itself up for a “Dubai times a thousand” scenario, even after observing what such in the United States, Dubai and elsewhere hath wrought.
- Nor have we mentioned the many and varied “unsustainable” environmental, social and logistical trends born of an overly rigid, centrally dominated economy that may well be built on an infrastructure ponzi scheme…
We’ll see how things play out of course. And one would be wise to heed the great Stan Druckenmiller’s advice, re, “never use valuation to time a market.” (That’s what price action is for.)
But I humbly submit before the market court of opinion that China’s leaders are most likely dumb, not smart — not necessarily excessively so, but in the same manner and fashion that all other governments have proven themselves dumb over time.
And with their new “let’s be like Dubai” intentions, they are working hard to confirm it…
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