Whitney Tilson follows up on his previous comments, which are a follow up on his original comments. Tilson was accused of being racist against Chinese people, after he railed against a Chinese website, which stole $1,000 from his father. Tilson claims that he does not think Chinese ladies are ‘crazy.’ Tilson believes that China is a kleptocracy, as John Hempton has previously stated. Below are Tilson’s comments obtained by ValueWalk. Tilson responds to these comments as well as to another issue he addressed, high frequency trading (HFT). HFT, has come under criticism from Michael Price, Leon Cooperman, Jim Chanos, Mark Cuban and many other famous investors. Tilson notes that the Indian stock Market crashed 16% in a matter of moments, several days ago.
I was not surprised that some folks took offence at the comments about China I included in my last email (I also got some kudos). It was a deliberate risk…
To be clear, there’s much I admire about China: the people are the hardest working, most capitalistic, most focused on education I’ve ever seen, their contributions to human development rival any civilization, and there’s never been a faster movement of more people out of abject poverty than in China in the past few decades. But as John Hempton persuasively argues below, it’s a kleptocracy and people need to know this and call them out on it.
1) Here’s the first of two comments:
I’m cringing reading this.
Chinese ladies are “crazy”? Chinese children are “selfish”? Because of the cultural revolution? What is this gibberish in your normally high-quality newsletter?
Investment into and business with China is a big topic. There is a wealth of serious thinking by serious people on the topic. And lots of smart investors are doing incredibly well in China.
But they do know how to deal with fraudulent companies. Governance practices. Accounting accuracy. Regulatory murkiness. Politicized economics. Legal / contract structures. Management behavior at SOE’s. Management behavior in private companies. And so on.
I don’t care about pc stuff. But you just broadcast the dumbest commentary on China I have ever seen by a serious investor. I’m still cringing.
As for the web company that ripped you off, that is a shame. But to be honest nobody in China would have bought online in that way. When you buy online in China, you normally pay cash on delivery (360buy). Or the money is held in escrow until cleared by the buyer (alibaba). If you pay first and wait for the delivery, you will eventually get ripped off. It is common knowledge.
Similar to it being common knowledge in New York that you do not leave your front door open all day. Eventually you will get robbed. It is just common practice in the environment.
Fraud is a problem in China for sure. But actually online purchases is an area where things are quite good. You have ratings for buyers and sellers, escrow accounts under the control of the buyer and real-time online communication with other shoppers. In fact, many people prefer to buy online because it is considered safer than brick and mortar (Tmall has 140k merchants online and Taobao has the world’s largest call center).
I buy from Chinese websites all the time and have never had a problem (but I would never pay first).
Note: Alibaba sells about 40k products per minute. And Chinese e-commerce will surpass US e-commerce in total dollar-terms by 2014-2015. That seems inconsistent with the fraud-ridden picture described.
Anyways. A bit of a rant. otherwise a big fan of your emails.
2) Here’s the second:
That first email over-generalizes and perpetuates a lot of stereotypes. I won’t say it’s racist but it’s pretty close. You couched it as “highly politically incorrect” so I have a feeling your gut also told you it was over the line. If someone substituted “Jewish” or “black” for “Chinese” in that email, I doubt you’d have forwarded it to hundreds (thousands?) of people.
The fact that the email was written by a Chinese American (who apparently has some very skewed views) does not legitimize his biased statements. By circulating the email widely, you’re giving it your implicit endorsement and spreading silly notions like this:
“. . . many of the Chinese that have left China in the last 10 years suffer from the same problems afflicting China today: rich, greedy, fake, shallow, cheaters, etc”
“To be clear: I’m not saying EVERY person in China is out to screw people, but when the system typically requires paying bribes, kissing ass, and lying, of course this behavior becomes ingrained. ”
“Their kids tend to be selfish and greedy as well (the apples tend to fall close to the tree), and are under tremendous pressure to win at all costs. Tiger moms aren’t a myth – Asians push education to a whole new level – but there’s a lot of cheating here as well. ”
“Lastly, the ladies from China are a shocking set of crazies.”
Like that email’s author, I’ve also had nearly 40 years to watch the actions, thoughts, and behaviors of multiple generations of Chinese individuals. The ones I know who have left China (in the last 10 years and earlier) are among the most industrious and ethical people I know. Munger, too, has talked many times about his admiration for this new wave of Chinese. Their kids get into the top universities not because they cheat or try to win at all costs, but because academics are given high priority. Lastly, I seriously doubt that the divorce rate among this “shocking set of crazies” is any different than the US divorce rate; there is no evidence to support the notion that the women are crazies.
