On 11 Aug 2015, Ben Hunt wrote:
Everything under heaven is in chaos; the situation is excellent.
― Mao Zedong (1893 – 1976)
A quick email on China’s currency devaluation last night.
The news itself is big enough, but it’s the Narrative that’s developing around the devaluation that has my risk antennae quivering like crazy.
Now he has updated his explanation of how the “China growth” narrative is due to be replaced by a “China value” narrative.
Solving the short seller’s dilemma requires answering one simple question: is the story broken? Is the informational shock sufficient to force long-only investors to doubt not just their facts, but – much more crucially – their beliefs, thus turning them into sellers, too? The facts of the informational shock are almost immaterial in resolving the short seller’s dilemma. Your personal beliefs about those facts are certainly immaterial. The only thing that matters is whether or not the river of information coming out of the sell-side has shifted course in a way that swamps the old belief structures and establishes new Common Knowledge.
The China growth story is now broken. To be clear, I am NOT saying that China’s economy is broken. On the contrary, I’m a China bull. What I’m saying is that what everyone believes that everyone believes about Chinese growth – the Common Knowledge about Chinese growth – has now shifted dramatically for the worse. What I’m also saying is that China-related stocks and markets are going to have a very hard time working until the investors who believed in the China growth story are replaced by investors who believe in a different China story, probably a China value story. That can take a long time and it can be a very painful transition, as any value investor who ever bought a mega-cap tech stock can attest.