Value investor, Patrick Wolff of Grandmaster Capital makes a bear case for Chinese investing and explains why, right now, the U.S. is the safest place to invest your money. Someone adds in that if you add up the exports of the top ten trading partners with China, growth is a *minus 4 percent year-over-year.
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Patrick Wolff video and computer transcript on China below
ears of a bubble in china are growing. here is jim chan os earlier this month at cnbc’s delivering alpha conference. the marks have done nothing but go up globally in four years. with one exception, basically, china. and the credit cycle that wesaw, which we thought would happen first if real estate has not happened. real estate has held up, which is the interesting thing about china. i think it’s the next shoe to drop. joining us now from san francisco is patrick wolff, founding manager of grand marshall capital. the fund was up 43% in june. she former manager and grand master of chess. once you are a grand master, patrick, have you that for life? that’s right. it doesn’t matter how bad your game gets afterwards. did you ever play road golf? actually, we played ten, yefl years ago, if i remember correctly. who won? we chatted. nice guy. we have him on set. sometimes you look over at him, he’s looking around and i’ve got him to admit he was thinkingant like chess moves. while he’s sitting here. once you got the bug, it’s hard to get rid of it. when i’m like that liepg i like in sling blade with me,it’s food, usually bacon, foofd, something like that. in there well, you have to take up chess. more french friechls i tell you, what’s interesting. i like your three scenarios. you bought the the base xas for china the bear case, they’re all bad. i don’t think that’s consensus right now, patrick. consensus i really believe is soft landing and back to something that the rest of the world still really likes. i agree with that. i think that’s totally misguided. i think, well, so to elaborate on those scenarios, in a base case scenario, i think you get severe recession and financial crisis in china. i think that should be the base case scenario. if i were the ceo of caterpillar. if i were secretary of state john kerry, that would be my base case scenario for china. severe recession, financial crisis? yeah. awesome, wow. okay. well, i think that’s what you are seeing. a bear case scenario is the same thing only worse and then you get massive capital and political instable. maybe something like tiananmen square will work. it hits the fan. would affect the entire globe? well, it’s unclear how much it would affect the entire globe. i think without question a base case scenario will be bad for emerging markets. if you seen, jim chan os is a very smart guy. i agree gree with a lot of what he said. i disagree with what he said about stockmarkets over the last fo years. look at board of trade, for example, the lot of the commodity driven markets have not been doing well. it’s been western marks have have been more removed, of course, the united states has been the star performing. then your full case, you get a recession, but it actually, in china. yeah. but there is something good that comes from it. there is some structural reform. this i think is the key, right? people look at china. by the way, i have no idea what china is growing at. as far as i know, china may not be growing at this point. the current chinese premier has been quoted in wikileaks is saying he doesn’t believe the gdp numbers. people should forgive the gdp numbers. one interesting what i to try to characterize that, if you take the top ten trading partners with coin and you add up their exports to china, then you’ve got data that the chinesegovernment doesn’t get to put their hands on, if you look at that data what you actually got is about minus 4% year over year. so according to an outside view of what’s going on in china, it’s that. minus 4%? yeah. yeah. if you add up, you know the topten exporters to china. it’s minus 4, year over year. people really need to just get out of their mind the anchoring effect of hearingthese numbers out of china that are meaningless, but to get back to the notion of a bull case scenario, i think the realquestion in china is can they hold the system together andenact wrenching structural reforms? now, i think those structural reforms could be, would normally be very painful. i think there is no reason it wouldn’t be painful for china over the next few years. but if are you able do it, then you might have a 44, more open, more capitalistic economy that would be better able grow once you go through those changes. i hope that’s what happens. i’m not opt mick about it. but i think that should be your bull case scenario. i think in any case, china is in for rough sledding. i agree with you, joe, i don’t think people — i don’t think the consensus view is taking into account robs. don’t count chosen out. there has been a lot of people that have been there. there have been a lot of china enablers. tell us something yesterday, a one sentence edict from whoever is in charge over there, they want to look at everything thegovernment owes. they want all the local places to get together and they want some type of reporting back to their central authority of how much they owe. did you see that? and what does that mean? they have no idea where capital is deployed at this point, do they? i think that’s right. look, joe, let me ask you a simple rhetorical question. if president obama were to get in front of the nation and say, look with ve a growth problem in the united states, so what my government is going to do fromhenceforth is mandate a minimum 5% real gdp growth rate. will fix our problem. would you be optimistic? i think he is trying to do that with his infrastructure, isn’t he? come on. seriously.what china has is nothing like what we have in a normalcapitalistic economy. that’s because you have a republican congress. the point i’m making is coin has very much a command economy at the top level. right. is calling. all right.you are right. it’s a matter of degree, but there’s a little bit of central planning infrastructure, clone energy, that kind of stuff n.china, it’s to a whole new level. it has caused a hugemisallocation of capital that we all thought would come home toroost. they all say china knows how to do it. you know, anything that can’t go on forever will eventually stop. these kind of investment bubbles, the longer they go on, the harder they tend to fall. i think that’s why a number of us, you know, think that china is in for a big fall. i hope they can manage theirproblems. i think the base case scenario ought to be that it’s going to be more than a hard landing. something worse. if you lock back at the great recession for the u.s. and europe, so demand collapses for a lot of chinese products. a lot of us thought at that juncture china would discover what it’s like if you are tied to the global business cycle. instead, they postpone that inevitable, right? they’ve created this wild infrastructure become for two years, one could make the case that that postponement actually spread out the full hit of the great recession and they’re in the midst of it now. i think there is really something to that. one thing i would emphasize is, if you actually sit down and look at the finances a lot of these chinese companies, particularly the ones that trade in hong kong as we have done at grand master. what is striking is they may report accounting profit. they’re not making money. there is a reason why shibor keeps lurching upwards is because the banks don’t have capital. i don’t have capital because they’re not getting paid back on their loans. they aren’t getting paid back on loans because the companies aren’t making money t. workingcapitals have ballooned to an extraordinarily level. people aren’t paying each other’s bills. people have suffering an eform us cpap exxon assets not returning cash. this is the problem large for the chinese economy. can i split one hair with you? we got to go. you’ve got an enormous amount of exchanges reserves, typically the giant crisis for developing economies is when they have a run open their currency that. piece they don’t have to worry about. absolutely. coin cannot have external funding crisis. china can have an internal funding crisis and that’s why isay the capital flight, nobody knows a lot of the gaming thatgoes on is basically a back door for rich keenese to try to get the money out t. chinese government in my opinion may beappreciating steadily even though exports get weaker andweaker. precisely because they want to provide an incentive for people to keep their money on shore.