3) For more on China, see the two posts of John Hempton of Bronte Capital (who, incidentally, will be speaking at the next Value Investing Congress in Las Vegas on May 6-7). He calls China a kleptocracy, which Wikipedia defines as follows:
Kleptocracy, alternatively cleptocracy or kleptarchy, (from Greek: ??????? – klept?s, “thief” and ?????? – kratos, “power, rule”, hence “rule by thieves”) is a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often without pretense of honest service. This type of government corruption is often achieved by the embezzlement of state funds.
Kleptocracies are generally associated with corrupt forms of authoritarian governments, particularly dictatorships,oligarchies, military juntas, or some other forms of autocratic and nepotist government in which no outside oversight is possible, due to the ability of the kleptocrat(s) to personally control both the supply of public funds and the means of determining their disbursal. Kleptocratic rulers typically treat their country’s treasury as though it were their own personal bank account, spending the funds on luxury goods as they see fit. Many kleptocratic rulers also secretly transfer public funds into secret personal numbered bank accounts in foreign countries in order to provide them with continued luxury if/when they are eventually removed from power and forced to leave the country.
Kleptocracy is most common in developing countries. Such incomes constitute a form of economic rent and are therefore easier to siphon off without causing the income itself to decrease (for example, due to capital flight as investors pull out to escape the high taxes levied by the kleptocrats).
Here’s the introduction of Hempton’s first post:
China is a kleptocracy of a scale never seen before in human history. This post aims to explain how this wave of theft is financed, what makes it sustainable and what will make it fail. There are several China experts I have chatted with – and many of the ideas are not original. The synthesis however is mine. Some sources do not want to be quoted.
The macroeconomic effects of the Chinese kleptocracy and the massive fixed-currency crisis in Europe are the dominant macroeconomic drivers of the global economy. As I am trying a comprehensive explanation for much of the world’s economy in less that two thousand words I expect some kick-back.
China is a kleptocracy. Get used to it.
I start this analysis with China being a kleptocracy – a country ruled by thieves. That is a bold assertion – but I am going to have to assert it. People I know deep in the weeds (that is people who have to deal with the PRC and the children of the PRC elite) accept it. My personal experience is more limited but includes the following:
(a). The children and relatives of CPC Central Committee members are amongst the beneficiaries of the wave of stock fraud in the US,
(b). The response to the wave of stock fraud in the US and Hong Kong has not been to crack down on the perpetrators of the stock fraud (so to make markets work better). It has been to make Chinese statutory accounts less available to make it harder to detect stock fraud.
(c). When given direct evidence of fraudulent accounts in the US filed by a large company with CPC family members as beneficiaries or management a big 4 audit firm will (possibly at the risk to their global franchise) sign the accounts knowing full well that they are fraudulent. The auditors (including and arguably especially the big four) are co-opted for the benefit of Chinese kleptocrats.
Lots of interesting comments on the message boards: http://brontecapital.blogspot.com/2012/06/macroeconomics-of-chinese-kleptocracy.html and http://brontecapital.blogspot.com/2012/06/macroeconomics-of-chinese-kleptocracy.html
4) Here’s an interesting comment on HFT:
Re: HFT, seems to me that the better analogy of the high freqs is of ticket scalpers, rather than the “brokerage” model aluded to by the guy from the “industry”. There is a reason society bans scalpers from within several hundred feet of an event venue – they are distasteful and largely unneccesary middlemen in an entertainment (non-critical) market. I have no doubt street corner scalpers or Ticketmaster (the King of scalpers) will tell you that they provide liquidity – but how many customers believe this? I recognize the margins on HFT are much skinnier, but it is the same forcible insertion of middleman into a transaction that the other two parties who prefer to avoid, but can’t. Imagine if we let the ticket scalpers front run exchanges of more essential of goods/services?
A free market works best, but letting the HFT co-locate on exchange grounds is selling information advantage to a fleet parasitic middlebots. Worse, it’s coming at the expense of the confidence of regular investors in the very institution of the equity market.
5) And here’s Joe Saluzzi on HFT:
Pressure on HFT is building. Not sure if you caught this interview on CNBC from Tuesday. I was on with Leon Cooperman and Mark Cuban:
Did you see that India flash crashed last night…down 16% and straight back up.