Wednesday, March 24, 2010

GMO on China

Edward Chancellor from GMO has a very interesting white paper on China "China's Red Flags". He argues that past manias and bubbles can be identified by the following characteristics:
(1) A compelling growth story
(2) A blind faith in the competence of the authorities
(3) A large increase in investments
(4) A surge in corruption
(5) Easy money or low interest rates
(6) Fixed currency regimes
(7) Fast credit growth
(8) Moral Hazard
(9) Fragile financial structures with high leverage and marginal returns on projects barely covering the financing costs
(10) Rapidly rising property prices

He then goes through the list with China's latest numbers, ticks the box by most and concludes:
"Were China's economy to slow below Beijing's 8% growth target, bad things are liable to happen. Much of the new infrastructure would turn out to be otiose; excess capacity would linger in many industries; the real estate bubble would burst and the banking sytem would face a rash of non-performing loans. Investors who are immersed in China Dream ignore this scenario. When the China juggernaut eventually stalls, they face a rude awakening".

The article contains a lot of interesting sources notably on China's urbanization and demographics. I have been warned!

Wednesday, March 10, 2010

Millennium's Englander on Hedge Funds

Dealbook has the keynote address. Due Dilligence a la Englander: make sure that
(1) Alignment of interests between manager and investors is in place
(2) The manager has sufficient skin in the game
(3) The strategy really is what you are looking for.