Market Thinking

making sense of the narrative

Avoiding Confirmation Bias

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The widespread consensus in the Western Media is that EverGrande is going to crash the Chinese Economy and that the Australia/US/UK defense pact is ‘good news’. Short term traders are backing this, but we would suggest that neither of these statements is true and that long term investors need to try and remove the political spin from the investment decision. To help support our views we include some links to challenge the conventional wisdom.


The Evergrande Contagion story continues to roll out, as discussed yesterday. For a bit of alternative perspective we thought it worth putting in some links to other voices, notably from the ‘wrong sort of media’ as far as most western investors are concerned, Russia and China. This is important, for as every successful investor knows, when you are a buyer of a stock, the analyst you need to get in to talk to you and your team is not the one who has a buy on the stock – that is simply indulging in Confirmation Bias – rather, you need to consult the analyst who has a sell on the stock.

Thus first up we have an article from Russia Today (RT) by (British writer) Tom Fowdy, pointing out that this is not China’s Lehman moment – however much SInophobes want it to be. Of course we could be accused of indulging in our own bit of confirmation bias, by selecting an analyst that supports our own opinion, but one can not deny the points he makes about constant negative spin on all things Chinese.

RT is an interesting site generally as, if nothing else, it is free of the, surprisingly pervasive, ‘official narrative’ from western government departments. This has always been present, but has become far more obvious since the start of the pandemic. As an illustration, check out this, frankly surreal, video of the US mainstream media appearing to, literally, be talking from the same script.

Now ask, “how much of what we read elsewhere has been similarly scripted?”, by governments or by corporates. Remember, the Godfather of PR was a man called Edward Bernays, who having successfully campaigned to get the US into the first world war wrote a book on his techniques called Propaganda.

“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.”
― Edward L. Bernays, Propaganda

The fact that one of his biggest fans was a chap called Goebbels rather tainted the term Propaganda, so it evolved to PR. The reality is that due to the new Cold War, western governments want us to only believe bad things about China and good things about “The West’.

Meanwhile, we would naturally suspect that The Global Times would have a more positive spin on things, after all they are the semi official mouthpiece of the Chinese Government, with their own Propaganda. But that is of course exactly the point, if we want to know what the Chinese government are most likely to do, then why not listen to them, rather than a journalist in London or New York who views China through a western prism? The fact that Robert Armstrong in the FT today suggested that the real risk of Evergrande was a wealth effect due to Chinese consumers leveraging up on the back of house price inflation (they can’t actually do this) is a case in point.

The key takeaway from the Global Times piece is that the debt is manageable and that the government’s focus is on delivering the properties to the end clients.

This is not to say that Evergrande is not in trouble. For a more detailed understanding of the issues with the company, it is definitely worth looking at the link from GMT research, who are essentially forensic accountants and looked at the whole issue of the way Evergrande not only financed its working capital, but also how it managed to avoid any write downs of unsold properties on its balance sheet and a whole host of other ‘red flags’.

From a trader’s perspective, the report, which came out in January 2017, would have been a disaster – the share price went up 6x over the following nine months – but from an investors’ perspective it was extremely valuable. From that October peak, the share price halved over the next two years and post a sharp squeeze after the pandemic bounce last summer, it has continued to fall and is currently around half the price it was in January 2017. As we noted yesterday, the failings of Evergrande are no surprise to anyone who has spent more than five minutes looking at Chinese property developers.

The bigger issue (which is unlikely to be resolved by this) is the, frankly ridiculous, nature of the so-called risk management of Asian High Yield Bond markets. The benchmark indices give the biggest weighting to the companies with the biggest debts (!) and the risk management industry then advises managers to lower their benchmark risk by matching these weightings in their portfolios. This is a classic example of borrowing something from Equities (market cap weighting) that (sort of) works and imposing it somewhere else, in this case high yield bonds, where it clearly doesn’t – but doing it anyway. This has meant that many Asian High Yield Bond funds have ‘lowered their risk’ by having more than 50% of their exposure to Chinese Property Developers. In this sense, Evergrande is arguably a bigger issue for Western Bond investors than it is for the Chinese government.

Australia/US/UK Defense.

To a different topic, but related in that it has been reported with a heavy political spin – the US/Australia/UK defense alliance that was announced last week. Our initial take-away was probably best summed up by this comedy sketch, which, like some of the best comedy, works on account of it being very close to the truth.

“We are going to spend $400bn to protect our trade routes with China…from China.?”

The western media has (naturally) written this up as an unalloyed triumph, with the UK press in particular enjoying the extra twist of upsetting President Macron and the French. However, not everyone in Australia is happy about this, in the Sydney Morning Herald today, Ex-Premier Paul Keating has come out with a withering attack on the Morrison Government.

Initially it looked decidedly odd that Australia was switching to nuclear submarines since the original design the French had offered were indeed nuclear, but the Australians had asked them to switch them to diesel electric! The (valid) reasons given at the time were that they a) didn’t need the range b) they were too expensive and c) that they didn’t have the facilities or the trained crew for nuclear. So what, we might ask, has changed?

This is of course all about politics (on all sides). The reality is that Australia has broken its contract with the French because America told it to. This is all part of the “you are either with us or against us’ approach that the US is increasingly taking to its ‘allies’. (Nice country you have here, shame if anyone were to break it). However, there are further twists to the story, as detailed by the (ever insightful) geo-political blog Moon of Alabama.

The key point is that Scott Morrison (otherwise known as “the Fella from Down Under” by Joe Biden) has, in fact, only agreed to 18 months of talks on the deal, which takes him past the next Election, and that rather than actually buy any submarines (which would not in any event be ready until the 2040s), what is actually going to happen is that Australia are going to ‘lease’ them off the US government and that they will be crewed by US personnel. So in other words, the US are going to build a nuclear submarine base in Australia in order to further their Cold War against China and the Australians are going to pay for them to be there.

This is not going to go away as a topic, since the Australians are going to pay for those submarines in other ways too. From an Australian economic point of view this is, frankly, a disaster; the ‘insult’ to France means that trade with the EU is going to suffer, while the even bigger insult to China comes at a time when Australia’s biggest trading partner is already seeking alternative sources of commodities such as Iron Ore and coking coal. As the link to Moon of Alabama details, China is rapidly developing the ability to access the iron ore reserves in Guinea.

In addition, with the incorporation of Afghanistan into the Shanghai Co-operation Organisation and the extension of One Belt One Road across Central Asia, China will have access to and be investing in alternative sources of key strategic commodities like Copper, Lithium and Uranium, as well as coking coal for steel. While we are not so pessimistic as MoA on the prospect for the commodity trade, the reality is that there is going to be increased competition and ‘the China Price’ will fall.

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