I've learned there's a big difference between a long-focused value investor and a good short-seller. That difference is psychological and I think it falls into the realm of behavioral finance.
I call it the Rule of Three. If you read a company's financial statements three times, and you still can't figure out how they make their money, that's usually for a reason.
I've seen a lot more go to zero than infinity.
Bubbles are best identified by credit excesses, not valuation excesses. And there's no bigger credit excess than in China.
People who lose money always need someone to blame.
I used to think that good short-sellers could be trained like long-focused value investors because it should be the same skill set; you’re tearing into the numbers, you’re valuing the businesses, you’re assigning a consolidated value, and hopefully you’re seeing something the market doesn’t see.But now I’ve learned that there’s a big difference between a long-focused value investor and a good short-seller. That difference is psychological and I think it falls into the realm of behavioral finance.
Increasingly, the real estate developers can't get bank loans for their project financing in China. They're now going into the Hong Kong market to raise money in the bond market at very, very high rates, as high as 15, 20 percent.
The Macau casinos have a wonderful business, it's taking in money from Chinese businessmen elsewhere who send it through junky companies to casinos to gamble. The growth continues and they have basically western managers and western accounting, so we trust the numbers a little bit more.
I'll always understand the Schadenfreude aspect to short-selling. I get that no one will always like it. I'm also convinced to the deepest part of my bones that short-selling plays the role of real-time financial watchdog. It's one of the few checks and balances in the market.
What we define as a bubble is any kind of debt-fueled asset inflation where the cash flow generated by the asset itself - a rental property, office building, condo - does not cover the debt incurred to buy the asset. So you depend on a greater fool, if you will, to come in and buy at a higher price.
What American people and what the markets want is a fair and level playing-field, where the rules are clearly elucidated, where the referees are competent, and where we know that the game is not rigged.
What people don't realize is that China papered over its last two credit bubbles, those in 1999 and 2004. The banks were never bailed out - they just exchanged their bad loans for questionable bonds from quasi-state organizations.
The interesting thing about the China story, getting back to the macro and micro, and as dire as I think the macro story is - due to bad credit and credit extension that makes Greece and Spain and the U.S. look like child's play - when you get to the micro of individual companies, they look even worse.
It's very difficult in the technology space when you have been leapfrogged to prosper again.
Our concerns about what we saw in Australia: an economy clearly tied to China has hitched its wagon to the tail of the tiger. In terms of the general complacency, what we heard over and over from investors and clients and potential clients is, 'yes, yes, there are some excesses, but the government will figure out a way.
If you're a short-seller, that's a cacophony of negative reinforcement. You're basically told that you're wrong in every way imaginable every day. It takes a certain type of individual to drown that noise and negative reinforcement out and to remind oneself that their work is accurate and what they're hearing is not.
Dubai was a property bubble. Plain and simple. Go to Dubai and see what happened. It was... what I call it the 'Edifice complex' - it's just, we can grow by putting up lots and lots of buildings and trying to attract people to come here, stay here, and put up offices here and sooner or later, you put up too many.
Chinais a world class if not the world class property bubble, primarily high-rise buildings, offices and condos.
And so it can be very much in the interest of bank A to sell-short bank B shares, or buy CDSes on bank B, because they have exposure to bank B. It's the responsible thing to do as a fiduciary, and yet if everyone does it at the same time, it's destabilizing because everyone is selling.
Derivatives in and of themselves are not evil. There's nothing evil about how they're traded, how they're accounted for, and how they're financed, like any other financial instrument, if done properly.
Healthcare is growing now at about 10 per cent per annum in the U.S. top line, versus 3 per cent for the economy. As someone with a sharp pencil and an eye for this kind of thing, this can't last.
The U.S. healthcare system is probably the most interesting large group of companies that are heading for major problems that we've seen in a long, long time.
In China, remember, the the banks are arms of state policy. They loan because the local party official or regional party official tells them we need a new stadium. They are instruments of state policy.
The Chinese banking system is built on quicksand and that's the one thing a lot of people don't realize. [...] Everybody seems to think it is a free and clear open checkbook. It's not. [...] The banking system in China is extremely fragile.
So you know, everyone points out Greece's default record, but the history of a lot of sovereign nations is not a good one when it comes to lending them money.
