Is China an incredible growth story, or merely a giant bubble waiting to burst? Editor Justice Litle of Taipan Daily explains why the most logical answer just might be “both.”
In a recent
Taipan Daily piece, “Gearing Up for the China Bubble,” we talked about bearish opportunities (ways to profit when the China bubble bursts).
To be clear, though, I’m no permabear when it comes to China. In the bigger-picture sense, what is happening in China is very exciting.
Take the views of Jim Rogers, for example. Jim Rogers just might be the biggest China bull on the planet. He even wrote a book about it... titled, appropriately enough, A Bull in China: Investing Profitably in the World’s Greatest Market.
From New York to Shanghai
I had the chance to meet Jim Rogers at a New Orleans investment conference a few years ago. At that conference (and no doubt in many other places), Rogers compared the Shanghai of today to New York City a century ago.
The point of the comparison was two-fold:
- Shanghai (and China itself) could top the 21st-century league tables in the same fashion that New York and the United States owned 20th. (If you could have gone long Manhattan 100 years ago – and not been shaken out – it would have been one heck of a bet.)
- Though America dominated the past hundred years, there were plenty of bumps along the way. In the Panic of 1907, for example, the country nearly went broke! And then, of course, you had WWI, the Roaring Twenties, the Crash of ’29, the Great Depression, WWII and so on. China could see a similarly bumpy ride.
I more or less agree with Jim Rogers. Or, at the very least, I don’t disagree as to China’s multi-decade prospects. I’m not as sure about the distant future as he is – can we really be certain China won’t be derailed? – but I don’t count out his case.
Destination guarantees aside, there is one thing for certain. Long-haul China investors will be in for a roller-coaster ride. Epic growth stories reliably give birth to excellent long-term opportunities. But they also give birth to epic bubbles. That was the key point I wished to express in my earlier piece,
“Gearing Up for the China Bubble”. And it is a point I think Rogers would readily concede, given America’s bubble-strewn path to greatness.
Not Rockwell, but Pollock
The above is why, as a trader, I savor the ability to look at a story from both sides. When human emotion and sweeping drama are involved, you just know there are going to be periods of extreme over- and under-evaluation. That makes one-sidedness a handicap.
After all, the history of emerging market growth is NOT marked by steady, sober, Madoff-like ascent, in which prices and growth measures soothingly tick upward with metronomic regularity. Instead, real-world growth patterns are more akin to the ravings of a brilliant manic depressive.
If the China growth story were a painting, in other words, it wouldn’t be a Norman Rockwell – tidy, warm and endearing. It would be more like a Jackson Pollock – messy, chaotic, and at times rather frightening.
Valuation and Time Frames
F. Scott Fitzgerald once wrote that “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”
Expecting a China bubble to burst, while yet remaining open to the long-term bullish case, would seem to be an example of what Fitzgerald is talking about. But it isn’t, really, from the perspective of valuation and time frames.
Some old hands are fond of saying, “there are no bad investments – only bad prices.” This speaks to valuation, as embedded in prices offered and prices paid. Sometimes Mr. Market is willing to offer you very attractive pricing on his wares. And sometimes his prices are insane.
Given the above, there is a time to buy... a time to sell... and, if one is so inclined, a time to go short. The story may chug along, but valuations change like the seasons. (Were I to visit New York on my birthday this year, would I be better off packing a light jacket and shorts or boots and a heavy coat? Without knowing my date of birth, you can’t hazard a guess.)
So it goes with the great China story. If you can visualize the China story as having “intrinsic value” in the same manner that a business has estimable intrinsic value, you’ve got the gist of the idea.
Sometimes prices will get way ahead of themselves, giving “China Inc.” a price tag well above comfortable intrinsic value. At other times prices will be depressed, making the same basket of assets an attractive buy. And at still other times, investors will drink deep of the Wall Street Kool-Aid, sending valuations well over the moon. It is my aim, as an investor and a trader, to profit from both the high and the low extremes.
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Justice Litle is Editorial Director for Taipan Publishing Group and Taipan Daily – a free investing and trading e-letter – as well as the editor of Justice Litle’s Macro Trader.
If his name sounds familiar, it’s because Justice is regarded as one of the top trading experts in the world. While pursuing a Ph.D. at Oxford University in England, Justice began his financial adventure that includes researching and investing in trading and commodities.
Because of his trading expertise, Justice has been quoted in The Wall Street Journal... written multiple articles for Futures magazine... given regular market commentary to the likes of Reuters and Dow Jones, and contributed to the book Trend Following. In fact, under his guidance, Outstanding Investments, a world-class natural resource newsletter, delivered a top-rated performance two years in a row.
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